GRANT PRIDECO INC - 10-K Annual Report

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

FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-15423

GRANT PRIDECO, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0312499
(State or Other Jurisdiction (I.R.S. Employer
of 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)

Securities to be registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: NONE

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

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

Aggregate market value of Common Stock held by nonaffiliates as of June 30,
2003: $1,408,228,676

Number of shares of Common Stock outstanding as of March 2, 2004:
121,717,532

DOCUMENTS INCORPORATED BY REFERENCE

Listed below is the document parts of which are incorporated herein by
reference and the part of this report into which the document is incorporated:

(1) Proxy Statement for 2004 Annual Meeting of Stockholders - Part III

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TABLE OF CONTENTS

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FORM 10-K

PART I

ITEM 1. BUSINESS

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; and a leading provider of high-performance
engineered connections and premium tubular products and services. We operate
primarily through four business segments: (1) Drilling Products and Services,
(2) Drill Bits, (3) Tubular Technology and Services, and (4) Marine Products and
Services. Our Drill Bits segment is comprised entirely of ReedHycalog(TM), which
we purchased from Schlumberger Technology Corporation (Schlumberger) on December
20, 2002.

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
generally track the level of domestic and international drilling activity;
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 worldwide rig
count until customers no longer have sufficient inventory to sustain current and
near-term expected future activity. Drill bit demand and our Drill Bits
segment's earnings and cash flows have closely tracked the worldwide rig count.
Results from our Tubular Technology and Services segment generally follows
changes in North American offshore and natural gas rig counts, but short-term
demand is also affected by inventories held by oil country tubular goods (OCTG)
distributors. Demand for our marine products and services generally follow the
level of offshore and deepwater drilling activity in North America and
international locations.

Additional information regarding our revenues and foreign investments by
geographic region can be found in the footnotes to our consolidated financial
statements starting on page 40 of this Annual Report on Form 10-K.

Grant Prideco was incorporated in Delaware on June 22, 1990. Our corporate
headquarters is located at 1330 Post Oak Boulevard, Suite 2700, Houston, Texas
77056.

DRILLING PRODUCTS AND SERVICES SEGMENT

Our Drilling Products and Services segment manufactures and sells a variety
of drill stem products used for the drilling of oil and gas wells. The principal
products sold by this segment are: (1) drill pipe products, including tool
joints, (2) drill collars and heavy weight drill pipe, and (3) drill stem
accessories.

Our drill stem products wear out through a combination of friction and metal
fatigue and generally are utilized by our customers for a three to five year
period assuming regular use. Demand for our drill stem products is impacted
primarily by changes in drilling activity and worldwide rig activity. However,
since drill stem products are not consumables and represent more of a capital
investment by our customers, demand for these products also is significantly
impacted by the level of inventory held by our customers and their perceptions
as to future activity and their near-term need for new drill stem products. As a
result, even in periods of rising or strong drilling activity, our customers may
elect to defer purchases until their own inventory reaches levels at which
additional purchases are necessary to sustain their existing drilling
activities.

In recent years, we have seen increasing intensity of use of drill pipe and
other drill stem products, which causes these products to wear out faster. This
increased intensity of use results from more wells being drilled directionally,
horizontally, deeper or in more extreme downhole environments. We believe these
trends will favorably impact long-term demand for our drill stem products going
forward.

With the increased complexity of drilling activity, demand for our
proprietary line of eXtreme(TM) drilling and other premium drilling products has
increased. This value-added product line is specifically designed for extreme
drilling conditions such as extended reach, directional, horizontal, deep gas,
offshore, and ultra-deepwater drilling, as well as high-temperature,
high-pressure, and corrosive well conditions. Operators and drilling contractors
have embraced this product line as a way to improve their efficiency and assure

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performance when drilling under extreme conditions. We believe that our eXtreme
product line offers some of the highest-performance drilling products ever
brought to market and provides our customers with engineered solutions for some
of their most challenging drilling applications. In addition to our eXtreme
product line, our premium drill pipe products also include our Hi-Torque(R)
connections, proprietary sour-service grades, and other proprietary products.

Our drill stem products are sold to a variety of customers, including oil
and gas drilling contractors, rental tool companies, and major, independent, and
state-owned oil and gas companies. Our customers' purchasing decisions are
generally based on operational requirements, quality, price, and delivery. The
principal competitors for our drill stem products include Drilco Group (a
subsidiary of Smith International Inc.), Texas Steel Conversion, OMSCO
Industries (a subsidiary of ShawCor Ltd.), IDPA, and various smaller local
manufacturers in the U.S. and in foreign countries. We typically compete on
quality, technology, price, and delivery and we believe we are the technological
leader in our industry.

The following is a description of our principal drill stem products:

DRILL PIPE PRODUCTS

Drill pipe is the principal tool, other than the rig, required for the
drilling of an oil or gas well. Its primary purpose is to connect the
above-surface drilling rig to the drill bit. A drilling rig will typically have
an inventory of 10,000 to 25,000 feet of drill pipe depending on the size and
service requirements of the rig. Joints of drill pipe are connected to each
other with a welded-on tool joint to form what is commonly referred to as the
drill string or drill stem.

When a drilling rig is operating, motors mounted on the rig rotate the drill
pipe and drill bit. In addition to connecting the drilling rig to the drill bit,
drill pipe provides a mechanism to steer the drill bit and serves as a conduit
for drilling fluids and cuttings. Drill pipe is a capital good that can be used
for the drilling of multiple wells. Once a well is completed, the drill pipe may
be used again in drilling another well until the drill pipe becomes damaged or
wears out. We estimate that the average life of a string of drill pipe is three
to five years, depending on usage, and that an average rig will consume between
125 to 175 joints (3,875 to 5,425 feet) per year under normal conditions.

In recent years, the depth and complexity of the wells our customers drill,
as well as the specifications and requirements of the drill pipe they purchase,
have substantially increased. We estimate that over 95% of the drill pipe we
sell outside of China is required to meet specifications exceeding minimum
American Petroleum Institute (API) standards. We offer a broad line of premium
drilling products designed for the offshore, international, and domestic
drilling markets. Our premium drilling products include our proprietary lines of
XT(R) connections and our patented 5 7/8-inch drill pipe that delivers hydraulic
performance superior to standard 5 1/2-inch drill pipe, and weight benefits
superior to standard 6 5/8-inch drill pipe.

DRILL COLLARS

Drill collars are used in the drilling process to place weight on the drill
bit for better control and penetration. Drill collars are located directly above
the drill bit and are manufactured from a solid steel bar to provide necessary
weight.

HEAVY WEIGHT DRILL PIPE AND OTHER DRILL STEM PRODUCTS

Heavy weight drill pipe is a thick-walled seamless tubular product that is
less rigid than a drill collar. Heavy weight drill pipe provides a gradual
transition zone between the heavier drill collar and the lighter drill pipe.

We also provide kellys, subs, pup joints (short and odd-sized tubular
products), and other drill stem accessories. These products all perform special
functions within the drill string as part of the drilling process.

INTELLISERV JOINT VENTURE

We own 50% of this joint venture partially sponsored by the U.S. Department
of Energy to commercialize intelligent drill pipe that permits real-time
transfer of data through the drill string. This modified drill pipe is embedded
with a telemetry system that permits two-way data transmission along the drill
string at rates of up to two million bits per second, which is exponentially
greater than the data transmission rates for measurement in the drilling and
logging systems utilized today. We currently are in the prototype testing and
refinement stage and have not yet introduced a product commercially. Due to the
unproven nature of the technology and that it is still in its development state,
we can provide no assurances that it will be successful or be able to be
marketed and sold on a commercial basis.

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OPERATIONS

Our drill stem products are manufactured in the U.S., China, Italy, Mexico,
Singapore, Austria, and Indonesia. These products are sold and serviced through
over 16 sales and service facilities located around the world. During the fourth
quarter of 2003, we completed an evaluation of our existing manufacturing
capacities and locations. Following this manufacturing rationalization study, we
determined that we had excess capacity and duplicate operations in certain
locations that could be eliminated without affecting our ability to quickly and
efficiently react to market increases. As a result, we shut down our Bryan,
Texas facility, significantly downsized our Canadian operations, and
rationalized certain operations in our Veracruz, Mexico and Navasota, Texas
locations. We expect this rationalization to reduce operating costs by $11
million to $12 million annually. Additional charges of approximately $1.9
million are expected in the first quarter of 2004 related to severance, lease
termination, and other exit costs.

We believe we are the only fully vertically integrated drill pipe
manufacturer in the world, controlling each facet of the drill pipe
manufacturing process. We manufacture the green tube (drill pipe tube that has
not been heat-treated or processed), the tool joint, and complete the finishing
and welding operations. We believe this unique manufacturing strategy provides
us with significant competitive advantages over other drill pipe manufacturers,
including those located outside the U.S. that may have labor and other cost
advantages over our U.S.-based manufacturing operations. By controlling each
facet of the drill pipe manufacturing process, we are able to tailor our
processes and techniques to meet our customers' demanding product
specifications, particularly with respect to green drill pipe tubes with body
wall thickness, wall uniformity, and other features that exceed minimum API
standards and are not readily available from third-party mills. During 2003, we
completed the final stages of a capital improvement program aimed at automating
certain manufacturing processes that we believe will reduce our costs and allow
us to respond more quickly to changes in demand.

DRILL BITS SEGMENT

Our Drill Bits segment's products and services are comprised of the
operations of ReedHycalog, which was acquired from Schlumberger in late December
2002. This segment is a leading global designer, manufacturer, and distributor
of drill bits and related technology to the oil and gas industry. This segment
also services its customer base through a technical sales and marketing network
in virtually every significant oil and gas-producing region in the world. Drill
bits are generally sold directly to drilling rig operators and to drilling
contractors on turnkey and footage contracts. Competition is based on technical
performance, price, and service.

Drilling through subsurface strata to locate oil and gas requires a drill
bit to be run on drill pipe or conveyed through coiled tubing and rotated by
surface rig equipment or downhole motors and turbines. Selecting the optimal bit
for a particular application represents one of the many challenges faced by oil
and gas companies and drilling contractors in planning a well. Similar to the
drill stem market, the primary market driver is worldwide drilling activity or,
more specifically, total footage drilled. In addition, demand is a function of
well depth and complexity with demand for fixed-cutter bits tied more strongly
to offshore, directional, or horizontal drilling.

Drill bits constitute a very small percentage of total well costs, but are a
critical component of well-construction economics. The time required to drill a
well is directly related to a drill bit's rate of penetration and footage
drilled prior to becoming dull and requiring replacement. On a cost-per-foot
basis, selecting the appropriate drill bit significantly reduces drilling costs
by decreasing drilling time and the number of trips required in and out of a
well. Typically, roller-cone bits are most appropriate for shallow land rig
operations, while higher performance roller-cone or fixed-cutter bits with
better rates of penetration and longer lives offer the most economic choice for
offshore and deep wells where rig rates and trip costs are high. However, there
is a trend towards increased use of fixed-cutter bits in operations that
traditionally have utilized roller-cone bits.

We provide a complete series of drill bits incorporating advanced materials
technology and a range of performance-enhancing features. This broad product
offering provides customers with maximum flexibility in selecting drill bits. In
addition, we provide drill bit selection and well planning services through our
field sales organization and bit optimization engineers.

Our principal competitors for the sale of drill bits are Hughes Christensen
(a division of Baker Hughes Inc.), Security DBS (a division of Halliburton
Company) and Smith Bits (a division of Smith International Inc.), as well as
numerous smaller competitors throughout the world.

The drill bit market consists of two product types: fixed-cutter bits and
roller-cone bits. We manufacture and sell both product types on a global basis.

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FIXED-CUTTER BITS

ReedHycalog first manufactured fixed-cutter natural diamond bits in 1953 and
synthetic polycrystalline diamond compact (PDC) bits in 1974.

The predominant fixed-cutter bit used in the oil and gas industry is the PDC
bit. PDC bits have no moving parts and are therefore intrinsically more reliable
than roller-cone bits, but they are generally more sensitive to geological
changes. PDC bits drill with a shearing action to remove rock by dragging the
diamond elements through the formation as the drill bit body rotates. PDC bits
allow faster rates of drilling penetration and can drill complete well sections
without the need for bit replacement. As a result, they are used in high cost
drilling locations (such as offshore or in remote locations) where their
technical advantages reduce drilling time sufficiently to justify the higher
cost product.

We provide fixed-cutter bit types and technology under various brand names
including TReX(TM), SteeringWheel(TM), DuraDiamond(TM), and many others. One of
the most significant recent innovations is the TReX cutter technology, which
significantly increases abrasion resistance (wear life) without sacrificing
impact resistance (toughness). This technology produces material that maintains
a sharp, low-wearing cutting edge that is producing results that exceed
conventional standards for PDC bit performance.

ROLLER-CONE BITS

ReedHycalog has manufactured roller-cone bits since 1916 and produces
roller-cone bits for a wide variety of oil and gas drilling applications.
Roller-cone bits consist of three rotating cones that have cutting teeth, which
penetrate the formation through a crushing action as the cones rotate in
conjunction with the rotation of the drill pipe. This cutting mechanism, while
less efficient than fixed-cutter bits, is more versatile in harder formations,
or where the geology is changing. We manufacture roller-cone drill bits with
milled teeth and with tungsten carbide insert teeth, which have a longer life in
harder formations.

We market our roller-cone products and technology globally under various
brand names including TuffDuty(TM), Titan(TM), and Mudpick(TM).

OPERATIONS

We manufacture fixed-cutter bits in Stonehouse (U.K.) and in Houston, Texas
and roller-cone bits in Singapore and a separate facility in Houston, Texas. All
facilities are ISO 9001 and 14001 certified.

We market our drill bits through a global sales and marketing network with
our employees strategically positioned around the world. Sales people are
located in North and South America, Europe, CIS, Africa, Middle East and Asia.
The sales force is technologically sophisticated and has developed strong
regional expertise.

TUBULAR TECHNOLOGY AND SERVICES SEGMENT

Our Tubular Technology and Services segment provides a full range of premium
threaded connections for casing, production tubing, and other accessory
equipment. This segment also manufactures and sells premium casing for use with
our connections as well as third-party connections. During 2003, we made a
strategic decision to exit the manufacture and sale of premium tubing. As a
result, this segment only markets and sells its premium connection designs for
use on third-party tubing.

The demand for our tubular technology and services is heavily dependent upon
North American natural gas drilling activity, and it is more particularly
dependent upon rigs drilling for deep gas in the Gulf of Mexico. On a short-term
basis, demand for these products is affected by the level of inventory held by
distributors of OCTG. Distributors often reduce purchases until their inventory
positions are brought in line with then-prevailing market conditions.

Over the long-term, a key factor positively impacting demand for our tubular
technology and services is the U.S. dependence on natural gas as a fuel. Gas
wells generally encounter higher reservoir pressure and corrosive environments,
which both typically increase proportionally with increased depths. Therefore,
gas wells can require larger diameter tubulars with thicker walls, higher
strength steel grades, and special metallurgy that is resistant to corrosive
elements. For these wells, premium connections, as opposed to standardized API
connections, are typically used to ensure the integrity of the tubulars
throughout the life of the well. Also,

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depletion rates for natural gas wells in the U.S. have significantly increased
during the past decade, which indicates that more wells will need to be drilled
to keep production levels constant. This increased demand in North America for
natural gas should increase the number of natural gas wells being drilled and
completed, thus increasing demand for our tubular technology and services.

The following is a description of our principal premium connections and
tubular products and services:

ATLAS BRADFORD(R) THREADING AND SERVICE

We market our premium engineered connections primarily through our Atlas
Bradford product line, which has been recognized as one of the industry's
leading connections for more than 40 years. We offer this product line primarily
in the U.S. and Canada due to a licensing arrangement that we previously entered
into in which the international rights to our Atlas Bradford connection line
were licensed to a third party. We also manufacture and sell connections for
drilling with casing and expandable operations on a worldwide basis and recently
introduced our ATS-E(TM), a semi-premium connection, for sale on a worldwide
basis.

Our customers use premium connections when they need a connection that
maintains a gas-tight seal while subjected to extreme tension, pressure, and
compression forces or while drilling near environmentally sensitive areas. The
failure of a premium connection can be a catastrophic event, leading to the loss
of a well or a blowout.

We actively promote our premium connections to oil and gas operators, the
ultimate end-users of the products, while selling the premium connections
through a network of major distributors in the U.S. and Canada. Additionally, we
provide tubular (casing, liner, and tubing) string design recommendations, a
full range test and demonstration facility, plus field service personnel to
assist in the running of the products. Our principal competitors for premium
connections are Hydril Company, IDPA, the Tenaris Group, Sumitomo, Kawasaki
Steel, Lone Star Steel, Citra Tubindo, Hunting Interlock, Inc., Benoit, Inc.,
and numerous other competitors domestically and internationally.

TUBE-ALLOY(TM) ACCESSORIES

Tubular accessories are manufactured and sold through our Tube-Alloy product
line and include flow control equipment, such as vacuum-insulated tubing, pup
joints, and landing nipples. Our vacuum-insulated tubing represents an advanced
flow-control solution used to minimize paraffin deposits, gas hydrate formation,
and annular pressure buildup in deepwater production environments. Through our
Tube-Alloy product line, we thread third-party tubular products with our Atlas
Bradford connections as well as with third-party connections licensed to us. Our
competitors for these products and services include Hunting Interlock, Inc.,
Benoit, Inc., Oil Tools International, international steel mills, and numerous
other regional competitors in the U.S. and worldwide.

TCA(TM)

Premium casing products are offered through our TCA product line. These
product offerings are designed to address that segment of the oilfield tubular
casing market that requires special product characteristics and performance not
generally offered by the tubular steel mills. Our TCA product line also provides
tubular processing services for major tubular steel mills.

We manufacture and sell premium casing, which includes high-performance,
proprietary, and custom-designed OCTG from 5 to 17 inches in diameter as well as
API casing. Our premium casing is designed for critical applications. To
capitalize on the high value spot market, we maintain common and high-alloy
green tube inventories to provide quick delivery of custom-finished casing and
coupling stock. To meet exact customer specifications and delivery requirements,
we offer our specialized Premium Pipe Pak(TM) product line. Premium Pipe Pak is
an innovative bundling of proprietary casing, premium engineered connections,
and inspection services offered in conjunction with an independent third-party
inspection company. This product line allows the customer the option of having
threaded and inspected critical-service casing shipped "rig-ready" directly to
the customer's well site, which reduces costs and delivery times.

TEXAS ARAI(TM) COUPLINGS

We manufacture and sell couplings through our Texas Arai product line.
Couplings are used to connect joints of premium and API casing and tubing. Texas
Arai is one of the world's largest providers of couplings for oilfield
applications. Texas Arai's couplings are provided to mills, distributors of
tubular products, and end-users. Our competitors for couplings include Wheeling
(a subsidiary of Lone Star Steel), Lincoln, Amtec, and domestic and
international steel mills.

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OPERATIONS

Our Tubular Technology and Services segment operations are located in Texas,
Louisiana, Oklahoma, Wyoming, and Canada. We also offer accessory threading
services in Venezuela. In connection with our TCA operations in Muskogee,
Oklahoma, we have entered into a long-term supply agreement with U.S. Steel
Corporation that we expect will supply the majority of our steel needs at this
location for the next several years.

MARINE PRODUCTS AND SERVICES SEGMENT

Our Marine Products and Services segment consists of our proprietary XL
Systems marine connections for large bore tubulars, including drive pipe, jet
strings, conductor casing, and top tension production risers.

The demand for our marine products and services is heavily dependent on the
level of offshore and deepwater drilling activity in the U.S. Gulf of Mexico and
other international locations. While this activity is dependent upon oil and gas
prices, deepwater projects are generally longer-term and more capital intensive
in nature and less likely to be influenced by short-term changes in oil and gas
prices.

Our XL System's product line offers the customer an integrated package of
large bore tubular products and services for offshore wells. This product line
includes our proprietary line of wedge thread marine connections on large bore
tubulars and related engineering and design services. We provide this product
line for drive pipe, jet strings, and conductor casing. We also offer weld-on
connections and service personnel in connection with the installation of these
products. Recently, we completed development of our new Viper(TM) weld-on
connector that we believe will permit us to penetrate traditional markets that
do not require the enhanced performance of our proprietary wedge thread design.

Risers generally come in sizes ranging from 9 5/8-inches to 13 3/8-inches
and represent that section of the offshore production system from the wellhead
and mudline up to the offshore production platform, which is typically either a
floating platform, tension leg platform or SPAR. We currently offer top tension
production risers and have begun to bundle our riser products with other
third-party technology to offer a complete line of riser products. Our risers
are sold with our various marine riser connectors. The tubular and coupling
components of our riser products are often manufactured for our Marine Products
and Services segment by our Atlas Bradford, TCA, and Texas Arai product lines.

Our XL Systems product line competes with DrilQuip, Vetco, Oil States,
Franks, and various other competitors domestically and internationally.

OPERATIONS

Our marine products and services are manufactured primarily at our locations
in Beaumont, Texas and Vlissingen, The Netherlands. In addition, during the
latter part of 2003, we moved our Asia Pacific facility from Singapore to a new
manufacturing location in Batam Island, Indonesia, which we expect will permit
us to more effectively service the Asian Pacific market.

OTHER SEGMENT

Our Other segment contains our operations with respect to two joint
ventures.

We are currently involved in a joint venture to develop POS-GRIP(TM)
wellheads for subsea applications. During the first quarter of 2004, we sold
back to our joint venture partner our right to POS-GRIP technology for jack-up
exploration applications and have granted our partner an option to purchase our
rights to POS-GRIP for subsea applications. We recently entered into a supply
contract with British Petroleum for the supply of up to 15 wellheads in
connection with this joint venture and we expect proceeds and profitability from
this contract to fund this operation during 2004 and 2005.

We also own 50% of a joint venture to develop and commercialize composite
rotors and staters for pumps and drilling motors. We expect to complete our
evaluation of this technology during 2004.

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OTHER BUSINESS DATA

RESEARCH AND ENGINEERING

We maintain an active research and engineering program. The program improves
existing products and processes, develops new products and processes, and
improves engineering standards and practices that serve the changing needs of
our customers. Our expenditures for research and engineering activities totaled
$2.5 million, $3.2 million, and $17.7 million in 2001, 2002, and 2003,
respectively. These costs do not include amounts expended by our Intelliserv or
composite pumps and motors joint ventures. The increase from 2002 to 2003
related primarily to the ReedHycalog acquisition, which has an extensive
research and engineering program.

Patents

Many of our business lines rely on patents and proprietary technologies. We
currently have numerous patents issued or pending. Many of our patents provide
us with competitive advantages in our markets. Although we consider our patents
and our patent protection to be important for our existing business and for the
development of new technologies and businesses, we do not believe that the loss
of one or more of our patents would have a material adverse effect on our
business as a whole.

BACKLOG

As of December 31, 2003, we had a product backlog of $120.6 million,
representing 14% of our total revenues for the year ended December 31, 2003.
This backlog was comprised of $81.3 million from Drilling Products and Services,
$22.6 million from Tubular Technology and Services, and $16.7 million from
Marine Products and Services. We had a product backlog as of December 31, 2001
and 2002, of $144.8 million, and $87.2 million, respectively. These year-end
backlogs represented 20% and 14% of our total revenues for those years,
respectively. The increase in product backlog from 2002 to 2003 reflects the
strengthening North American market conditions. Due to the nature of the drill
bits business, the ReedHycalog acquisition did not have any significant change
in our backlog levels.

INSURANCE

We believe that we maintain insurance coverage that is adequate for the
risks involved. However, there is always a risk that our insurance may not be
sufficient to cover any particular loss or that our insurance may not cover all
losses. For example, while we maintain product liability insurance, this type of
insurance is limited in coverage, and it is possible that an adverse claim could
arise that exceeds our coverage. Further, insurance rates are subject to wide
fluctuations, and changes in coverage could result in increases in our cost or
higher deductibles and retentions.

We do not maintain political risk insurance (generally designed to cover
expropriation and nationalization exposures), but do maintain all-risk property
insurance that covers losses from insurrection, civil commotion, and uprising.
This insurance does not cover losses resulting from a declared state of war and
provides a limited range of coverage from terrorist attacks.

FEDERAL REGULATION AND ENVIRONMENTAL MATTERS

Our operations are subject to federal, state, local, and foreign laws and
regulations relating to the energy industry in general and the environment in
particular. Environmental laws have over the years become more stringent, and
compliance with such laws increases our overall cost of operations. In addition
to affecting our ongoing operations, applicable environmental laws can require
us to remediate contamination at our properties, at properties formerly owned or
operated by us, and at facilities to which we sent waste materials for treatment
or disposal and impose liability for related damages of natural resources. While
we are not currently aware of any situation involving an environmental claim
that would likely have a material adverse effect on our business, it is always
possible that an environmental claim could arise with respect to one or more of
our current businesses or a business or property that one of our predecessors
owned or used that could have a material adverse effect.

Our expenditures to comply with environmental laws and regulations were not
material in 2003, and are not expected to be material in 2004. We also believe
that we are in material compliance with applicable environmental requirements
and our costs for compliance with environmental laws and regulations are
generally within the same range as those of our competitors. However, we can
offer no assurance that our costs to comply with environmental laws will not be
material in the future. Prior to our acquisition,

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ReedHycalog was conducting remediation of groundwater at certain of its
facilities. Based on currently available information, the indemnification
provided by Schlumberger in the acquisition agreement and contractual
indemnities from other third parties, we do not believe that these matters will
result in material expenditures by us. However, there can be no guarantee that
the indemnities will be available to cover all costs or that material
expenditures will not be incurred.

Our operations are also affected by trade laws affecting the import of OCTG,
drill pipe, and other products into the U.S. Although the majority of our
manufacturing operations, including the capital investment, employees, and costs
and expenses associated therewith, are located in the U.S., we have key
manufacturing facilities located outside the U.S., including our drill bit
operations in the U.K. and Singapore, our Voest-Alpine subsidiary located in
Austria, our drill pipe manufacturing facility located in Canada, and our tool
joint manufacturing operations in Mexico and Italy, that support our domestic
operations. Our premium tubular business also is affected by the level of
foreign imports of tubular products into the U.S.

Imports of products from our foreign locations that are utilized by our
domestic manufacturing operations can be the subject of investigations,
including antidumping and countervailing duty orders, into whether such products
are unfairly priced at low levels (i.e., dumping) and causing material damage to
the domestic industry, as well as investigations under Section 201 of the trade
laws into whether such imports have seriously damaged the domestic industry.
Although we believe we are the clear price leader for drill pipe and other drill
stem products and do not utilize imports from our foreign facilities to "dump"
our products, our products have been, and may in the future be, the subject of
such investigations.

EMPLOYEES

As of February 29, 2004, we had 4,102 employees. Certain of our operations
are subject to union contracts. These contracts, however, cover about 14% of our
total employees. We believe our relationship with our employees is good.

AVAILABLE INFORMATION

We file annual, quarterly, and other reports and other information with the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of
1934 (the "Exchange Act"). You may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. You may obtain additional information about the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site (http://www.sec.gov) that contains reports, proxy information statements,
and other information regarding issuers that file electronically with the SEC,
including us.

We also make available free of charge on or through our Internet site
(http://www.grantprideco.com) our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and other information statements and,
if applicable, amendments to those reports filed or furnished pursuant to
Section 13(a) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.

11

ITEM 2. PROPERTIES

The following table describes the principal manufacturing, other facilities
and offices we currently own or lease:

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, we are the subject of various claims and
litigation. We maintain insurance to cover many of our potential losses and we
are subject to various self-retentions and deductibles with respect to our
insurance. See "Business--Other Business Data--Insurance." Although we are
subject to various ongoing items of litigation, we do not believe that any of
the items of litigation that we are currently subject to will result in any
material uninsured losses to us. It is possible, however, that an unexpected
judgment could be rendered against us in the cases in which we are involved that
could be uninsured and beyond the amounts that we currently have reserved or
anticipate incurring for that matter.

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

No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of 2003.

12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has a par value of $0.01 per share and is listed and traded
on the New York Stock Exchange (NYSE) under the symbol "GRP." The following
table sets forth for the periods indicated the high and low sales prices of our
common stock as reported on the NYSE:

We have not paid cash dividends on our common stock since becoming a public
company. We currently intend to retain any earnings for use in our business and
do not anticipate paying cash dividends in the foreseeable future. In addition,
our senior credit facility and indenture governing our 9 5/8% Senior Notes Due
2007 and our 9% Senior Notes Due 2009 contain restrictions on our ability to pay
dividends. Refer to Part II -- Item 7 -- "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" for further information.

At March 2, 2004, we had 3,120 record holders of our common stock.

13

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain of our historical financial data.
Until we were spun off on April 14, 2000, we were a wholly-owned subsidiary of
Weatherford International, LTD. (Weatherford). This information has been
prepared as if we had been a stand-alone company for the periods presented. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K. The
following information may not be indicative of our future operating results.

- ----------
(a) Includes a cumulative effect of accounting change related to SEC Staff
Accounting Bulletin (SAB) No. 101 of $1.8 million, net of tax.

(b) Includes a cumulative effect of accounting change related to Financial
Accounting Standards Board (SFAS) No. 142, "Goodwill and Other
Intangible Assets" of $6.4 million, net of tax.

(c) We have calculated our pro forma earnings per share using our pro forma
basic and diluted weighted average shares outstanding for the 1999
period presented. In calculating our pro forma basic weighted average
shares, we have adjusted Weatherford's historical basic weighted
average shares outstanding for the applicable period to reflect the
number of shares that would have been outstanding at the time assuming
a distribution of one share of our common stock for each share of
Weatherford common stock. Our pro forma diluted weighted average shares
reflect an estimate of the potential dilutive effect of common stock
equivalents. This estimate is calculated based on Weatherford's
dilutive effect of stock options and restricted stock. The effect of
stock options and restricted stock is not included in the diluted
weighted average shares computation for periods in which a loss occurs
because to do so would have been anti-dilutive.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion is intended to assist you in understanding our
financial position as of December 31, 2002 and 2003, and our results of
operations for each of the years in the three-year period ended December 31,
2003. This discussion should be read with our consolidated financial statements
and their notes included elsewhere in this Annual Report on Form 10-K.

The 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.

14

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; and a leading provider of high-performance
engineered connections and premium tubular products and services. We operate
primarily through four business segments: (1) Drilling Products and Services,
(2) Drill Bits, (3) Tubular Technology and Services, and (4) Marine Products and
Services. Our Drill Bits segment is comprised entirely of ReedHycalog, which we
purchased from Schlumberger on December 20, 2002.

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
generally track the level of domestic and international drilling activity,
however their revenues, cash flows, and profitability follow the rig count at
different stages within the market cycles. Drill pipe demand is also a function
of customer inventory levels and typically lags changes in the worldwide rig
count until customers no longer have sufficient inventory to sustain current and
near-term expected future activity. Drill bit demand and our Drill Bits
segment's earnings and cash flows have closely tracked the worldwide rig count.
Results from our Tubular Technology and Services segment generally follows
changes in North American offshore, deep drilling, natural gas rig counts, but
short-term demand is also affected by inventories held by OCTG distributors.
Demand for our marine products and services generally 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.

During the three-year period ended December 31, 2003, the revenues,
profitability, and cash flows from each of our business segments have been
significantly impacted by changes in oil and gas prices and rig counts, which
were highly volatile during this period. The following table sets forth certain
information with respect to oil and gas prices at the dates indicated and the
North American (U.S. and Canadian) and international rig counts for the periods
reflected:

- ----------

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

(b) Price per MMBtu as of the dates presented above. Source: U.S.
Energy Information Administration.

(c) Source: Baker Hughes Rig Count (excludes onshore China and
Russia).

FUTURE MARKET TRENDS AND EXPECTATIONS

Looking forward, we anticipate that our 2004 results will be based on the
level of drilling activity and our customers' views regarding the sustainability
of that activity. These perceptions, in turn, will depend on their views
regarding the sustainability of oil and natural gas prices. Commodity prices
have been particularly strong during the first few months of 2004, and this has
resulted in some increased drilling activity. We expect this higher activity to
result in strong revenues from our Drill Bits segment; however, these higher
activity levels have not translated into the level of increased demand
historically experienced by our Drilling Products and Services and our Tubular
Technology and Services segments due to drill pipe inventory levels held by our
customers and OCTG

15

inventories held by our distributors. As a result, any ultimate increase in
activity for these segments, as well as the timing of such recovery, is
difficult to predict. In addition, our Tubular Technology and Services segment
is particularly influenced by the Gulf of Mexico rig count, which has remained
flat.

Our future results also could be affected by recent changes in steel prices,
which have significantly increased since the end of 2003, caused primarily by
significant increases in the prices paid by our suppliers for scrap and coke
utilized in their operations. As a result, our costs for tubulars utilized to
manufacture tool joints, drill collars, and heavy weight drill pipe have
increased. In addition, rising steel costs could offset some of the projected
benefits from our vertical integration in China. Our partner in our Austrian
joint venture also is seeking to renegotiate its supply contract for billets to
our Voest-Alpine affiliate. Although we intend to increase the prices that we
charge to our customers to pass along any cost increases borne by us as a result
of these recent changes in steel prices, there is no assurance that we will be
able to successfully accomplish this in all regions in which we operate. To the
extent we are unable to do so, our results of operations would be adversely
affected.

When planning our operations for 2004, we relied on various assumptions
including little improvement in drilling activity or drill pipe demand. As a
result, we have forecasted that we would again sell less drill pipe than
consumed by our customer base in 2004 as they continue to draw down their
inventories of these items. We have also forecasted productivity improvements
resulting from our manufacturing rationalization project being executed in early
2004 and cost reductions from vertical integration in China. These improvements
will be partially offset by increased expenses from inflation and the
strengthening Euro. Our assumptions and estimates regarding future earnings are
considered forward-looking statements and are subject to the risks and
uncertainties inherent in such statements, including those summarized under
"Forward-Looking Statements and Exposures" beginning on page 26 of this report.
Using these assumptions, we expect to earn between $0.30 and $0.34 per share
during 2004 (before any severance charges associated with our manufacturing
rationalization or other unusual, unknown, or special items).

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002

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

- ----------
(a) Includes other charges of $2.6 million, $2.4 million in Drilling
Products and Services and $0.2 million in Tubular Technology and
Services, related to fixed asset write-downs for idle assets that were
taken out of service pursuant to our ongoing automation and efficiency
initiatives and were classified as held for sale. The amount was
determined by use of internal appraisals and evaluations to assess the
net realizable value upon disposal based on expected future cash flows.

(b) Includes other charges of $4.5 million related to an executive employee
terminated in June 2002.

(c) Includes other charges of $24.9 million related to fixed asset
write-downs for our manufacturing rationalization program designed to
take out of service redundant or idle assets before their estimated
useful lives pursuant to our initiative to streamline manufacturing
capacity and improve operating efficiencies. The amount was determined
by use of internal appraisals and evaluations to assess the net
realizable value upon disposal based on expected future cash flows.

(d) 2003 includes transition costs of $3.9 million in Operating Income
(Loss) related to the ReedHycalog acquisition in December 2002.

(e) Includes other charges of $6.4 million, $0.4 million in Tubular
Technology and Services and $6.0 million in Other, classified as cost
of sales related to the write-down of inventories, primarily industrial
products, to their estimated net realizable values. The amount was
determined by use of internal appraisals and evaluations to assess the
estimated net realizable value upon disposition.

16

(f) Includes other charges of $6.4 million related to the write-down of two
technology joint ventures. Included in this amount is a goodwill
impairment of $2.5 million, an intangible asset write-off of $1.3
million, and an equity-method investment impairment of $2.6 million.

(g) Includes other charges of $1.5 million for stock compensation expense.
In May 2003, two members of the Board of Directors volunteered to step
down to reduce the number of common directors between us and our former
parent Weatherford, and vesting of their stock-based compensation was
accelerated. Also included is a $1.4 million credit reflecting the
actual 2003 settlement of a liability accrued as a charge in 2000.

Net income was $5.2 million ($0.04 per share) on revenues of $838.5 million
for 2003, compared to net income of $6.6 million ($0.06 per share) on revenues
of $639.7 million for the same period in 2002. The results for 2002 and 2003
include other charges along with transition costs of $4.4 million in 2003
related to the ReedHycalog acquisition and other ReedHycalog acquisition expense
of $2.0 million in 2002. Also included in 2002 net income is a cumulative effect
of an accounting change of $6.4 million, net of tax, related to a transitional
goodwill impairment charge reflecting the adoption of SFAS No. 142, "Goodwill
and Other Intangible Assets" effective January 1, 2002.

Consolidated operating income was $46.1 million in 2003, compared to $46.0
million in 2002, including other charges mentioned above.

Other operating expense (sales and marketing, general and administrative,
and research and engineering) as a percentage of revenue increased from 13% in
2002 to 23% in 2003. This increase relates primarily to our Drill Bits segment,
which has a significant worldwide sales and marketing infrastructure and an
extensive research and engineering program.

DRILLING PRODUCTS AND SERVICES

Our Drilling Products and Services segment revenues decreased $9.0 million,
or 3%, in 2003 as compared to 2002 and operating income decreased $39.3 million,
or 68%, for the same period. Included in 2003 operating income were fixed asset
write-downs of $24.9 million related to our decision to consolidate our drill
stem manufacturing operations based upon a rationalization study that was
completed during the fourth quarter of 2003. Included in 2002 operating income
were fixed asset write-downs of $2.4 million related to efficiency and
automation initiatives primarily at our operations located in Mexico. Operating
margin of 6% in 2003 was down from 18% in 2002 including charges. During 2003,
drill pipe footage sold increased 0.7 million feet, from 6.4 million feet sold
to 7.1 million feet sold when compared to 2002, and average sales price per foot
decreased by 10%. The decrease in price reflects a shift in product mix from
higher margin, large-diameter, drilling products to lower margin,
small-diameter, drilling products. Also contributing to the decrease in revenues
are decreased sales of tool joints and heavy weight drill pipe in 2003. These
decreases are partially offset by incremental revenues for 2003 related to the
majority purchase of Jiangsu Shuguang Grant Prideco Tubular Limited (JSG) in
March 2002.

DRILL BITS

On December 20, 2002, we acquired ReedHycalog, which comprises our Drill
Bits segment. Our Drill Bits segment reported revenues of $259.0 million in 2003
as compared to $5.3 million in 2002. Operating income was $58.4 million in 2003,
which includes $3.9 million of transition costs related to the integration of
ReedHycalog, and the operating income margin was 23% as compared to operating
income of $0.8 million and operating margin of 15% in 2002. ReedHycalog's
results have strengthened throughout the year reflecting worldwide sales
increases and successful market penetration of our new TReX fixed-cutter bit.

TUBULAR TECHNOLOGY AND SERVICES

Our Tubular Technology and Services segment revenues decreased $26.6
million, or 12%, in 2003 as compared to 2002 and operating income decreased $0.7
million, or 9%, for the same period. Included in 2003 operating income was a
$0.4 million inventory reserve charge to reflect the estimated realizable value
of inventory of exited tubing product lines. Included in 2002 operating income
was a charge of $0.2 million related to idled fixed assets. These revenue and
operating income decreases reflect the impact of exiting the tubing product
lines, starting in the first quarter of 2003, as well as decreased premium
threading and tubular processing activities. The 2003 results also include
incremental revenues and operating income related to our Grey-Mak business that
was acquired in September 2002.

MARINE PRODUCTS AND SERVICES

Our Marine Products and Services segment revenues decreased $0.9 million in
2003 as compared to 2002 and operating income

17

decreased $2.6 million, or 67% for the same period. Operating margin of 2% in
2003 was down from 5% in 2002. These decreases were due primarily to the sales
of our Rotator subsidiary in September 2003 and our Petrodrive product line in
December 2003, which were partially offset by increased sales by our XL Systems
product line. Operating income decreased at a greater percentage than revenues
as a result of increased research and development expenses and a shift in
product mix toward lower margin business.

OTHER OPERATIONS

Our Other segment included our industrial drill pipe operations and our
construction casing and water well operations. We exited the industrial drill
pipe business in the second quarter of 2003 and the construction casing and
water well business with the sale of our Star Iron Works subsidiary in the first
quarter of 2003.

In 2003, we moved our joint ventures relating to POS-GRIP technology from
our Marine Products and Services segment to our Other segment. Prior periods
have been restated to reflect this change. During the first quarter of 2004, we
sold to our partner our rights to POS-GRIP technology for jack-up exploration
applications and have granted our partner an option to purchase our rights to
POS-GRIP technology for subsea applications.

Our Other segments revenues decreased $18.4 million, or 65%, in 2003 as
compared to 2002, and operating loss increased $15.7 million for the same
period. Included in the 2003 operating loss are charges totaling $12.4 million,
which consisted of an inventory reserve charge of $6.0 million to reflect the
estimated realizable value of inventory for the exited industrial drill pipe
product lines and asset impairments of $6.4 million related to two technology
joint ventures.

CORPORATE

Corporate general and administrative expenses for 2003 were $22.8 million
compared to $23.5 million in 2002. Included in 2002 corporate expenses was a
charge of $4.5 million related to severance. Excluding this charge, corporate
expenses increased due primarily to higher incentive and business development
costs in 2003. As a percentage of revenues, corporate expenses remained
relatively flat as a percentage of revenues in 2002 and 2003.

OTHER ITEMS

Our interest expense was $43.9 million in 2003 compared to $27.1 million in
2002. This increase was 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 Senior Credit Facility, which includes a $50 million term loan. See
"Liquidity and Capital Resources" for further discussion of the Senior Credit
Facility.

Other, Net increased $12.1 million in 2003 as compared to 2002. This
increase relates to a $6.6 million gain from favorably renegotiating a liability
to our former parent, a gain on the sale of businesses of $3.5 million, along
with favorable foreign exchange fluctuation in 2003. These increases were
partially offset by transition costs in 2003 of $2.9 million associated with the
ReedHycalog integration.

Our equity income (loss) decreased to an equity loss of $0.5 million in 2003
from equity income of $5.3 million in 2002. This decrease was primarily related
to a decrease in equity income contributed by Voest-Alpine of $4.4 million due
to decreased activity. The remaining decrease relates to our equity-method
investments in G-PEX and Intelliserv that have increased costs related to the
continued development of their products in 2003, coupled with equity income in
2002 related to JSG before our majority interest purchase in March 2002.

Our effective tax rate in 2003 was 35% as compared to 31% in 2002. This
expected increase in the effective tax rate was due to higher foreign earnings
in 2003 related to the ReedHycalog acquisition, partially offset by the
favorable renegotiation of a liability with our former parent.

18

YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001

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

- ----------

(a) Includes other charges of $11.1 million related to inventory write-offs
and capitalized manufacturing variance write-offs which were classified
as cost of sales. Of these charges, $4.7 million related to Drilling
Products and Services, $0.5 million related to Tubular Technology and
Services, $2.0 million related to Marine Products and Services, and
$3.9 million related to our Other segment.

(b) Includes other charges of $19.2 million to write-off assets. In
connection with our operational review conducted in 2001, we reassessed
the viability of restructuring our relationship with OCTL in India and
determined that a continued relationship was no longer viable. As a
result of this determination, we wrote-off the remaining $17.7 million
of unpaid receivables and advances owed to us by OCTL. Also includes
fixed asset write-downs of $1.5 million related to our decision to
discontinue the manufacturing of industrial flanges.

(c) Includes other charges of $14.5 million related to severance of
executive, manufacturing, and marketing employees terminated in
connection with the restructuring plan that was implemented in the
first quarter of 2001. The total number of employees severed was 24,
and the amount accrued for severance was based upon the positions
eliminated and our severance policy. Of these charges, $14.2 million
related to Corporate, $0.2 million related to Marine Products and
Services, and less than $0.1 million related to both Drilling Products
and Services and our Other segment.

(d) Includes other charges of $2.6 million, $2.4 million in Drilling
Products and Services and $0.2 million in Tubular Technology and
Services, related to fixed asset write-downs for idle assets that were
taken out of service pursuant to our ongoing automation and efficiency
initiatives and were classified as held for sale. The amount was
determined by use of internal appraisals and evaluations to assess the
net realizable value upon disposal based on expected future cash flows.

(e) Includes other charges of $4.5 million related to an executive employee
terminated in June 2002.

Net income for the year ended December 31, 2002, after cumulative effect of
accounting change of $6.4 million, net of tax, was $6.6 million ($0.06 per
share) on revenues of $639.7 million, compared to $28.1 million ($0.25 per
share) on revenues of $740.1 million for the same period in 2001. During both
2001 and 2002, our results of operations and earnings were affected by the
various other charges along with ReedHycalog acquisition expenses of $2.0
million in 2002. In addition, we adopted the new goodwill accounting standard,
which ceased the amortization of goodwill, as of January 1, 2002. Goodwill
amortization for the year ended December 31, 2001 was $6.4 million and is
included in general and administrative expenses.

DRILLING PRODUCTS AND SERVICES

Our Drilling Products and Services segment revenues decreased $65.3 million,
or 17%, in 2002 as compared to 2001 and operating income increased $0.6 million,
or 1%, in the same period. Included in 2002 operating income were charges of
$2.4 million related to our efficiency and automation initiatives primarily at
our operations located in Mexico. Included in 2001 operating income were $24.0
million of inventory write-offs and capitalized manufacturing variances and
goodwill amortization of $3.2 million. The decrease in revenues was due
primarily to a 27% decline in the average North American rig count, and the
resulting overall weak demand for our drill stem products. However, the decrease
in demand was partially offset by an increase in average pricing for drill pipe
in 2002 due to a sales mix improvement toward international and offshore
markets, which tend to purchase our higher-priced, more technologically advanced
products, coupled with an overall price increase implemented in 2001.

19

DRILL BITS

Since we acquired ReedHycalog on December 20, 2002, its contributions were
minimal since we reflect only 10 days of activity during 2002.

TUBULAR TECHNOLOGY AND SERVICES

Our Tubular Technology and Services segment revenues decreased $55.4
million, or 20%, in 2002 as compared to 2001 and operating income decreased
$36.1 million, or 82%, for the same period. Included in 2002 operating income
were fixed asset write-downs of $0.2 million related to assets held for sale.
Included in 2001 operating income were $0.5 million of inventory write-offs and
capitalized manufacturing variances. Revenues and operating income were
negatively affected by a 19% decline in the U.S. natural gas rig count when
compared to the same period last year and OCTG distributors purchasing at low
levels in light of the weak and uncertain market conditions. The decrease in
operating income also reflects unabsorbed manufacturing costs incurred to
maintain capacity for an expected industry upturn.

MARINE PRODUCTS AND SERVICES

Our Marine Products and Services segment revenues increased $28.1 million,
or 63%, in 2002 as compared to 2001 and reported operating income of $3.9
million in 2002 as compared to an operating loss of $1.2 million in 2001.
Included in the 2001 operating loss were charges of $2.2 million related to
inventory write-offs, capitalized manufacturing variances, and severance, and
goodwill amortization of $0.4 million. In the first quarter of 2001, we began to
strengthen our XL Systems products and services sales force, consolidated
certain offshore selling activities, and began to build a broader product line.
Additionally, in the fourth quarter of 2001, we added a new management team.
These actions, coupled with the acquisition of our Rotator subsidiary in the
second quarter of 2002, resulted in increased revenues for this segment despite
the 26% decrease in the U.S. offshore rig count. This segment's sales and
marketing and general and administrative expenses increased as a percentage of
revenues from 18% in 2001 to 20% in 2002. This increase was due to increased
operating expenses associated with our Rotator acquisition coupled with costs
incurred to develop infrastructure for future growth of this segment.

OTHER

Our Other segment revenues decreased $13.0 million, or 31%, in 2002 as
compared to 2001 and its operating loss decreased $5.7 million, from an
operating loss of $6.8 million in 2001 to an operating loss of $1.1 million in
2002. Included in the 2001 operating loss are charges of $4.0 million related to
inventory write-offs, capitalized manufacturing variances, and severance and
goodwill amortization of $0.3 million. The decrease in revenues was from our
industrial drill pipe operations due to decreased activity levels related to
depressed fiber optic installation and construction markets. The decrease in
operating loss, excluding charges, was due to efficiencies obtained from
organizational restructurings that took place in the first quarter of 2001.

CORPORATE

Our Corporate general and administrative expenses were flat as a percentage
of revenues at 4% of revenues in 2001 and 2002.

OTHER ITEMS

Our interest expense of $27.1 million in 2002 was flat when compared to
2001.

Our equity income decreased $3.4 million in 2002 when compared to 2001. This
decrease primarily relates to a decrease in equity income contributed by our
investment in Voest-Alpine coupled with an increase in equity losses related to
development of our Intelliserv joint venture.

Our effective tax rate in 2002 was 31% as compared to 35% in 2001. This
decrease in the effective tax rate for 2002 is due primarily to the effects of
ceasing goodwill amortization effective January 1, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity depends upon our cash flow from operations, the level of
availability under our senior credit facility and our ability to raise capital
from third parties. During 2003, we reduced our borrowings under our credit
facilities and increased our borrowing

20

capacity. As a result of these improvements, along with our financing completed
in connection with the ReedHycalog acquisition in December 2002, we believe we
have significantly improved our liquidity position and that we are well
positioned to not only take full advantage of upturns in the market for our
products and services, but to maintain our businesses and take advantage of
opportunities even in the event of any downturns.

At December 31, 2003, we had cash and cash equivalents of $19.2 million,
working capital of $344.6 million, and unused borrowing availability of $122.3
million under our revolving credit facility, compared to cash and cash
equivalents of $21.9 million, working capital of $340.3 million and unused
borrowing availability under our revolving credit facility of $91.0 million at
December 31, 2002.

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

OPERATING ACTIVITIES

Our net cash flow provided by operating activities decreased by $41.4
million in 2003 as compared to 2002. Cash flow before changes in operating
assets and liabilities increased by $33.4 million, which was offset by a use of
cash of $74.8 million related to net increases in operating assets and
liabilities (primarily accounts receivable and inventory). These changes reflect
the increased oil and gas drilling activity in 2003 when compared to 2002.

Our net cash flow provided by operating activities increased by $81.1
million in 2002 as compared to 2001. Cash flow before changes in operating
assets and liabilities decreased by $43.0 million in 2002 due to declines in oil
and gas drilling activity. However, this decrease was offset by a source of cash
of $124.1 million related to reductions in operating assets and liabilities
(primarily accounts receivable and inventory), reflecting our working capital
management program implemented in late 2001.

INVESTING ACTIVITIES

Net cash used in investing activities decreased by $290.0 million in 2003 as
compared to 2002 due primarily to decreased business acquisitions during 2003,
coupled with proceeds from the sale of businesses of $30.4 million and a
decrease in capital expenditures for property, plant, and equipment of $4.4
million.

Net cash used in investing activities increased by $271.7 million in 2002 as
compared to 2001 due primarily to increased business acquisitions during 2002
coupled with increased capital expenditures for property, plant, and equipment.
In December 2002, we finalized our acquisition of ReedHycalog, which used
approximately $255 million in cash to fund the purchase price.

Capital expenditures for property, plant, and equipment totaled $45.8
million and $41.4 million for the years ended December 31, 2002 and 2003,
respectively. We currently expect to expend approximately $40.0 million for
capital expenditures for property, plant, and equipment during 2004. This
includes capital expenditures related to our capital improvement program to
reduce production costs and improve efficiencies and the existing equipment
base.

FINANCING ACTIVITIES

Our net cash provided by financing activities decreased by $262.8 million in
2003 as compared to 2002. In 2002, we received net proceeds of $170.4 million
from the issuance of $175 million 9% Senior Notes Due 2009, coupled with net
borrowings of $33.9 million. In 2003, net repayments on total debt were $57.8
million.

Our net cash provided by financing activities increased by $199.4 million in
2002 as compared to 2001. In 2002, we received net proceeds of $170.4 million
from the issuance of $175 million 9% Senior Notes Due 2009, coupled with net
borrowings of $33.9 million.

21

SENIOR CREDIT FACILITY AND OTHER LONG-TERM DEBT

Our debt balances are primarily comprised of: (1) borrowings under our
senior credit facility, (2) our 9 5/8% Senior Notes due 2007, and (3) our 9%
Senior Notes due 2009. We estimate our required principal and interest payments
for our outstanding debt to be approximately $48.0 million for 2004.

Senior Credit Facility

In connection with the ReedHycalog acquisition in December 2002, we entered
into a new four-year $240 million senior secured credit facility (Senior Credit
Facility) with a syndicate of U.S. and foreign banks maturing on December 18,
2006. The Senior Credit Facility is comprised of a $50 million term loan
consisting of a $47 million U.S. term loan and a $3 million Canadian term loan,
and a $190 million revolving credit facility, which includes up to $20 million
for letter of credits, consisting of a $183 million U.S. revolving facility and
a $7 million Canadian revolving facility.

The credit facilities are guaranteed by Grant Prideco and all domestic
subsidiaries and are secured by substantially all of our U.S. assets, including
U.S. inventories, equipment, receivables, owned real property, and stock of
certain foreign subsidiaries. The Canadian credit facilities are guaranteed by
Grant Prideco and all U.S. subsidiaries and are secured by substantially all of
our U.S. assets and certain of our Canadian inventories, equipment, receivables,
and owned real property and 65% of the stock of certain foreign subsidiaries.

Availability under the revolving credit facility, which was $122.3 million
as of December 31, 2003, is based on the collateral value of the inventories and
receivables securing the credit facility. The current outstanding principal
balance of the term loans was $42.9 million at December 31, 2003. Amounts
outstanding under the credit facilities accrue interest at a variable rate based
on either the U.S. prime rate (plus 0.75% to 2.00% depending on our leverage
ratio and the type of loan, whether revolving or term) or LIBOR (plus 1.75% to
3.00% depending on our leverage ratio and the type of loan, whether revolving or
term) for the U.S. denominated advances or a variable rate based on the Canadian
prime rate (plus 0.75% to 2.00% depending on our leverage ratio and the type of
loan, whether revolving or term) or the applicable rate for Canadian bankers
acceptances, for Canadian denominated advances. Interest on outstanding
borrowings is payable monthly or, with respect to LIBOR borrowings, either
quarterly or at the end of the applicable LIBOR period. The U.S. revolving
credit facility also provides us with availability for stand-by letters of
credit. We are required to comply with various affirmative and negative
covenants which will limit our ability to incur new debt, make certain
investments and acquisitions, sell assets, grant liens, and take other actions.
We are subject to financial covenants that require us to limit our capital
expenditures and, under certain circumstances, require us to maintain a certain
minimum fixed charge coverage ratio.

9% Senior Notes Due 2009

In December 2002, we issued $175.0 million principal amount of 9% Senior
Notes Due 2009. Net proceeds from the issuance of approximately $170.0 million
were used, along with certain other funds, to fund the cash portion of the
ReedHycalog acquisition. Interest is payable June 15 and December 15 of each
year. After December 15, 2006, we may redeem all or part of the 9% Senior Notes
at any time at a price of 100% of their principal amount plus an applicable
premium and accrued and unpaid interest to the redemption date. The 9% Senior
Notes are guaranteed by all of our domestic subsidiaries. The indenture
governing the 9% Senior Notes contains various covenants customary in such
instruments, including restrictions to incur new debt, pay dividends, sell
assets, grant liens, and other related items.

9 5/8% Senior Notes Due 2007

In December 2000, we issued $200.0 million principal amount of 9 5/8% Senior
Notes Due 2007. The 9 5/8% Senior Notes were issued at a discount to yield an
effective interest rate of 9 3/4%. Net proceeds from the issuance of $193.3
million were utilized to repay a $100.0 million subordinated note to Weatherford
International, Inc. and to repay outstanding borrowings under our then-existing
revolving credit facility of approximately $80.3 million. Interest is payable
June 1 and December 1 of each year. We may redeem all or part of the 9 5/8%
Senior Notes at any time at a price of 100% of their principal amount plus an
applicable premium and accrued and unpaid interest to the redemption date. The 9
5/8% Senior Notes are guaranteed by all of our domestic subsidiaries. The
indenture governing the 9 5/8% Senior Notes contains various covenants customary
in such instruments, including restrictions to incur new debt, pay dividends,
sell assets, grant liens, and other related items.

In the event there is a payment default under the Senior Credit Facility,
the 9% and 9 5/8% Senior Notes could come due. As of December 31, 2003, we were
in compliance with the various covenants under the Senior Credit Facility and
the 9% and 9 5/8% Senior Notes agreements.

22

LIQUIDITY OUTLOOK

We estimate our required principal and interest payments for our outstanding
debt to be approximately $48.0 million for 2004 and capital expenditures for
2004 to be approximately $40.0 million in the aggregate. We currently expect to
satisfy all required capital expenditures and debt service requirements during
2004 from operating cash flows, existing cash balances, and the revolver of our
Senior Credit Facility. As of December 31, 2003, we had borrowed $57.2 million
under the Senior Credit Facility, of which $14.3 million related to the
revolving credit facility borrowings, and $42.9 million related to the term
loan. Also, $5.9 million had been used to support outstanding letters of credit.
Net borrowing availability was $122.3 million.

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 a combination of the issuance of
additional equity and debt 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.

The following table summarizes our contractual obligations and commercial
commitments at December 31, 2003 (in thousands):

TAX MATTERS

As a result of our spinoff from Weatherford, subsequent to April 14, 2000 we
are no longer able to combine the results of our operations with those of
Weatherford in reporting income for United States federal income tax purposes
and for income tax purposes in states and foreign countries in which we do
business. Under the terms of a tax allocation agreement with Weatherford, we
will not have the future benefit of any prior tax losses or benefits incurred as
part of a consolidated return with Weatherford. Moreover, we will be liable to
Weatherford for any corporate-level taxes incurred by Weatherford as a result of
the spinoff, except to the extent the taxes arise solely as a result of a change
of control of Weatherford. We believe these matters will not have a material
adverse effect on our earnings.

RELATED-PARTY TRANSACTIONS

Until April 14, 2000, we were a wholly-owned subsidiary of Weatherford. We
were spun off from Weatherford on April 14, 2000, through a distribution by
Weatherford to its stockholders of all of our Common Stock. Weatherford no
longer owns any interest in our Company. Prior to our 2003 Annual Meeting held
in May 2003, we had seven Directors, five of which also served on the Board of
Weatherford. Following the 2003 Annual Meeting, we now have nine Directors, of
which only three serve on Weatherford's Board.

23

In connection with the spinoff, we entered into a preferred supplier
agreement with Weatherford in which Weatherford agreed to purchase at least 70%
of its requirements of drill stem products from us, subject to certain
exceptions. In return, we agreed to sell those products at prices not greater
than that at which we sell to similarly situated customers, and we provided
Weatherford a $30.0 million credit towards the purchase of those products.
During 2003, we extended the term of this contract by two years and reduced the
unused preferred supplier credit balance by $6.6 million. At December 31, 2003,
the remaining credit balance was $7.9 million. Weatherford purchased
approximately $14.3 million of drill stem products from us during 2003.
Weatherford also purchased API tubing and accessory threading services from us
aggregating $8.1 million during 2003.

Our Drill Bits segment sells drill bits worldwide to oil and gas operators,
including Newfield Exploration Company (Newfield). In addition, a division of
our Tubular Technology and Services segment also sells accessories directly to
Newfield. Two of our directors, Mr. Trice and Mr. Hendrix, are directors of
Newfield and Mr. Trice is Newfield's President and Chief Executive Officer.
During 2003, Newfield purchased approximately $1.0 million of products from us.

During 2003, we renewed a supply contract with Voest-Alpine under which we
agreed to purchase a minimum of 57,000 metric tons of green tubulars during 2003
and 52,000 metric tons per year thereafter through July 2007. This Euro
denominated contract fixes the price of steel green tubes within a range, and it
limits total price increases to 5% over the life of the contract. Because this
agreement requires us to purchase tubulars or pay a penalty regardless of our
needs, purchases under this agreement may be made for inventory or we may be
forced to pay a penalty during periods of low customer demand. The maximum
penalties due under the contract would be 43.60 Euros for every metric ton that
a two-year average of purchases fell below the annual purchase minimum. Any
purchases made in excess of demand would require us to use our working capital
and expose us to risks of excess inventory during a downturn. Although these
purchases could require a substantial expenditure, 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 believe we will meet our contractual
commitments for 2004 without incurring unnecessary penalties or material
unnecessary inventory positions. We also believe that there are numerous other
supply sources available to us at reasonably competitive prices in the event
that Voest-Alpine is not able to supply all of our requirements.

OFF-BALANCE SHEET FINANCING

We do not have any off-balance sheet hedging, financing arrangements or
contracts except for those associated with our investments in three companies
that are not consolidated in our financial statements: Voest-Alpine, G-PEX, and
Intelliserv. These investments are accounted for under the equity-method of
accounting. The assets and liabilities of Voest-Alpine are summarized in Note 7
to our audited consolidated financial statements. The two other joint ventures
relate to technologies we are currently developing. These two companies do not
have any debt, other than trade payables relating primarily to research and
development expenses.

Additionally, Voest-Alpine has entered into forward contracts to cover its
currency risk related to accounts receivables and accounts payables and has also
entered into interest rate swap agreements to reduce its exposure to changes in
floating interest rate payments of its long-term bonds.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN No. 46) was issued. FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
variable interest entities, which are certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated support from other parties. The Interpretation is
intended to achieve more consistent application of consolidation policies to
variable interest entities and thus, to improve comparability between
enterprises engaged in similar activities even if some of those activities are
conducted through variable interest entities. The Interpretation is effective
immediately for variable interest entities created after January 31, 2003, and
to variable interest entities in which we obtained an interest after that date.
In December 2003, the FASB issued a revision to FIN No. 46, (FIN No. 46R), to
clarify some of the provisions of FIN No. 46 and to exempt certain entities from
its requirements. Under the new guidance, special effective date provisions
apply to enterprises that have fully or partially applied FIN No. 46 prior to
issuance of this revised interpretation. Otherwise, application of FIN No. 46R
is required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. We are
currently analyzing the potential impact, if any, this interpretation will have
on our consolidated results of operations and its financial condition, with
respect to entities acquired before February 1, 2003.

24

In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that financial instruments within its scope be classified as an
asset or liability. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and must be applied to the our
existing financial instruments effective July 1, 2003, the beginning of the
first fiscal period after June 15, 2003. We adopted SFAS No. 150 in the third
quarter of 2003 and there was no impact on our consolidated results of
operations or financial condition.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are fully described in Note 1 to our
consolidated financial statements included in this Annual Report on Form 10-K.
Certain of our accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating
financial estimates. By their nature, these judgments are subject to an inherent
degree of uncertainty. These judgments are based on our historical experience,
terms of existing contracts, our observance of trends in the industry,
information provided by our customers, and information available from other
outside sources, as appropriate. Actual results may differ from these judgments
and assumptions.

Revenue Recognition

We recognize revenue in accordance with our sales agreements, which is on
the date of customer acceptance, where the manufacturing process is complete,
the customer has been provided with all proper inspection and other required
documentation, title and risk of loss has passed to the customer, collectability
is reasonably assured, and we have met all of our delivery obligations. With
respect to our Drill Bits segment, for consignment and performance sales,
revenue is recognized when the customer runs the drill bit. Customer advances or
deposits are deferred and recognized as revenue when we have completed all of
our performance obligations related to the sale. We also recognize revenue for
services as they are performed. Allowances for bad debts are provided based on
specific account collection issues. If actual future bad debts differ from what
has been identified, additional allowances may be required.

Inventories

Inventory costs are stated at the lower of cost or market using the
first-in, first-out method. We value our inventories primarily using standard
costs, which approximate actual costs, that include raw materials, direct labor,
and manufacturing overhead allocations. We also perform obsolescence reviews on
slow-moving drill stem and tubular related inventories and establish reserves
based on current assessments about future demands, market conditions, and
related management initiatives. Our inventory obsolescence policy with respect
to drill bits is to reserve 50% of the cost of inventories held longer than one
year and 100% of the cost of inventories held longer than two years. If market
conditions are different than those projected by management, additional
inventory reserves may be required.

Business Combinations

The cost of business acquisitions is allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition using third-party appraisals and management estimates. Management's
estimates of fair value are based upon assumptions believed to be reasonable,
but which are inherently uncertain. In addition, estimated liabilities to exit
activities of an acquired operation or an existing operation, including the
exiting of contractual obligations and the termination of employees, are subject
to change as management continues its assessment of operations and finalizes its
integration plans.

Long-Lived Assets

A review for impairment of long-lived assets is performed whenever events or
changes in circumstances indicate that the carrying amount of long-lived assets
(group) may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset group to expected
future net cash flows without interest costs to be generated by the asset group.
If such asset group is considered to be impaired, the impairment loss to be
recognized is measured by the amount by which the carrying amount of the asset
group exceeds fair value based on expected future cash flows. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
selling costs. In 2003, we recorded fixed asset write-downs of $24.9 million
related to our Drilling Products and Services manufacturing rationalization.
While we believe no other impairment existed at December 31, 2003 under
accounting standards applicable at that date, different conditions or
assumptions, or changes in cash flows or profitability, if

25

significantly negative or unfavorable, could have a material adverse effect on
the outcome of our impairment evaluation and our financial condition or future
results of operations.

Goodwill and Intangible Assets

Goodwill and intangible assets that have indefinite useful lives are subject
to annual impairment tests. Goodwill is tested for impairment using a two-step
process that begins with an estimation of the fair value of each of our
reporting units compared with its carrying value. If the carrying amount exceeds
the fair value of a reporting unit, a second step test is completed comparing
the implied fair value of the reporting unit's goodwill to its carrying value to
measure the amount of impairment. Intangible assets that are not amortized will
be tested for impairment at least annually by comparing the fair values of those
assets to their carrying values. Other identifiable intangible assets that are
subject to amortization are amortized on a straight-line basis over the years
expected to be benefited, ranging from 1.5 to 20 years. In 2003, we recorded a
goodwill impairment of $2.5 million and an intangible asset write-down of $1.3
million related to a technology joint venture included in our Other segment.
While we believe no other impairment existed at December 31, 2003 under
accounting standards applicable at that date, different conditions or
assumptions, or changes in cash flows or profitability, if significantly
negative or unfavorable, could have a material adverse effect on the outcome of
our impairment evaluation and our financial condition or future results of
operations.

Valuation Allowance for Deferred Tax Assets

We record a valuation allowance to reduce our deferred tax assets when it is
more likely than not that some portion or all of the deferred tax assets will
expire before realization of the benefit or that future deductibility is not
probable. The ultimate realization of the deferred tax assets depends on the
ability to generate sufficient taxable income of the appropriate character in
the future. This requires us to use estimates and make assumptions regarding
significant future events such as the taxability of entities operating in the
various taxing jurisdictions.

Contingent Liabilities

We have contingent liabilities and future claims for which we have made
estimates of the amount of the actual costs of these liabilities or claims.
These liabilities and claims sometimes involve threatened or actual litigation
where damages have been quantified and we have made an assessment of our
exposure and recorded a provision to cover an expected loss based on our
experience in these matters and, when appropriate, the advice of outside counsel
or other outside experts. Upon the ultimate resolution of these uncertainties,
our future reported financial results will be impacted by the difference between
our estimates and the actual amounts paid to settle a liability. Examples of
areas where we have made important estimates of future liabilities primarily
include litigation, warranty claims, and contract claims. While management
believes the recorded liabilities are adequate, inherent limitations in the
estimation process may cause future actual losses to exceed expected losses.

Pension Plans

The plan obligations and related assets of defined benefit pension plans are
presented in Note 14 of the Notes to Consolidated Financial Statements. Plan
assets, which consist primarily of marketable equity and debt instruments, are
valued using market quotations as of the period end. Plan obligations and the
annual pension expense are determined by independent actuaries and through the
use of a number of assumptions. Key assumptions in measuring the plan
obligations include the discount rate and the estimated future return on plan
assets. In determining the discount rate, the Company utilizes the yield on
high-quality, fixed-income investments currently available with maturities
corresponding to the anticipated timing of the benefit payments. Asset returns
are based upon the anticipated average rate of earnings expected on the invested
funds of the plans.

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

26

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 that
would impact our expectations.

In making our forward-looking statements, we have made numerous assumptions
regarding our operations. Although we believe, as of the date this report is
filed, that these assumptions are reasonable, there can be no assurance that
they will be correct in the future. Our assumptions include the following:

o The average North American rig count (U.S. and Canada) for 2004 will
be 1,441.

o The average international rig count for 2004 will be 792.

o Commodity gas prices will not fall in a manner that would affect
demand for our products or potential purchasing decisions or
customer perceptions.

o Drill stem demand will increase only modestly during 2004, and U.S
land-based operators will not increase purchases in meaningful
quantities.

o We expect modest drill bit pricing improvements.

o We expect our effective tax rate to be approximately 37% during
2004.

o There will be no changes in domestic or worldwide political events
that would have an adverse consequence upon the domestic or
worldwide economies and the demand for our products and services. In
particular, we assume that Organization of Petroleum Exporting
Countries (OPEC) and other oil exporting countries and organizations
will take reasonable actions to insure that worldwide oil prices
remain relatively stable and not fall for any prolonged period of
time that would adversely affect demand for our products, and that
United States current and potential military actions in Afghanistan,
Iraq, or elsewhere will not disrupt any of our operations or demand
for our products.

o Any loss of drill bit sales from Schlumberger, ReedHycalog's former
owner, will be offset by other international and domestic market
share gains.

o We will expend approximately $40 million on capital expenditures
during 2004.

o We will reduce our consolidated debt by approximately $60 million
during 2004.

o We will not experience any material unusual losses, expenses, or
charges associated with litigation, warranty claims, environmental
matters, or property losses.

o Our utility costs, labor costs, and other expenses will not increase
substantially from their current levels.

o Our manufacturing operations will not experience any material
disruptions in supply or efficiencies.

o We will not incur any material currency remeasurement or
transactional losses or other foreign currency losses.

o There will not be any material acquisitions or divestments during
the year. Although we have made this assumption for modeling
purposes, we do expect that some acquisitions and divestments will
be made during the year that will affect our projections and
assumptions.

o There will be no material adverse affect on our operations as a
result of U.S. trade laws during 2004. Our operations and costs
will not be adversely affected by any other actions under the trade
laws relating to products imported by us from our foreign locations.

o In connection with the Drilling Products manufacturing
rationalization program and the charge recorded in 2003 of $24.9
million related to fixed-asset write-downs, we expect this
rationalization to reduce operating costs by approximately $11
million to $12 million annually. Additional charges of approximately
$1.9 million related to this

27

program are expected in the first quarter of 2004 due to severance,
lease termination, and other exit costs and these costs are not
included in our earnings per share estimates.

o We expect to reduce costs of our Chinese operations by $3.6 million
as a result of our joint venture to manufacture upset-to-grade
tubulars becoming operational.

o We expect to earn approximately $5.2 million in revenues from new
product introductions by our Tubular Technology Services and Marine
Products and Services segments.

RISK FACTORS AND EXPOSURES

The businesses in which we operate 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 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 OPEC;

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 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.

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

The U.S. and worldwide economies have been very volatile, and their future
directions are uncertain. If North American or international economies 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.

28

Steel prices have increased significantly since the end of 2003, caused
primarily by significant increases in the prices paid by our suppliers for scrap
and coke utilized in their operations. Although we have a long-term supply
contract with our Voest-Alpine affiliate relating to our supply of green tubes
utilized in our drill pipe operations, we do not have such supply contracts in
place for our suppliers of bars and billets utilized to manufacture our tool
joints, drill collars and heavy weight drill pipe. Our partner in our Austrian
joint venture also is seeking to renegotiate its supply contract for billets to
our Voest-Alpine affiliate. Our forward-looking statements assume that we will
be able to pass on to our customers any cost increases we may experience as a
result of the current shortages being experienced in the worldwide steel
markets. If we are unable to, our results of operations could be materially
adversely affected.

With respect to our Chinese operations, we purchase green tubes from our
supplier on a cost-plus basis. As such, any increase in our raw material costs
that we cannot pass on to our customers could have an adverse impact on our
operations. In addition, certain of the benefits forecasted from our joint
venture to manufacture upset-to-grade tubulars in China are based upon price
differentials between our Chinese supplier and our Voest-Alpine affiliate, which
may not materialize if steel prices continue to rise.

In addition, rising steel costs also have the potential to delay increases
in demand for our drill stem components and premium casing products. As drill
stem products are not consumables, our customers could elect to defer purchases
until such time as they determine that steel prices have stabilized or returned
to more normalized conditions. Our forward-looking statements do not assume that
there will be any reduced demand for our drill stem products or premium casing
as a result of increased prices caused by the current shortages being
experienced in the worldwide steel markets. Reduced demand could adversely
affect our results of operations.

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 manufacturing costs or problems, or lack of demand.

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 technology that
is 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.

In addition, we are in the process of developing new products that we intend
to introduce to the market during 2004. These products include new large
diameter premium connectors for our Tubular Technology and Services and Marine
Products and Services segments and drill bits. If we are unable to introduce
such products as a result of delays in our development activities, such
introductions not being accepted by our end-users, or delays or abandonment for
other reasons, our projected results could be adversely affected.

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 steady demand for our products and services during
2004, in particular our drill stem products. In the event demand for these
products increases, we will be required to increase our production during peak
demand periods with minimal

29

operational disruption and inefficiency. If this does not happen, or we
experience difficulties in this regard, our results of operations during this
ramp-up for high demand periods could be 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.

During 2003, we derived approximately 41% of our total revenues from our
facilities outside the U.S. In addition, a large part 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. Our operations in certain
international locations, including Mexico, Austria, Italy, China, Indonesia, and
Singapore are subject to various political and economic conditions existing in
those countries that could disrupt operations. These risks include:

o changes in foreign tax laws;

o changes in regulations and labor practices;

o currency fluctuations and devaluations;

o currency restrictions, banking crises, 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. We have not historically carried political
risk 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 or the movement of funds and
assets could materially adversely affect our results of operations and financial
position.

During 2003, approximately $52.5 million of our revenues were earned by our
Chinese operations. As is customary in this country, it is common for our
Chinese operations to settle receivables and payables through bearer bonds and
notes. Recently, Chinese banks have been experiencing a shortage of currencies,
which could affect our ability to fully realize on these bonds and notes. At
December 31, 2003, we were not holding any such bearer bonds or notes. To date,
our Chinese operations have not experienced significant losses as a result of
such practice; however, there can be no assurance that such losses could not
occur in the future. Any such losses could have a materially adverse affect on
our results of operations in the period in which they occur.

We have renewed an agreement with Voest-Alpine, an entity of which we own
50.01%, to purchase green tubulars through September 2007. 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. Further, 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 with respect to this contract.
Thus, a material long-term strengthening of the Euro versus the U.S. dollar
could materially adversely affect our results of operations.

IN CONNECTION WITH OUR BUSINESS OPERATIONS, WE COULD BE SUBJECT TO
SUBSTANTIAL LIABILITY CLAIMS THAT ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.

Our products 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. 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.

30

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 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. 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 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.

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 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.

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 do own and operate
international manufacturing operations that support our U.S.-based business. 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 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. market, which could adversely affect our results of operations.

OUR RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED BY
CHARGES ASSOCIATED WITH FUTURE OPERATIONAL CHANGES IMPLEMENTED BY
MANAGEMENT OF OUR COMPANY.

Our management recently completed a review and assessment of our drill stem
manufacturing operations which resulted in a downsizing of certain of our
operations, primarily in Canada. As a result of this downsizing, we wrote-off
during 2003 various

31

equipment and assets that were no longer useful in our business. We also expect
to incur approximately $1.9 million in severance, lease termination, and other
exit costs during the first quarter of 2004.

In addition to these activities, management continues to conduct
company-wide assessments of all of our related manufacturing strategies and
practices and of our under-performing product lines to determine possible
improvements to manufacturing efficiencies and future profitability. Such
assessment could in the future result in divestitures or operational
rationalizations that result in write-downs or other losses during any
particular accounting period. Our forward-looking statements assume that none of
the results of these reviews or activities will adversely affect our results of
operations in any period.

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 management ERP system that we believe
will, in the long term, significantly enhance our information systems, internal
processes and controls. This implementation is ongoing and 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 which could result in increases
in our operating and other cost that could adversely affect our results of
operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.
Refer to Note 10 to the financial statements included elsewhere in this Annual
Report on Form 10-K for additional information on financial instruments.

FOREIGN CURRENCY RISK

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. To the extent that business transactions
in these countries are not denominated in their respective country's functional
currency, we are exposed to foreign currency exchange rate risk. Our
manufacturing facilities located outside of the U.S. incur costs in local
currencies, but they tend to sell in U.S. dollars, and in some cases owe U.S.
dollar denominated debt. In addition, our long-term supply contract with
Voest-Alpine is denominated in Euros. Subsidiaries with asset and liability
balances denominated in currencies other than their functional currency are
remeasured in the preparation of their financial statements using a combination
of current and historical exchange rates, with any resulting remeasurement
adjustments included in net income during the period. Net foreign currency
transaction gains (losses) for the years ended December 31, 2001, 2002, and 2003
were $(0.5) million, $(0.2) million, and $3.2 million, respectively. The foreign
currency transaction gains realized in 2003 relate primarily to the
strengthening of the Canadian dollar and the British pound in relation to the
U.S. dollar. The Euro also strengthened in 2003; however, the impact was not
material.

INTEREST RATES

We are and will be subject to market risk for changes in interest rates
related primarily to our long-term debt. The following tables summarize our debt
obligations at December 31, 2002 and 2003, that are sensitive to changes in
interest rates. The tables present principal cash flows by expected maturity
dates and weighted average interest rates (in thousands):

Excluding the Senior Notes, most of our long-term borrowings are at variable
rates. Currently, we have variable interest rate debt totaling approximately
$58.5 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 December 2003 levels, our
combined interest expense would increase by approximately $0.5 million annually.
The carrying value of our variable interest rate debt approximates fair value as
it bears interest at current market rates.

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

33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements are filed in this Item 8:

Report of Independent Auditors

Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2003

Consolidated Balance Sheets at December 31, 2002 and 2003

Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2003

Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 2003

Notes to Consolidated Financial Statements

34

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
Grant Prideco, Inc.

We have audited the accompanying consolidated balance sheets of Grant
Prideco, Inc. (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of operations, cash flows, and stockholders' equity for
each of the three years in the year ended December 31, 2003. Our audits also
included the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Grant Prideco,
Inc. at December 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

As discussed in Note 11 to the consolidated financial statements, the
Company changed its method of accounting for goodwill effective January 1, 2002.

/s/ Ernst & Young LLP

Houston, Texas
February 11, 2004

35

GRANT PRIDECO, INC.

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

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

36

GRANT PRIDECO, INC.

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

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

37

GRANT PRIDECO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

38

GRANT PRIDECO, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

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

39

GRANT PRIDECO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Company is the world's largest manufacturer and supplier of oilfield
drill pipe and other drill stem products and a leading North American provider
of high-performance tubular technology and services. The Company's drill stem
products are used to drill oil and gas wells while its tubular technology and
services are primarily used in drilling and completing oil and gas wells. The
Company also provides a variety of products and services to the growing
worldwide offshore and deepwater market through its Marine Products and Services
segment. The Company's marine products and services are used for subsea
construction, installation, and production of oil and gas wells. The Company is
also a global leader in drill bit technology, manufacturing, sales, and service,
due to the Company's acquisition of ReedHycalog(TM) on December 20, 2002.
ReedHycalog is a leading designer, manufacturer, and distributor of fixed-cutter
and roller-cone drill bits to the global oil and gas industry. ReedHycalog has
been designing, manufacturing, and distributing drill bits for over 80 years.
The Company's customers include drilling contractors; North American oil country
tubular goods (OCTG) distributors; major, independent and state-owned oil
companies; and oilfield service companies.

The Company's business is dependent on the level of drilling activity
worldwide, which depends on the level of capital spending by major, independent
and state-owned exploration and production companies. This capital spending is
driven by current and forecasted prices for oil and gas, and the perceived
stability and sustainability of those prices. The Company's Drilling Products
and Services segment and Drill Bit segment's revenues most closely track
worldwide rig counts, while its Tubular Technology and Services business is
dependent on the U.S. rig count, particularly the natural gas rig count, and
more specifically, rigs drilling for deep gas. The Company's marine products and
services are primarily dependent on domestic and international offshore rig
counts, particularly in the U.S. Gulf of Mexico.

Principles of Consolidation

The consolidated financial statements include the accounts of Grant Prideco
and its wholly owned subsidiaries. The following table lists less than 100%
owned consolidated subsidiaries as of December 31, 2003:

The minority interests of the above listed subsidiaries are included in the
balance sheets and statements of operations as "Minority Interests".
Intercompany transactions and balances between Grant Prideco's businesses have
been eliminated. The Company accounts for its 50% or less-owned affiliates using
the equity-method of accounting, as the Company has a significant influence but
not a controlling interest (see Note 7).

Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 2003 classifications. These reclassifications had
no impact on net income.

Use of Estimates

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, restructuring,
self-insurance, valuation of goodwill and long-lived assets, allowance for
doubtful accounts, determination of income taxes, contingent liabilities and
purchase accounting allocations. Actual results could differ from those
estimates.

40

Cash

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. At December 31, 2002 and 2003,
the Company had $8.5 million and $0.3 million of restricted cash, respectively.
The restricted cash balance at December 31, 2002 primarily related to the
Company's 54% interest in H-Tech that is subject to dividend and distribution
restrictions, and funding for the issuance of Industrial Revenue Bonds (IRB's)
that was designated for a specific purpose. The restricted cash balance at
December 31, 2003 primarily related to the Company's 60% interest in TPCO for
cash that is designated for a specific purpose.

Inventories

Inventory costs are stated at the lower of cost or market using the
first-in, first-out method. The Company values its inventories primarily using
standard costs, which approximate actual costs, that include raw materials,
direct labor, and manufacturing overhead allocations. The Company also performs
obsolescence reviews on its slow-moving drill stem and tubular related
inventories and establishes reserves based on current assessments about future
demands, market conditions, and related management initiatives (see Note 3). For
the Company's drill bit inventory, its inventory obsolescence policy is to
reserve 50% of the cost of inventories held longer than one year and 100% of
cost of inventories held longer than two years.

Property, Plant, and Equipment

Property, plant, and equipment is carried at cost. Maintenance and repairs
are expensed as incurred. The costs of renewals, replacements, and betterments
are capitalized. When properties and equipment are sold, retired, or otherwise
disposed of, the cost and related accumulated depreciation are eliminated and
the resulting gain or loss is recognized. Depreciation on fixed assets is
computed using the straight-line method over the estimated useful lives for the
respective categories. The useful lives of the major classes of property, plant,
and equipment are as follows:

Property, plant, and equipment consisted of the following:

Depreciation expense was $29.1 million, $30.2 million, and $42.0 million for
the years ended December 31, 2001, 2002, and 2003, respectively, which includes
depreciation of assets related to capital leases.

The Company reviews long-lived assets (groups) for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
group may not be recoverable and when management determines it is more likely
than not that an asset group will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life. This consists of
comparing the carrying amount of an asset group with its expected future net
cash flows without interest costs. If the asset group's carrying amount is less
than such cash flow estimate, it is written down to its fair value based on
expected future cash flows. Estimates of expected future cash flows represent
management's best estimate based on currently available information and
reasonable and supportable assumptions. Any impairment recognized is permanent
and may not be restored. See Note 4 for discussion related to the Company's
fixed asset write-downs.

41

Goodwill and Identifiable Intangible Assets

The Company's intangible assets are comprised of goodwill and identifiable
intangible assets. Goodwill is subject to annual impairment tests. Other
identifiable intangible assets are amortized on a straight-line basis over the
years expected to be benefited, ranging from 1.5 to 20 years. Periodically, or
when events or circumstances indicate that the carrying amount of identifiable
intangible assets may not be recoverable, the Company evaluates such assets for
impairment based on the undiscounted cash flows associated with the asset
compared to the carrying amount of that asset. See Note 11 for discussion
related to the Company's goodwill and identifiable intangible asset impairments.

Stock-Based Compensation

The Company accounts for its stock-based compensation programs using the
intrinsic value method of accounting established by Accounting Principles Board
(APB) Opinion 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 Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" (see Note 13).

Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123. The pro forma information has been determined
as if the Company had accounted for its stock options under the fair value
method. The following is a summary of the Company's net income (loss) and net
income (loss) per share as reported and pro forma as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The pro forma effects of applying SFAS
No. 123 may not be representative of the effects on reported net income for
future years since options vest over several years and additional awards are
made each year.

Pro forma information applying to the fair value method follows:

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility. See
Note 13 for a discussion of the assumptions used in the option pricing model and
estimated fair value of employee stock options.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which amends SFAS No. 123 to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income (loss) of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, SFAS No.
148 amends APB No. 28, "Interim Financial Reporting" to require disclosure about
those effects in interim financial information. SFAS No. 148's amendment of the
transition and disclosure requirements of SFAS No. 123 are effective for fiscal
years ending after December 15, 2002, with earlier application permitted. SFAS
No. 148's amendment

42

of the disclosure requirements of APB No. 28 is effective for interim periods
beginning after December 15, 2002. The Company adopted SFAS No. 148 on January
1, 2003. The Company did not change to the fair value-based method of accounting
for stock-based employee compensation.

Pension Plans

On December 20, 2002, the Company assumed sponsorship of two defined benefit
pension plans incurred in connection with the ReedHycalog acquisition. Generally
accepted accounting principles require the Company to develop actuarial
assumptions in determining annual pension expense and benefit obligations for
the related plans. These assumptions are reviewed on an annual basis and
modified as necessary to reflect changed conditions. Further, the recognition of
a minimum pension liability and in certain circumstances an adjustment to
stockholders' equity is required when the fair market value of year-end pension
assets are less than the accumulated benefit obligation. Future increases or
decreases to the minimum pension liability are dependent upon actuarial
experience, including whether asset returns exceed assumed rates of return.

The assets and related obligations of the defined benefit pension plans are
presented in Note 14. The plans assets are valued using market quotations and
consist primarily of marketable equity and debt instruments. The plan's
obligations and annual pension expenses are determined by independent actuaries
and through the use of a number of assumptions. Key assumptions used in
measuring the plans obligations include the discount rate, and the estimated
future return on plan assets. In determining the discount rate, the Company
utilizes the yield on high-quality, fixed-income investments currently available
with maturities corresponding to the anticipated timing of the benefit payments.
Asset returns are based upon the anticipated average rate of earnings expected
on the invested funds of the plans.

Foreign Currency Translation

The functional currency for the majority of the Company's 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.
Net foreign currency transaction gains (losses) for the years ended December 31,
2001, 2002, and 2003 were $(0.5) million, $(0.2) million, and $3.2 million,
respectively.

Derivative Instruments and Hedging Activities

From time-to-time, the Company uses foreign currency forward contracts and
call options to hedge certain of its exposures to changes in foreign exchange
rates, primarily related to the Euro. The fair value is calculated based on
current forward rates for the forward contracts and call options.

Off-Balance Sheet Financing

The Company does not have any off-balance sheet hedging, financing
arrangements or contracts except those associated with our investments in three
companies that are not consolidated in the Company's financial statements:
Voest-Alpine, G-PEX, and Intelliserv, Inc. (Intelliserv). These investments are
accounted for under the equity-method of accounting. The assets and liabilities
of Voest-Alpine are summarized in Note 7 to the Company's audited consolidated
financial statements. The two other joint ventures relate to technologies the
Company is currently developing. These two companies do not have any debt, other
than trade payables relating primarily to research and development expenses.

Additionally, Voest-Alpine has entered into forward contracts to cover its
currency risk related to accounts receivables and accounts payables and has also
entered into interest rate swap agreements to reduce its exposure to changes in
floating interest rate payments of its long-term bonds.

Accounting for Income Taxes

The accompanying financial statements have been prepared under SFAS No. 109,
"Accounting for Income Taxes", assuming Grant Prideco was a separate entity for
all periods prior to the spinoff from Weatherford International Ltd.
(Weatherford). Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.

43

In connection with the spinoff from Weatherford, Grant Prideco and
Weatherford entered into a tax allocation agreement (the "Tax Allocation
Agreement"). Under the terms of the Tax Allocation Agreement, Grant Prideco will
be responsible for all taxes and associated liabilities relating to the
historical businesses of Grant Prideco. The Tax Allocation Agreement also
provides that any tax liabilities associated with the spinoff shall be assumed
and paid by Grant Prideco subject to certain exceptions relating to changes in
control of Weatherford. The Tax Allocation Agreement further provides that in
the event there is a tax liability associated with the historical operations of
the Company that is offset by a tax benefit of Weatherford, Weatherford will
apply the tax benefit against such tax liability and will be reimbursed for the
value of such tax benefit when and as Weatherford would have been able to
otherwise utilize that tax benefit for its own businesses. Also, the Tax
Allocation Agreement provides that Weatherford will have the future benefit of
any tax losses incurred by Grant Prideco prior, as a part of a consolidated
return with Weatherford, to the spinoff, and Grant Prideco will be required to
pay Weatherford an amount of cash equal to any such benefit utilized by Grant
Prideco or which expires unused by Grant Prideco to the extent those benefits
are not utilized by Weatherford.

Revenue Recognition

The Company recognizes revenue in accordance with its sales agreements,
which is on the date of customer acceptance, when the manufacturing process is
complete, the customer has been provided with all proper inspection and other
required documentation, title and risk of loss has passed to the customer,
collectability is reasonably assured, and the Company has met all of its
delivery obligations. With respect to our Drill Bits segment, for consignment
and performance sales, revenue is recognized when the customer runs the drill
bit. Customer advances or deposits are deferred and recognized as revenue when
the Company has completed all of its performance obligations related to the
sale. The Company also recognizes revenue as services are performed. Reserves
for bad debt of $2.8 million and $3.5 million as of December 31, 2002 and 2003,
respectively, are provided based on specific account collection issues. The
provision for bad debt expense was $1.1 million and $1.9 million for 2002 and
2003, respectively.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income or loss
by the weighted average number of common shares outstanding during the year.
Diluted net income (loss) per share reflects 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 is antidilutive. The
computation of diluted earnings per share for 2001, 2002, and 2003 did not
include options to purchase 5.0 million, 5.2 million, and 5.1 million shares,
respectively, of common stock because their exercise prices were greater than
the average market price of the common stock.

The following table reconciles basic and diluted weighted average shares:

Recently Issued Accounting Pronouncements

In January 2003, the FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN No. 46) was issued. FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
variable interest entities, which are certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated support from other parties. The Interpretation is
intended to achieve more consistent application of consolidation policies to
variable interest entities and thus, to improve comparability between
enterprises engaged in similar activities even if some of those activities are
conducted through variable interest entities. The Interpretation is effective
immediately for variable interest entities created after January 31, 2003, and
to variable interest entities in which the Company obtains an interest after
that date. In December 2003, the FASB issued a revision to FIN No. 46, (FIN No.
46R), to clarify some of the provisions of FIN No. 46 and to exempt certain
entities from its requirements. Under the new guidance, special effective date
provisions apply to enterprises that have fully or partially applied FIN No. 46
prior to issuance of this revised interpretation. Otherwise, application of FIN
No. 46R is required in financial statements of public entities that have
interests in structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of variable
interest entities is required in financial statements for periods ending after
March 15, 2004. The Company is currently analyzing the potential impact, if any,
this

44

interpretation will have on its consolidated results of operations and its
financial condition, with respect to entities acquired before February 1, 2003.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that financial instruments within its scope be classified as an
asset or liability. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and must be applied to the Company's
existing financial instruments effective July 1, 2003, the beginning of the
first fiscal period after June 15, 2003. The Company adopted SFAS No. 150 in the
third quarter of 2003 and there was no impact on the Company's consolidated
results of operations or financial condition.

2. COMPREHENSIVE INCOME

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

3. INVENTORIES

Inventories by category are as follows:

Work in process and finished goods inventories include the cost of
materials, labor, and plant overhead.

4. OTHER CHARGES

2003 Charges

During 2003, the Company incurred $37.8 million of pre-tax charges, $24.6
million net of tax. These charges include $24.9 million, $16.2 million net of
tax, related to fixed asset write-downs, $6.4 million, $4.1 million net of tax,
related to inventory reserves for exited product lines which are classified in
cost of sales, $6.4 million, $4.2 million net of tax, related to asset
impairments, and $1.5 million, $1.0 million net of tax, related to stock based
compensation expense. The 2003 pre-tax charges are summarized in the chart below
(in thousands):

45

- ----------

(a) The write-down of fixed assets was reported as other charges and
related to assets taken out of service as part of the Drilling Products
and Services' manufacturing rationalization program. The amount was
determined by use of internal appraisals and evaluations to assess the
net realizable value upon disposal based on expected future cash flows.

(b) The other impairments relate to two technology joint ventures. The
amount was determined by use of internal appraisals and evaluations to
assess the net realizable value upon disposal based on expected future
cash flows.

(c) In May 2003, two members of the Board of Directors volunteered to step
down to reduce the number of common directors between Grant Prideco and
its former parent, Weatherford, and vesting of their stock-based
compensation was accelerated (See Note 13).

(d) In July 2003, the dispute underlying the 2000 $4.7 million contingent
liability accrual was settled for $3.3 million, therefore a $1.4
million credit was recorded to reflect the actual 2003 settlement of
the liability accrued as a charge taken in 2000.

(e) The inventory reserves for the exited product lines were reported as
cost of sales and relate to the write-down of inventories, primarily
industrial drilling products, to their net estimated realizable values.
The amount was determined by use of internal appraisals and evaluations
to assess the estimated net realizable value upon disposition. The
remaining inventory, which had a carrying value of $1.2 million as of
December 31, 2003, is expected to be liquidated by the end of 2004.

2002 Charges

During 2002, the Company incurred $7.0 million of pre-tax charges, $4.9
million net of tax. These charges included $2.6 million related to fixed asset
write-downs and $4.4 million for executive severance payments and related
expenses and are summarized in the following chart (in thousands):

- ----------

(a) The fixed asset write-downs relate to idle assets taken out of service
pursuant to the Company's ongoing automation and efficiency initiatives
and are classified as held for sale. The amount was determined by use
of internal appraisals and evaluations to assess the estimated fair
value upon disposition.

(b) The severance charge relates to an executive employee terminated during
June 2002. The amount accrued for severance was based upon the
terminated employee's employment contract, which was paid in July 2002.

2001 Charges

During 2001, the Company incurred $44.8 million of pre-tax charges, $29.1
million net of tax. These charges include $11.1 million, $7.2 million net of
tax, related to inventory write-offs and capitalized manufacturing variance
write-offs which were classified as cost of sales, $17.7 million, $11.5 million
net of tax, pertaining to the write-off of assets related to the Company's
manufacturing arrangement with Oil Country Tubular Ltd. (OCTL) in India,
severance and related expenses of $14.5 million, $9.4 million net of tax, and a
fixed asset impairment of $1.5 million, $1.0 million net of tax, related to the
decision to discontinue the manufacturing of industrial flanges. As of December
31, 2002, all of the charges have been utilized or paid. These charges are
summarized in the following chart:

46

- -------------

(a) In connection with the Company's operational review conducted in 2001,
the Company reassessed the viability of restructuring its relationship
with OCTL in India and determined that a continued relationship was no
longer viable. As a result of this determination, the Company wrote-off
the remaining $17.7 million of unpaid receivables and advances owed to
it by OCTL.

(b) The flange machinery and equipment impairment was reported as other
charges and relates to the Company's decision to discontinue the
manufacturing of industrial flanges. The amount was determined by use
of internal appraisals and evaluations to assess the net realizable
value upon disposal.

(c) The severance charge relates to executive, manufacturing, and marketing
employees terminated in connection with the Company's restructuring
plan that was implemented in 2001. The total number of employees
severed was 24, and the amount accrued for severance was based upon the
positions eliminated and the Company's severance policy, all of which
were paid in 2001.

(d) Certain capitalized manufacturing cost variances were expensed as cost
of sales in connection with the Company's operational review and
revisions of manufacturing standards and costing during 2001.

(e) The inventory write-off was reported as cost of sales and was made
pursuant to a review of the Company's planned dispositions of inventory
in an effort to reduce inventory levels of older, slow-moving products
and also included write-offs pursuant to the Company's decision to
discontinue manufacturing of industrial flanges. The amount was
determined by use of internal appraisals and evaluations to assess the
estimated net realizable value upon disposal and also included a charge
related to certain inventory purchase contract obligations with above
market prices.

2000 Charges

The Company recorded certain charges in 2000 totaling $7.9 million that
related to accrued liabilities. The accrued liability balance as of December 31,
2003 is summarized below (in thousands):

- ----------

(a) The litigation accrual was reported as other charges and relates to an
outstanding lawsuit filed against the Company in May 1997 for patent
infringement. On March 2, 2001 a jury found that the Company had
infringed on the patent and awarded the plaintiff approximately $2.0
million in damages, including prejudgment interest. Pursuant to the
jury award, the Company reevaluated the estimated range of loss on the
lawsuit and concluded that an additional charge of $2.5 million was
necessary to increase the accrued liability balance at December 31,
2000. This remaining $0.7 million accrual was settled during the first
quarter of 2004.

(b) The contingent liability accrual was reported as other charges and
represents the probable estimated settlement under the terms of a
contract relating to purchase commitments. In July 2003, the dispute
underlying the contingent liability accrual was settled for $3.3
million and a $1.4 million adjustment was made in the second quarter of
2003 to reduce the accrued contingent liability to the actual
settlement amount.

5. ACQUISITIONS

On December 20, 2002, the Company purchased the ReedHycalog drill bits
business from Schlumberger Technology Corporation and its affiliates
(Schlumberger) for $364.9 million, consisting of $259.3 million in cash, $90
million in Grant Prideco common stock, and $15.6 million of assumed non-current
liabilities and an accrued working capital adjustment. 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.

47

In addition to the cash and equity consideration for ReedHycalog, the
Company assumed certain of Schlumberger's and its affiliates' obligations,
responsibilities, liabilities, costs, and expenses arising out of or incurred in
connection with the operation of ReedHycalog. This includes, subject to certain
exceptions, certain of Schlumberger's and its affiliates' obligations,
liabilities, costs, and expenses related to the operation of its business,
contractual matters, warranty claims, and various accrued liabilities, including
certain known and unknown obligations, liabilities, costs, and expenses arising
or incurred prior to the closing date. The Company believes that, as a result of
Schlumberger's indemnification obligations, the Company will not have any
material exposure for pre-closing matters. However, the indemnification the
Company received is subject to certain thresholds and limits and the Company
cannot assure that such indemnification will be adequate.

The purchase price for ReedHycalog has been allocated to the fair values of
assets acquired and liabilities assumed. Some allocations are based on studies
and independent valuations.

The components of the purchase price and final allocation as of the
acquisition date, including the weighted average useful life of intangibles, are
as follows (in thousands, except the useful life information which is in years):

Goodwill that is deductible for income tax purposes related to this
acquisition was $73.6 million.

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 are
included in the Company's Tubular Technology and Services segment.

On March 26, 2002, the Company acquired an additional 48.5% interest in JSG,
a Chinese entity engaged in the manufacture and sale of drill pipe to the
Chinese and related markets, thereby giving the 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. 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. JSG's results of operations are included in the Company's
Drilling Products and Services segment.

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 December 31, 2003, the
Company had invested approximately $2.5 million

48

into this joint venture. In January 2004, the Company paid its remaining
committed contribution of $2.5 million. TPCO's results of operations are
included in the Company's Drilling Products and Services segment.

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 $5.1 million, all of which related to the 2003
step-acquisition. Rotator's results of operations and financial condition are
included in the Company's Marine Products and Services segment. In September
2003, the Company sold Rotator. See Note 6 for further discussion.

On November 6, 2001, the Company acquired a license to Plexus
International's patented POS-GRIP(TM) wellhead and related technology for subsea
well applications and certain exploration and development wells. The Company
also acquired the assets and customer base for the associated wellhead rental
business. The purchase price was $2 million in cash, and the Company has agreed
to fund an additional $4 million in working capital to support the POS-GRIP
technology and the wellhead rental business. As of December 31, 2003, the
Company has funded working capital of approximately $2.5 million. Additional
consideration of $2.5 million was paid in 2003 based on a multiple of Plexus'
actual earnings for the annual period ending December 31, 2002. In 2003, the
Company recorded goodwill and intangible asset impairment charges related to
Plexus. See Note 11 for further discussion of these charges.

The acquisitions discussed above were accounted for using the purchase
method of accounting. The results of operations of all acquisitions are included
in the 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. See Note 12 for
supplemental cash flow information concerning acquisitions.

The 2001 and 2002 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.

The following unaudited pro forma summary presents information as if
ReedHycalog had been acquired at the beginning of 2002. The pro forma amounts
include certain adjustments, including recognition of depreciation and
amortization based on the final 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 period
presented and they are not intended to be a projection of future results.

6. DISPOSITIONS

On December 2, 2003, the Company sold its Petro-Drive operations, a provider
of hammer services, for $7 million in cash. The Petro-Drive operations were
included in the Company's Marine Products and Services segment. The Company
recognized a pre-tax $0.1 million loss on the sale, which is recorded in the
Consolidated Statement of Operations in "Other, Net".

On September 2, 2003, the Company sold Rotator for $13.5 million in cash,
subject to a working capital adjustment to be finalized in the first half of
2004. The gain recognized on the sale was $2.2 million, or $1.4 million net of
tax, and is included in the Consolidated Statements of Operations in "Other,
Net". Revenues related to Rotator included in the Marine Products and Services
segment's results for the years ended 2002 and 2003 were $12.6 million and $8.7
million, respectively. Operating income related to Rotator for the years ended
2002 and 2003 were $1.3 million, and $0.9 million, respectively. In March 2004,
the Company recorded a working capital adjustment of $0.8 million.

49

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". Revenues related to Star included in the Other segment's
results for the years ended 2001, 2002, and 2003 were $20.8 million, $19.5
million, and $3.6 million, respectively. Operating income related to Star for
the years ended 2001, 2002, and 2003 were $2.0 million, $1.4 million, and $0.1
million, respectively.

7. 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. The investment in Voest-Alpine was $37.9
million and $36.6 million at December 31, 2002 and 2003, respectively.
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 due to equity method amortization of goodwill related to the investment
in 2001, and the elimination of intercompany profit on Voest-Alpine sales to the
Company. At December 31, 2002 and 2003, the Company's investment in Voest-Alpine
exceeded its equity in its net assets by approximately $14.1 million and $17.5
million, respectively, due to goodwill, tax adjustments, and timing differences.
Amortization of the goodwill related to the investment totaling $0.3 million is
included in Equity Income in Unconsolidated Affiliates for the year ended
December 31, 2001.

During 2003, the Company renewed a supply contract with Voest-Alpine under
which the Company agreed to purchase a minimum of 57,000 metric tons of green
tubulars during 2003 and 52,000 metric tons per year thereafter through July
2007. This Euro-denominated contract fixes the price of steel green tubes within
a range, and it limits total price increases to 5% over the life of the
contract. Because this agreement requires the Company to purchase tubulars or
pay a penalty regardless of its needs, purchases under this agreement may be
made for inventory or the Company may be forced to pay a penalty during periods
of low customer demand. The maximum penalties due under the contract would be
43.6 Euros for every metric ton that a two-year average of purchases fell below
the annual purchase minimum. Any purchases made in excess of demand would
require the Company to use its working capital and expose the Company to risks
of excess inventory during a downturn. Although these purchases could require a
substantial expenditure, the Company expects to be able to eventually use or
sell all of the tubular products they are required to purchase from
Voest-Alpine. Purchases of tubulars from Voest-Alpine totaled $37.1 million,
$22.0 million, and $27.0 million for the years ended December 31, 2001, 2002,
and 2003, respectively. Trade payables to Voest-Alpine were $9.3 million at
December 31, 2003 and $6.4 million at December 31, 2002.

In March 2002, the Company purchased an additional 48.5% interest in JSG, a
Chinese drill pipe manufacturer, for a total of 70% interest. Prior to the
purchase, the Company accounted for the JSG investment under the equity method
of accounting (see Note 5 for further discussion).

50

In September 2001, the Company entered into a joint venture, G-PEX, related
to the commercialization of composite progressive cavity motors and pumps. The
Company has a 50% interest in this joint venture and its investment is accounted
for under the equity method of accounting. The Company is currently funding 100%
of the expenses related to G-PEX until commercialization of the product. Once
the product has reached commercialization, G-PEX is obligated to reimburse the
Company for all expenses paid on behalf of G-PEX. G-PEX has encountered several
engineering and technical delays and as of December 31, 2003 has not delivered
any products for field-testing. As a result, the Company is uncertain that G-PEX
will be able to successfully commercialize its product line, and therefore,
concluded, in the fourth quarter of 2003, that the G-PEX investment was impaired
based on expected future cash flows. A charge was recorded in 2003 to write off
the net investment of $2.6 million and all future cash advances to fund G-PEX's
operations will be expensed.

In May 2001, the Company purchased all of the outstanding shares of
Intellipipe, Inc. common stock for 0.6 million shares of Grant Prideco common
stock with a fair value of approximately $12 million. The Company, through its
100% owned subsidiary Intellipipe, Inc., owns a 50% interest in Intelliserv.
Intelliserv is currently developing and commercializing a drill pipe telemetry
system. The Company's investment in Intelliserv is accounted for under the
equity-method of accounting and as of December 31, 2002, and 2003 the Company's
investment in Intelliserv was $11.4 million, and $11.1 million, respectively.
For the years ended December 31, 2001, 2002, and 2003 the Company has recorded
equity losses of $0.4 million, $3.0 million, and $3.6 million, respectively.
Intelliserv is in the prototype testing and refinement stage.

8. SHORT-TERM DEBT

As of December 31, 2003, the Company had short-term borrowings of $1.3
million with a weighted average interest rate of 4.6%. Additionally, at December
31, 2002, there were outstanding borrowings of $0.2 million under a
miscellaneous credit facility and at December 31, 2002 and 2003, there were $3.1
million and $1.2 million, respectively, of outstanding letters of credit which
had been supported under various available letter of credit facilities that are
not related to the Senior Credit Facility.

9. LONG-TERM DEBT

Long-term debt consists of the following:

The following is a summary of scheduled long-term debt maturities by year
(in thousands):

2004.......... $ 9,785
2005.......... 7,428
2006.......... 43,104
2007.......... 199,528
2008.......... 234
Thereafter.... 176,559
--------
$436,638
========

Senior Credit Facility

In connection with the ReedHycalog acquisition in December 2002, the Company
entered into a new four-year $240 million senior secured credit facility (Senior
Credit Facility) with a syndicate of U.S. and foreign banks. This Senior Credit
Facility replaced the Company's prior revolving credit facility. The Senior
Credit Facility is comprised of a $50 million term loan consisting of a $47
million U.S. term loan and a $3 million Canadian term loan, and a $190 million
revolving credit facility, which includes up to $20 million for letter of
credits, consisting of a $183 million U.S. revolving facility and a $7 million
Canadian revolving facility.

51

The credit facilities are guaranteed by Grant Prideco, Inc. and all domestic
subsidiaries and are secured by substantially all of the Company's U.S. assets,
including U.S. inventories, equipment, receivables, owned real property, and
stock of certain foreign subsidiaries. The Canadian credit facilities are
guaranteed by Grant Prideco, Inc. and all U.S. subsidiaries and are secured by
substantially all of the Company's U.S. assets and certain Canadian inventories,
equipment, receivables, owned real property, and 65% of the stock of certain
foreign subsidiaries.

Amounts outstanding under the Senior Credit Facility accrue interest at a
variable rate based on either the U.S. prime rate (plus 0.75% to 2.00% depending
on the Company's leverage ratio and the type of loan, whether revolving or term)
or LIBOR (plus 1.75% to 3.00% depending on the Company's leverage ratio and the
type of loan, whether revolving or term) for the U.S. denominated advances or a
variable rate based on the Canadian prime rate (plus 0.75% to 2.00% depending on
the Company's leverage ratio and the type of loan, whether revolving or term) or
the applicable rate for Canadian bankers acceptances, for Canadian denominated
advances. Interest on outstanding borrowings is payable monthly or, with respect
to LIBOR borrowings, either quarterly or at the end of the applicable LIBOR
period. The U.S. revolving credit facility also provides the Company with
availability for stand-by letters of credit. The Company is required to comply
with various affirmative and negative covenants, which will limit the Company's
ability to incur new debt, make certain investments and acquisitions, sell
assets, grant liens, and take other actions. The Company is also subject to
financial covenants that require the Company to limit its capital expenditures
and, under certain circumstances, require the Company to maintain a certain
minimum fixed charge coverage ratio. As of December 31, 2003, the Company was in
compliance with the various covenants under the Senior Credit Facility.

As of December 31, 2003, the Company had borrowed $57.2 million under the
Senior Credit Facility, of which $42.9 million relates to the term loan, $14.3
million relates to the revolving credit facility, and $5.9 million had been used
to support outstanding letters of credit. Net borrowing availability was $122.3
million. As of December 31, 2002, the Company had borrowed $107.3 million under
the Senior Credit Facility, of which $50 million relates to the term loan and
$4.2 million had been used to support outstanding letters of credit. Net
borrowing availability was $91.0 million. The revolving credit facility, under
the Senior Credit Facility, is recorded as "Long-Term Debt" in the accompanying
Consolidated Balance Sheets as the Company has the ability under the credit
agreements and the intent to maintain these obligations for longer than one
year.

9% Senior Notes Due 2009

In December 2002, the Company issued $175.0 million principal amount of 9%
Senior Notes Due 2009 (9% Senior Notes). Net proceeds from the issuance of
approximately $170.0 million were used, along with certain other funds, to fund
the cash portion of the ReedHycalog acquisition. Interest is payable June 15 and
December 15 of each year. After December 15, 2006, the Company may redeem all or
part of the 9% Senior Notes at any time at a price of 100% of their principal
amount plus an applicable premium and accrued and unpaid interest to the
redemption date. The 9% Senior Notes are guaranteed by all of the Company's
domestic subsidiaries. The indenture governing the 9% Senior Notes contains
various covenants customary in such instruments, including restrictions to incur
new debt, pay dividends, sell assets, grant liens, and other related items.

9 5/8% Senior Notes Due 2007

In December 2000, the Company issued $200.0 million principal amount of 9
5/8% Senior Notes Due 2007 (9 5/8% Senior Notes). The 9 5/8% Senior Notes were
issued at a discount to yield an effective interest rate of 9 3/4%. Interest is
payable June 1 and December 1 of each year. The Company may redeem all or part
of the 9 5/8% Senior Notes at any time at a price of 100% of their principal
amount plus an applicable premium and accrued and unpaid interest to the
redemption date. The 9 5/8% Senior Notes are guaranteed by all of the Company's
domestic subsidiaries. The indenture governing the 9 5/8% Senior Notes contains
various covenants customary in such instruments, including restrictions to incur
new debt, pay dividends, sell assets, grant liens, and other related items.

In the event there is a payment default under the Senior Credit Facility,
the 9% and 9 5/8% Senior Notes could come due. As of December 31, 2003, the
Company was in compliance with the various covenants under the 9% and 9 5/8%
Senior Notes agreements.

10. FINANCIAL INSTRUMENTS

From time to time the Company uses foreign currency forwards and call
options to hedge certain of its exposures to changes in foreign exchange rates.
The forwards and call options have only nominal value at the time of purchase.
The counterparties to these derivative foreign exchange contracts are
creditworthy multinational commercial banks. Management believes that the risk
of counterparty nonperformance is minimal. The Company does not engage in
derivative activity for speculative or trading purposes.

52

Cash Flow Hedges

At December 31, 2001, the Company's Italian subsidiary had U.S. Dollar/Euro
forward contracts and call options with notional amounts totaling $15.3 million
U.S. Dollars. These contracts were marked to market based on forward rates and
there was no material impact on income as a result of these forward contracts.
The Company recognized losses of $0.6 million in "Other, Net" in the
accompanying Statements of Operations related to foreign currency forward
contracts that resulted from an overhedged position with respect to the
anticipated Euro-denominated purchases of inventory during 2001. As of December
31, 2002, all of the Company's forward contracts had expired.

The following table summarizes activity in Other Comprehensive Income (Loss)
related to derivatives classified as cash flow hedges for the year ended
December 31, 2002 (in thousands):

Fair Value Hedges

The Company had forward contracts in place to purchase 2.9 million Euros for
a notional amount of $2.9 million U.S. Dollars at December 31, 2001. In January
2002, one of the forward contracts expired, and the remaining forward contract
was cancelled. There was no material impact on income as a result of these
transactions.

Net Investment Hedge

Gains and losses attributable to the translation of the 7 1/2 year
Voest-Alpine debt were included in Other Comprehensive Income as the debt was
designated as, and was effective as, a net investment hedge of the Company's
equity investment in Voest-Alpine. For the year ended December 31, 2002, $0.1
million related to the net investment hedge was included in the foreign currency
translation adjustment. In May 2002, the Voest-Alpine debt was paid in full.

Fair Value of Financial Instruments Other than Derivatives

The Company's financial instruments other than derivative instruments
consist primarily of cash and cash equivalents, trade receivables, trade
payables and debt. The book values of cash and cash equivalents, trade
receivables and trade payables are considered to be representative of their
respective fair values due to the short-term maturity of those instruments. The
Company determined fair value for debt based on current market rates. The
Company had approximately $490.4 million and $436.6 million of debt at December
31, 2002 and 2003, respectively. The fair value of the debt at December 31, 2002
and 2003 was $508.5 million and $488.1 million, respectively.

11. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted 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 are subject to
annual impairment tests. Other intangible assets will continue to be amortized
over their useful lives.

In accordance with SFAS No. 142, prior period amounts were not restated. A
reconciliation of the previously reported net income and earnings per share for
the year ended December 31, 2001 to the amounts adjusted for the reduction of
amortization expense, net of the related income tax effect, is as follows (in
thousands, except per share amounts):

53

SFAS No. 142 provides for a two-step transitional goodwill impairment test
with respect to existing goodwill. The first step of the test involved 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
exceeded the fair value of a reporting unit, the Company was required to
complete the second step of the transitional goodwill impairment test for that
reporting unit by December 31, 2002. The Company's reporting units are as
follows: 1) Drilling Products and Services, 2) Drill Bits, 3) Tubular Technology
and Services, 4) Marine Products and Services, and 5) Other. During 2003, the
Company reorganized its reporting structure and transferred the Plexus
International (Plexus) division from the Marine Products and Services (Marine)
reporting unit to the Other reporting unit. Plexus, which was acquired in 2001
(see Note 5), was never integrated into the Marine reporting unit after its
acquisition and the benefits of its goodwill were never realized. The carrying
amount of Plexus' acquired goodwill, $2.5 million, was also transferred to the
Other reporting unit.

Completion of the first step of the test, upon adoption of SFAS No. 142,
indicated the carrying value of the Other reporting unit exceeded its fair
value. The Company then performed the second step of the impairment test for
this reporting unit during the fourth quarter of 2002, and a pre-tax goodwill
impairment loss was recorded totaling $9.3 million, $6.4 million net of tax.
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 fair value of the Other reporting unit was
determined using a combination of discounted cash flow projections and
comparable company market value multiples. The circumstances leading to the
goodwill impairment in the Other reporting unit were overall weak market
conditions in the telecommunications industry, which contributed to declining
revenues and profitability, and a reduction in the estimated future expected
performance of this reporting unit.

The Company performs its annual test for potential goodwill impairment as of
October 1st of each year or when events occur or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount. The Company completed its annual assessment in the fourth
quarter of 2003. The annual goodwill impairment test for 2003 indicated that the
fair value of the Other reporting unit was below its carrying value and a
pre-tax goodwill impairment loss was recorded totaling $2.5 million, $1.6
million net of tax. The carrying amount of goodwill by reporting unit was as
follows:

Intangible assets of $39.0 million and $36.3 million, including accumulated
amortization of $3.4 million and $7.3 million, as of December 31, 2002 and 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, trademarks, technology licenses, and customer relationships that are
amortized over the definitive terms of the related agreement or the Company's
estimate of the useful life if there are no definitive terms. During 2003, the
Company recorded an impairment on licenses related to its Plexus division of
$1.3 million, net of $0.2 million of accumulated amortization. The following
table shows the Company's intangible assets by asset category (in thousands):

Amortization expense related to intangible assets for the years ended
December 31, 2001, 2002, and 2003 was $1.0 million, $0.9 million, and $4.1
million, respectively. Excluding the impact of future acquisitions, estimated
annual amortization expense related to existing intangible assets for years 2004
through 2008 is expected to be approximately $4.0 million, $3.4 million, $3.3
million, $2.6 million and $2.3 million, respectively.

54

12. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes (net of refunds) was as follows:

The following summarizes investing activities relating to acquisitions:

The acquisition information for 2003 primarily relates to fair value
adjustments of net assets acquired in the ReedHycalog acquisition in December
2002.

13. STOCK-BASED COMPENSATION

Stock Option and Restricted Stock Plans

The Company has stock option plans pursuant to which directors, officers,
and other key employees may be granted restricted stock and options to purchase
shares of Grant Prideco Common Stock (Common Stock) at the fair market value
on the date of grant.

The Company has in effect a 2000 Employee Stock Option and Restricted Stock
Plan (2000 Plan), a 2000 Non-Employee Director Stock Option Plan (Director
Plan), and a 2001 Employee Stock Option and Restricted Stock Plan (2001 Plan).
Under these plans, restricted stock or options to purchase up to an aggregate of
15.8 million shares of Common Stock may be granted. Stock options and restricted
stock vest one to four years from the date of grant and expire ten to fourteen
years from the date of grant. Restricted shares are subject to certain
restrictions on ownership and transferability when granted. In October 2001, an
award was granted to a director replacing 750,000 options for 350,000 shares of
restricted stock. In June 2002, an award was granted to an executive officer for
500,000 shares of restricted stock. At December 31, 2003, approximately 3.8
million shares were available for granting under such plans.

The Company also has stock options granted to employees and directors of
Weatherford that were granted prior to September 1998. Under the terms of Grant
Prideco's spinoff from Weatherford, these employees and directors were granted
an equal number of options to purchase Common Stock. The Company granted a total
of 1,247,255 stock options related to the Weatherford grants prior to September
1998. As of December 31, 2003, options outstanding related to the Weatherford
plans prior to September 1998 were 909,880.

Compensation expense recognized in 2001, 2002, and 2003 related to the
restricted stock awards was $0.2 million, $2.1 million, and $2.9 million,
respectively.

Compensation expense of $8.8 million was recognized during 2001 for stock
options exercised by an executive employee who was terminated in February 2001.
Under the terms of his employment contract, the executive exercised his right to
surrender all vested stock options for cash. This amount was included in the
2001 Other Charges under Severance. Compensation expense of $1.5 million was
recognized in 2003 for accelerated vesting of restricted stock and stock options
related to two members of the Board of Directors. This amount was included in
the 2003 Other Charges under Stock Compensation Expense. See Note 4 for further
discussion of these charges.

A summary of the status of the Company's stock options under the 2000 Plan,
the Director Plan, and the 2001 Plan along with the Weatherford grants prior to
September 1998 as of December 31, 2001, 2002, and 2003 and the changes during
the year ended on those dates are presented below (actual amounts):

55

The following table summarizes information about stock options outstanding
at December 31, 2003:

The fair value of stock options granted by the Company during 2001, 2002,
and 2003 was estimated using the Black-Scholes option-pricing model, with the
following weighted average assumptions:

Executive Deferred Compensation Plans

In April 2000, Weatherford spun off Grant Prideco to its stockholders as an
independent, publicly traded company. Weatherford maintains various Executive
Deferred Compensation Stock Ownership Plans (the "Weatherford EDC Plans"). Prior
to the spinoff from Weatherford, participants in the Weatherford EDC Plans had a
right to receive shares of Weatherford common stock upon termination of their
employment based on the deferred amounts placed in their individual accounts.
Under the Weatherford EDC Plans, in the event of a dividend or special
distribution to the shareholders of Weatherford, the accounts of the employees
are to represent a right to receive the consideration provided through the
dividend or special distribution. As a result, participants in the Weatherford
EDC Plans were entitled to receive shares of both Weatherford common stock and
Common Stock in respect of amounts deferred by the participants prior to the
spinoff. Accordingly, a portion of the deferred compensation liability recorded
by Weatherford was allocated to Grant Prideco based on the relative market value
of the Common Stock to the relative market value of the Weatherford common stock
on the date of spinoff. The liability transferred to Grant Prideco was
approximately $4.2 million and is included in "Deferred Compensation Obligation
in Stockholders' Equity". The Company has reserved 519,000 shares of Common
Stock in settlement of this obligation. As of December 31, 2003, 360,505 shares
remain. Settlements under the Weatherford EDC Plans will be solely in
Weatherford common stock and Common Stock.

At the time of the spinoff from Weatherford, Grant Prideco established
separate Executive Deferred Compensation Stock Ownership Plans (the "Grant EDC
Plans") in which certain Grant Prideco employees and directors participate. The
terms of the Grant EDC Plans are substantially similar to the Weatherford EDC
Plans. A separate trust (the "Trust") has been established by Grant Prideco
following the spinoff to fund the benefits under the Grant EDC Plans. The funds
provided to the Trust are invested in Common Stock through open market purchases
by a trustee independent of the Company. The assets of the Trust are available
to satisfy the claims of all general creditors of Grant Prideco in the event of
a bankruptcy or insolvency. Settlements under the Grant EDC Plans will be in
Common Stock. Accordingly, the Common Stock held by the Trust is included in
Stockholders' Equity as "Treasury Stock, at Cost".

56

Employee Stock Purchase Plan

In 2003, the Company's Employee Stock Purchase Plan ("ESPP") was approved
and the Company reserved 1.2 million shares of Common Stock for issuance under
the ESPP. Under the ESPP, eligible employees may elect up to 10% of their
earnings withheld, subject to certain limitations. Each one-year offering period
commences on January 1 of each year, except the initial offering period which
commenced on July 1, 2003 and concluded December 31, 2003. The price at which
the Common Stock may be purchased under the ESPP is equal to 85% of the lower of
the fair market value of the Common Stock on the commencement date or the last
trading day of each offering period. There were approximately 91,000 shares sold
through the ESPP in 2003.

14. RETIREMENT AND EMPLOYEE BENEFIT PLANS

DEFINED CONTRIBUTION PLAN

The Company has defined contribution plans covering certain of its
employees. The Company's expenses related to these plans totaled $0.9 million,
$1.2 million, and $2.4 million in 2001, 2002, and 2003, respectively.

PENSION PLANS

On December 20, 2002, the Company assumed sponsorship of two defined benefit
pension plans in connection with the ReedHycalog acquisition (see Note 5).

The assignment of the purchase price to individual assets acquired and
liabilities incurred in connection with the acquisition, includes a $5.2 million
pension liability for the projected benefit obligation in excess of plan assets,
thereby eliminating any previously existing unrecognized net gain or loss,
unrecognized prior service cost, unrecognized net obligation or net asset
existing at the date of acquisition. Further, comparative information prior to
the acquisition is not presented.

US Pension Plans

As part of the purchase agreement with Schlumberger, Grant Prideco acquired
the Reed Hourly Pension Plan. This plan covers approximately 200 employees and
provides a defined benefit based on a fixed dollar amount per year of service.
The fixed dollar amount is defined in the union contract and is subject to
change. Grant Prideco used purchase accounting as of the acquisition date and
established an accrued pension cost equal to the unfunded benefit obligation at
that time. As a result of the date of the acquisition, there was no pension
expense recorded for the year ending December 31, 2002.

57

Obligations and Funded Status

The following table reflects information concerning the change in benefit
obligation, change in plan assets, and reconciliation of funded status. The
Company's benefits are presented and computed as of and for the twelve months
ended on the December 31 measurement date (in thousands).

The accumulated benefit obligation was $12.7 million and $13.7 million as of
December 31, 2002 and 2003, respectively.

The following table provides information related to the accumulated benefit
obligation in excess of plan assets (in thousands):

Components of Net Periodic Benefit Cost (in thousands):

58

Additional Information

The Company is required to recognize a minimum liability if the plan has an
accumulated benefit obligation in excess of plan assets. Adjustments to the
minimum liability are included in other comprehensive income (in thousands).

Assumptions

Assumptions used to determine net benefit obligations for the fiscal year
ended December 31:

Assumptions used to determine net periodic benefit cost:

To develop the expected return on plan assets assumption, Grant Prideco
considered the current level of expected returns on various asset classes. The
expected return for each asset class was then weighted based on the target asset
allocation to develop the expected return on plan assets assumption for the
portfolio. This resulted in the selection of a new 6.6% expected return on plan
assets assumption beginning in 2004.

Asset Categories

The following table provides the target and actual asset allocations:

All of the Reed Hourly Pension Plan assets were invested in cash as of
December 31, 2002 and December 31, 2003 due to transition from the acquisition
of the plan. Grant Prideco has adopted a new target asset allocation to invest
in 65% equities, 33% fixed income, and 2% cash. The assets will be transferred
into these new asset classes during 2004.

The primary investment objective is to ensure, over the long-term life
of the pension plans, an adequate pool of sufficiently liquid assets to support
the benefit obligations to participants, retirees and beneficiaries. In meeting
this objective, the pension plan seeks to achieve a high level of investment
return consistent with a prudent level of portfolio risk. Investment objectives
are long-term in nature covering typical market cycles of three to five years.
Any shortfall of investment performance compared to investment objectives should
be explainable in terms of general economic and capital market conditions.

Cash Flow

The Company does not expect to contribute to the plan in 2004.

59

Non-US Pension Plans

As part of the purchase agreement with Schlumberger, Grant Prideco acquired
the Hycalog Retirement Death Benefit Scheme. This plan covers approximately 115
employees and provides pensions on a defined benefits basis. The plan is closed,
with no future benefits accruing. Grant Prideco used purchase accounting as of
the acquisition date and established an accrued pension cost equal to the
unfunded benefit obligation at that time. As a result of the date of the
acquisition, there was no pension expense recorded for the year ending December
31, 2002. As part of purchase accounting, an additional adjustment to accrue the
pension cost of $8.7 million was recognized during 2003.

Obligations and Funded Status

The following table reflects information concerning the change in benefit
obligation, change in plan assets, and reconciliation of funded status. The
Company's benefits are presented and computed as of and for the twelve months
ended on the December 31 measurement date (in thousands).

The accumulated benefit obligation was $11.2 million and $21.5 million as of
December 31, 2002 and 2003, respectively.

The following table provides information related to the accumulated benefit
obligation in excess of plan assets (in thousands):

60

Components of Net Periodic Benefit Cost (in thousands):

Additional Information

As a result of a legal dispute regarding the benefit accruals of the plan,
Grant Prideco recognized an additional $8.7 million for the Hycalog Retirement
Death Benefit Scheme under purchase accounting.

The Company is required to recognize a minimum liability if the plan has an
accumulated benefit obligation in excess of plan assets. Adjustments to the
minimum liability are included in other comprehensive income (in thousands).

Assumptions

Assumptions used to determine net benefit obligations for the fiscal year
ended December 31:

Assumptions used to determine net periodic benefit cost:

15. INCOME TAXES

The domestic and foreign components of income before income taxes consist of
the following:

61

The components of the benefit (provision) for income taxes are as follows:

- ----------

(a) Excludes the deferred tax benefit of $2.9 million relating to the
cumulative effect of the accounting change for the year ended 2002 (see
Note 1).

The following is a reconciliation of income taxes at the U.S. federal income
tax rate of 35% to the effective provision for income taxes reflected in the
Consolidated Statements of Operations:

Deferred tax assets and liabilities are recognized for the estimated future
tax effects of temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements. The measurement
of deferred tax assets and liabilities is based on enacted tax laws and rates
currently in effect in each of the jurisdictions which the Company has
operations. Additionally, applicable U.S. income and foreign withholding taxes
have been provided on undistributed earnings of the Company's international
subsidiaries that are not considered to be permanently indefinitely reinvested.

Deferred tax assets and liabilities are classified as current or non-current
according to the classification of the related asset or liability for financial
reporting. The components of the net deferred tax assets (liabilities) and the
related valuation allowances were as follows:

At December 31, 2003 and 2002, the Company had United States net operating
loss (NOL) carryforwards for tax purposes of approximately $22.8 million and
$1.9 million, respectively, which will expire in the years 2022 through 2023. At
December 31, 2003

62

and 2002, the Company had foreign tax credit carryforwards of $5.0 million and
$3.8 million, respectively, which will expire in the years 2007 through 2008. At
December 31, 2003 and 2002, the Company had a valuation allowance of $9.4
million and $2.0 million, respectively, due to the uncertainty of utilization of
foreign tax credits to reduce the U.S. income tax liability. During 2003, $3.1
million was reclassed from another deferred liability to the valuation
allowance. The Company has not recorded a deferred income tax liability that
would result from the distribution of earnings from certain foreign subsidiaries
if those earnings were actually repatriated. The Company intends to indefinitely
reinvest the undistributed current year earnings of foreign subsidiaries located
in Italy, Canada, Mexico, Singapore, Venezuela, and the United Kingdom. It is
not practicable to determine the amount of federal income taxes, if any, that
might become due in the event that the balance of such earnings were to be
distributed. The total amount of foreign earnings indefinitely reinvested is
approximately $31.0 million. Deferred taxes at December 31, 2003 include an
adjustment related to the acquisition of ReedHycalog.

16. DISPUTES, LITIGATION, AND CONTINGENCIES

Litigation and Other Disputes

The Company is aware of various disputes and potential claims and is a party
in various litigation involving claims against the Company, some of which are
covered by insurance. Based on facts currently known, the Company believes that
the ultimate liability, if any, which may result from known claims, disputes,
and pending litigation would not have a material adverse effect on the Company's
financial position or its results of operations with or without consideration of
insurance coverage.

Insurance

The Company is predominantly self-insured through an insurance policy for
employee health insurance claims and is self-insured for workers' compensation
claims for certain of its employees. The amounts in excess of the self-insured
levels are fully insured. Self-insurance accruals are based on claims filed and
an estimate for significant claims incurred but not reported. Although the
Company believes that adequate reserves have been provided for expected
liabilities arising from its self-insured obligations, it is reasonably possible
that management's estimates of these liabilities will change over the near term
as circumstances develop.

17. COMMITMENTS

Operating Leases

The Company is committed under various operating leases, which primarily
relate to office space and equipment. Total lease expense incurred under
operating leases was approximately $5.3 million, $8.9 million, and $11.3 million
for the years ended December 31, 2001, 2002, and 2003, respectively. Future
minimum rental commitments under these operating leases are as follows (in
thousands):

2004........... $ 15,510
2005........... 9,561
2006........... 7,337
2007........... 5,818
2008........... 4,658
Thereafter..... 10,124
--------
$ 53,008
========

Other Commitments

At the time of the December 1998 acquisition by the Company of 93% of T.F.
de Mexico, the Company entered into a 30-year supply contract with Tubos de
Acero de Mexico, S.A. (TAMSA). Under the supply contract, TAMSA has been given
the right to supply certain of the Company's operations as long as the prices
are on a competitive basis. This supply agreement does not obligate the Company
to make purchases from TAMSA for any location other than Mexico and India, nor
restrict the Company's right to make purchases without offering a right to
purchase the materials from TAMSA to the extent those purchases are made from
affiliates of the Company such as Voest-Alpine.

Grant Prideco maintains consignment purchase arrangements with various
suppliers whereby suppliers' inventory is held on site at the Company's
manufacturing facilities. Under the terms of these arrangements, the Company
pays to the supplier an inventory stocking fee on the consignment inventory and
has an obligation to purchase the inventory under certain circumstances. As of
December 31, 2003, the Company had closed-ended purchase commitments maturing
within the next twelve months of approximately $0.7 million and open-ended
purchase commitments of approximately $3.7 million, of which $3.0 million are
expected to mature within the next twelve months.

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18. RELATED PARTIES

Until April 14, 2000, the Company was a wholly-owned subsidiary of
Weatherford. The Company was spun off from Weatherford on April 14, 2000,
through a distribution by Weatherford to its stockholders of all of the
Company's Common Stock. Weatherford no longer owns any interest in the Company.
Prior to the Company's 2003 Annual Meeting held in May 2003, the Company had
seven Directors, five of which also served on the Board of Weatherford.
Following the 2003 Annual Meeting, the Company now has nine Directors, of which
only three serve on Weatherford's Board.

In connection with the spinoff, the Company entered into a preferred
supplier agreement with Weatherford in which Weatherford agreed to purchase at
least 70% of its requirements of drill stem products from the Company, subject
to certain exceptions. In return, the Company agreed to sell those products at
prices not greater than that at which it sells to similarly situated customers,
and the Company provided Weatherford a $30.0 million credit towards the purchase
of those products. During 2003, the Company extended the term of this contract
by two years and reduced the unused preferred supplier credit balance by $6.6
million. At December 31, 2003, the remaining credit balance was $7.9 million, of
which $1.0 million is classified as "Other Accrued Liabilities", with the
remaining balance classified as "Other Long-Term Liabilities" in the
accompanying Consolidated Balance Sheets. Weatherford purchased approximately
$14.3 million of drill stem products from the Company during 2003. Weatherford
also purchased API tubing and accessory threading services from the Company
aggregating $8.1 million during 2003.

The Company's Drill Bits segment sells drill bits worldwide to oil and gas
operators, including Newfield Exploration Company (Newfield). In addition, a
division of the Company's Tubular Technology and Services segment also sells
accessories directly to Newfield. Two of the Company's directors, Mr. Trice and
Mr. Hendrix, are directors of Newfield and Mr. Trice is Newfield's President and
Chief Executive Officer. During 2003, Newfield purchased approximately $1.0
million of products from the Company.

19. SEGMENT INFORMATION

Business Segments

The Company operates primarily through four business segments: Drilling
Products and Services, Drill Bits, 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, including
tool joints, drill collars, heavy weight drill pipe, and drill stem and other
accessories. In December 2002, the Company acquired ReedHycalog, which became
the Company's Drill Bits segment. The Drill Bits segment designs, manufacturers,
and distributes fixed-cutter and roller-cone drill bits. The Company's Tubular
Technology and Services segment provides a full range of premium threaded
connections for casing, production tubing, and other accessory equipment, and
also manufactures and sells premium casing for use with the Company's
connections as well as third-party connections. The Marine Products and Services
segment consists of proprietary XL Systems marine connections for large bore
tubulars, including drive pipe, jet strings, conductor casing, and top tension
production risers. In addition to the products and services provided through the
Company's four primary business segments, the Company also has an Other segment
that prior to first quarter of 2003 manufactured drill pipe and other products
used in the industrial markets for fiber optic cable installation, construction,
and water well drilling. These operations were disposed of during 2003.
Currently the Other segment includes the Company's Plexus joint venture for
POS-GRIP technology, which was previously included in the Company's Marine
Products and Services segment. Prior periods have been restated for current year
presentation.

64

The Company's products are used in the exploration and production of oil and
natural gas. Segment information below has been prepared in accordance with SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information".
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies", except that income tax (provision)
benefit is allocated to the segments by an application of the Company-wide
effective rate to the net income (loss) of each segment. Intersegment sales,
which have been eliminated at the segment level, are recorded at cost plus an
agreed upon intercompany profit.

Foreign Operations and Export Sales

Financial information by geographic segment for each of the three years
ended December 31, 2003 is summarized below. Revenues are attributable to
countries based on the location of the entity selling products rather than
ultimate use. Long-lived assets represent long-term assets excluding deferred
tax assets.

65

Major Customers and Credit Risk

Substantially all of the Company's customers are engaged in the exploration
and development of oil and gas reserves. The Company's drill pipe, drill bit
products and other related products are sold primarily to rig contractors,
operators, and rental companies. The Company's premium tubulars and connections
are sold primarily to operators and distributors. This concentration of
customers may impact the Company's overall exposure to credit risk, either
positively or negatively, in that customers may be similarly affected by changes
in economic and industry conditions. The Company performs ongoing credit
evaluations of its customers and does not generally require collateral in
support of its trade receivables. The Company maintains reserves for potential
credit losses, and actual losses have historically been within the Company's
expectations. Foreign sales also present various risks, including risks of war,
civil disturbances, and governmental activities that may limit or disrupt
markets, restrict the movement of funds, or result in the deprivation of
contract rights or the taking of property without fair consideration. Most of
the Company's foreign sales, however, are to large international companies,
in-country national oil companies, or are secured by a letter of credit or
similar arrangements.

In the years ended December 31, 2001, 2002, and 2003, there were no
individual customers who accounted for 10% or more of total revenues.

66

20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tabulation sets forth unaudited quarterly financial data for
2003 and 2002 (in thousands, except per share data).

- --------------

(a) Includes $6.4 million of other charges in the second quarter of 2003
related to inventory reserves for exited product lines, which were
classified as cost of sales.

(b) Includes other charges of $1.5 million for stock compensation expense
and a $1.4 million credit for a previously recorded contingent
liability in the second quarter of 2003.

(c) Includes $31.3 million of other charges in the fourth quarter of 2003
related to fixed asset write-downs and asset impairments related to two
technology joint ventures.

(d) Earnings per share (EPS) in each quarter is computed using the weighted
average number of shares outstanding during that quarter while EPS for
the full year is computed by taking the average of the weighted average
number of shares outstanding each quarter. Thus, the sum of the four
quarters' EPS may not equal the full-year EPS.

(e) Includes $7.0 million of other charges in the second quarter of 2002
related to fixed asset write-downs and executive severance costs.

(f) Effective January 1, 2002, the Company adopted SFAS No. 142, which
requires goodwill to be tested annually for impairment. The initial
impairment test was completed in the fourth quarter of 2002 and
resulted in a $6.4 million, net of tax, write-down of goodwill that is
recorded as a cumulative effect of an accounting change as of January
1, 2002.

See Note 4 for further discussion of 2002 and 2003 other charges.

67

21. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The following balance sheets as of December 31, 2002 and 2003, and the
related statements of operations and cash flows for each of the three years in
the period ended December 31, 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 STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)

CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)

68

CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)

69

CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2002
(IN THOUSANDS)

70

CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2003
(IN THOUSANDS)

71

CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)

CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)

72

CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)

73

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's principal
executive officer and principal financial officer, evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) as of the end of the fiscal year ended December
31, 2003. Based on this evaluation, the Company's principal executive officer
and principal financial officer have concluded that the Company's disclosure
controls and procedures were effective as of the end of the fiscal year ended
December 31, 2003, to ensure that information that is required to be disclosed
by the Company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified
in the SEC's rules and forms.

CHANGES IN INTERNAL CONTROLS

There were no changes in the Company's internal control over financial
reporting that occurred during the fiscal quarter ended December 31, 2003 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference from
Grant Prideco's Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2003.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from
Grant Prideco's Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference from
Grant Prideco's Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from
Grant Prideco's Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2003.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference from
Grant Prideco's Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2003.

74

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report or
incorporated herein by reference:

1. Our consolidated financial statements are listed on page 34 of
this report.

2. Financial Statements Schedule:

Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2003.

Note: All financial statement schedules not filed with this
report required by Regulation S-X have been omitted as not
applicable or not required or the information required has been
included in the notes to financial statements.

3. Our exhibits are listed below under Item 15(c).

(b) Reports on Form 8-K:

1. Current Report on Form 8-K dated November 5, 2003, filing the
Company's press release related to its third quarter 2003 results
of operations.

2. Current Report on Form 8-K dated December 4, 2003, filing the
announcement of the resignation of Louis A. Raspino, the
Company's Senior Vice President and Chief Financial Officer.

(c) Exhibits

2.1 Distribution Agreement, dated as of March 22, 2000,
between Weatherford and Grant Prideco, Inc.
(incorporated by Reference to Exhibit 2.1 to Grant
Prideco, Inc.'s Registration Statement on Form S-3, Reg.
No. 333-35272).

3.1 Restated Certificate of Incorporation of Grant Prideco,
Inc. (incorporated by reference to Exhibit 3.1 to Grant
Prideco, Inc.'s Registration Statement on Form S-3, Reg.
No. 333-35272).

3.2 Restated Bylaws of Grant Prideco, Inc. (incorporated by
reference to Exhibit 3.2 to Grant Prideco, Inc.'s
Registration Statement on Form 10, File No. 1-15423, as
amended).

4.1 Indenture for 9 5/8% Senior Notes due 2007 (incorporated
by Reference to Exhibit 4.7 to Grant Prideco, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 2000, File No. 1-15423).

4.2 Form of 9 5/8% Senior Notes due 2007 (included as part
of Exhibit 4.1 above).

4.3* Grant Prideco, Inc. 2000 Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.6
to Grant Prideco, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 2000, File No. 1-15423).

4.4* Grant Prideco, Inc. 2000 Employee Stock Option and Stock
Plan (incorporated by reference to Exhibit 10.5 to Grant
Prideco, Inc.'s Registration Statement on Form 10, File
No. 1-15423, as amended).

4.5* Grant Prideco, Inc. Executive Deferred Compensation Plan
(incorporated by reference to Exhibit 10.9 to Grant
Prideco, Inc.'s Registration Statement on Form 10, File
No. 1-15423, as amended).

4.6* Grant Prideco, Inc. Foreign Executive Deferred
Compensation Plan (incorporated by reference to Exhibit
10.8 to Grant Prideco, Inc.'s Registration Statement on
Form 10, File No. 1-15423, as amended).

4.7* Grant Prideco, Inc. Deferred Compensation Plan for
Non-Employee Directors (incorporated by reference to
Exhibit 10.10 to Grant Prideco, Inc.'s Registration
Statement on Form 10, File No. 1-15423, as amended).

4.8* Grant Prideco, Inc. 401(k) Savings Plan (incorporated by
reference to Exhibit 10.11 to Grant Prideco, Inc.'s
Registration Statement on Form 10, File No. 1-15423, as
amended).

75

4.9* Grant Prideco, Inc. 2001 Stock Option and Restricted
Stock Plan (incorporated by reference to Exhibit 10.16
to Grant Prideco, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 2001, File No. 1-15423).

4.11 Indenture relating to 9% Senior Notes due 2009 dated as
of December 4, 2002, between Grant Prideco Escrow Corp.
and Wells Fargo Bank, N.A., as trustee (incorporated by
reference to Exhibit 4.2 to Grant Prideco, Inc.'s
Current Report on Form 8-K, File No. 1-15423, filed on
January 3, 2003).

4.12 Form of 9% Senior Notes due 2009 (included as part of
Exhibit 4.11).

4.13 Supplemental Indenture dated as of December 20, 2002,
among Grant Prideco, Inc., Grant Prideco Escrow Corp.,
certain of Grant Prideco, Inc.'s subsidiaries, and Wells
Fargo Bank, N.A., as trustee (incorporated by reference
to Exhibit 4.4 to Grant Prideco, Inc.'s Current Report
on Form 8-K, File No. 1-15423, filed on January 3,
2003).

4.14 Credit Agreement, dated as of December 19, 2002, among
Grant Prideco, Inc., certain of its subsidiaries, the
Lenders party thereto, Deutsche Bank Trust Company
Americas, as US, Deutsche Bank AG, Canada Branch, as
Canadian Agent, Transamerica Business Capital
Corporation, as Documentation Agent, JP Morgan Chase
Bank, as Co-Syndication Agent, and Lynch Capital, as
Co-Syndication Agent (incorporated by reference to
Exhibit 4.6 to Grant Prideco, Inc.'s Current Report on
Form 8-K, File No. 1-15423, filed on January 3, 2003).

4.15 Security Agreement, dated as of December 19, 2002, among
Grant Prideco, Inc., certain of its subsidiaries and
Deutsche Bank Trust Company Americas, as agent
(incorporated by Reference to Exhibit 4.7 to Grant
Prideco, Inc.'s Current Report on Form 8-K, File No.
1-15423, filed on January 3, 2003).

4.16 Amended and Restated Credit Agreement, dated as of
December 19, 2002 between Grant Prideco Canada Ltd. and
Deutsche Bank AG, Canada Branch, as agent (incorporated
by reference to Exhibit 4.8 to Grant Prideco, Inc.'s
Current Report on Form 8-K, File No. 1-15423, filed on
January 3, 2003).

4.17 Amendment No. 1 to Credit Agreement.

4.18 Amendment No. 2 to Credit Agreement.

4.19 Security Agreement, dated as of December 19, 2002
between Grant Prideco Canada Ltd. and Deutsche Bank AG,
Canada Branch, as agent (incorporated by reference to
Exhibit 4.9 to Grant Prideco, Inc.'s Current Report on
Form 8-K, File No. 1-15423, filed on January 3, 2003).

4.20 Form of Subsidiary Guarantee by certain of Grant
Prideco, Inc.'s subsidiaries in favor of Deutsche Bank
Trust Company Americas, as agent (incorporated by
reference to Exhibit 4.10 to Grant Prideco, Inc.'s
Current Report on Form 8-K, File No. 1-15423, filed on
January 3, 2003).

4.21* Employee Stock Purchase Plan.

10.1 See Exhibits 2.1 and 4.1 through 4.20 for certain items
material contracts.

10.2* Employment Agreement with Michael McShane dated June 26,
2002 (incorporated by reference to Exhibit 10.1 to Grant
Prideco, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, File No. 1-15423).

10.3* Employment Agreement with Matthew Fitzgerald dated
January 12, 2004.

10.4* Employment Agreement with Philip Choyce dated April 14,
2000 (incorporated by reference to Exhibit 10.26 to
Grant Prideco, Inc.'s Registration Statement on Form
S-4, Reg. No. 333-102635).

10.5* Form of Change of Control Agreement with William Chunn,
Dan Latham, Warren Avery and Philip Choyce (incorporated
by reference to Exhibit 10.6 to Grant Prideco, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000, File No. 1-15423).

10.6* Form of Change of Control Agreement with Curtis Burton,
Marshall Danby, and John Deane (incorporated by
reference to Exhibit 10.12 to Grant Prideco, Inc.'s
Annual Report on 10-K for the year ended December 31,
2001, File No. 1-15423).

10.7 Preferred Supplier Agreement dated April 14, 2000,
between Grant Prideco, Inc. and Weatherford
International, Inc. (incorporated by reference to
Exhibit 10.12 to Weatherford International, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000, File No. 1-13086).

10.8 Amendment No. 1 to preferred supplier agreement
(incorporated by reference to Exhibit 10.1 of Grant
Prideco, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003).

10.9 Tax Allocation Agreement dated April 14, 2000 between
Grant Prideco, Inc. and Weatherford (incorporated by
reference to Exhibit 10.13 to Weatherford International,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, File No. 1-13086).

76

10.10 Investment Agreement, dated as of April 29, 1999, by and
between Grant Prideco, Inc. and Voest-Alpine Schienen
GmbH & Co KG (incorporated by reference to Exhibit 10.12
to Grant Prideco, Inc.'s Registration Statement on Form
10, File No. 1-15423, as amended).

10.11 Operating Agreement, dated as of July 23, 1999, by and
Grant Prideco, Inc. and Voest-Alpine Schienen GmbH &
CoKG (incorporated by reference to Exhibit 10.13 to
Grant Prideco, Inc.'s Registration Statement on Form 10,
File No.1 -15423, as amended).

10.12 Supply Agreement, dated as of August 1, 2003, by and
between Voest-Alpine Stahlrohr Kindberg GmbH & Co KG and
Grant Prideco, Inc.

10.13 Stock Purchase Agreement, dated as of June 19, 1998, by
and between Weatherford, Pridecomex Holding, S.A. de
C.V., Tubos de Acero de Mexico S.A. and Tamsider S.A. de
C.V. (incorporated by reference to Exhibit 10.16 to
Grant Prideco, Inc.'s Registration Statement on Form 10,
File No. 1-15423, as amended).

10.14 Master Technology License Agreement, dated as of June
19, 1998, by and between Grant Prideco, Inc. and DST
Distributors of Steel Tubes Limited (incorporated by
reference to Exhibit 10.17 to Grant Prideco, Inc.'s
Registration Statement on Form 10, File No. 1-15423, as
amended).

10.15 Agreement, dated as of November 12, 1998, by and between
Tubos de Acero de Mexico, Tamsider S.A. de C.V., DST
Distributors of Steel Tubes Limited, Techint Engineering
Company, Weatherford, Grand Prideco, Pridecomex Holding,
S.A. de C.V. and Grant Prideco, S.A. de C.V.
(incorporated by reference to Exhibit 10.18 to Grant
Prideco, Inc.'s Registration Statement on Form 10, File
No. 1-15423, as amended).

10.16 Agreement, dated as of December 1, 1998, by and between
Tubos de Acero de Mexico, Tamsider S.A. de C.V.,
Weatherford and Pridecomex Holdings, S.A. de C.V.
(incorporated by reference to Exhibit 10.19 to Grant
Prideco, Inc.'s Registration Statement on Form 10, File
No. 1-15423, as amended).

10.17* Nonqualified Deferred Compensation Plan.

21.1 Subsidiaries of Registrant.

23.1 Consent of Ernst & Young LLP.

31.1 Certification of Michael McShane.

31.2 Certification of Matthew D. Fitzgerald.

32.1 Section 906 Certification.

* Designates a management or compensatory plan or
arrangement.

77

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002, AND 2003

78

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ MICHAEL MCSHANE
- -------------------------------------------------------------
Michael McShane
Chief Executive Officer, President, and Chairman of the Board

Date: March 15, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following individuals on behalf of the
registrant and in the capacities and on the dates indicated.

79

INDEX TO EXHIBITS

2.1 Distribution Agreement, dated as of March 22, 2000, between Weatherford
and Grant Prideco, Inc. (incorporated by Reference to Exhibit 2.1 to
Grant Prideco, Inc.'s Registration Statement on Form S-3, Reg. No.
333-35272).

3.1 Restated Certificate of Incorporation of Grant Prideco, Inc.
(incorporated by reference to Exhibit 3.1 to Grant Prideco, Inc.'s
Registration Statement on Form S-3, Reg. No. 333-35272).

3.2 Restated Bylaws of Grant Prideco, Inc. (incorporated by reference to
Exhibit 3.2 to Grant Prideco, Inc.'s Registration Statement on Form 10,
File No. 1-15423, as amended).

4.1 Indenture for 9 5/8% Senior Notes due 2007 (incorporated by Reference to
Exhibit 4.7 to Grant Prideco, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2000, File No. 1-15423).

4.2 Form of 9 5/8% Senior Notes due 2007 (included as part of Exhibit 4.1
above).

4.3* Grant Prideco, Inc. 2000 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.6 to Grant Prideco, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 2000, File
No. 1-15423).

4.4* Grant Prideco, Inc. 2000 Employee Stock Option and Stock Plan
(incorporated by reference to Exhibit 10.5 to Grant Prideco, Inc.'s
Registration Statement on Form 10, File No. 1-15423, as amended).

4.5* Grant Prideco, Inc. Executive Deferred Compensation Plan (incorporated
by reference to Exhibit 10.9 to Grant Prideco, Inc.'s Registration
Statement on Form 10, File No. 1-15423, as amended).

4.6* Grant Prideco, Inc. Foreign Executive Deferred Compensation Plan
(incorporated by reference to Exhibit 10.8 to Grant Prideco, Inc.'s
Registration Statement on Form 10, File No. 1-15423, as amended).

4.7* Grant Prideco, Inc. Deferred Compensation Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.10 to Grant Prideco,
Inc.'s Registration Statement on Form 10, File No. 1-15423, as amended).

4.8* Grant Prideco, Inc. 401(k) Savings Plan (incorporated by reference to
Exhibit 10.11 to Grant Prideco, Inc.'s Registration Statement on Form
10, File No. 1-15423, as amended).

4.9* Grant Prideco, Inc. 2001 Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.16 to Grant Prideco, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 2001, File
No. 1-15423).

4.11 Indenture relating to 9% Senior Notes due 2009 dated as of December 4,
2002, between Grant Prideco Escrow Corp. and Wells Fargo Bank, N.A., as
trustee (incorporated by reference to Exhibit 4.2 to Grant Prideco,
Inc.'s Current Report on Form 8-K, File No. 1-15423, filed on January 3,
2003).

4.12 Form of 9% Senior Notes due 2009 (included as part of Exhibit 4.11).

4.13 Supplemental Indenture dated as of December 20, 2002, among Grant
Prideco, Inc., Grant Prideco Escrow Corp., certain of Grant Prideco,
Inc.'s subsidiaries, and Wells Fargo Bank, N.A., as trustee
(incorporated by reference to Exhibit 4.4 to Grant Prideco, Inc.'s
Current Report on Form 8-K, File No. 1-15423, filed on January 3, 2003).

4.14 Credit Agreement, dated as of December 19, 2002, among Grant Prideco,
Inc., certain of its subsidiaries, the Lenders party thereto, Deutsche
Bank Trust Company Americas, as US, Deutsche Bank AG, Canada Branch, as
Canadian Agent, Transamerica Business Capital Corporation, as
Documentation Agent, JP Morgan Chase Bank, as Co-Syndication Agent, and
Lynch Capital, as Co-Syndication Agent (incorporated by reference to
Exhibit 4.6 to Grant Prideco, Inc.'s Current Report on Form 8-K, File
No. 1-15423, filed on January 3, 2003).

4.15 Security Agreement, dated as of December 19, 2002, among Grant Prideco,
Inc., certain of its subsidiaries and Deutsche Bank Trust Company
Americas, as agent (incorporated by Reference to Exhibit 4.7 to Grant
Prideco, Inc.'s Current Report on Form 8-K, File No. 1-15423, filed on
January 3, 2003).

4.16 Amended and Restated Credit Agreement, dated as of December 19, 2002
between Grant Prideco Canada Ltd. and Deutsche Bank AG, Canada Branch,
as agent (incorporated by reference

80

to Exhibit 4.8 to Grant Prideco, Inc.'s Current Report on Form 8-K, File
No. 1-15423, filed on January 3, 2003).

4.17 Amendment No. 1 to Credit Agreement.

4.18 Amendment No. 2 to Credit Agreement.

4.19 Security Agreement, dated as of December 19, 2002 between Grant Prideco
Canada Ltd. and Deutsche Bank AG, Canada Branch, as agent (incorporated
by reference to Exhibit 4.9 to Grant Prideco, Inc.'s Current Report on
Form 8-K, File No. 1-15423, filed on January 3, 2003).

4.20 Form of Subsidiary Guarantee by certain of Grant Prideco, Inc.'s
subsidiaries in favor of Deutsche Bank Trust Company Americas, as agent
(incorporated by reference to Exhibit 4.10 to Grant Prideco, Inc.'s
Current Report on Form 8-K, File No. 1-15423, filed on January 3, 2003).

4.21* Employee Stock Purchase Plan.

10.2 See Exhibits 2.1 and 4.1 through 4.20 for certain items material
contracts.

10.2* Employment Agreement with Michael McShane dated June 26, 2002
(incorporated by reference to Exhibit 10.1 to Grant Prideco, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File
No. 1-15423).

10.3* Employment Agreement with Matthew Fitzgerald dated January 12, 2004.

10.4* Employment Agreement with Philip Choyce dated April 14, 2000
(incorporated by reference to Exhibit 10.26 to Grant Prideco, Inc.'s
Registration Statement on Form S-4, Reg. No. 333-102635).

10.5* Form of Change of Control Agreement with William Chunn, Dan Latham,
Warren Avery and Philip Choyce (incorporated by reference to Exhibit
10.6 to Grant Prideco, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, File No. 1-15423).

10.6* Form of Change of Control Agreement with Curtis Burton, Marshall Danby,
and John Deane (incorporated by reference to Exhibit 10.12 to Grant
Prideco, Inc.'s Annual Report on 10-K for the year ended December 31,
2001, File No. 1-15423).

10.9 Preferred Supplier Agreement dated April 14, 2000, between Grant
Prideco, Inc. and Weatherford International, Inc. (incorporated by
reference to Exhibit 10.12 to Weatherford International, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File
No. 1-13086).

10.10 Amendment No. 1 to preferred supplier agreement (incorporated by
reference to Exhibit 10.1 of Grant Prideco, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003).

10.9 Tax Allocation Agreement dated April 14, 2000 between Grant Prideco,
Inc. and Weatherford (incorporated by reference to Exhibit 10.13 to
Weatherford International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, File No. 1-13086).

10.10 Investment Agreement, dated as of April 29, 1999, by and between Grant
Prideco, Inc. and Voest-Alpine Schienen GmbH & Co KG (incorporated by
reference to Exhibit 10.12 to Grant Prideco, Inc.'s Registration
Statement on Form 10, File No. 1-15423, as amended).

10.11 Operating Agreement, dated as of July 23, 1999, by and Grant Prideco,
Inc. and Voest-Alpine Schienen GmbH & CoKG (incorporated by reference to
Exhibit 10.13 to Grant Prideco, Inc.'s Registration Statement on Form
10, File No.1 -15423, as amended).

10.12 Supply Agreement, dated as of August 1, 2003, by and between
Voest-Alpine Stahlrohr Kindberg GmbH & Co KG and Grant Prideco, Inc.

10.13 Stock Purchase Agreement, dated as of June 19, 1998, by and between
Weatherford, Pridecomex Holding, S.A. de C.V., Tubos de Acero de Mexico
S.A. and Tamsider S.A. de C.V. (incorporated by reference to Exhibit
10.16 to Grant Prideco, Inc.'s Registration Statement on Form 10, File
No. 1-15423, as amended).

10.14 Master Technology License Agreement, dated as of June 19, 1998, by and
between Grant Prideco, Inc. and DST Distributors of Steel Tubes Limited
(incorporated by reference to Exhibit 10.17 to Grant Prideco, Inc.'s
Registration Statement on Form 10, File No. 1-15423, as amended).

10.15 Agreement, dated as of November 12, 1998, by and between Tubos de Acero
de Mexico, Tamsider S.A. de C.V., DST Distributors of Steel Tubes
Limited, Techint Engineering Company, Weatherford, Grand Prideco,
Pridecomex Holding, S.A. de C.V. and Grant Prideco, S.A. de C.V.
(incorporated by reference to Exhibit 10.18 to Grant Prideco, Inc.'s
Registration Statement on Form 10, File No. 1-15423, as amended).

10.16 Agreement, dated as of December 1, 1998, by and between Tubos de Acero
de Mexico, Tamsider S.A. de C.V., Weatherford and Pridecomex Holdings,
S.A. de C.V. (incorporated by reference to Exhibit 10.19 to Grant
Prideco, Inc.'s Registration Statement on Form 10, File No. 1-15423, as
amended).

10.17* Nonqualified Deferred Compensation Plan.

81

21.1 Subsidiaries of Registrant.

23.1 Consent of Ernst & Young LLP.

31.1 Certification of Michael McShane.

31.2 Certification of Matthew D. Fitzgerald.

32.1 Section 906 Certification.

* Designates a management or compensatory plan or arrangement.