GRANT PRIDECO INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

COMMISSION FILE NUMBER 001-15423

GRANT PRIDECO, INC.
(Exact name of Registrant as specified in its Charter)

DELAWARE 76-0312499
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1330 POST OAK BLVD.
SUITE 2700
HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)

(832) 681-8000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the issuer is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

TITLE OF EACH CLASS OUTSTANDING AT MAY 13, 2003
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Common Stock, par value $0.01 per share 121,407,838

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GRANT PRIDECO, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNT)

The accompanying notes are an integral part of these
consolidated financial statements.

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GRANT PRIDECO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these
consolidated financial statements.

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GRANT PRIDECO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

The accompanying notes are an integral part of these
consolidated financial statements.

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GRANT PRIDECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL

Basis of Presentation

The accompanying consolidated financial statements of Grant Prideco, Inc.
(the "Company" or "Grant Prideco") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all disclosures required by
generally accepted accounting principles for complete financial statements. All
significant transactions among Grant Prideco and its consolidated subsidiaries
have been eliminated. The interim financial statements have not been audited.
However, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
statements have been included. Results of operations for interim periods are not
necessarily indicative of the results of operations that may be expected for the
entire year. The balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. These interim financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2002.

The Annual Report on Form 10-K for the year ended 2002 includes disclosures
related to significant accounting policies including revenue recognition,
accounts receivable valuation, inventory valuation, business combinations,
impairment of long-lived assets, goodwill and intangible assets, estimates
related to contingent liabilities and future claims, and pension liabilities.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements, and the
related reported amounts of revenues and expenses during the reporting period.
The significant estimates made by management in the accompanying consolidated
financial statements include reserves for inventory obsolescence,
self-insurance, valuation of goodwill and long-lived assets, product warranty
claims, determination of income taxes, contingent liabilities and purchase
accounting allocations. Actual results could differ from those estimates.

Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 2003 classifications and are of a normal recurring
nature. These reclassifications have no impact on net income.

2. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes changes in stockholders' equity during
the periods that do not result from transactions with stockholders. The
Company's total comprehensive income (loss) is as follows:

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3. INVENTORIES

Inventories by category are as follows:

4. OTHER CHARGES

2000 Charges

The Company incurred $41.3 million of pre-tax charges, $26.9 million net of
tax, in 2000 relating primarily to inventory write-offs and other asset
impairments and reductions. Of this amount, $7.9 million were established as
accrued liabilities. The accrued liability balances as of March 31, 2003 are
summarized below:

The remaining accrued liabilities are expected to be paid by the end of the
year.

5. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution from the exercise or
conversion of securities into common stock. Common stock equivalent shares are
excluded from the computation if their effect was antidilutive. When a loss
occurs for the period, the effect of stock options is not included in the
diluted computation because to do so would be antidilutive. The computation of
diluted earnings per share for the three months ended March 31, 2002 and 2003
did not include options to purchase 5.7 million and 5.4 million shares,
respectively, of common stock because their exercise prices were greater than
the average market price of the common stock for the applicable periods.

6. STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation programs using the
intrinsic value method of accounting established by APB No. 25, "Accounting for
Stock Issued to Employees" and related interpretations. Under APB No. 25, no
compensation expense is recognized when the exercise price of an employee stock
option is equal to the market price of common stock on the grant date.
Nonemployee stock-based compensation is accounted for using the fair value
method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation".

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Had compensation cost for stock options been determined based on the fair
value at the grant dates for awards under the Company's incentive compensation
plans, the Company's net earnings and net earnings per share would have been
reduced to the pro forma amounts indicated as follows.

The weighted average fair value of each stock option included in the
preceding pro forma amounts were estimated using the Black-Scholes option
pricing model and is amortized over the vesting period of the underlying
options.

7. SENIOR CREDIT FACILITY

As of March 31, 2003, the Company had borrowed $77.5 million under a $240
million Senior Credit Facility (Senior Credit Facility), comprising $29.3
million revolving credit facility borrowings and $48.2 million relates to the
term loan, and $4.4 million had been used to support outstanding letters of
credit. Net borrowing availability was $110.8 million. The revolving credit
facility borrowings, under the Senior Credit Facility, are recorded as
"Long-Term Debt" in the accompanying Consolidated Balance Sheets, as the Company
has the ability under the credit agreements.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets".
Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite
lives are no longer amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.

The Company completed the transitional goodwill impairment test as of
January 1, 2002 during the fourth quarter of 2002 and recorded a pre-tax
goodwill impairment charge of $9.3 million, $6.4 million net of tax, related to
its Industrial reporting unit. This charge had no impact on cash flows and was
recorded as a cumulative effect of a change in accounting principle in the
Consolidated Statements of Operations effective January 1, 2002.

The carrying amount of goodwill by reporting unit is as follows:

Intangible assets of $39.0 million and $38.2 million, including accumulated
amortization of $3.4 million and $4.4 million, as of

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December 31, 2002 and March 31, 2003, respectively, are recorded at cost and are
amortized on a straight-line basis. The Company's intangible assets primarily
consist of patents, covenants not to compete, technology licenses, and customer
relationships that are amortized over the definitive terms of the related
agreement or the Company's estimate of the useful lives if there are no
definitive terms. The following table shows the Company's intangible assets by
asset category (in thousands):

Amortization expense related to intangible assets for the three months ended
March 31, 2002 and 2003 were $0.3 million and $1.0 million, respectively, and is
recorded in "General and Administrative" and "Research and Engineering" expenses
in the Consolidated Statement of Operations. Estimated annual amortization
expense related to existing intangible assets for the remainder of 2003 is $2.9
million and 2004 through 2008 is expected to be approximately $3.5 million, $2.9
million, $2.8 million, $2.4 million, and $2.3 million, respectively.

9. RESTRICTED CASH

At March 31, 2003, the Company had $4.6 million of restricted cash. The
restricted cash primarily relates to its 60% interest in Tianjin Pipe Company
(TPCO) that is subject to dividend and distribution restrictions.

10. SEGMENT INFORMATION

BUSINESS SEGMENTS

The Company operates primarily through four business segments: Drilling
Products and Services, ReedHycalog(TM), Tubular Technology and Services, and
Marine Products and Services. The Company's Drilling Products and Services
segment manufactures and sells a full range of proprietary and API drill pipe,
drill collars, heavy weight drill pipe and accessories. The ReedHycalog segment
designs, manufacturers, and distributes fixed-cutter and roller-cone drill bits.
The Company's Tubular Technology and Services segment designs, manufactures, and
sells a complete line of premium connections and associated premium tubular
products and accessories. The Company's Marine Products and Services segment
manufactures and sells a variety of products used in subsea construction and
installation, which consists primarily of large bore casing and riser products
and high specification valves for use in drilling and production activity. In
addition to the products and services provided through the Company's four
primary business segments the Company also has an Other segment that
manufactures drill pipe and other products used in the industrial markets for
fiber optic cable installation, construction, and water well drilling. (See Note
15 for further discussions related to the Company's Other operations.) The
Company is also involved in joint ventures for the development of telemetry
drill pipe and composite motors and pumps.

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11. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. Previous
accounting guidance was provided by Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 replaces EITF Issue No. 94-3 and is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company adopted SFAS No. 146 as of January 1, 2003. The adoption of SFAS No.
146 had no material impact on the Company's consolidated results of operations
or financial condition.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN No. 46). FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support from other parties. FIN No. 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
to the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN No. 46 had no material
impact on the Company's consolidated results of operations or financial
condition.

12. ACQUISITIONS

On December 20, 2002, the Company purchased the ReedHycalog drill bits
business from Schlumberger Technology Corporation and its affiliates
(Schlumberger) for approximately $350 million, consisting of $255 million in
cash (subject to adjustment), approximately $90 million in Grant Prideco common
stock, and approximately $5 million of assumed non-current liabilities. At March
31, 2003, goodwill recognized in the acquisition of ReedHycalog was $158.5
million. The results of ReedHycalog have been included in the financial
statements from the date of acquisition. ReedHycalog is a leading designer,
manufacturer, and distributor of fixed-cutter and roller-cone drill bits to the
global oil and gas industry.

The following unaudited pro forma summary presents information as if
ReedHycalog had been acquired at the beginning of the period presented. The pro
forma amounts include certain adjustments, including recognition of depreciation
and amortization based on the allocated purchase price of the properties, plant,
and equipment acquired and of intangible assets; adjustment to reduce employee
benefit expenses related to benefit plans not to be continued by Grant Prideco;
increased interest expense on acquisition debt; and elimination of interest
income that is not expected to have a continuing impact. The pro forma amounts
do not reflect any benefits from economies which might be achieved from the
combined operations.

The pro forma results are not necessarily indicative of what would have
occurred if the ReedHycalog acquisition had been in effect for the periods
presented and they are not intended to be a projection of future results.

On September 13, 2002, the Company acquired the assets of Grey-Mak Pipe,
Inc. (Grey-Mak), a company headquartered in Casper, Wyoming, that specializes in
the threading of casing and tubing and provides related accessories. The Company
paid approximately $4.8 million in cash, and goodwill recognized in the
acquisition was approximately $0.6 million. Grey-Mak's results of operations and
financial condition are included in the Company's Tubular Technology and
Services segment.

On March 26, 2002, the Company acquired an additional 48.5% interest in
Jiangsu Shuguang Grant Prideco Tubular Limited (JSG), a Chinese entity engaged
in the manufacture and sale of drill pipe to the Chinese and related markets,
thereby giving the

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Company a 70% controlling interest in JSG. The Company previously owned
approximately 21.5% of JSG and accounted for its investment under the equity
method. The Company paid approximately $0.5 million in cash and issued 1.3
million shares of Grant Prideco common stock for the additional interest.
Goodwill recognized in the step acquisition of JSG was approximately $11.3
million. Subsequent to acquiring a controlling interest, the Company's
consolidated financial statements include the accounts of JSG in the Drilling
Products and Services segment. Previously recorded goodwill of $2.9 million
related to the Company's initial 21.5% investment has been reclassified from
"Investments in and Advances to Unconsolidated Affiliates" to "Goodwill" in the
Consolidated Balance Sheets.

On March 26, 2002, the Company also entered into a joint venture with TPCO
for the manufacture of unfinished upset to grade pipe in China, with the intent
of this joint venture to supply JSG with all of its tubular requirements. The
Company currently owns a 60% interest in the joint venture with TPCO and plans
to invest approximately $5 million for machinery and equipment representing the
Company's contribution to the joint venture. As of March 31, 2003, the Company
had invested approximately $2.7 million into this joint venture.

On May 7, 2002, the Company acquired 65% of Rotator AS (Rotator), a
Norwegian company that manufactures control valves and systems for the offshore
oil and gas industry. On January 28, 2003, the Company purchased the remaining
35% interest in Rotator. Total consideration for the purchase of Rotator was 0.3
million shares of Grant Prideco common stock with a value of approximately $5.1
million and $6.1 million in cash. Goodwill recognized in the acquisition of
Rotator was approximately $5.2 million. Rotator's results of operations and
financial condition are included in the Company's Marine Products and Services
segment.

The acquisitions discussed above were accounted for using the purchase
method of accounting. The results of operations of all acquisitions are included
in the Consolidated Statements of Operations from their respective dates of
acquisition. The purchase price was allocated to the net assets acquired based
upon their estimated fair market values at the date of acquisition. The 2002 and
2003 acquisitions, with the exception of the ReedHycalog acquisition, are not
material to the Company individually or in the aggregate for each applicable
year, therefore pro forma information is not presented. See Note 13 for
supplemental cash flow information concerning acquisitions.

13. SUPPLEMENTAL CASH FLOW INFORMATION

The following table summarizes investing activities relating to acquisitions
(in thousands):

14. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company's 50.01% owned joint venture, Voest-Alpine, is accounted for
under the equity method of accounting due to the minority owner having
substantive participating rights. Summarized financial information for
Voest-Alpine is as follows (in thousands):

The Company's equity in earnings differs from its proportionate share of net
income (loss) due to the elimination of intercompany profit on Voest-Alpine
sales to the Company.

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15. EXITING PRODUCT LINES

On March 25, 2003, the Company sold Star Iron Works, Inc. (Star), a
manufacturer of drilling tools for the water well, construction, and utility
boring industries, for $11.0 million in cash and a note valued at approximately
$0.9 million. The gain recognized on the sale of Star was $1.3 million, $0.8
million net of tax, and is recorded in the Consolidated Statements of Operations
as "Other, Net".

The Company also recently announced the shut-down of its Bryan, Texas
facility, where the majority of its industrial drill pipe and oil and gas tubing
operations have occurred. Future operations, if any, will be conducted at the
Company's Navasota, Texas location.

16. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The following unaudited condensed consolidating balance sheet as of March
31, 2003, condensed consolidating statements of operations for the three months
ended March 31, 2002 and 2003 and condensed consolidating statements of cash
flows for the three months ended March 31, 2002 and 2003 are provided for the
Company's domestic subsidiaries that are guarantors of debt securities issued by
the Company. The Company's obligations to pay principal and interest under the
9% and 9 5/8% Senior Notes are guaranteed on a joint and several basis by all of
the Company's domestic subsidiaries. The guarantees are full and unconditional
and the guarantor subsidiaries are 100% owned by Grant Prideco, Inc.

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion is intended to assist you in understanding our
financial condition as of December 31, 2002 and March 31, 2003, and our results
of operations for each of the three months ended March 31, 2002 and 2003. This
discussion should be read with our financial statements and their notes included
elsewhere in this report as well as our financial statements and related
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2002, previously filed with the
Securities and Exchange Commission in our Annual Report on Form 10-K.

Our discussion of our results of operations and financial condition contains
statements relating to our future results, including certain projections and
trends, which constitute forward-looking statements. Certain risks and
uncertainties may cause actual results to be materially different from projected
results contained in these forward-looking statements and other disclosures.
These risks and uncertainties are more fully described under "Forward-Looking
Statements and Exposures" below. As used herein, unless otherwise required by
the context, the term "Grant Prideco" refers to Grant Prideco, Inc. and the
terms "we," "our," and similar words refer to Grant Prideco and its
subsidiaries. The use herein of such terms as "group," "organization," "we,"
"us," "our," and "its," or references to specific entities, are not intended to
be a precise description of corporate relationships.

GENERAL

We are the world leader in drill stem technology development and drill pipe
manufacturing, sales and service; a global leader in drill bit technology,
manufacturing, sales and service; a leading provider of high-performance
engineered connections and premium tubulars in North America; and a provider of
a variety of products, services and technological solutions to offshore markets
worldwide. We historically have operated through three primary business
segments: (1) Drilling Products and Services, (2) Tubular Technology and
Services (previously Premium Connections and Tubular Products) and (3) Marine
Products and Services. On December 20, 2002, we acquired the ReedHycalog drill
bits business from Schlumberger Technology Corporation and its affiliates, which
we are operating as our fourth primary business segment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In our annual report on Form 10-K for the year ended December 31, 2002, we
identified our most critical accounting policies upon which our financial
condition depends as those relating to revenue recognition, accounts receivable
valuation, inventory valuation, business combinations, impairment of long-lived
assets, goodwill and intangible assets, estimates related to contingent
liabilities and future claims, and pension liabilities.

MARKET TRENDS AND OUTLOOK

Our business is materially dependent on the level of oil and gas drilling
activity worldwide, which, in turn, depends on the level of capital spending by
major, independent, and state-owned exploration and production companies. This
capital spending is driven by current prices for oil and gas and the perceived
stability and sustainability of those prices. All of our business segments
follow domestic and international rig counts levels, however, their revenues,
cash flows, and profitability follow the rig counts at different stages within
the market cycles. Drill pipe demand is also a function of customer inventory
levels and typically lags changes in the rig counts by approximately six months.
Results from our Tubular Technology and Services segment should closely follow
changes in North American rigs drilling for deep-gas and offshore, but
short-term demand can also be affected by inventories held by OCTG distributors.
Demand for our marine products and services follows the level of offshore and
deepwater drilling activity, which, although dependent upon prices for oil and
gas, is less likely to follow short-term changes in oil and gas prices as these
projects are more capital intensive and are typically based upon long-term
forecasts for oil and gas prices. Historically, drill bit demand and
ReedHycalog's earnings and cash flows have closely tracked the domestic and
international rig count, which we believe will offset somewhat the cyclicality
and mid-to-late cycle returns from our Drilling Products and Services segment.

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Prices for oil and natural gas have been and continue to be volatile, and
material declines adversely affect the demand for our products and services. The
following table sets forth certain information with respect to oil and natural
gas prices and the North American (U.S. and Canadian) and international rig
counts:

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(a) Price per barrel of West Texas Intermediate (WTI) crude. Source: U.S. Energy
Information Administration.

(b) Price per MMBtu. Source: U.S. Energy Information Administration.

(c) Source: Baker Hughes Rig Count (International Rig Count excludes China and
the former Soviet Union).

FUTURE MARKET TRENDS AND EXPECTATIONS

During the first quarter of 2003, North American rig counts increased and we
expect them to continue to increase throughout the remainder of 2003. To date,
however, these increases have only marginally benefited our operations, as the
increased rig count has been mainly attributable to shallow land-based drilling
as opposed to deep-gas and offshore drilling that are important drivers for the
majority of our operations. As a result, we currently expect that second quarter
2003 results of operations will be flat to slightly better than our first
quarter 2003 results of operations. For all of 2003, we currently expect to be
in line with our original guidance of $0.30 per share. Our forward-looking
statements do not take into account any non-recurring items that may affect
results of operations including transition expenses associated with the
ReedHycalog acquisition and costs associated with the shut-down of our Bryan,
Texas facility.

In order to meet our expectations for the second quarter of 2003, it will be
necessary for us to obtain and complete new drill pipe orders that were not
committed to as of the end of the first quarter. In addition, in order to meet
our expectations for all of 2003, our drill stem order rate and backlog as well
as our premium connection businesses will need to increase substantially. In
order for this to occur, rig counts must continue to increase throughout the
remainder of 2003, including increases in rigs drilling offshore and for
deep-gas, and our customers' perceptions regarding the sustainability of these
rig counts must cause them to increase their purchases of drill pipe and drill
stem products.

All of our forecasts and assumptions are considered forward-looking
statements, and are subject to numerous risks and uncertainties, including those
highlighted under "Forward-Looking Statements and Exposures".

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RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002

The following table summarizes the results of the Company (in thousands):

- ----------

(a) We calculate EBITDA by taking operating income (loss) and adding back
depreciation and amortization, excluding the impact of other charges. EBITDA
is presented herein because it enhances an investor's understanding of our
ability to satisfy principal and interest obligations with respect to our
indebtedness and to use cash for other purposes, including capital
expenditures. EBITDA is also used for internal analysis. Calculations of
EBITDA should not be viewed as a substitute to calculations under U.S. GAAP,
in particular operating income and net income. In addition, EBITDA
calculations by one company may not be comparable to another company. Our
EBITDA for the three months ended March 31, 2002 and 2003 were as follows:

CONSOLIDATED RESULTS

Net income was $4.0 million ($0.03 per share) on revenues of $190.5 million
in the first quarter of 2003, compared to net income of $1.1 million ($0.01 per
share) on revenues of $152.1 million in the first quarter of 2002. Net income
for last year's first quarter includes a cumulative effect of accounting change
of $6.4 million, net of tax, related to a transitional goodwill impairment
charge related to the adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" effective January 1,
2002.

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The $38.4 million sequential increase in revenues primarily resulted from
$53.3 million of incremental revenues related to ReedHycalog and a $5.4 million
increase at the Marine Products and Services segment, offset by a $14.2 million
decrease at the Drilling Products and Services segment, a $3.9 million decrease
at the Tubular Technology and Services segment and a $2.1 million decrease in
the Other segment.

Consolidated operating income of $17.0 million in the first quarter of 2003
included $1.5 million of ReedHycalog transition costs. (The remaining portion of
the transition costs is included in other expense.) Excluding these costs,
operating income was $18.5 million in the first quarter of 2003, which is flat
when compared to last year's first quarter. On the same basis, operating income
margin of 10% in the first quarter of 2003 compares to 12% in last year's first
quarter. The decrease in margins primarily relates to decreased margins in the
Drilling Products and Services segment, partially offset by favorable margins at
ReedHycalog.

SEGMENT RESULTS

DRILLING PRODUCTS AND SERVICES SEGMENT

Our Drilling Products and Services revenues decreased $14.2 million, or 18%,
in the first quarter of 2003 as compared to the same period in 2002.
Year-over-year, drill pipe footage sold was essentially flat at 1.3 million feet
sold. This primarily reflects the decline in the North American drill pipe
market, offset by additional volume from our Chinese acquisition completed in
last year's second quarter. On these flat year-over-year volumes, the decrease
in revenues relates to a change in product mix toward the Chinese market, and
certain international markets where small diameter, non-premium product usage is
prevalent. Operating income in the Drilling Products and Services segment
decreased $12.4 million, or 58%, in the first quarter of 2003 as compared to the
same period in 2002 and operating margins of 14% are down from 27% in last
year's first quarter. These decreases reflect the decrease in revenues coupled
with an unfavorable shift in product mix, and less absorption of overhead costs
due to lower production at our facilities other than China. This decrease also
reflects a decrease in equity earnings related to our investment in JSG, which
is now consolidated due to our majority interest purchase mentioned above, and
related to our investment in Voest-Alpine due to decreased worldwide oil and gas
drilling activity.

REEDHYCALOG(TM)

ReedHycalog, which was acquired on December 20, 2002, reported revenues of
$53.3 million in the first quarter of 2003. Operating income in the first
quarter of 2003, which includes $1.5 million of transition costs related to the
integration of ReedHycalog, was $9.7 million, and the operating income margin
was 18%. Excluding the transition costs, operating income was $11.2 million, and
the operating income margin was 21%. We expect transition expenses to decline
approximately 50% during the second quarter of 2003, and then rapidly decline
for the remainder of the year.

TUBULAR TECHNOLOGY AND SERVICES SEGMENT

Our Tubular Technology and Services segment revenues decreased $3.9 million,
or 7%, in the first quarter of 2003 as compared to the same period in 2002. This
decrease reflects the lower Gulf of Mexico rig count activity, down 9% from last
year's first quarter, coupled with slightly lower domestic mill activity. The
first quarter of 2003 also includes incremental revenues related to our purchase
of Grey-Mak Pipe, Inc. in September 2002. Operating income in the Tubular
Technology and Services segment decreased $0.1 million, or 4%, in the first
quarter of 2003 as compared to the same period in 2002. This decrease reflects
the decline in revenues partially offset by a higher margin product mix in the
first quarter of 2003 as compared to the same period in 2002.

MARINE PRODUCTS AND SERVICES SEGMENT

Our Marine Products and Services revenues increased $5.4 million, or 42%, in
the first quarter of 2003 as compared to the same period in 2002. Operating
income was $0.2 million in the first quarter of 2003 as compared to a loss of
$0.3 million in the first quarter of 2002. These improved results are due to the
purchase of Rotator in the second quarter of 2002 and a 17% increase in sales at
XL Systems.

17

OTHER OPERATIONS

Our Other operations revenues decreased $2.1 million, or 30%, in the first
quarter of 2003 as compared to the same period in 2002, however, our operating
loss decreased from a loss of $1.0 million in the first quarter of 2002 to a
loss of $0.3 million in the first quarter of 2003.

To date we have not made any significant income from this segment and have
put together a plan to exit these product lines. On March 25, 2003, we sold Star
Iron Works, Inc. (Star), a manufacturer of drilling tools for water well,
construction, and utility boring industries, for $11.0 million in cash and a
note valued at approximately $0.9 million. We recorded a gain of $1.3 million on
the sale, $0.8 million after tax. We also recently announced the closure of our
Bryan, Texas facility, where the majority of our industrial drill pipe
operations have occurred. Future operations, if any, will be conducted at our
Navasota, Texas location.

OTHER ITEMS

Our interest expense increased $4.8 million in the first quarter of 2003 as
compared to the same period in 2002. This increase is due to new debt related to
the ReedHycalog acquisition in December 2002. We issued $175 million 9% Senior
Notes Due 2009 and entered into a new $240 million Senior Credit Facility
(Senior Credit Facility), which includes a $50 million term loan.

Other, Net increased $1.3 million in the first quarter of 2003 as compared
to the same period in 2002. This increase is primarily due to favorable foreign
exchange fluctuation of $1.3 million; gain on the sale of Star of $1.3 million,
partially offset by transition costs of $1.1 million associated with the
ReedHycalog integration.

Our effective tax rate for the first quarter of 2003 was 34.5% as compared
to 33% for the same period in 2002. This increase in the effective tax rate is
due to higher expected foreign earnings in 2003 related to the ReedHycalog
acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Overview

At March 31, 2003, we had cash and cash equivalents of $21.7 million and net
working capital of $322.1 million, excluding short-term debt, as compared to
cash and cash equivalents of $21.9 million and net working capital of $356.9
million, excluding short-term debt, at December 31, 2002. This $34.8 million
decrease in net working capital reflects declining market conditions when
compared to the first quarter of 2002 coupled with the working capital
management program we implemented in the fourth quarter of 2001, which focuses
on minimizing the cash conversion cycle related to inventories, accounts
receivable, and accounts payable.

The following table summarizes our cash flows provided by operating
activities, net cash used in investing activities and net cash used in financing
activities for the periods presented (in thousands):

OPERATING ACTIVITIES

Net cash flows provided by operating activities increased by $3.0 million
for the three months ended March 31, 2003 as compared to the same period in
2002. The improvement in operating cash flows is attributable to the ReedHycalog
acquisition in December 2002 coupled with the working capital management program
we implemented in the fourth quarter of 2001. Excluding the effects of the
ReedHycalog acquisition, operating income was down $11.2 million when compared
to the same period in the prior year. This decrease reflects the downturn in the
oil and gas drilling markets during 2002.

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INVESTING ACTIVITIES

Net cash used in investing activities increased by $0.5 million for the
three months ended March 31, 2003 as compared to the same period in 2002. The
change from the prior year includes net cash used in acquisitions of $7.0
million related to the remaining 35% interest purchase of Rotator and costs
associated with the ReedHycalog acquisition, which were more than offset by
proceeds received of $11.0 million from the sale of Star in the first quarter of
2003. The prior year first quarter includes net cash used in the acquisition of
$3.3 million relating to the additional 48.5% interest purchase of JSG.

FINANCING ACTIVITIES

Net cash used in financing activities was $31.8 million for the three months
ended March 31, 2003 as compared to net cash used in financing activities of
$14.4 million for the same period in 2002. The increase is due primarily to
repayments on our Senior Credit Facility.

Capital Expenditures

Our capital expenditures for property, plant, and equipment totaled $10.4
million and $10.5 million for the three months ended March 31, 2002 and 2003,
respectively. We currently expect to expend approximately $25.0 million for
capital expenditures for property, plant, and equipment during the remainder of
2003.

New Senior Credit Facility and Other Long-Term Debt

Our debt balances are primarily comprised of: (1) borrowings under our
Senior Credit Facility that we entered into contemporaneously with the closing
of the ReedHycalog acquisition and which replaced our prior revolving credit
facility, (2) our $200 million 9 5/8% Senior Notes due 2007, and (3) our $175
million 9% Senior Notes due 2009.

At March 31, 2003, we had outstanding borrowings of $77.5 million under the
Senior Credit Facility, of which $48.2 million related to the term loan, and
$4.4 million had been used to support outstanding letters of credit. Net
borrowing availability was $110.8 million. At December 31, 2002, we had
outstanding borrowings of $107.3 million, of which $50 million related to the
term loan, and $4.2 million had been used to support outstanding letters of
credit. Net borrowing availability was $91.0 million.

We estimate our required principal and interest payments for our outstanding
debt to be approximately $50.6 million for the remainder of 2003. We currently
expect to satisfy all required capital expenditures and debt service
requirements during 2003 from operating cash flows, existing cash balances, and
the revolver portion of our Senior Credit Facility.

Based on our current projected capital expenditures and required principal
and interest payments, our operating cash flows, existing cash balances, and
estimated availability under the Senior Credit Facility, we believe we can
satisfy all of our expected commitments during the next 12 months and will have
sufficient liquidity in the event of a prolonged market downturn to not only
maintain our existing operations but to take advantage of strategic
opportunities that may present themselves during any such period. Acquisitions
and expansions will be financed from cash flow from operations, borrowings under
our Senior Credit Facility, or through the issuance of additional debt and
equity financing, as appropriate. Any future financing will be arranged to meet
our requirements, with the timing, amount, and form of issue dependent on the
prevailing market and general economic conditions.

Other Commitments

As part of our agreement to invest in Voest-Alpine, in 1999 we entered into
a four-year supply contract with Voest-Alpine under which we agreed to purchase
a minimum of 60,000 metric tons of green tubulars per year through September
2003. Because this agreement requires us to purchase tubulars regardless of our
needs, our purchases under this agreement may be made for inventory during
periods of low customer demand. These types of purchases would require us to use
our working capital and expose us to risks of excess inventory during those
periods. Although these purchases could require us to expend a material amount
of money, we expect that we will be able to eventually use or sell all of the
tubular products we are required to purchase from Voest-Alpine. We currently are
in the process of extending the term of this supply agreement and do not believe
there will be any material changes to the current term and conditions of this
agreement.

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In connection with our spinoff from Weatherford International, Inc.
(Weatherford) in April 2000, we entered into a preferred supplier agreement with
Weatherford in which Weatherford agreed to purchase at least 70% of its
requirements for drill stem products from us. In return, we agreed to sell those
products at prices not greater than the price that we sell to similarly situated
customers, and, as partial consideration for amounts due to Weatherford at that
time, we provided Weatherford a $30 million credit towards 20% of the purchase
price of those products. We recently renegotiated this contract with
Weatherford, which extended this contract until March 2005 and reduced the
outstanding credit balance to $10.0 million.

RECENT ACCOUNTING PRONOUNCEMENTS

For recent accounting pronouncements, see Note 11 of the unaudited
consolidated financial statements included herein.

FORWARD-LOOKING STATEMENTS AND EXPOSURES

In light of the SEC's Regulation FD, we have elected to provide in this
report various forward-looking statements and operational details. We have done
so to assure full market disclosure of information that we generally make
available to our investors and securities analysts. We expect to provide updates
to this information on a regular basis in our periodic and current reports filed
with the SEC. We have also made our investor conference calls open to all
investors and encourage all investors to listen in on these calls. We will
publicly announce the call-in information in a press release before such calls.
We are providing this information to assist our stockholders in better
understanding our business. These expectations reflect only our current view on
these matters as of the date of this report and are subject to change based on
changes of facts and circumstances. There can be no assurance that these
expectations will be met and our actual results will likely vary (up or down)
from those currently projected. These estimates speak only of our expectations
as of the date of this report and we make no undertaking to update this
information. The absence of an update should not be considered as an affirmation
of our current expectations or that facts have not changed during the quarter
that would impact our expectations.

In modeling our earnings for all of 2003, we have made numerous assumptions
regarding our operations that are more fully described in our Annual Report on
Form 10-K.

RISK FACTORS AND EXPOSURES

Our Company and the businesses in which it operates are subject to various
risks and uncertainties that could have adverse consequences on our results of
operations and financial condition and that could cause actual results to be
materially different from projected results contained in the forward-looking
statements in this report and in our other disclosures. Investors should
carefully consider these risks and uncertainties when evaluating our Company and
the forward-looking statements that we make. These risks and uncertainties
include, but are not limited to, the following:

A DECLINE OR STAGNATION IN DOMESTIC AND WORLDWIDE OIL AND GAS DRILLING
ACTIVITY WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

Our business is materially dependent on the level of oil and gas drilling
activity in North America and worldwide, which in turn depends on the level of
capital spending by major, independent and state-owned exploration and
production companies. This capital spending is driven by current prices for oil
and gas and the perceived stability and sustainability of those prices. Oil and
gas prices have been subject to significant fluctuation in recent years in
response to changes in the supply and demand for oil and gas, market
uncertainty, world events, governmental actions, and a variety of additional
factors that are beyond our control, including:

o the level of North American and worldwide oil and gas exploration and
production activity;

o worldwide economic conditions, particularly economic conditions in North
America;

o oil and gas production costs;

o the expected costs of developing new reserves;

o national government political requirements and the policies of the
Organization of Petroleum Exporting Countries (OPEC);

20

o the price and availability of alternative fuels;

o environmental regulation; and

o tax policies.

Decreased demand for our products results not only from periods of lower
drilling activity, but also from the resulting build up of customer inventory of
drill pipe associated with idle rigs, which can be used on active rigs in lieu
of new purchases. The time period during which drill pipe inventory is used is a
function of the number of rigs actively drilling and the expected future level
of drilling activity. A decrease in the number of rigs actively drilling results
in a large amount of unused drill pipe on idle rigs and a decrease in demand for
new drill pipe. In general, customers begin placing orders for new drill pipe
when expected rig utilization over the next two quarters approaches the number
of rigs for which customers have available drill pipe.

Our forward-looking statements assume that rig counts, particularly in North
America, will continue to increase throughout the remainder of 2003 and that
this will drive significant increases in our drill stem and tubular technology
products, in particular, during the second half of 2003. A decline, or even a
leveling off or stagnation of drilling activity, would cause our actual results
to be significantly less than those currently expected.

OUR EXPECTATIONS FOR OUR RESULTS OF OPERATIONS DURING 2003 ARE DEPENDENT
UPON A SIGNIFICANT INCREASE IN OUR DRILL STEM AND PREMIUM CONNECTION
BUSINESSES DURING THE REMAINDER OF THE YEAR.

Entering the second quarter of 2003, our consolidated backlog was $107.1
million. Although this backlog is at a higher level than the past several
quarters, and we believe is continuing to grow, in order to meet our
expectations for the second quarter of 2003, it will be necessary for us to
obtain and complete new drill pipe orders that were not committed to as of the
end of the first quarter. In addition, in order to meet our expectations for all
of 2003, our drill stem order rate and backlog as well as our premium connection
businesses will need to increase substantially. In order for this to occur, rig
counts must continue to increase throughout the remainder of 2003, including
increases in rigs drilling offshore and for deep gas, and our customers'
perceptions regarding the sustainability of these rig counts must cause them to
increase their purchases of drill pipe and drill stem products.

AN ECONOMIC DOWNTURN COULD ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS AND
SERVICES AND OUR RESULTS OF OPERATIONS.

The U.S. and worldwide economies slowed during 2002. The decline in the U.S.
economy has negatively impacted natural gas drilling activity. If expected
economic improvement in the U.S. does not occur or international markets decline
unexpectedly, our results of operations and financial condition could be
materially adversely affected.

INCREASES IN THE PRICES OF OUR RAW MATERIALS COULD AFFECT OUR RESULTS OF
OPERATIONS.

We use large amounts of steel tubulars and bars in the manufacture of our
products. The price of these raw materials has a significant impact on our cost
of producing products. If we are unable to pass future raw material price
increases on to our customers, our margins and results of operations could be
adversely affected.

DUE TO INTENSE COMPETITION IN OUR INDUSTRY, OUR REVENUES MAY DECLINE IF WE
DO NOT DEVELOP, PRODUCE, AND COMMERCIALIZE NEW COMPETITIVE TECHNOLOGIES AND
PRODUCTS OR IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR CURRENT AND FUTURE
INTELLECTUAL PROPERTY RIGHTS RELATING TO OUR TECHNOLOGIES AND PRODUCTS.

The markets for our premium products and services are characterized by
continual developments. Substantial improvements in the scope and quality of
product function and performance can occur over a short period of time. In order
to remain competitive, we must be able to develop commercially competitive
products in a timely manner in response to changes in technology. Our ability to
develop new products and maintain competitive advantages depends on our ability
to design and commercially market products that meet the needs of our customers,
including delivery schedules, and product specifications.

Additionally, the time and expense invested in product development may not
result in commercially feasible applications that provide revenues. We could be
required to write-off our entire investment in a new product that does not reach
commercial viability. Moreover, we may experience operating losses after new
products are introduced and commercialized because of high start-up costs,
unexpected operating costs or problems, or lack of demand.

21

Many of our products and the processes we use to manufacture them have been
granted U.S. and international patent protection, or have patent applications
pending. Nevertheless, patents may not be granted for our applications and, if
patents are issued, the claims allowed may not be sufficient to protect our
technology. If our patents are not enforceable, or if any of our products
infringe patents held by others, our financial results may be adversely
affected. Our competitors may be able to independently develop technologies that
are similar to ours without infringing on our patents, which is especially true
internationally where the protection of intellectual property rights may not be
as effective. In addition, obtaining and maintaining intellectual property
protection internationally may be significantly more expensive than doing so
domestically. We may have to spend substantial time and money defending our
patents and, after our patents expire, our competitors will not be legally
constrained from developing products substantially similar to ours.

OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION ARE DEPENDENT UPON OUR
ABILITY TO SUCCESSFULLY INCREASE AND DECREASE, WITHOUT MATERIAL DISRUPTION,
OUR MANUFACTURING CAPACITY AND EXPENSE IN RESPONSE TO CHANGES IN DEMAND AND
TO MAINTAIN PRICES FOR OUR PRODUCTS, WHICH CAN BE ADVERSELY AFFECTED BY
CHANGES IN INDUSTRY CONDITIONS AND COMPETITIVE FORCES.

Our projections assume a steady increase in demand for our products and
services during 2003, in particular our drill stem products in which we are
forecasting significant increases during the second half of 2003. In order to
meet our projections, we assume we will increase our production during peak
demand periods with minimal operational disruption and inefficiency. If this
does not happen, our results of operations during ramp-up for high demand
periods could be materially adversely affected.

Beginning in 2001, we initiated substantial price increases for our drill
stem products, which began benefiting revenues and operating profit during the
third quarter of 2001. Our ability to maintain these price increases is subject
to various risks, including adverse changes in industry conditions, as well as
unexpected actions by our competitors. If market conditions or other factors
cause us to decrease prices, our results could be materially adversely affected.

OUR INTERNATIONAL OPERATIONS MAY EXPERIENCE SEVERE INTERRUPTIONS DUE TO
POLITICAL, ECONOMIC, OR OTHER RISKS, WHICH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION OR UNEXPECTED COSTS.

During the first quarter of 2003, we derived approximately 39% of our total
revenues from our facilities outside the U.S. In addition, large parts of sales
from our domestic locations were for use in foreign countries. In addition, many
of our key manufacturing operations are outside of the U.S. We currently do not
carry political risk insurance.

Our manufacturing facilities located outside of the U.S. incur costs in
local currencies. In addition, our long-term supply contract with Voest-Alpine
is denominated in Euros. We have no significant offset for revenues in Euros and
we have not hedged for currency risk associated with these exposures.

Overall, our operations in international locations, including Mexico,
Austria, Italy, China, Indonesia, United Kingdom, Canada, and Singapore are
subject to various political and economic conditions existing in those countries
that could disrupt operations or cause us to incur unexpected costs. These risks
include:

o changes in foreign tax laws;

o changes in regulations and labor practices;

o currency fluctuations and devaluations;

o currency restrictions and limitations on repatriation of profits; and

o political instability or military conflict.

Our foreign operations may suffer disruptions, and we may incur losses that
will not be covered by insurance. In particular, terrorist attacks and other
threats to U.S. national security and resulting U.S. military activity
throughout the world increase the possibility that our operations could be
interrupted or adversely affected. Such disruption could result in our inability
to ship products in a timely and cost-effective manner or our inability to place
contractors and employees in various countries or regions.

Any material currency fluctuations or devaluations, or political events that
disrupt oil and gas exploration and production, the

22

movement of funds and assets or increases in operating costs could materially
adversely affect our results of operations and financial condition.

We have entered into an agreement with Voest-Alpine, an entity of which we
own 50.01%, to purchase 60,000 metric tons of green tubulars per year through
September 2003. Our future results could be adversely affected if we are unable
to use or resell these tubulars. In addition, we have agreed to be responsible
for paying any "anti-dumping" duties in the U.S. on the resale of these
tubulars, which could affect our ability to resell the tubulars in the U.S.

IF WE ARE UNABLE TO ADEQUATELY RENEW OR REPLACE OUR SUPPLY CONTRACT WITH
VOEST-ALPINE AND OUR PROCESSING AGREEMENT WITH U.S. STEEL, OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION WOULD BE ADVERSELY AFFECTED.

Our four year supply contract with Voest-Alpine, under which we have agreed
to purchase a minimum of 60,000 metric tons of tubulars per year, expires in
September 2003. We currently are in the process of extending the term of this
supply agreement and do not believe there will be any material changes to the
current term and conditions of this agreement. If we are unable to successfully
renew or replace this supply contract on terms reasonably acceptable to us, our
results of operations would be adversely affected.

Similarly, we have entered into a contract with U.S. Steel to provide
processing services for virtually all of its large diameter casing products.
This contract expires on December 31, 2003, and we do not expect that it will be
renewed. During 2002, this contract contributed approximately $10 million in
revenues and earnings per share of approximately $0.02. If we are unable to
adequately replace this business with comparable quantities and sales margins,
our results of operations and financial condition could be adversely affected.

IN CONNECTION WITH OUR BUSINESS OPERATIONS AND THE REEDHYCALOG ACQUISITION,
WE COULD BE SUBJECT TO SUBSTANTIAL LIABILITY CLAIMS THAT ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

We have assumed a substantial portion of ReedHycalog's obligations,
responsibilities, liabilities, costs, and expenses arising out of or incurred in
connection with its business. Our products, as well as ReedHycalog's drill bits
and related technologies, are complex, and the failure of this equipment to
operate properly or to meet specifications may greatly increase our customers'
costs of drilling a well. In addition, many of these products are used in
hazardous drilling and production applications where an accident or product
failure can cause personal injury or loss of life; damage to property,
equipment, or the environment; regulatory investigations and penalties; and the
suspension of the end-user's operations. If our products or services fail to
meet specifications or are involved in accidents or failures, we could face
warranty, contract, or other litigation claims for which we may be held
responsible and our reputation for providing quality products may suffer.

Our insurance may not be adequate in risk coverage or policy limits to cover
all losses or liabilities that we may incur or be responsible for under the
ReedHycalog purchase agreement. Moreover, in the future, we may not be able to
maintain insurance at levels of risk coverage or policy limits that we deem
adequate or at premiums that are reasonable for us, particularly in the recent
environment of significant insurance premium increases. Further, any claims made
under our policies will likely cause our premiums to increase. Any future
damages deemed to be caused by our products or services, including those of
ReedHycalog, that are assessed against us and that are not covered by insurance,
or that are in excess of policy limits or subject to substantial deductibles,
could have a material adverse effect on our results of operations and financial
condition.

WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH, AND SAFETY LAWS AND REGULATIONS
THAT EXPOSE US TO POTENTIAL FINANCIAL LIABILITY.

Our operations are regulated under a number of federal, state, local, and
foreign environmental laws and regulations which govern, among other things, the
discharge of hazardous materials into the air and water, as well as the
handling, storage, and disposal of hazardous materials and the remediation of
contaminated sites. Compliance with these environmental laws is a major
consideration in the manufacturing of our products. Because we use and generate
hazardous substances and wastes in our manufacturing operations, we may be
subject to material financial liability for any investigation and clean up of
such hazardous materials, and any related personal injury damages or toxic tort
claims. We have not historically carried insurance for such matters.

In addition, many of our current and former properties are or have been used
for industrial purposes. Accordingly, we also may be subject to financial
liabilities relating to the investigation and remediation of hazardous materials
resulting from the action of previous owners or operators of industrial
facilities on those sites. Liability in many instances may be imposed on us
regardless of the legality of the original actions relating to the hazardous or
toxic substances or whether or not we knew of, or were responsible for, the
presence of those substances. Liabilities we have assumed in connection with the
ReedHycalog acquisition include, subject to certain

23

exceptions, certain obligations, liabilities, costs, and expenses for violations
of health, safety and environmental laws relating to the assets and include
certain unknown, as well as known, obligations, liabilities, costs, and expenses
arising or incurred prior to, on or after the closing date. Furthermore, with
certain exceptions, we may be required to indemnify Schlumberger against losses
incurred in connection with or related to these assumed liabilities.

We are also subject to various federal, state, local, and foreign laws and
regulations relating to safety and health conditions in our manufacturing
facilities. Those laws and regulations may subject us to material financial
penalties or liabilities for any noncompliance, as well as potential business
disruption if any of our facilities or a portion of any facility is required to
be temporarily closed as a result of any violation of those laws and
regulations. Any such financial liability or business disruption could have a
material adverse effect on our financial condition and results of operations.

WE ARE UNFAMILIAR WITH THE DRILL BITS BUSINESS AND MAY FACE UNEXPECTED
DIFFICULTIES IN OPERATING THE BUSINESS OR MAY NOT ACHIEVE THE EXPECTED
BENEFITS OF THE REEDHYCALOG ACQUISITION.

Prior to the ReedHycalog acquisition, we did not own or operate drill bits
businesses. The ReedHycalog acquisition has resulted in a new drill bit product
line for us. Our overall management team has limited experience in drill bits
development, manufacturing, and distribution operations, so we may face
regulatory and operational matters with which we are unfamiliar. In addition, we
may be operating in unfamiliar markets and be less able to respond to changes in
markets than our more experienced competitors. Therefore, until the ReedHycalog
assets, product lines, and operations have been transitioned into our
operations, it is difficult to predict accurately the effects of the ReedHycalog
acquisition. Furthermore, synergies and other benefits we expect to result from
the acquisition of ReedHycalog may not be achieved or, if achieved, may not be
achieved in the period in which they are expected. In addition, whether we will
actually realize anticipated benefits depends on future events and circumstances
beyond our control, such as economic conditions in general or in the oil and gas
industry in particular, and the other risk factors discussed elsewhere in this
report.

WE MAY NOT HAVE THE SAME COMPETITIVE ADVANTAGES IN THE DRILL BITS BUSINESS
AS WE ENJOY IN THE COMPETITIVE ENVIRONMENT FOR THE MANUFACTURE, SUPPLY, AND
PROVISION OF OILFIELD DRILL PIPE AND OTHER DRILL STEM PRODUCTS AND PREMIUM
CONNECTIONS AND TUBULAR PRODUCTS.

We hold a leading market position and have greater resources than many of
our competitors in the business of manufacturing, supplying, and providing
oilfield drill pipe and other drill stem products and premium connections and
tubular products. The competitive environment for the drill bits business
differs greatly, with Smith International, Baker Hughes, ReedHycalog, and
Halliburton being the largest competitors. Each of Smith International, Baker
Hughes, and Halliburton has greater marketing, financial, and technical
resources than we do and could use those resources to affect our ability to
compete, thereby reducing the sales, profits, and benefits we expect to receive
from the ReedHycalog acquisition.

ASSIMILATING REEDHYCALOG INTO OUR CORPORATE STRUCTURE MAY STRAIN OUR
RESOURCES AND MAY PROVE TO BE DIFFICULT.

The ReedHycalog acquisition was significantly larger than any of our
previous acquisitions. The significant expansion of our business and operations,
in terms of both geography and magnitude, resulting from the acquisition of
ReedHycalog may strain our administrative, operational, and financial resources.
In addition, the ReedHycalog acquisition included the drill bit assets, but did
not include all of the corporate infrastructure necessary to operate such
business. The creation of corporate and administrative infrastructure for
ReedHycalog and the assimilation of ReedHycalog into our Company will require
substantial time, effort, attention, and dedication of management resources and
may detract our management in unpredictable ways from our traditional business.
The transition process could create a number of potential challenges and adverse
consequences for us, including the possible unexpected loss of key employees,
customers or suppliers, a possible loss of revenues or an increase in operating
or other costs. These types of challenges and uncertainties could have a
material adverse effect on our business, financial condition, and results of
operations. We may not be able to manage the combined operations and assets
effectively or realize any of the anticipated benefits of ReedHycalog.

As part of our business strategy, we intend to pursue other strategic
acquisitions and we may face similar challenges regarding such acquisitions.

OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY ACTIONS UNDER U.S.
TRADE LAWS AND NEW FOREIGN ENTRANTS INTO U.S. MARKETS.

Although we are a U.S.-based manufacturing company, we own and operate
international manufacturing operations that support

24

our U.S.-based businesses. If actions under U.S. trade laws were instituted that
limited our access to these products, our ability to meet our customer
specifications and delivery requirements would be reduced. Any adverse effects
on our ability to import products from our foreign subsidiaries could have a
material adverse effect on our results of operations.

Additionally, foreign producers of tubular goods have been found to have
sold their products, which may include premium connections, for export to the
U.S. at prices that are lower than the cost of production, or their prices in
their home market, or a major third-country market. Anti-dumping orders
restricting the manner and price at which tubular goods from certain countries
can be imported are currently in effect. If such orders are revoked or changed,
we could be exposed to increased competition from imports that could reduce our
sales and market share. In addition, the premium connections market served by
our Atlas Bradford(R) product line is highly competitive. The level of
competition could further increase if foreign steel mills, with their own lines
of internationally accepted premium connections, more successfully penetrate the
U.S. markets.

OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED DUE TO AN
IMPLEMENTATION OF A NEW ENTERPRISE-WIDE RESOURCE PLANNING (ERP) SYSTEM.

We currently are implementing a new ERP system that we believe will, in the
long-term, significantly enhance our information systems, internal processes,
and controls. This implementation is ongoing, includes a significant amount of
management's time and dedication, and may distract management in unpredictable
ways from our core businesses. Additionally, the ERP system might not result in
the anticipated benefits and may actually cause disruptions and inefficiencies
in our businesses that could result in increases in our operating and other
costs that could adversely affect our results of operations.

OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED DUE TO UNEXPECTED
LITIGATION OR WARRANTY ISSUES ARISING FROM OUR PRODUCTS AND OPERATIONS.

Although we carry insurance that we consider customary for our industry,
litigation and claims for which we are not insured can occur, including employee
claims, intellectual property claims, breach of contract claims, and warranty
claims. Our forward-looking statements assume that such uninsured claims or
issues will not occur. As previously outlined under our critical accounting
policies, we account for warranty reserves on a specific identification basis.
As a result, a significant unexpected warranty issue during a particular quarter
or year could cause a material reduction in our results of operations in the
quarter or year that the reserve for such warranty is made.

MATERIAL CHANGES IN KEY ASSUMPTIONS ABOUT THE COMPANY'S REPORTING UNITS AND
THEIR BUSINESS PROSPECTS, OR CHANGES IN MARKET CONDITIONS, COULD RESULT IN
A GOODWILL IMPAIRMENT CHARGE.

At March 31, 2003, the Company has recorded goodwill of $395.3 million. SFAS
no. 142, "Goodwill and Other Intangible Assets" provides for an annual two-step
goodwill impairment test with respect to existing goodwill. The first step of
the test involves a comparison of the fair value of each of the Company's
reporting units, as defined under SFAS No. 142, with its carrying value. If the
carrying amount exceeds the fair value of a reporting unit, the Company is
required to complete the second step of the impairment test, which compares the
implied value of reporting unit goodwill with the carrying amount of that
goodwill. The Company's estimates of fair value are based on various valuation
techniques, including discounted cash flow projections and comparable company
market value multiples. The estimates of cash flows, based on reasonable and
supportable assumptions and projections, require management's judgment. Any
changes in key assumptions about the Company's reporting units and their
business prospects, or changes in market conditions, could result in a goodwill
impairment charge that could materially adversely affect our results of
operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES

FINANCIAL INSTRUMENTS

We are currently exposed to certain market risks arising from transactions
that we enter into in the normal course of business. These risks relate to
fluctuations in foreign currency exchange rates and changes in interest rates.

FOREIGN CURRENCY RISK

25

The functional currency for a majority of our international operations is
the applicable local currency. Results of operations for foreign subsidiaries
with functional currencies other than the U.S. dollar are translated using
average exchange rates during the period. Assets and liabilities of these
foreign subsidiaries are translated into U.S. dollars using the exchange rates
in effect at the balance sheet date, and the resulting translation adjustments
are included in stockholders' equity. However, foreign currency transaction
gains and losses are reflected in income for the period. We sometimes hedge our
exposure to changes in foreign exchange rates principally with forward
contracts.

Forward contracts designated as hedges of foreign currency transactions are
marked to the forward rate with the resulting gains and losses recognized in
earnings, offsetting losses and gains on the transactions hedged. We enter into
foreign exchange contracts only as a hedge against existing economic exposures
and not for speculative or trading purposes. The counterparties to our foreign
exchange contracts are creditworthy multinational commercial banks. We believe
that the risk of counterparty nonperformance is minimal. At March 31, 2003, we
had no open forward contracts.

Our manufacturing facilities located outside of the U.S. incur costs in
local currencies. In addition, our long-term supply contract with Voest-Alpine
is denominated in Euros. We have no significant offset for revenues in Euros and
we have not hedged for currency risk associated with these exposures.

INTEREST RATES

We are and will be subject to market risk for changes in interest rates
related primarily to our long-term debt. Excluding the Senior Notes, most of our
long-term borrowings are at variable rates, which reflect current market rates,
and therefore the fair value of these borrowings approximates book value. Based
upon these balances, an immediate change of one percent in the interest rate
would not cause a material change in interest expense on an annual basis.

The fair value of financial instruments which differed from their carrying
value at December 31, 2002 and March 31, 2003, were as follows (in millions):

Currently, we have variable interest rate debt totaling approximately $80.8
million. These variable rate debts expose us to the risk of increased interest
expense in the event of increases in short-term interest rates. If the variable
interest rate were to increase by 1% from March 2003 levels, our combined
interest expense would increase by approximately $0.8 million annually. The
carrying value of our variable interest rate debt approximates fair value as
they bear interest at current market rates.

26

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

In response to regulations promulgated by the Securities and Exchange
Commission relating to the recently enacted Sarbanes-Oxley Act, we have
instituted a formalized process intended to provide greater focus and accuracy
with respect to disclosures contained in our reports filed with the Securities
and Exchange Commission. These procedures include obtaining input and
recommendations from our key managers in our operating divisions and in our
legal, finance and accounting departments, detailed reviews of the financial and
operational results of each of our segments with senior management from these
divisions, input and review from our outside legal and accounting advisors, and
reviews and certificates from our key accounting and operating personnel
regarding our results of operations and books and records.

Within 90 days before the filing of this Report, the Company's principal
executive officer and principal financial officer evaluated the effectiveness of
the Company's disclosure controls and procedures we have instituted. Based on
the evaluation, our principal executive officer and principal financial officer
believe that:

1. the Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in
the reports it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms;

2. such information is accumulated and communicated to the Company's
management, including the Company's principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure; and

3. the Company's disclosure controls and procedures are effective.

CHANGES IN INTERNAL CONTROLS

There have been no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
evaluation referred to in the preceding paragraph, nor have there been any
corrective actions with regard to significant deficiencies or material
weaknesses.

PART II

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

1. Exhibits:

10.1 Amendment to Preferred Supplier Agreement

99.1 Section 906 Certifications

2. Reports filed on Form 8-K during the three months ended March 31, 2003 -

1. Report on Form 8-K, dated January 3, 2003, under Item 2. Acquisition
or Disposition of Assets, announcing the acquisition of ReedHycalog.
In connection with the acquisition, we also filed under Item 5.
Other Events, announcing a new credit facility and under Item 7.
Financial Statements, Pro Forma Information, and Exhibits, filing
the ReedHycalog financial statements.
2. Report on Form 8-K/A, dated January 3, 2003, filed January 21, 2003,
under Item 2. Acquisition or Disposition of Assets, announcing the
acquisition of ReedHycalog. In connection with the acquisition, we

27

also filed under Item 5. Other Events, announcing a new credit
facility and under Item 7. Financial Statements, Pro Forma
Information, and Exhibits, filing the ReedHycalog financial
statements and pro forma information.
3. Report on Form 8-K, dated February 5, 2003, under Item 9. Regulation
FD Disclosure, for a presentation to investors.
4. Report on Form 8-K, dated February 10, 2003, under Item 5. Other
Events, reporting our financial results for the fourth quarter and
fiscal year ended December 31, 2002.
5. Report on Form 8-K/A, dated January 3, 2003, filed April 4, 2003,
under Item 7. Financial Statements, Pro Forma Information, and
Exhibits, filing updated pro forma information related to the
ReedHycalog acquisition as of December 31, 2002.

28

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

GRANT PRIDECO, INC.

By: /s/ LOUIS A. RASPINO
--------------------------------------------------
Louis A. Raspino
Sr. Vice President and Chief Financial Officer

By: /s/ GREG L. BOANE
--------------------------------------------------
Greg L. Boane
Corporate Controller and Principal Accounting Officer

Date: May 15, 2003

29

CERTIFICATION

I, Michael McShane, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Grant Prideco, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's Board of Directors (or persons performing the equivalent
function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003 Signature: /s/ MICHAEL MCSHANE
--------------------- -------------------------------
President and Chief Executive Officer

30

CERTIFICATION

I, Louis A. Raspino, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Grant Prideco, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's Board of Directors (or persons performing the equivalent
function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003 Signature: /s/ LOUIS A. RASPINO
----------------- ----------------------------------
Sr. Vice President and Chief Financial Officer

31

EXHIBIT INDEX

Exhibit Number Description
- -------------- -----------

a. 10.1 Amendment to Preferred Supplier Agreement

b. 99.1 Section 906 Certifications