UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 001-15423

Grant Prideco, Inc.

(Exact name of registrant as specified in its charter)

(281) 878-8000

(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 þ          No o

      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.     o

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

      Aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant: $1,450,165,174. This figure is estimated as of June 30, 2004, at which date the closing price of the registrant’s shares on the New York Stock Exchange was $18.46 per share.

      Number of shares of Common Stock outstanding as of March 18, 2005: 124,636,659

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 2005 Annual Meeting of Stockholders — Part III

TABLE OF CONTENTS

FORM 10-K

PART I

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. Our drill stem and drill bit products are used to drill oil and gas wells while our tubular technology and services are primarily used in drilling and completing oil and gas wells. Our customers include drilling contractors; North American oil country tubular goods (OCTG) distributors; major, independent and state-owned oil companies; and other oilfield service companies. We primarily operate through three business segments: (1) Drilling Products and Services, (2) Drill Bits and (3) Tubular Technology and Services. In the first quarter of 2004, we announced an organizational restructuring that resulted in our former Marine Products and Services businesses now being reflected in the Tubular Technology and Services segment. Prior periods have been restated for comparability.

      Our business is primarily 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. In a declining market, customers are contractually required to purchase ordered drill pipe even if they will no longer need that pipe. This creates a situation where our customers have an inventory of excess drill pipe. Consequently, in a market with increasing activity, customers delay purchasing until they no longer have sufficient inventory to sustain current and near-term expected future activity. Drill bit demand and this segment’s earnings and cash flows have closely tracked the worldwide rig count. Within our Tubular Technology and Services segment, there are four product lines: Atlas Bradford premium connections, Tube-Alloy accessories, TCA premium casing and XL Systems large bore connections and services. Results for this segment’s Atlas Bradford, Tube-Alloy and TCA product lines predominantly follow changes in North American (in particular Gulf of Mexico) offshore drilling, deep drilling and natural gas drilling rig counts, but short-term demand for Atlas Bradford products also can be affected by inventories at OCTG distributors. The TCA product line also is affected by the level of U.S. OCTG mill activity. This segment’s XL Systems product line generally follows the level of worldwide offshore drilling activity.

      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 33 of this Annual Report on Form 10-K.

      Grant Prideco was incorporated in Delaware on June 22, 1990. Our corporate headquarters is located at 400 N. Sam Houston Pkwy. East, Suite 900, Houston, Texas 77060.

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 heavyweight 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 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.

      With the increased complexity of drilling activity, demand for our proprietary line of eXtreme^tm drilling and other premium drilling products has remained strong. This value-added product line coupled with our XT® (eXtreme torque) connections 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 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 can also include our CT-M57^tm connections that can withstand external pressures exceeding 25,000 psi and internal pressures nearing 30,000 psi, along with 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 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.

      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 connections and 5⁷/8-inch drill pipe that delivers hydraulic performance superior to standard 5¹/2-inch drill pipe and weight benefits superior to standard 6⁵/8-inch drill pipe.

      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.

      Heavyweight drill pipe is a thick-walled seamless tubular product that is less rigid than a drill collar. Heavyweight 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.

      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 field trial 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.

      Our major drill stem manufacturing plants are located in the U.S., China, Italy, Mexico, Singapore 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 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 (through a 50.01% owned joint venture) 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.

Drill Bits Segment

      Our Drill Bits segment’s products and services are comprised of the operations of ReedHycalog. 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 oil and gas operators and, to a lesser extent, drilling contractors on turnkey and footage contracts. Competition is based on technical performance, price and service.

      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.

      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.), Smith Bits (a division of Smith International Inc.), and Security DBS (a division of Halliburton Company) as well as numerous smaller competitors throughout the world.

      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, Rotary Steerable and many others. One of the most significant innovations is our 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.

      During 2004, this segment acquired the assets of Novatek International, Inc. (Novatek), a manufacturer of PDC cutters, as well as Diamond Products International, Inc., a leading provider of bi-center 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 TuffCutter^tm.

      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. In January 2005, in connection with an expansion of our Singapore operations, a significant portion of the production of roller-cone bits has been moved from Houston, Texas to Singapore. 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 third-party connections and is a leading supplier of tubulars and threaded connections for the large-bore tubular market. During 2003, we made a strategic decision to exit the manufacture and sale of premium tubing. Additionally, in 2004 we sold our Texas Arai couplings business which is now reflected as discontinued operations in our accompanying financial statements.

      Although we sell our large-bore tubulars and connections on a world wide basis, the demand for the majority of 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 many of these products is also 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, 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:

      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 licensed ATS-E^tm 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, Vallourec and Mannesmann Tubes, the Tenaris Group, Sumitomo, Kawasaki Steel, Lone Star Steel, Citra Tubindo, Hunting Interlock, Inc., Benoit, Inc. and numerous other competitors domestically and internationally.

      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.

      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.

      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. We also completed development of our new high strength 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 range from 9⁵/8-inches to 13³/8-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 XL Systems product line by our Atlas Bradford and TCA product lines.

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

      Our Tubular Technology and Services segment operations are located in Texas, Louisiana, Oklahoma, Wyoming, Vlissingen, The Netherlands 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. In addition, during the latter part of 2003, we moved our XL Systems Asia Pacific facility from Singapore to a new manufacturing location in Batam Island, Indonesia.

Other Segment

      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 Star Iron Works (Star) in the first quarter of 2003. As of the end 2004, the remaining inventory related to the industrial drill pipe operations had been sold.

      In 2003, we moved our joint ventures relating to POS-GRIP technology from our Tubular Technology 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 the 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.

Other Business Data

      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 $20.5 million, $17.7 million and $3.2 million in 2004, 2003 and 2002, respectively. These costs do not include amounts expended by our IntelliServ joint venture, which is accounted for as an equity-method investment. The significant increase from 2002 to 2003 related primarily to the ReedHycalog acquisition, which has an extensive research and engineering program.

      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.

      As of December 31, 2004, we had a product backlog of $270.5 million, representing 29% of our total revenues for the year ended December 31, 2004, which we expect to complete during 2005. This backlog was comprised of $203.3 million from Drilling Products and Services and $67.2 million from Tubular Technology and Services. We had a product backlog as of December 31, 2003 and 2002, of $120.6 million and $87.2 million, respectively. These year-end backlogs represented 15% and 14% of our total revenues for those years, respectively. The increase in product backlog from 2003 to 2004 reflects the strengthening of overall market conditions for oil and gas drilling.

      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.

      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 2004, and are not expected to be material in 2005. 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, 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 any material effect on the Company’s capital expenditures, earnings or competitive position. 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 50.01% owned Voest-Alpine Tubulars GmbH & Co KG (Voest-Alpine) subsidiary located in Austria 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.

      As of February 28, 2005, we had 4,064 employees. Certain of our operations are subject to union contracts. These contracts, however, cover approximately 9% of our total employees. We believe our relationship with our employees is good.

      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.

      The following table describes the principal manufacturing, other facilities and offices we currently own or lease. We believe that our manufacturing facilities are well maintained and suitable for their intended purpose.

      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.

      No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of 2004.

PART II

      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 9⁵/8% 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 18, 2005, we had 2,815 record holders of our common stock.

      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 during 2000. Additionally, in April 2004 we sold the assets and business of our Texas Arai division and prior year results related to this division have been reclassified as discontinued operations. 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.

      The following discussion is intended to assist you in understanding our financial position as of December 31, 2004 and 2003, and our results of operations for the three-year period ended December 31, 2004. 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.

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 three business segments: (1) Drilling Products and Services, (2) Drill Bits and (3) Tubular Technology and Services.

Market Trends and Outlook

      Our business is primarily 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. In a declining market, customers are contractually required to purchase ordered drill pipe even if they will no longer need that pipe. This creates a situation where our customers have an inventory of excess drill pipe. Consequently, in a market with increasing activity, customers delay purchasing until they no longer have sufficient inventory to sustain current and near-term expected future activity. Drill bit demand and this segment’s earnings and cash flows have closely tracked the worldwide rig count. Within our Tubular Technology and Services segment, there are four product lines: Atlas Bradford premium connections, Tube-Alloy accessories, TCA premium casing and XL Systems large bore connections and services. Results for this segment’s Atlas Bradford, Tube-Alloy and TCA product lines predominantly follow changes in North American (in particular Gulf of Mexico) offshore drilling, deep drilling and natural gas drilling rig counts, but short-term demand for Atlas Bradford products also can be affected by inventories at OCTG distributors. The TCA product line also is affected by the level of U.S. OCTG mill activity. This segments XL Systems product line generally follows the level of worldwide offshore drilling activity.

      For the periods below, the revenues, profitability, and cash flows from each of our business segments have been impacted by changes in oil and gas prices and rig counts. 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:

Future Market Trends and Expectations

      Looking forward, we anticipate that our results will be based on the level of drilling activity and our customers’ views regarding the sustainability of that activity. These perceptions depend on their views regarding the sustainability of oil and natural gas prices. Commodity prices were particularly strong during 2004, and this resulted in strong drilling activity.

      When forecasting our results for 2005, we relied on several assumptions about the market, our customers, our suppliers and the Company. In the market, we anticipate continuing improvement in drilling activity, with average worldwide rig counts up 4% to 5% over 2004. Importantly, we anticipate that our customers will continue to believe in the sustainability of drilling activity. For all business units, we believe price improvements are justifiable and achievable, and we will be able to modestly increase prices to our customers. As such, we believe our 2005 results will improve over 2004. On December 31, 2004, total backlog was up $149.9 million from December 31, 2003 to $270.5 million: this is the highest level since the company became public in April, 2000. The improved backlog with strong drilling activity are expected to translate into a 10% to 15% increase in volumes at our Drilling Products and Services segment. Revenues at our Drill Bits segment should move commensurate with the rig count, and our Tubular Technology and Services segment, with its strong leverage to the weak Gulf of Mexico rig count, should benefit from a full year of restructurings and pricing improvements made during 2004.

Results of Operations

      The following table summarizes the results of the Company:

      Consolidated revenues increased $141.8 million, or 18%, while the worldwide rig count increased 10%. Consolidated operating income increased $96.4 million, or 213%, and operating income margins increased

from 5.6% to 15.0%. Operating income in 2004 and 2003 included other charges and transition costs mentioned above totaling $9.0 million and $41.7 million, respectively. Improved margins reflect better pricing at all of our segments and efficiencies obtained from the Drilling Products and Services’ rationalization program and the Tubular Technology and Services’ restructuring program. These improved margins were partially offset by increased costs at the Drill Bits segment.

      Other operating expenses (sales and marketing, general and administrative, and research and engineering) as a percentage of revenues increased slightly from 24% to 25%. The increase in other operating expenses resulted primarily from increased sales and marketing expenses at the Company’s Drill Bits segment from international expansion costs and bad debt expense related to foreign accounts receivable, higher incentive expenses and increased costs related to compliance with Section 404 of the Sarbanes-Oxley Act.

      Interest expense decreased $2.0 million due to lower debt balances compared to the prior year. Equity income (loss) from unconsolidated affiliates increased to income of $1.6 million compared to a loss of $0.5 million in 2003. This improvement primarily reflects increased equity income from our investment in Voest-Alpine partially offset by increased development spending in our IntelliServ joint venture. Additionally, 2003 includes losses from one of our technology joint ventures that we wrote-off in December 2003. Other income, net decreased from $11.1 million in 2003 to $0.4 million in 2004. Fiscal 2003 includes gains related to the sales of businesses of $3.4 million and favorably renegotiating a liability to our former parent of $6.6 million, partially offset by transition costs in 2003 of $2.9 million associated with the ReedHycalog integration. Fiscal 2004 includes net gains from asset sales of $4.5 million. Additionally, the Company incurred foreign exchange losses of $3.7 million in 2004 versus losses of $3.2 million in 2003 resulting primarily from the U.S. dollar weakening in relation to the Euro and British Pound.

      The Company’s tax rate in 2004 was 31.2% compared to 35.0% in 2003. The rate decrease was primarily attributable to lower expected foreign taxes due to the favorable renegotiation of a tax holiday for certain foreign operations.

Segment Results

      Revenues for the Drilling Products and Services segment increased $82.3 million, or 27%, and operating income increased $71.7 million, or 382%, which includes other charges mentioned above of $2.0 million and $24.9 million in 2004 and 2003, respectively. The operating income margin of 23% was up from 6%, including charges. During 2004, drill pipe footage sold increased 0.9 million feet, or 13%, from 7.1 million feet to 8.0 million feet sold. The average sales price per foot increased by 15%, which primarily reflects a shift in product mix from lower margin, small-diameter drilling products to higher margin, large-diameter drilling products and price increases implemented during the year that include surcharges due to higher steel prices. Also contributing to the revenues increase are increased sales of tool joints, heavyweight drill pipe and drill collars and this segment’s results reflect the benefits from the rationalization program implemented at the beginning of 2004, which increased facility utilization and provided efficiency improvements.

      Revenues for the Drill Bits segment increased $67.9 million, or 26%. This increase was primarily attributable to increased revenues in U.S. and Canada reflecting the 11% increase in the North American rig count, increased revenues at certain international regions due to focused sales and marketing efforts and increased revenues from the Company’s acquisition of Diamond Products International, Inc. (DPI) in August 2004. This segment continues to have success in its newly developed product lines, which include ReedHycalog’s rotary steerable bit technologies and directional products, ReedHycalog’s TReX^tm diamond technology and the TuffCutter^tm, TuffDuty^tm and Titan^tm lines of roller-cone products. Operating income increased $12.1 million, or 21%, which includes transition costs mentioned above of $3.9 million in 2003, however operating income margins decreased slightly from 23% to 22%. The decrease in margins was primarily due to manufacturing inefficiencies while shifting capacity between plants in connection with an expansion of our Singapore operations, and incremental sales and marketing expenses in connection with this segment’s

international expansions, increased bad debt expense related to foreign accounts receivable and the acquisition of DPI.

      Revenues for the Tubular Technology and Services segment remained relatively flat. Revenues were up at this segment’s TCA and XL Systems product lines but were offset by declines at the other divisions within this segment. Operating income increased $13.3 million, or 174%, which includes other charges mentioned above of $3.2 million and $0.4 million in 2004 and 2003, respectively. Operating income margin of 9% was up from 3%, including charges, reflecting improved results at this segment’s TCA, XL Systems and Premium product lines due to improved pricing, strong mill activity and the benefit of cost cutting initiatives implemented since last year related to this segment’s restructuring program.

      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 Star in the first quarter of 2003.

      In 2003, we moved our joint ventures relating to POS-GRIP technology from our Tubular Technology and Services segment to this segment. Prior periods have been restated to reflect this change. During the first quarter of 2004, we sold the rights to the 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 segment revenues decreased $8.1 million, or 81%, and operating loss decreased $14.6 million, which includes other charges mentioned above of $12.4 million in 2003. As of the end 2004, the remaining inventory related to the industrial drill pipe operations had been sold.

      Corporate expenses for 2004 were $38.1 million compared to $22.8 million, which includes other charges mentioned above of $3.8 million and $0.1 million in 2004 and 2003, respectively. As a percentage of revenues, Corporate expenses increased from 3% to 4%. The increase was primarily due to higher incentive expenses, costs related to the implementation of Sarbanes-Oxley and depreciation of the Company’s new ERP system.

      The following table summarizes the results of the Company:

      Consolidated revenues increased $194.4 million, or 32%, and consolidated operating income decreased $1.7 million, or 4%. Operating income margins decreased from 7.7% to 5.6%. Operating income in 2003 and 2002 included other charges and transition costs mentioned above totaling $41.7 million and $7.1 million, respectively. The increases, excluding other charges, were due to the acquisition of ReedHycalog in December 2002.

      Other operating expense (sales and marketing, general and administrative, and research and engineering) as a percentage of revenue increased from 14% to 24%. 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.

      Our interest expense increased $16.8 million due to new debt related to the ReedHycalog acquisition in December 2002. In connection with the acquisition, 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. Equity income (loss) from unconsolidated affiliates decreased to a loss of $0.5 million in 2003 from income of $5.3 million in 2002. This decrease was primarily due to a $4.4 million decrease in equity income contributed by our investment in Voest-Alpine due to decreased activity. The remaining decrease relates to our equity-method investments in G-PEX and IntelliServ that had increased costs from continued development of their products in 2003, coupled with equity income in 2002 related to Jiangsu Shuguang Grant Prideco Tubular Limited (JSG) before our majority interest purchase in March 2002. Other income (expense), net increased from expense of $1.0 million to income of $11.2 million in 2003. 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 $3.4 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 Drilling Products and Services segment revenues decreased $9.0 million, or 3%, and operating income decreased $39.3 million, or 68%, which includes other charges mentioned above of $24.9 million and $2.4 million in 2003 and 2002, respectively. Operating income margin of 6% 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, 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 heavyweight drill pipe. These decreases are partially offset by incremental revenues for 2003 related to our majority-interest purchase of JSG in March 2002.

      On December 20, 2002, we acquired ReedHycalog, which comprises our Drill Bits segment. Our Drill Bits segment reported revenues of $259.0 million compared to $5.3 million. Operating income was $58.4 million compared to $0.8 million and operating income margins were 23% compared to 15%, which includes transition costs mentioned above. ReedHycalog’s results have strengthened throughout the year reflecting worldwide sales increases and successful market penetration of this segments new TReX fixed-cutter bit.

      Our Tubular Technology and Services segment revenues decreased $31.9 million, or 12%, and operating income decreased $5.2 million, or 40%, which includes other charges mentioned above of $0.4 million and $0.2 million in 2003 and 2002, respectively. Operating income margin of 3% was down from 5%, including charges. These decreases reflect the impact of exiting the tubing product lines in the first quarter of 2003, sales of our Rotator subsidiary in September 2003 and our Petro-Drive product line in December 2003, as well as decreased premium threading and tubular processing activities. The 2003 results also included incremental revenues and operating income related to our Grey-Mak business that was acquired in September 2002.

      Our Other segment revenues decreased $18.4 million, or 65%, and operating loss increased $15.6 million, which includes other charges mentioned above of $12.4 million in 2003. This 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 Star in the first quarter of 2003.

      In 2003, we moved our joint ventures relating to POS-GRIP technology from our Tubular Technology and Services segment to this segment. Prior periods have been restated to reflect this change.

      Corporate expenses were $22.8 million compared to $23.5 million, which includes other charges mentioned above of $0.1 million and $4.5 million in 2003 and 2002, respectively. Excluding these charges, Corporate expenses increased primarily due to higher incentive and business development costs in 2003. As a percentage of revenues, Corporate expenses remained relatively flat.

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 2004, we repaid all of the outstanding borrowings under our senior credit facility and increased our borrowing base capacity. As a result of these improvements, we have significantly improved our liquidity position. We believe that we are positioned to take

advantage of upturns in the market for our products and services, take advantage of strategic opportunities as they become available and maintain sufficient company liquidity in the event of a downturn.

      At December 31, 2004, we had cash of $47.6 million, working capital of $401.3 million, and unused borrowing availability of $168.0 million under our senior credit facility, compared to cash of $19.2 million, working capital of $344.6 million and unused borrowing availability under our senior credit facility of $122.3 million at December 31, 2003.

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

      Net cash flow provided by operating activities increased by $30.2 million in 2004 compared to 2003. Cash flow before changes in operating assets and liabilities increased by $65.8 million, which was offset by a use of cash of $35.6 million related to a net increase in operating assets. This use of cash was primarily due to increased inventories reflecting the increased drilling activity and increased accrued liabilities primarily related to incentive expenses, partially offset by an improvement in days sales outstanding of 16 days.

      Net cash flow provided by operating activities decreased by $35.7 million in 2003 compared to 2002. Cash flow before changes in operating assets and liabilities increased by $24.5 million, which was offset by a use of cash of $60.2 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.

      Net cash used in investing activities increased by $21.6 million in 2004 compared to 2003. This increase was primarily attributable to higher cash payments for acquisitions of businesses of $25.6 million, which were partially offset by increased proceeds from the sales of businesses (including the discontinued operations of Texas Arai) and fixed assets of $0.8 million. Cash payments for business acquisitions, net of cash acquired, in 2004 include $17.3 million for the assets of Novatek and $16.5 million for DPI, while the activity in 2003 includes $3.1 million of post-closing acquisition payments related to both ReedHycalog and POS and $5.2 million for acquiring an additional 35% interest in Rotator. Proceeds from the sale of businesses in 2004 include $19.9 million for Texas Arai, $1.3 million for POS and $0.8 million for a post-closing receipt related to Rotator, while the activity in 2003 includes $13.1 million for the sale of Rotator, $6.3 million for the sale of our Petro-Drive operations and $11.0 million for the sale of Star.

      Net cash used in investing activities decreased by $290.0 million in 2003 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.

      Capital expenditures for property, plant and equipment totaled $37.9 million and $41.4 million for the years ended December 31, 2004 and 2003, respectively. We currently expect to expend approximately $40.0 million for capital expenditures for property, plant and equipment during 2005. This includes capital expenditures related to our capital improvement program to reduce production costs and improve efficiencies and the existing equipment base, and excludes any capital spending related to our IntelliServ joint venture.

      Net cash used in financing activities decreased by $22.5 million in 2004 compared to 2003. This change primarily reflects increased proceeds from stock options exercised in 2004 of $25.2 million partially offset by increased repayments on our debt. As of December 31, 2004, there were no borrowings outstanding under the revolver or term loan portions of our senior credit facility.

      Net cash provided by financing activities decreased by $268.5 million in 2003 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 $36.8 million. In 2003, net repayments on total debt were $60.6 million.

      Our debt balances are primarily comprised of: (1) borrowings under our senior credit facility, (2) 9% Senior Notes due 2009 and (3) 9⁵/8% Senior Notes due 2007. We estimate our required principal and interest payments for outstanding debt to be approximately $39.3 million for 2005.

      In connection with the ReedHycalog acquisition in December 2002, we entered into a 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 was comprised of a $50 million term loan and a $190 million revolving credit facility, which includes up to $20 million for letter of credits. As of December 31, 2004, we did not have any outstanding borrowings under the Senior Credit Facility and $7.7 million of revolver availability had been reserved to support outstanding letters of credit. Once the term loan was repaid, it no longer represented availability under the Senior Credit Facility.

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

      Availability under the revolving credit facility, which was $168.0 million as of December 31, 2004, is based on the collateral value of the inventories and receivables securing the credit facility. Amounts outstanding under the credit facilities accrue interest at a variable rate based on either the U.S. prime rate (plus 0.75% to 1.75% depending on our leverage ratio) or LIBOR (plus 1.75% to 2.75% depending on our leverage ratio) for the U.S. denominated advances or a variable rate based on the Canadian prime rate (plus 0.75%) 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 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, repurchase equity, repurchase debt 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.

      In December 2002, we issued $175.0 million principal amount of 9% Senior Notes Due 2009. Net proceeds from the issuance of $170.4 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 (starting at 4%) 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.

      In December 2000, we issued $200.0 million principal amount of 9⁵/8% Senior Notes Due 2007. The 9⁵/8% Senior Notes were issued at a discount to yield an effective interest rate of 9³/4%. 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 $80.3 million. Interest is payable June 1 and December 1 of each year. We may redeem all or part of the 9⁵/8% 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 9⁵/8% Senior Notes are guaranteed by all of our domestic subsidiaries. The indenture governing the 9⁵/8% 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 9⁵/8% Senior Notes could come due. As of December 31, 2004, we were in compliance with the various covenants under the Senior Credit Facility and the 9% and 9⁵/8% Senior Notes agreements.

      We estimate our required principal and interest payments for our outstanding debt to be approximately $39.3 million for 2005 and capital expenditures for 2005 to be approximately $40.0 million in the aggregate. We currently expect to satisfy all required capital expenditures and debt service requirements during 2005 from operating cash flows, existing cash balances and the revolver portion of our Senior Credit Facility.

      Based on our current projected capital expenditures and required principal and interest payments, our operating cash flows, existing cash balances and estimated availability under the revolver portion of 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 the revolver portion of 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, 2004:

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. Currently, we now have nine Directors, of which only three serve on Weatherford’s Board.

      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. The effect of this reduction in the supplier credit was a reduction in the accrued liability as a credit to other income. Such adjustment is reflected in “Other Income (Expense), Net” in the Consolidated Statements of Operations for the year ended December 31, 2003. At December 31, 2004, the remaining credit balance was $4.1 million. Weatherford purchased approximately $25.1 million of drill stem products from us during 2004. Weatherford also purchased API tubing and accessory threading services from us aggregating $3.9 million during 2004.

      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 Chairman, President and Chief Executive Officer. During 2004, Newfield purchased approximately $2.1 million of products from us. We believe that the prices we charge are on terms comparable to those that would be available to unaffiliated third parties.

      During 2004, our supply agreement with Voest-Alpine was amended. The amended agreement provided for a reduced minimum quantity commitment per year through July 31, 2007, effective April 1, 2004. The amendment also provides for a surcharge provision under which actual costs of key raw materials in the green pipe production process will be indexed to the April 2003 base cost and surcharges per ton assessed accordingly for the difference. These surcharges are phased in and did not significantly impact 2004, however, they will be in place for 2005 forward. The contract includes a penalty for every metric ton that a two-year average of purchases fall below the annual purchase minimum. During 2004, we met our minimum purchase requirements and we currently believe we will meet our contractual commitments for 2005 without incurring unnecessary penalties or material unnecessary inventory positions.

Off-Balance Sheet Financing

      We do not have any off-balance sheet hedging, financing arrangements or contracts except those associated with our investments in two companies that are not consolidated in our financial statements: Voest-Alpine 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. Additionally, Voest-Alpine has entered into forward contracts to cover its currency risk related to accounts receivables and accounts payables, has entered into interest rate swap agreements to reduce its exposure to changes in floating interest rate payments of its long-term bonds, and has also entered into an agreement with a bank to sell a significant portion of its

accounts receivable. IntelliServ is our technology joint venture that is currently developing technology for intelligent drill pipe that permits real-time transfer of data through the drill string. IntelliServ does not have any debt, other than trade payables relating primarily to research and development expenses.

Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (FASB) issued the revised SFAS No. 123, “Share-Based Payment” (SFAS 123R), which addresses the accounting for share-based payment transactions in which a company obtains employee services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. This statement eliminates the ability to account for employee share-based payment transactions using APB No. 25 and requires instead that such transactions be accounted for using the grant-date fair value based method. This statement will be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 (July 1, 2005 for the Company). Early adoption of SFAS 123R is encouraged. This Statement applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grant-date fair value as previously calculated for the pro-forma disclosure under SFAS 123.

      We expect that upon the adoption of SFAS 123R, we will apply the modified prospective application transition method, as permitted by the Statement. Under such transition method, upon the adoption of SFAS 123R, our financial statements for periods prior to the effective date of the Statement will not be restated. The impact of this Statement on our financial statements or its results of operations in 2005 and beyond will depend upon various factors, among them our future compensation strategy. We expect that the effect of applying this Statement on our results of operations in 2005 as it relates to existing option plans would not be materially different from the SFAS 123 pro forma effect previously reported.

      In November 2004, the FASB issued SFAS No. 151 “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (SFAS 151). SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed and production facilities overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS 151 will have a significant effect on our financial statements.

      The American Jobs Creation Act of 2004 (the “Act”) enacted on October 22, 2004 provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated foreign earnings. To qualify for the deduction, certain criteria in the Act must be satisfied. We are in the process of evaluating whether we will repatriate foreign earnings under the repatriation provisions of the Act and if so, the amount that will be repatriated. Through December 31, 2004, we have not provided deferred taxes on certain foreign earnings because such earnings were intended to be indefinitely reinvested outside the United States. Whether we will take advantage of this provision depends on a number of factors including reviewing future Congressional guidance before a decision can be made. Until that time, we will make no change in our current intention to indefinitely reinvest certain earnings of our foreign subsidiaries. If we were to repatriate these earnings, a one-time tax benefit to our Consolidated Statements of Operations of up to approximately $2.1 million could occur.

      In December 2003, the FASB revised SFAS No. 132, “Employer’s Disclosures about Pensions and Other Post-Retirement Benefits”. The revised Statement requires new disclosures in addition to those required by the original Statement about the assets, obligations, cash flows and net periodic benefit costs of defined benefit pension plans and other defined benefit post-retirement plans. As revised, SFAS No. 132R is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this Statement were effective for interim periods beginning after December 15, 2003. However,

disclosure of the estimated future benefit payments was effective for fiscal years ending after June 14, 2004. We adopted SFAS 132R during 2004. The adoption of SFAS 132R did not have any impact on our results of operations or financial position. See Note 13 for disclosures regarding our defined benefit pension plans.

      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 (VIE’s), 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 VIE’s and, thus, to improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through VIE’s. FIN No. 46 requires the entity, which absorbs a majority of the variable income or loss of a VIE be considered the primary beneficiary and requires consolidation of the VIE. The Interpretation was effective immediately for VIE’s created after January 31, 2003, and to VIE’s in which we obtain 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 was 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 VIE’s was required in financial statements for periods ending after March 15, 2004. We are not a primary beneficiary of a VIE nor do we hold any significant interests or involvement in a VIE. The adoption of this Interpretation did not have a material effect on our results of operations or financial position.

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.

      We recognize revenues when the earnings process is complete and collectibility is reasonably assured. With respect to the Drilling Products and Services and Tubular Technology and Services segments, this includes satisfying the following criteria: the arrangement with the customer is evident; the sales price is fixed or determinable; the manufacturing process is complete (including completion of all proper inspections); title and risk of loss have passed to the customer and all delivery obligations have been met. If requested in writing by the customer; delivery may be satisfied through delivery to our customer storage location or to a third-party storage facility. With respect to our Drill Bits segment, 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 revenues as services are performed. Additionally, we recognize revenues associated with rebillable shipping costs.

      For sales transactions where title and risk of loss has transferred to the customer but the supporting documentation does not meet all of the criteria for revenue recognition prior to the products being in the physical possession of the customer, recognition of the revenues and related inventory costs from these transactions are required to be deferred until the customer takes physical possession. At December 31, 2004, we had deferred revenues and charges related to such transactions of $21.4 million and $17.2 million,

respectively. The deferred charges represent customer-owned finished goods inventory on deferred sales transactions for which legal title transfer has occurred, but the product is not yet in the customer’s physical possession. See Note 19 of the Notes to Consolidated Financial Statements for information on the restatement of the first three quarters of 2004. The impact of deferred revenues and charges on prior years’ financial statements was not material.

      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 performs obsolescence reviews on our slow-moving and excess inventories and establish reserves based on current assessments of factors such as age of inventory, technological obsolescence, future product demands, market conditions and related management initiatives. If such factors are different than those projected by management, additional inventory reserves may be required.

      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 and exit plans.

      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 undiscounted future net cash flows 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 discounted future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less selling costs. In 2004, we recorded fixed asset impairments of $3.8 million related to the write-off of leasehold improvements and furniture and fixtures resulting from the relocation of our Corporate office in September 2004. While we believe no other impairment existed at December 31, 2004 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.

      Goodwill and intangible assets that have indefinite useful lives are subject to at least an annual impairment test and more frequently if circumstances indicate their value may not be recoverable. 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. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value to carrying value. Based on our annual goodwill impairment test as of October 1, 2004, we do not believe any of our goodwill is impaired as of December 31, 2004. While we believe no impairment existed at December 31, 2004 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.

      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 taxable profitability of entities operating in the various taxing jurisdictions.

      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, environmental liabilities 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.

      The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when we determine the liabilities are no longer necessary. Substantially all of these potential tax liabilities are recorded in “Other Long-Term Liabilities” on the Consolidated Balance Sheets as payment is not expected within one year.

      The plan obligations and related assets of defined benefit pension plans are presented in Note 13 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 expectations as of the date of this report and we make no undertaking to update this information. The absence of an update should not be considered as an affirmation of our current expectations or that facts have not changed during the quarter that would impact our expectations.

      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:

      Our forward-looking statements and projections of future results assume stable to moderately increasing demand for our products and services. However, our businesses are 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:

      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.

      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.

      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.

      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.

      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.

      We rely on various suppliers to supply the components utilized to manufacture our drilling products and premium casing. The availability of the raw materials is not only a function of the availability of steel, but also the alloy materials that are utilized by our suppliers in manufacturing tubulars that meet our proprietary chemistries. Currently, there is a worldwide shortage of scrap, coke and alloys that has caused raw material prices to increase for steel tubulars, billets and bars utilized in our manufacturing operations. To date, these shortages have not caused a material disruption in availability or our manufacturing operations, however, there can be no assurance that material disruptions could not occur in the future. If material disruptions to raw materials availability occur, it could adversely affect our results of operations and our ability to increase our manufacturing operations to meet the increased revenues upon which our forward-looking statements are based.

      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.

      Our projections assume steady to modest increasing demand for our products and services during 2005, 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 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.

      For the year ended December 31, 2004, we have derived approximately 39% 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., including Mexico, Italy, United Kingdom, China, Indonesia, and Singapore. Our operations in certain international locations are subject to various political and economic conditions existing in those countries that could disrupt operations. These risks include:

      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.

      As of December 31, 2004, approximately $73.6 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. At December 31, 2004, we were not holding any such 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.

      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. 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. 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.

      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.

      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.

      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.

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 1 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 the majority of our international operations is the U.S. dollar. Adjustments resulting from the remeasurment of the local currency financial statements into the U.S dollar functional currency, which uses a combination of current and historical exchange rates, are included in net income in the current period. The functional currency of our Canadian, Venezuelan and Chinese operations is the local currency. Adjustments resulting from the translation of the local functional currency financial statements to the U.S dollar, which is based on current exchange rates, are included in stockholders’ equity in the current period. In addition, our long-term supply contract with Voest-Alpine is denominated in Euros. 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, 2004, 2003 and 2002 were ($2.7 million), $3.2 million, and $(0.2 million), respectively. The foreign currency transaction losses realized in 2004 were primarily from the U.S. dollar weakening in relation to the Euro and British Pound. 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.

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 table summarizes our debt obligations at December 31, 2004 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:

      As of December 31, 2004, our long-term borrowings at variable rates were paid off, therefore, we were not exposed to the risk of cash flow variability due to increased or decreased interest expense in the event of changes in short-term interest rates. However, the Company’s fixed rate Senior Notes outstanding at December 31, 2004 subject the Company to risks related to changes in the fair value of the debt and exposes the Company to potential gains or losses if it were to repay or refinance such debt. A 1% change in market interest rates would increase or decrease the fair value of our fixed rate debt by approximately $9 million to $10 million.

      The fair value of financial instruments which differed from their carrying value at December 31, 2004 and 2003, were as follows:

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Grant Prideco, Inc.

      We have audited the accompanying consolidated balance sheets of Grant Prideco, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. 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 described in Note 10 to the consolidated financial statements, the Company changed its method of accounting for goodwill effective January 1, 2002.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 29, 2005, expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

Houston, Texas

March 29, 2005

GRANT PRIDECO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

GRANT PRIDECO, INC.

CONSOLIDATED BALANCE SHEETS

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

GRANT PRIDECO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

GRANT PRIDECO, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY