10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number: 000-31579

HYDRIL COMPANY

(Exact name of registrant as specified in its charter)

DELAWARE	95-2777268
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3300 NORTH SAM HOUSTON PARKWAY EAST HOUSTON, TX (Address of principal executive offices)	77032-3411 (Zip Code)

(281) 449-2000

(Registrant’s telephone number, including area code)

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

Common Stock, par value $.50 per share

Rights to Purchase Preferred Stock

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes þ         No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes o         No þ

     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.    þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Large accelerated filer þ         Accelerated filer o         Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o         No þ

     As of June 30, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,065,489,792 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System. The class B common stock is not publicly traded. For the purposes of the foregoing determination, the value of each share of class B common stock was assumed to be equal to the value of a share of common stock.

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 28, 2006.

Class	Outstanding at February 28, 2006
Common Stock, $.50 par value per share Class B common stock outstanding	20,421,436 shares 3,279,920 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Proxy Statement for the Registrant’s 2006 Annual Meeting of Stockholders to be filed within 120 days of December 31, 2005	Portions of Part III

HYDRIL COMPANY

Form 10-K

For the Year Ended December 31, 2005

Index

		Page
Part I
Item 1.	Business		4
Item 1A.	Risk Factors		14
Item 1B.	Unresolved Staff Comments		23
Item 2.	Properties		24
Item 3.	Legal Proceedings		24
Item 4.	Submission of Matters to a Vote of Security Holders		25
Item S-K 401(b)	Executive Officers of the Registrant		25
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer of Equity Securities		26
Item 6.	Selected Financial Data		27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		41
Item 8.	Financial Statements and Supplementary Data		42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		73
Item 9A.	Controls and Procedures		73
Item 9B.	Other Information		73
Part III
Item 10.	Directors and Executive Officers of the Registrant		73
Item 11.	Executive Compensation		73
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		74
Item 13.	Certain Relationships and Related Transactions		74
Item 14.	Principal Accounting Fees and Services		74
Part IV
Item 15.	Exhibits and Financial Statement Schedules		74
Signatures			77
Description of Non-Employee Director Compensation
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Powers of Attorney
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

* * *

Cautionary Statement Regarding Forward-Looking Information

      This annual report contains forward-looking statements. These statements relate to future events or our future financial performance, including our business strategy and product development plans, and involve known and unknown risks and uncertainties. These risks and uncertainties include, but are not limited to, competition from steel mills, limitations on the availability of pipe for threading, the impact of imports of tubular goods and of international and domestic trade laws, the loss of or change to distribution methods of premium connections in the U.S. and Canada, the consolidation of end-users, the risks associated with

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fixed-price contracts, the impact of changes in oil and natural gas prices and worldwide and domestic economic conditions on drilling activity and demand for and pricing of Hydril’s products, the ability to attract and retain skilled labor and Hydril’s ability to successfully develop new technologies and products and maintain and increase its market share. Please read “ITEM 1A — RISK FACTORS” for more information about many of these risks and uncertainties. These factors may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends”, “plans”, “anticipated”, “believes” “estimated” “potential,” or the negative of these terms or other comparable terminology.

      These statements are only projections, based on anticipated industry activity. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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PART I

ITEM 1 — BUSINESS

      Hydril is engaged worldwide in engineering, manufacturing and marketing premium connection and pressure control products used for oil and gas drilling and production. Our premium connections are used in drilling environments where extreme pressure, temperature, corrosion and mechanical stress are encountered, as well as in environmentally sensitive drilling. These harsh drilling conditions are typical for deep-formation, deepwater and horizontal or extended reach wells. Our pressure control products are primarily safety devices that control and contain fluid and gas pressure during drilling, completion and maintenance of oil and gas wells in the same environments. We also provide aftermarket replacement parts, repair and field services for our installed base of pressure control equipment. These products and services are required on a recurring basis because of the impact on original equipment of the extreme conditions in which pressure control products are used.

      Hydril was founded in 1933 and reincorporated under the laws of the state of Delaware in 1972. In October 2000, we completed an initial public offering. Our common stock is traded on the Nasdaq National Market under the symbol “HYDL”. Hydril’s website address is www.hydril.com. Hydril’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available free of charge through Hydril’s website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission. Information contained on Hydril’s website is not incorporated into this Annual Report and does not constitute a part of this Annual Report.

OVERVIEW OF OUR INDUSTRY

      Demand for oilfield products, such as premium connection and pressure control equipment, is cyclical in nature and depends substantially on the condition of the oil and gas industry and our customers’ willingness to invest capital in oil and gas exploration and development. The level of these capital expenditures is highly sensitive to existing oil and gas prices as well as the oil and gas industry’s view of such prices in the future. Generally, increasing oil and gas prices, usually referred to as “commodity prices”, result in increased oil and gas exploration and production, which translates into greater demand for oilfield products and services. Conversely, falling commodity prices generally result in reduced demand for oilfield products and services. Historically, changes in budgets and activity levels by oil and gas exploration and production companies have lagged significant movements in commodity prices.

      In recent years, the focus of drilling activity has been shifting towards the less-explored deeper geological formations and deepwater locations, which offer potentially prolific reserves. Exploration and production company operators have also increasingly relied on advanced drilling technologies such as horizontal drilling to improve production and recovery rates of oil and gas reservoirs. Demand for premium connection and pressure control products is favorably impacted by these trends. We believe that the level of drilling activity in the harsh environments that require these products will continue to grow as exploration and production company operators increasingly target deeper geological formations, shift their exploration offshore and apply horizontal and deviated drilling techniques.

      The level of worldwide drilling activity, in particular, the number of rigs drilling at target depths greater than 15,000 feet and the number of rigs drilling offshore generally drive sales of premium connection products, although the rate of consumption varies widely among markets based on specific geological formations, customer history and preference, and available alternatives. The main factors that affect sales of pressure control capital equipment products are the level of construction of new drilling rigs and the rate at which existing rigs are refurbished. Demand for our aftermarket replacement parts, repair and field services is driven primarily by the level of worldwide offshore drilling activity as well as the total U.S. rig count.

      During 2005, commodity prices continued their upward trend which began in 2003. Average 2005 U.S. crude oil prices increased 37% from the 2004 average and average natural gas prices increased 46% from the 2004 average. As a result, drilling activity in the United States rose throughout the year. The U.S. rig

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count ended 2005 at 1,471, which was 18% above the year-ended 2004 and the average U.S. rig count for 2005 was up 16% over the average for 2004. The average U.S. deep formation rig count (rigs drilling to a target depth greater than 15,000 feet) for 2005 was 186, an increase of 9% from the 2004 average. Internationally, drilling activity overall also increased, although not to the same extent as domestic levels. The international rig count (rigs drilling outside of the United States and Canada) ended 2005 at 948, up 9% from the year-ended 2004. The worldwide offshore rig count ended 2005 at 348 compared to 356 for the year-ended 2004. The decrease was primarily attributable to a decline in the number of rigs drilling in the Gulf of Mexico due to damage sustained in hurricanes Katrina and Rita.

      As a result of rising rig counts in the United States, and in particular the increase in the deep formation rig count, demand for our premium connections in the U.S. increased in 2005. The higher demand was reflected in higher consumption of our products by our customers and end users, which included restocking of inventories they had depleted in the prior two years below recent historical levels.

      We have a greater presence in some international markets than others. As a result, the success of our premium connections business internationally is particularly influenced by the level of drilling activities in certain locations that use our products. For 2005, demand in almost all of our key international markets was better than indicated by the increase in the overall international rig count.

      Our pressure control aftermarket revenue is influenced by the level of drilling activity throughout the world as measured by the U.S. rig count and the worldwide offshore rig count, both of which were up on average during 2005. As a result, our customers purchased a higher level of spare parts and repair services during 2005 as compared to 2004.

      Finally, demand for new rig construction and refurbishment worldwide, which had not been strong since 1999, increased significantly in 2005. Since late in 2003, commodity prices have steadily increased, driving increased levels of drilling and exploration worldwide. Consequently, utilization of the drilling rigs of major drilling contractors have risen, supporting increases in the rates charged to their customers. As a result, the profitability of the major drilling contractors has improved over the past two years which has led them to begin placing orders for the construction of new rigs and the refurbishment of existing rigs. This increase in demand resulted in our receipt of significant new capital equipment orders in the third and fourth quarter of 2005 and raising our capital equipment backlog to $156.7 million at December 31, 2005 compared to $14.6 million at year-end of 2004.

Market for Premium Connections

      Premium connections join sections of well casing, production tubing and drill pipe used in various stages of drilling and production. The premium connection market is driven by the level of worldwide drilling activity, in particular by the number of rigs drilling to a target depth greater than 15,000 feet and also by offshore drilling. These depths require substantially more premium connections than shallower wells.

      In North America, the primary indicators of the premium connection market are the number of rigs drilling to greater than 15,000 feet and the number of rigs drilling in the Gulf of Mexico. Internationally, while the total international rig count is a general indicator of the premium connection market, spending on exploration and production is typically spread unevenly between various regions and can be subject to significant volatility. There are many variables, including political and civil unrest, which may adversely impact the level of drilling activity in particular countries or regions. In addition, our international presence is concentrated in particular geographic regions which may not always correspond to where drilling activity is heaviest. If we are affected by conditions that exist in only specific markets, our premium connections results may differ relative to movements in the international rig count. See “ITEM 1A — RISK FACTORS: A material or extended decline in expenditures by the oil and gas industry, due to a decline in oil and gas prices or other economic factors, would reduce our revenue.”

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      The following table shows the average rig count for rigs drilling at target depths greater than 15,000 feet in the United States, the average number of rigs under contract in the Gulf of Mexico and the average international rig count for each of the years 2001 through 2005:

	Average United		Average Gulf
	States Rig		Of Mexico		Average
	Count Over		Rigs Under		International
	15,000 ft(1)		Contract(2)		Rig Count(3)
Year	Number of Rigs		Number of Rigs		Number of Rigs
2001		161		164		745
2002		128		127		732
2003		143		124		771
2004		170		118		836
2005		186		130		908

(1)	Source: Average rig count calculated by Hydril using weekly data published by Smith International.
(2)	Source: Average rigs under contract calculated by Hydril using weekly data published by ODS-Petrodata Group.
(3)	Source: Average rig count calculated by Hydril using monthly data published by Baker Hughes Incorporated. The international rig count includes data for Europe, the Middle East, Africa, Latin America and Asia Pacific, and excludes data for Canada and the United States.

      Premium connections are generally required for drilling in environmentally sensitive areas. Oil and gas companies operating in locations where environmental laws and regulations require a particularly high degree of environmental safety, such as California, Alaska, the United Kingdom, Norway and Canada, might utilize premium connections due to their superior sealing capability and reliability. As environmental awareness increases worldwide, and as governments open for exploration new environmentally sensitive areas, we believe demand for premium connections in such areas will likely continue to increase.

Market for Pressure Control Equipment

      Pressure control products include a broad spectrum of equipment and parts required for outfitting new drilling rigs and upgrading and maintaining existing rigs.

      Demand for pressure control capital equipment depends on the level of construction of new offshore drilling rigs and the replacement and upgrading of equipment for existing offshore drilling rigs. In 2005 the rig equipment market experienced strong growth driven by an upturn in drilling rig utilization. The last offshore rig construction up cycle, which peaked in 1998, ended in 1999.

      As a result of the high level of wear and tear during operation, pressure control equipment requires frequent maintenance and repair (including replacement parts), and technical support services. Demand for our pressure control aftermarket replacement parts, repair and field services primarily depends upon the level of worldwide offshore drilling activity as well as the total U.S. rig count. Since 2000, demand for our aftermarket replacement parts and services has increased as a result of an overall increase in the U.S. and

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worldwide offshore rig counts. The following tables show the average worldwide offshore rig count and the average U.S. rig count for each of the years 2001 through 2005:

	Average
	Worldwide		Average United
	Offshore Rig		States Total Rig
	Count(1)		Count(2)
Year	Number of Rigs		Number of Rigs
2001		378		1,156
2002		344		830
2003		338		1,032
2004		342		1,192
2005		363		1,383

(1)	Source: Average rig count calculated by Hydril using weekly data for the United States and Canada, and monthly data for the international regions, as published by Baker Hughes International. The worldwide offshore rig count includes data for Europe, the Middle East, Africa, Latin America, Asia Pacific, the United States and Canada, and excludes the former Soviet Union and China.
(2)	Source: Average rig count calculated by Hydril using weekly data published by Baker Hughes Incorporated.

BUSINESS SEGMENTS

Our Premium Connection Business

      We manufacture and market premium connections for casing, production tubing and drill pipe. We also provide technical solutions and field support services to address specific customer needs in the design, selection and maintenance of premium connections.

      A conventional oil or gas well is drilled by attaching a drill bit to the end of a series of sections of drill pipe joined by threaded connections. Threaded connections are similar to the grooves on a bolt and enable sections of drill pipe to be screwed together. Once connected, the drill pipe may be up to several miles long, commonly referred to as a drill string. The entire drill string must be removed from the well numerous times during the drilling process to replace dull drill bits and accomplish other tasks. Removing the drill string requires the disassembly and reassembly of the entire drill string. As a result, threaded connections for drill pipe must be engineered to withstand numerous assemblies without compromising the integrity of the connections. When the well reaches sufficient depth during drilling, the drill string is pulled out of the well and sections of larger diameter pipe known as casing, also joined by threaded connections, are inserted into the well and cemented in place to prevent the well from collapsing. Drilling is resumed until the next target depth is reached and the process is repeated. Most wells use multiple concentric casing strings that “telescope” or fit inside one another. The casing diameter reduces as depth increases. Once the well has been drilled to the desired depth and cased, production tubing is placed inside the casing. The production tubing also consists of multiple sections of pipe that are joined with threaded connections. In a completed well, oil and natural gas pass up through the production tubing to the top of the well.

      Casing, production tubing, and drill pipe are the types of oilfield tubulars for which we produce our premium connections. The term “premium” refers to a product produced by a precision manufacturing process with performance characteristics superior to those of a standard industry connection. Premium connections can withstand extreme conditions encountered in deepwater offshore wells and deep gas wells, as well as in horizontal well drilling. They also provide pressure tight, highly reliable sealing necessary for environmentally sensitive drilling. The technical complexity of these premium connections requires a high degree of accuracy during manufacturing and substantially more machining and inspection time than standard connections.

      We utilize computer controlled machines in our premium connection manufacturing facilities worldwide. All of our machine programs are created and maintained on a central system in our technology center in

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Houston, Texas and transmitted to each of our ten premium connection manufacturing locations worldwide. As a result, all Hydril connections of a particular type, regardless of manufacturing location, are substantially identical, ensuring interchangeability.

      To meet customer needs, we provide a full line of premium connection products and accessories, including connections for pipe of nonstandard size or weight. Our various premium connection products exhibit various high performance characteristics, such as:

•  Pressure tight sealing. Our metal-to-metal pressure tight sealing is designed to prevent both gas and fluid leakage, a critical factor in the case of extreme pressure and environmentally sensitive drilling.

•  Tension resistance. Our premium integral thread designs have high tension strength, which supports the weight of numerous sections of pipe strung together in deep wells.

•  Torque capability. Our premium thread connection, in particular our proprietary Wedge Thread^tm connection, is designed to have torque capability that approaches pipe body strength in casing applications and surpasses it in most drill pipe and tubing applications. This design prevents connection damage due to overtorque, facilitates easier assembly and disassembly and reduces wear and tear from recurring service to the pipe.

•  Clearance. Our integral connections are machined directly onto the pipe, forming a smooth connection with little or no increase in diameter of the pipe. Coupled connections, on the other hand, use a bulkier third pipe, or coupling, to make a connection, resulting in less clearance inside the well. This integral quality is particularly important in deep drilling where well diameters become increasingly narrow because multiple strings of casing, production tubing, or drill pipe are utilized in one well.

•  Compression and bending flexibility. Our premium threads are designed to permit greater compression and bending of pipe strings than standard connections, which is particularly important in horizontal and extended-reach wells.

•  Corrosion resistance. Our unique manufacturing processes and designs reduce the propensity for galling, especially when applied to corrosion resistant materials, and extend the useful life of the connections and drill string. Our corrosion barrier ring, when used on plastic coated tubing connections, provides the entire tubing string with continuous internal protection from corrosive well bore fluids and also extends the useful life of the connections and tubing string.

•  Uniformity and compatibility. Our connections are manufactured worldwide with the same design, high tolerance specifications, and centrally manufactured tools and gauges, which enhances product uniformity and compatibility.

      We offer our customers technical services related to casing and tubing string design. Computer well design software is utilized in the design and specification of the tubulars and the thread connections. In addition, we offer highly-trained field service technicians to assist our customers worldwide. We have 33 licensed repair facilities worldwide to support our premium connection business.

Our Pressure Control Business

      We provide a broad range of pressure control equipment used in oil and gas drilling and well completion and maintenance. Our products regulate formation and drilling fluid pressure during normal operations and prevent well blowouts when the pressure of formation fluids and gases reaches critical levels.

      The oil, gas and water contained in the geological formations into which a well is drilled can be under extremely high pressure. This pressure increases with greater water and drilling depth. When unanticipated formation pressure is encountered, the pressure must be controlled to prevent an uncontrolled release of the fluids and gases from the well, known as a “blowout.” A blowout can have catastrophic consequences, as the oil and natural gas may ignite or the equipment and tubulars in the well may be suddenly propelled out of the well, potentially resulting in injury or death of personnel, destruction of drilling equipment or environmental damage. Blowouts can cause the loss of a well and significant downtime and additional expense. During

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drilling and maintenance operations, it is therefore essential to regulate the pressure, and to provide for mechanical safeguards to minimize the effects.

      Our pressure control products include blowout preventers, diverters, subsea control systems, drill stem valves, production chokes, pulsation dampeners and a variety of specialized elastomer products. We also provide integrated subsea control systems, which typically include a series of blowout preventers stacked on top of one another, along with other types of valves, and diverters. In addition, we provide replacement parts, repair and field services to maintain our installed base of products.

Pressure Control Products

      Blowout preventers. The key component of a pressure control system is a high-pressure valve located at the top of the well called a blowout preventer. When activated, blowout preventers seal the well and prevent fluids and gases from escaping. Blowout preventers are safety devices and are activated only if other techniques for controlling pressure in the well are inadequate.

      We manufacture two types of blowout preventers:

•  Annular blowout preventers, which we invented more than 65 years ago, seal the well by hydraulically closing a large rubber collar around the drill pipe or against itself if nothing is in the well.

•  Ram blowout preventers seal the well by hydraulically driving metal rams against each other across the top of the well.

      Control Systems. We make hydraulic and electro-hydraulic control systems for our blowout preventers. In general terms, hydraulic control systems are used to operate surface (land or jackup) blowout preventer stacks, and electro-hydraulic control systems are used to operate subsea blowout preventer stacks. Our electro-hydraulic control systems, also known as multiplex or MUX systems, use advanced software, micro-electronics and materials technology. MUX systems are capable of operating in water depths of up to 10,000 feet, and can be sold either as part of our integrated system or separately to integrate with the customers existing blowout prevention equipment.

      Integrated Systems. Our subsea systems integrate blowout preventers and other pressure control products with control systems, usually for use in deep, high-pressure wells drilled offshore.

      Diverters. Diverters are safety devices used to redirect or vent the uncontrolled flow of formation fluids and gases in a controlled manner during offshore drilling operations. A diverter is used during drilling when there is a danger of penetrating pressurized gas zones. Our diverters incorporate a patented integral vent design that reduces the need for peripheral devices normally required for the use of diverters.

      Drill Stem Valves. Manually operated drill stem valves are placed in the drill string to control well pressure in order to prevent blowouts and drilling fluid spillage during the installation and removal of drilling pipe. Our drill stem valves incorporate automatic pressure balancing, which we were the first to develop, that minimizes the torque required to operate them under pressure.

      Pulsation Dampeners. Pulsation dampeners counterbalance the pulsing of pressure fluids through pipelines that cause vibrations which may damage pipework and valves. In addition to oilfield applications, our pulsation dampeners are used in airport refueling systems and chemical refinery and processing plants. Our pulsation dampeners have a field replaceable bottom plate, which we were the first to develop, that reduces the number of costly shop repairs.

      Production Chokes. Production chokes are used to regulate the flow of oil, gas and other formation fluids from producing wells which may have high pressures, high flow rates or corrosive fluids. Our production chokes use a proprietary nozzle configuration that reduces internal erosion from produced sand and debris associated with many oil and gas wells.

      Elastomers. Our line of rubber products includes parts used in annular and ram blowout preventers, pulsation dampeners and other equipment. We specialize in bonding rubber to metal and offer a wide variety of elastomer products in a full range of sizes, pressure ratings and elastomer types.

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Aftermarket Products and Services

      Our aftermarket business is supported by our growing installed base of pressure control products. Because our products are subjected to harsh drilling conditions, they frequently require repair and maintenance services, which include replacement parts for those consumed during the drilling operation. We manufacture metal replacement parts, including ram blocks, pistons, cylinders, seal seats and valves. Elastomer replacement parts manufactured and sold include packing units for ram and annular blowout preventers and seal kits. We also have a staff of field service personnel who assist customers on site in the proper installation and use of our products.

      We provide aftermarket services at our 4 domestic and 4 international locations, and through 16 other authorized repair facilities.

Research and Development

      We emphasize both the development of new products and the continuous redesign and improvement of our existing products. We consider ourselves to be a leader in the development of new technology and equipment designed to enhance the productivity and safety of the drilling and production process in harsh drilling environments. Our current research and development efforts are primarily focused on improvements in threaded connections and enhancements to our blowout prevention and related equipment. Our future ability to develop new products depends on our ability to design and commercially produce products that meet the needs of our customers, successfully market new products, and obtain and maintain patent protection.

      We believe that, in addition to the technical competence and creativity of our employees, the success of our business depends on intellectual property protection. As part of our ongoing research, development and manufacturing activities, we have a policy of seeking patents, when appropriate, on inventions concerning new equipment and product improvements. We hold numerous United States and international patents and have numerous patent applications pending. As we redesign and improve existing products, we are often able to obtain extensions of patent lives beyond their original duration. In addition, our trademarks are registered in the United States and various foreign countries. Our competitors may be able to independently develop technology that is similar to ours without infringing on our patents, and we may be unable to successfully protect our intellectual property.

      Although in the aggregate our patents and trademarks are important to the manufacturing and marketing of many of our products, we do not consider any single patent or trademark or group of patents or trademarks to be material to our business as a whole. We also rely on trade secret protection for our confidential and proprietary information. We routinely enter into confidentiality agreements with our employees and suppliers. There can be no assurance, however, that others will not independently obtain similar information or otherwise gain access to our intellectual property.

      See “ITEM 1A — RISK FACTORS: If we do not develop new technologies and products that are commercially successful, our revenue may decline or we may be required to write-off any capitalized investment” and “Limitations on our ability to protect our intellectual property rights could cause a loss in revenue and any competitive advantage we hold.”

Our Customers, End-Users and Distribution

      The end-users of our products, who are not always our direct customers, are primarily international and domestic independent, major and state-owned oil and gas companies and drilling contractors. During 2005, we sold products and services to approximately 1,071 customers. We estimate that Petroleos de Venezuela S.A. (PdVSA), the state-owned oil and gas company of Venezuela, through direct and indirect sales, represented 13% of our 2005 consolidated revenue; and that Petroleos Mexicanos (Pemex), the state-owned oil and gas company of Mexico, through direct and indirect sales, represented 11% of our 2005 consolidated revenue. See “ITEM 1A — RISK FACTORS: Consolidation or loss of end-users of our products could adversely affect demand for our products and services and reduce our revenue.”

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      Premium Connection Products. In the United States and Canada, we sell our premium connection products primarily to steel pipe distributors who purchase the tubulars from steel mills and contract with us to apply the premium connection to the tubular goods. Due to the use of distributors, we do not own the pipe we thread and do not maintain an inventory of threaded or unthreaded tubulars. However, we market our premium connection products to the end-users, primarily exploration and production company operators, because it is the end-users who request their distributors to have our premium connection applied to the pipe.

      In 2005, our nine distributors accounted for 73% of our premium connection sales in the United States and Canada. In the United States, over the past ten years, there has been significant consolidation of tubular distributors, resulting in fewer distribution alternatives for our products. If methods of distribution change, many of our competitors may be better positioned than us to take advantage of those changes. See “ITEM 1A — RISK FACTORS: We rely on a few distributors for sales of our premium connections in the United States and Canada; a loss of one or more of our distributors or a change in the method of distribution could adversely affect our ability to sell our products.”

      Outside of the United States and Canada, where we have generated about 60% of our premium connection revenue over the past three years, our methods of distribution are more varied. We primarily sell our premium connections directly to exploration and production company operators, threading tubulars owned by customers or purchased by us for threading and resale. We also thread tubulars held by the steel producer and the producer sells the completed product to an end-user or distributor. Our premium connection products are sold for use in more than 65 countries by international customers and our United States customers operating abroad.

      In 2005, our two largest premium connection customers worldwide accounted for 20% and 14% of segment sales and our ten largest premium connection customers accounted for 70% of total segment sales.

      Our premium connection sales staff is managed from Houston, Texas and from Aberdeen, Scotland, and is located in 17 offices in Canada, Malaysia, Mexico, Nigeria, Singapore, the United Arab Emirates, the United Kingdom, the United States and Venezuela. We use manufacturer representatives in 61 countries worldwide.

      Pressure Control Products. Pressure control products are sold primarily to drilling contractors, both domestically and internationally, although we market some of our pressure control products to exploration and production company operators. Certain lines of our pressure control equipment are also sold to ship yards, rig manufacturers and integrators of equipment. Aftermarket replacement parts, repairs and field services are provided to both drilling contractors and companies that rent pressure control equipment. In 2005, our two largest pressure control customers accounted for 14% and 11%, respectively, of segment sales. Our ten largest customers in our pressure control segment in 2005 accounted for 56% of segment sales.

      We market our pressure control products through our direct sales force, distributors and authorized representatives. Our pressure control products are sold for use in more than 93 countries. Our pressure control sales staff is managed from Houston and is located in 10 offices in Canada, Mexico, Singapore, the United Arab Emirates, the United Kingdom and the United States. We use manufacturer representatives in 61 countries worldwide.

Our Competitors

      Our products are sold in highly competitive markets. See “ITEM 1A — RISK FACTORS: Intense competition in our industry could result in reduced profitability and loss of market share for us.”

      Premium Connection Products. In the premium connection market, domestically we compete with the Atlas Bradford product line of the Tubular Technology and Services segment of Grant Prideco, the Hunting Interlock product line of Hunting, and the VAM product line joint venture of Vallourec & Mannesmann and Sumitomo Metals, as well as numerous other independent threaders and steel mills. Internationally, we also compete with some of our domestic competitors and with Tenaris, Vallourec & Mannesmann, Sumitomo Metals and JFE Steel, each of which is vertically integrated through the ownership of steel mills. Integrated steel mills can apply threaded connections to tubulars they produce, which gives these competitors supply and

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pricing advantages over companies such as ours, which apply threaded connections to tubulars produced by others. Other steel producers who do not currently manufacture premium connections may begin doing so in the future. If domestic or other foreign steel mills begin providing premium threaded tubular goods directly to distributors or end-users, they would have a competitive advantage over us. See “ITEM 1A — RISK FACTORS: The level and pricing of tubular goods imported into the United States and Canada could adversely affect demand for our products and our results of operations” and “We may lose premium connection business to international and domestic competitors who produce their own pipe, as well as other new entrants or lose business due to limitations on the availability of pipe for threading.”

      We believe we are one of the largest providers of premium connections to the oil and gas industry both in the United States and worldwide. The principal competitive factors in the premium connections market are product design and engineering, product quality and reliability, price, product uniformity and compatibility, and the ability to provide timely field service and repair.

      Pressure Control Products. We have two primary competitors in the pressure control market, the Cameron segment of Cooper Cameron, and the Rig Technology segment of National Oilwell Varco. We also have more than ten smaller competitors. We believe that we have the largest installed base of annular blowout preventers worldwide and are one of the leading providers of subsea pressure control equipment. We believe the principal competitive factors in the pressure control products market are product quality and reliability, product design and engineering, price, and the ability to provide timely service and replacement parts.

Our Employees

      As of February 28, 2006, we had a total of approximately 1,700 full-time and full-time equivalent employees. Approximately 680 of those employees were employed by our international subsidiaries and are located outside the United States.

      We are a party to collective bargaining agreements which apply to approximately 100 employees located in Veracruz, Mexico and approximately 30 employees in Warri, Nigeria. These agreements are subject to annual review. We believe our relations with our employees are good.

Insurance

      Our operations are subject to the risks inherent in manufacturing products and providing services to the oil and gas exploration and production industry. These risks include personal injury and loss of life, business interruption, loss of production and property and equipment damage. Damages arising from an occurrence at a location where our products are used, have in the past and may in the future result in the assertion of potentially large claims against us.

      We maintain comprehensive insurance covering our assets and operations, including product liability and workers’ compensation insurance, at levels that we believe to be appropriate. We attempt to obtain agreements from our customers and vendors providing for indemnification against liability to others. Our insurance is subject to deductibles and in some cases only applies to losses in excess of significant amounts. In such cases, we bear the risk of loss for claims below these deductibles or amounts. We cannot assure you that our insurance coverage will be adequate in all circumstances or against all hazards nor can we assure you that we will be able to maintain adequate insurance coverage in the future at commercially reasonable rates or on acceptable terms.

Environmental Regulation

      Our business is affected by changes in public policy, federal, state and local laws and regulations relating to the energy industry. The adoption of laws and regulations curtailing exploration and development drilling for oil and gas for economic, environmental and other policy reasons may adversely affect our operations by limiting available drilling and other opportunities in the oil and gas exploration and production industry.

      Our United States and foreign operations are subject to increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges,

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waste management and workplace safety. Many of our operations, including painting operations at certain locations, require permits that may be revoked or modified, that we are required to renew from time to time. Failure to comply with such laws, regulations or permits can result in substantial fines and criminal sanctions, or require us to purchase costly pollution control equipment or implement operational changes or improvements.

      Because we use hazardous substances in our manufacturing operations, we may be responsible for remediating hazardous substances at our properties or at third party sites to which we sent waste for disposal. In addition, we currently own or lease, and have in the past owned or leased, numerous properties that for many years have been used for industrial purposes, including manufacturing. While we believe that we are currently utilizing operating and disposal practices that are in substantial compliance with applicable environmental laws and regulations, historical operating and disposal practices that were standard in the past may have resulted in the disposal or release of wastes on or under the properties we owned or leased, or on or under other locations where such wastes have been taken for disposal. These properties and wastes may be subject to the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as CERCLA or Superfund, the Resource Conservation and Recovery Act and analogous state laws. Under these laws, we may be required to remove previously disposed wastes and to remediate property contamination or to perform remedial operations to prevent future contamination.

      CERCLA imposes liability, without regard to fault or the legality of the original conduct, for the releases of hazardous substances into the environment. Persons subject to CERCLA include the owner and operator of the disposal site or sites where the release occurred and companies that generated, disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the resulting contamination and for damages to natural resources. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

      We have been identified as a potentially responsible party under state law analogous to CERCLA with respect to a waste disposal site near Houston, Texas. Based on the number of other potentially responsible parties, the total estimated site cleanup costs and our estimated share of such costs, we do not expect this matter to have a material adverse effect on our financial condition or results of operation. We also have in the past been identified as a potentially responsible party at other CERCLA or state cleanup sites. In each case, we have resolved our liability without incurring material costs.

      Although we believe that we are in substantial compliance with existing environmental laws and regulations, we cannot assure you that we will not incur substantial costs in the future. Moreover, it is possible that implementation of stricter environmental laws, regulations and enforcement policies could result in additional, currently unquantifiable costs or liabilities to us.

International and Other Matters

      In 2005, approximately 69% of our total revenue was derived from equipment or services ultimately provided or delivered to end-users outside the United States, and approximately 41% of our revenue was derived from products which were produced and used outside of the United States. See “ITEM 1A — RISK FACTORS: Our international operations may experience severe interruptions due to political, economic and other risks.”

      See Note 14 in the Consolidated Financial Statements in Item 8 for segment and geographic information.

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ITEM 1A — RISK FACTORS

      You should consider carefully the following risk factors and all other information contained in this report. Any of the following risks could impair our business, financial condition and operating results.

We may lose premium connection business to international and domestic competitors who produce their own pipe, as well as other new entrants or lose business due to limitations on the availability of pipe for threading.

      Our premium connections are applied to steel tubulars produced by steel mills. In the United States and Canada and sometimes internationally, our premium connections are applied to steel tubulars purchased by a distributor from the steel mills. In international markets distribution is more varied. We also purchase the tubulars from the steel mills, thread them and sell the complete product, or thread tubulars held by the steel mill, which the mill then sells, or thread tubulars owned by the end-user. In any case, the price paid by the purchaser includes, but does not differentiate between, the costs of the steel pipe and the connection. Pricing of premium connections can be affected by steel prices, as the steel pipe is the largest component of the overall price. We have no control over the availability or the price of the steel pipe. Prices for steel pipe have increased in recent periods due to higher worldwide demand for steel, and increased demand for oilfield tubulars, both of which in turn have contributed to a tight supply of tubulars for oil and gas applications. If these conditions persist and demand for pipe increases, we or our distributors could have difficulty obtaining plain-end pipe for us to thread. If we or our distributors are not able to obtain pipe for threading to satisfy end-user demand, our business would be adversely affected.

      A number of steel mills, especially internationally, are integrated steel producers, who both produce and thread steel tubulars. There are also some steel mills which market their own premium connections in North America. Accordingly, some of the steel mills that supply the plain-end pipe that we thread also compete with our premium connections. Due to the current tight supply of steel and steel tubulars and low levels of inventory of tubular goods for oil and gas applications in the industry generally, integrated producers may attempt to require that all or a greater portion of the pipe they produce bear their premium connections or change distribution methods in a way that is adverse to us. Integrated steel producers also have more pricing flexibility for premium connections since they control the production of both the steel tubulars to which the connections are applied, as well as the premium connections. This inherent pricing and supply control puts us at a competitive disadvantage, and we could lose business to integrated steel producers even if plain end pipe is available and we may have a better product. The acquisition of U.S. tubular steel manufacturing capacity by a foreign integrated steel mill could result in a loss of market share for Hydril. In addition, other domestic and foreign steel producers who do not currently manufacture tubulars with premium connections may in the future enter the premium connection business and compete with us.

The level and pricing of tubular goods imported into the United States and Canada could adversely affect demand for our products and our results of operations.

      The level of imports of tubular goods, which has increased in the last several years, affects the domestic tubular goods market. High levels of imports reduce the volume sold by domestic producers and tend to reduce their selling prices, both of which could have an adverse impact on our business. We believe that United States import levels are affected by, among other things:

•  United States and worldwide demand for tubular goods;

•  the trade practices of and government subsidies to foreign producers; and

•  the presence or absence of antidumping and countervailing duty orders.

      In many cases, foreign producers of tubular goods have been found by the United States government to have sold their products, which may include premium connections, for export to the United States at prices that are lower than the cost of production or their prices in their home market or a major third-country market, a practice commonly referred to as “dumping.” If not constrained by U.S. antidumping duty orders and countervailing duty orders, which impose duties on imported tubulars to offset dumping and subsidies

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provided by foreign governments, this practice allows foreign producers to capture sales and market share from domestic producers. Duty orders normally reduce the level of imported goods and result in higher prices in the United States market. Duty orders may be modified or revoked as a result of administrative reviews conducted at the request of a foreign producer or other party.

      In addition, antidumping and countervailing duty orders may be revoked as a result of periodic “sunset reviews”. Under the sunset review procedure, an order must be revoked after five years unless the United States Department of Commerce and the International Trade Commission determine that dumping is likely to continue or recur and that material injury to the domestic industry is likely to continue or recur. Antidumping duty orders currently cover imports of tubulars from Argentina, Italy, Japan, Korea and Mexico, and a countervailing duty order currently covers imports from Italy. Some of the foreign steel mills whose sales in the U.S. are currently constrained by these orders and duties have their own premium connection products and are significant competitors of ours, particularly outside of the U.S. where they are not subject to such orders. In addition, these steel mills have the benefit of the competitive advantages discussed above under “We may lose premium connection business to international and domestic competitors who produce their own pipe, as well as other new entrants or lose business due to limitations on the availability of pipe for threading.” The Department of Commerce has indicated it intends to initiate the next five-year sunset reviews of these orders no later than June 2006, which, by regulation, they would be required to complete by no later than June 2007. If the orders covering imports from these countries are revoked in full or in part or the duty rates lowered, we could be exposed to increased competition in the U.S. from imports that could reduce our sales and market share or force us to lower prices. Tubulars produced by domestic steel mills and threaded by us may not be able to economically compete with tubulars manufactured and threaded at steel mills outside the U.S.

We rely on a few distributors for sales of our premium connections in the United States and Canada; a loss of one or more of our distributors or a change in the method of distribution could adversely affect our ability to sell our products.

      There are a limited number of distributors who buy steel tubulars, contract with us to thread the tubulars and sell completed tubulars with our premium connections. In 2005, our nine distributors accounted for 73% of our premium connection sales in the United States and Canada.

      In the United States, tubular distributors have combined on a rapid basis in recent years resulting in fewer distribution alternatives for our products. In 1999, four distributors, one of which distributed our premium connections, combined to become one of the largest distributors of tubulars in the United States, and the combined company no longer distributes our products. Because of the limited number of distributors, we have few alternatives if we lose a distributor. Identifying and utilizing additional or replacement distributors may not be accomplished quickly and could involve significant additional costs. Even if we find replacement distributors, the terms of new distribution agreements may not be favorable to us. In addition, distributors may not be as well capitalized as our end-users and may present a higher credit risk.

      We cannot assure you that the current distribution system for premium connections will continue. For example, products may in the future, be sold directly by tubular manufacturers to end-users or through other distribution channels such as the internet. If methods of distribution change, many of our competitors may be better positioned to take advantage of those changes than we are.

Consolidation or loss of end-users of our products could adversely affect demand for our products and services and reduce our revenue.

      Exploration and production company operators and drilling contractors have undergone substantial consolidation in the last few years. Additional consolidation is probable. In addition, many oil and gas properties will be transferred over time to different potential customers.

      Consolidation results in fewer end-users for our products. In addition, merger activity among both major and independent oil and gas companies also affects exploration, development and production activity, as these consolidated companies attempt to increase efficiency and reduce costs. Generally, only the more promising exploration and development projects from each merged entity are likely to be pursued, which may result in

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overall lower post-merger exploration and development budgets. Moreover, some end-users are not as risk-averse and, as such, do not use as many premium products in drilling deep formation wells.

      Consolidation among drilling contractors could result in the combined contractor standardizing its equipment preferences in favor of a competitor’s products and lead to the loss of a customer. The capital equipment portion of our pressure control segment is heavily dependent on our offshore drilling contractor customers, and the loss of one of these customers through consolidation could have a material effect on our potential future capital equipment sales.

      We are subject to the usual risks associated with having a limited number of customers and end-users. The end-users of our products, who are not always our direct customers, are primarily international and domestic independent, major and state-owned oil and gas companies and drilling contractors. During 2005, we sold products to and services to approximately 1,071 customers. We estimate that for 2005, Petroleos de Venezuela S.A. (PdVSA), the state-owned oil and gas company of Venezuela, through direct and indirect sales, represented 13% of our consolidated revenue; and that Petroleos Mexicanos (Pemex), the state-owned oil and gas company of Mexico, through direct and indirect sales, represented 11% of our consolidated revenue. In 2005, our two largest premium connection customers accounted for 20% and 14% of segment sales, and our ten largest premium connection customers accounted for 70% of total segment sales. In 2005, our two largest pressure control customers accounted for 14% and 11% of segment sales and our ten largest pressure control customers accounted for 56% of segment sales.

      The loss of one or more of our significant customers or end-users, a reduction in exploration and development budgets as a result of industry consolidation or other reasons or a transfer of deep formation drilling prospects to end-users that do not rely as heavily on premium products could adversely affect demand for our products and services and reduce our revenue.

We may lose money on fixed price contracts, which currently constitute a significant part of our business, and such contracts could cause our quarterly revenue and earnings to fluctuate significantly.

      Almost all of our pressure control projects, including all of our larger engineered subsea control systems projects, are performed on a fixed-price basis. This means that we are responsible for all cost overruns, other than any resulting from change orders. Our costs and any gross profit realized on our fixed-price contracts could vary from the estimated amounts on which these contracts were originally based. This may occur for various reasons, including:

•  changes in cost, estimates or expected production time;

•  engineering design changes;

•  changes requested by customers; and

•  changes in the availability and cost of labor and material.

      The variations and the risks inherent in engineered subsea control systems projects may result in reduced profitability or losses on our projects. Depending on the size of a project, variations from estimated contract performance can have a significant impact on our operating results for any particular fiscal quarter or year. Our significant losses in 1997 through 1999 on fixed-price contracts to provide pressure control equipment and subsea control systems for pressure control equipment are an example of the problems we can experience with fixed-price contracts. Our backlog of pressure control capital equipment increased significantly during 2005 and consists mainly of fixed price projects to be shipped over the next three years. Accordingly, the magnitude of our exposure to possible losses on fixed price contracts has increased along with the increase in the backlog.

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Intense competition in our industry could result in reduced profitability and loss of market share for us.

      Contracts for our products and services are generally awarded on a competitive basis, and competition is intense. The most important factors considered by our customers in awarding contracts include:

•  availability and capabilities of the equipment;

•  ability to meet the customer’s delivery schedule;

•  price and indexes affecting price;

•  pipe costs and their impact on contract prices;

•  reputation;

•  experience;

•  safety record; and

•  technology.

      Many of our major competitors are diversified multinational companies that are larger and have substantially greater financial resources, larger operating staffs and greater budgets for marketing and research and development than we do. They may be better able to compete in making equipment available faster and more efficiently, meeting delivery schedules or reducing prices. In addition, two or more of our major competitors could consolidate producing an even larger company. Also our competitors may acquire product lines or consolidate with another company in the oilfield services and equipment industry, and as a result be able to offer a more complete package of drilling equipment and services rather than providing only individual components. For example, National Oilwell, a manufacturer and supplier of oilfield equipment, systems and services that has historically purchased Hydril pressure control equipment, recently merged with Varco International, a manufacturer of pressure control equipment and one of our primary competitors. As a result of any of the foregoing reasons, we could lose customers and market share to those competitors. These companies may also be in a better position to endure downturns in the oil and gas industry.

      We do not do business in as many countries as some of our larger multinational competitors and in some cases even where we do business, we do not have as significant a presence. Our lack of geographic diversity and penetration may have a material adverse affect on our results of operations and competitive position. Spending on exploration and production is typically spread unevenly between various regions with changes in geographic spending patterns arising as discoveries are made, the price of oil and gas changes, political changes take place or other factors occur that make drilling more or less attractive in a given geographic area. As a result, even when international rig counts and drilling activity increase overall, if the increased activity is not in countries in which we have a strong presence, we may not experience any increase in business and may lose market share.

      Moreover, some of our competitors with greater financial resources and multinational presence have relocated manufacturing operations to countries where they have substantially lower labor costs and lower general overhead costs. The relocation by competitors of manufacturing operations to low cost environments may continue in the future. As a result, our competitors may have lower costs than we do and be able to sell their products at prices significantly below ours.

      Finally, demand for pressure control capital equipment is currently increasing due to the number of recently announced contracts to build new drilling rigs or refurbish existing rigs. As a result, manufacturing capacity in the industry for blowout prevention equipment is being consumed at a faster rate than any of the previous five years. If demand for our products continues to increase, at some point in the future it is possible that our capacity could be maximized. If our capacity is maximized and another supplier, who is much larger than us, has capacity available to produce the equipment in the time frame desired by our customer, we could lose orders.

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A material or extended decline in expenditures by the oil and gas industry, due to a decline in oil and gas prices or other economic factors, would reduce our revenue.

      Demand for our products and services is substantially dependent on the level of capital expenditures by the oil and gas industry for the exploration for and development of crude oil and natural gas reserves. In particular, demand for our premium connections and our aftermarket pressure control products and services is driven by the level of worldwide drilling activity, especially drilling in harsh environments. A substantial or extended decline in drilling activity will adversely affect the demand for our products and services. Demand for our pressure control capital equipment is directly affected by the number of drilling rigs being built or refurbished. As drilling rig utilization and day rates have improved, drilling contractors have placed orders for new rigs and for refurbishment of existing rigs. As a result, we have recently experienced a significant increase in orders for our pressure control capital equipment. However, the industry is cyclical and should oil and gas prices decline for an extended period or there be an over-supply of rigs following new construction, drilling rig utilization and day rates could decline. A decrease in utilization and day rates could lower demand for our pressure control capital equipment and adversely affect revenue and operating income for our pressure control segment.

      Worldwide drilling activity is generally highly sensitive to oil and gas prices and can be dependent on the industry’s view of future oil and gas prices, which have been historically characterized by significant volatility.

      Oil and gas prices are affected by numerous factors, including:

•  the level of worldwide oil and gas exploration and production activity;

•  worldwide demand for energy, which is affected by worldwide economic conditions;

•  the policies of the Organization of Petroleum Exporting Countries, or OPEC;

•  significant decreases or increases in the production of oil or gas from countries due to war or civil unrest, such as in Iraq, Nigeria or Venezuela;

•  the cost of producing oil and gas;

•  interest rates and the cost of capital;

•  technological advances affecting hydrocarbon consumption, particularly oil and gas;

•  environmental regulation;

•  level of oil and gas inventories in storage;

•  tax policies, including “windfall profit” taxes on oil and gas companies, which have recently been proposed in the United States Congress;

•  extended disruptions of oil and gas drilling and production, refining or pipeline operations as a result of weather-related factors, such as hurricanes or tropical storms in the Gulf of Mexico or other natural disasters;

•  policies of national governments; and

•  war, civil disturbances and political instability.

      We expect prices for oil and natural gas to continue to be volatile and affect the demand and pricing of our products and services. A material decline in oil or gas prices could materially adversely affect our business. In addition, recessions and other adverse economic conditions can also cause declines in spending levels by the oil and gas industry, and thereby decrease our revenue and materially adversely affect our business.

Our international operations may experience severe interruptions due to political, economic and other risks.

      In 2005, approximately 69% of our total revenue was derived from services or equipment ultimately provided or delivered to end-users outside the United States, and approximately 41% of our revenue was

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derived from products which were produced and used outside of the United States. We are, therefore, significantly exposed to the risks customarily attendant to international operations and investments in foreign countries. These risks include:

•  political instability, civil disturbances, war and terrorism;

•  nationalization, expropriation, and nullification of contracts;

•  changes in regulations and labor practices;

•  changes in currency exchange rates and potential devaluations;

•  changes in currency restrictions which could limit the repatriations of profits or capital;

•  restrictive actions by local governments;

•  seizure of plant and equipment; and

•  changes in foreign tax laws.

      An interruption of our international operations could reduce our earnings or adversely affect the value of our foreign assets. The occurrence of any of these risks could also have an adverse effect on demand for our products and services or our ability to provide them. We have manufacturing facilities in Warri, Nigeria and in Batam, Indonesia and a portion of our revenue is from sales to customers in these countries and surrounding areas. In addition, a portion of our revenue is from sales to customers in Venezuela. These countries in recent history have experienced civil disturbances and violence, which have disrupted oil and gas exploration and production operations located there as well as day-to-day operations and oversight of our business from time to time. These disruptions have affected our operations and resulted in lower demand for our premium connection products and services and, accordingly have had an adverse affect on our results of operations in previous periods and may do so in the future.

If we are unable to attract and retain skilled labor, the results of our manufacturing and services activities will be adversely affected.

      Our ability to operate profitably and expand our operations depends in part on our ability to attract and retain skilled manufacturing workers, equipment operators, engineers and other technical personnel. Demand for these workers in the Houston area is currently high and the supply is limited, particularly in the case of skilled and experienced engineers and machinists. Because of the cyclical nature of our industry, many qualified workers choose to work in other industries where they believe lay-offs as a result of cyclical downturns are less likely. As a result, our growth may be limited by the scarcity of skilled labor. Even if we are able to attract and retain employees, the intense competition for them, especially when our industry is in the top of its cycle, may increase our compensation costs. Additionally, a significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the rates of wages we must pay or both. If our compensation costs increase or we cannot attract and retain skilled labor, the immediate effect on us would be a reduction in our profits and the extended effect would be diminishment of our production capacity and profitability and impairment of any growth potential. We have recently experienced tightening in the relevant labor markets, and if that trend continues, it may have an adverse affect on our results of operations and potential for growth.

The occurrence or threat of terrorist attacks could have an adverse affect on our results and growth prospects, as well as on our ability to access capital and obtain adequate insurance.

      The occurrence or threat of future terrorist attacks could adversely affect the economies of the United States and other developed countries. A lower level of economic activity could result in a decline in energy consumption, which could cause a decrease in spending by oil and gas companies for exploration and development. In addition, these risks could trigger increased volatility in prices for crude oil and natural gas which could also adversely affect spending by oil and gas companies. A decrease in spending for any reason could adversely affect the markets for our products and thereby adversely affect our revenue and margins and

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limit our future growth prospects. Moreover, these risks could cause increased instability in the financial and insurance markets and adversely affect our ability to access capital and to obtain insurance coverage that we consider adequate or are otherwise required by our contracts with third parties.

High fixed costs in the pressure control industry could exacerbate the level of price competition for our products, adversely affecting our business and revenue.

      Demand in the pressure control industry is currently high and utilization of capacity is increasing. Historically, however, there has been overcapacity in the pressure control equipment industry. When oil and gas prices fall, cash flows of our customers are reduced, leading to lower levels of expenditures and reduced demand for pressure control equipment. In addition, adverse economic conditions can reduce demand for oil and gas, which in turn could decrease demand for our pressure control products. Under these conditions, the overcapacity causes increased price competition in the sale of pressure control products and aftermarket services as competitors seek to capture the reduced business to cover their high fixed costs and avoid the idling of manufacturing facilities. Because we have multiple facilities that produce different types of pressure control products, it is even more difficult for us to reduce our fixed costs since to do so we might have to shut down more than one plant. During and after periods of increasing oil and gas prices when sales of pressure control products may be increasing, the overcapacity in the industry will tend to keep prices for the sale of pressure control products lower than if overcapacity were not a factor. As a result, when oil and gas prices are low, or are increasing from low levels because of increased demand, our business and revenue may be adversely affected because of either reduced sales volume or sales at lower prices or both.

If we do not develop new technologies and products that are commercially successful, our revenue may decline or we may be required to write-off any capitalized investment.

      The markets for premium connections and pressure control products and services are characterized by continual technological developments. As a result, substantial improvements in the scope and quality of product function and performance can occur over a short period of time. If we are not able to develop commercially competitive products in a timely manner in response to changes in technology, our business and revenue may be adversely affected. Our future ability to develop new products depends on our ability to:

•  design and commercially produce products that meet the needs of our customers;

•  successfully market new products; and

•  obtain and maintain patent protection.

      We may encounter resource constraints, technical issues, or other difficulties that could delay introduction of new products and services in the future. Our competitors may introduce new products or obtain patents before we do and achieve a competitive advantage. Additionally, the time and expense invested in product development may not result in commercial applications and provide revenue.

      For example, from time to time, we have incurred significant amounts in the development of new technologies which were not successful for various commercial or technical reasons. If we are unable to successfully implement technological or R&D type activities, our growth prospects may be reduced and the level of our future revenue may be materially and adversely affected. In addition, we would be required to write-off any capitalized investment in a product that is not a commercial success and does not have an alternative use. For example, in the case of advanced composite tubing, we wrote off a portion of our investment in the third quarter of 2004, recording a pre-tax impairment charge of $0.7 million. 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.

Limitations on our ability to protect our intellectual property rights could cause a loss in revenue and any competitive advantage we hold.

      Some of our products and the processes we use to produce them have been granted United States and international patent protection, or have patent applications pending. Nevertheless, patents may not be granted

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from our applications and, if patents are issued, the claims allowed may not be sufficient to protect our technology. If our patents are not enforceable, our business may be adversely affected. In addition, 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. The latter 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. After our patents expire, our competitors will not be legally constrained from developing products substantially similar to ours.

The loss of any member of our senior management and other key employees may adversely affect our results of operations.

      Our success depends heavily on the continued services of our senior management and other key employees. Our senior management consists of a small number of individuals relative to other comparable or larger companies. These individuals are Christopher T. Seaver, our President and Chief Executive Officer, Charles E. Jones, our Executive Vice President and Chief Operating Officer, Neil G. Russell, our Senior Vice President-Premium Connections and Senior Vice President-Business Development, Chuck Chauviere, our Vice President-Pressure Control, and Chris D. North, our Chief Financial Officer. These individuals, as well as other key employees, possess sales and marketing, engineering, manufacturing, financial and administrative skills that are critical to the operation of our business. We generally do not have employment or non-competition agreements with members of our senior management or other key employees. If we lose or suffer an extended interruption in the services of one or more of our senior officers or other key employees, our results of operations may be adversely affected. Moreover, we may not be able to attract and retain qualified personnel to succeed members of our senior management and other key employees.

Our quarterly sales and earnings may vary significantly, which could cause our stock price to fluctuate.

      Fluctuations in quarterly revenue and earnings could adversely affect the trading price of our common stock. Our quarterly revenue and earnings may vary significantly from quarter to quarter depending upon:

•  the level of drilling activity worldwide, as well as the particular geographic focus of the activity;

•  the variability of customer orders, which are particularly unpredictable in international markets;

•  the mix of our products sold and the margins on those products;

•  new products offered and sold by us or our competitors;

•  weather conditions or other natural disasters that can affect our operations or our customers’ operations, such as Hurricanes Katrina, Rita and Stan, which disrupted operations at our Gulf Coast facilities, in particular at our Westwego, Louisiana facility, as well as the operations of our customers in the region;

•  changes in commodity prices and currency exchange rates, which in some cases affect the costs and prices for our products;

•  pipe costs and their impact on contract prices;

•  delays in the delivery or other limitations on the availability of plain-end pipe from steel mills for threading by us for our customers;

•  the level of long-term capital equipment project orders which varies with the level of new rig construction and refurbishment activity in the industry;

•  changes in drilling and exploration plans which can be particularly volatile in international markets; and

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•  delays in the delivery of finished products to customers due to limitations on the availability of marine transportation, particularly internationally.

      In addition, our fixed costs cause our margins to decrease when demand is low and manufacturing capacity is underutilized.

We could be subject to substantial liability claims, which would adversely affect our results and financial condition.

      Most of our products are used in hazardous drilling and production applications where an accident or a failure of a product can have catastrophic consequences. For example, if one of our blowout preventers fails, the oil and gases from the well may ignite or the equipment and tubulars in the well may be suddenly propelled out of the well, potentially resulting in injury or death of personnel, destruction of drilling equipment, environmental damage and suspension of operations. Damages arising from an occurrence at a location where our products are used have in the past and may in the future result in the assertion of potentially large claims against us.

      While we maintain insurance coverage against these risks, this insurance may not protect us against liability for some kinds of events, including specified events involving pollution, or against losses resulting from business interruption. Our insurance may not be adequate in risk coverage or policy limits to cover all losses or liabilities that we may incur. Moreover, we may not be able in the future to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any significant claims made under our policies will likely cause our premiums to increase. Any future damages caused by our products or services that are not covered by insurance, are in excess of policy limits or are subject to substantial deductibles, could reduce our earnings and our cash available for operations.

Changes in regulation or environmental compliance costs and liabilities could have a material adverse effect on our results and financial condition.

      Our business is affected by changes in public policy, federal, state and local laws and regulations relating to the energy industry. The adoption of laws and regulations curtailing exploration and development drilling for oil and gas for economic, environmental and other policy reasons may adversely affect our operations by limiting available drilling and other opportunities in the oil and gas exploration and production industry. Our operations and properties are subject to increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges, waste management and workplace safety. Many of our operations require permits that may be revoked or modified, that we are required to renew from time to time. Failure to comply with such laws, regulations or permits can result in substantial fines and criminal sanctions, or require us to purchase costly pollution control equipment or implement operational changes or improvements. We incur, and expect to continue to incur, substantial capital and operating costs to comply with environmental laws and regulations.

We could become subject to claims related to the release of hazardous substances which could adversely affect our results and financial condition.

      We use and generate hazardous substances and wastes in our manufacturing operations. In addition, many of our current and former properties are or have been used for industrial purposes for many years. Accordingly, we could become subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, including property owned or leased by us now or in the past or third party sites to which we sent waste for disposal. We also could become subject to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, the enactment of new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could reduce our earnings and our cash available for operations. See Note 4 to our consolidated financial statements included elsewhere in this report for more information regarding environmental contingencies.

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Liability to customers under warranties may materially and adversely affect our earnings.

      We provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Our pressure control equipment and premium connections are often deployed in harsh environments including subsea applications. Failure of this equipment or our premium connections to operate properly or to meet specifications may increase our costs by requiring additional engineering resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past received warranty claims and we expect to continue to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation, our ability to obtain future business and our earnings could be materially and adversely affected.

Excess cash is invested in marketable securities which may subject us to potential losses.

      We invest excess cash in various financial instruments and money market mutual funds rated as the highest quality by nationally recognized rating agencies. However, changes in the financial markets, including interest rates, as well as the performance of the issuers can affect the market value of our short-term investments.

ITEM 1B — UNRESOLVED STAFF COMMENTS

      None.

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ITEM 2 — PROPERTIES

      The following table details our principal facilities, all of which we own, except as indicated below.

	Approximate
	Square Footage
Location	(Buildings)		Description
United States
Houston, Texas		238,540	Pressure control products manufacturing; principal executive offices.
Houston, Texas		179,000	Premium connection manufacturing.
Houston, Texas		100,000	Pressure control elastomer products manufacturing.
Westwego, Louisiana		40,000	Premium connection manufacturing.
Bakersfield, California (leased)		8,000	Premium connection manufacturing; warehouses pressure control replacement parts.
International
Veracruz, Mexico		124,000	Premium connection manufacturing.
Nisku, Alberta, Canada (leased)		48,000	Premium connection manufacturing.
Pipe Nagar, Maharashtra, India(1)		30,000	Premium connection manufacturing.
Batam, Indonesia (land is leased)		30,000	Premium connection manufacturing.
Veracruz, Mexico		21,200	Thread protector manufacturing for premium connections.
Warri, Nigeria		20,000	Repair and service of premium connections.
Aberdeen, Scotland		20,000	Premium connection manufacturing; warehouses pressure control replacement parts.
Dartmouth, Nova Scotia, Canada (leased)		15,600	Premium connection manufacturing.
New Mills, England (leased)		10,000	Pressure control products manufacturing.

(1)  This facility is owned by a joint venture of which we own 50%.

      We have 25 sales and service offices worldwide in Alaska, California, Louisiana, Texas, Canada, Indonesia, Malaysia, Mexico, Nigeria, Singapore, the United Kingdom and Venezuela. Most of these offices provide service personnel to support drilling contractors and exploration and production company operators. All of these offices are under lease, with leases ranging in duration from one month to two years. We also have approximately 116 acres of undeveloped land surrounding some of the properties listed above and approximately 69 acres of additional undeveloped land. Machinery, equipment, buildings, and other facilities owned and leased are considered by management to be adequately maintained and adequate for the Company’s operations.

ITEM 3 — LEGAL PROCEEDINGS

      We are involved in legal proceedings arising in the ordinary course of business. In our opinion, these matters will not have a material adverse effect on our financial position or results of operations.

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

      No matters were submitted to a vote by stockholders during the quarter ended December 31, 2005.

ITEM S-K 401(b) — EXECUTIVE OFFICERS OF THE REGISTRANT

      The following table provides information regarding our executive officers as of December 31, 2005.

Name	Age		Position(s)
Richard C. Seaver		83	Chairman of the Board
Christopher T. Seaver		57	President, Chief Executive Officer and Director
Charles E. Jones		46	Executive Vice President and Chief Operating Officer
Neil G. Russell		60	Senior Vice President-Premium Connections and Senior Vice President-Business Development
E. Charles Chauviere III		41	Vice President-Pressure Control
Chris D. North		50	Chief Financial Officer and Secretary

      Richard C. Seaver is our Chairman of the Board, a position he has held since 1992. Previously, Mr. Seaver has served as a director since 1964, as President from 1964 to 1986, and as Secretary and General Counsel from 1957 to 1964.

      Christopher T. Seaver is our President, Chief Executive Officer and a director. He has served as President since June 1993, and as Chief Executive Officer and as a director since February 1997. He is a director and the secretary of the Petroleum Equipment Suppliers Association, a director of the American Petroleum Institute, and a director and vice chairman of the National Ocean Industries Association. Prior to joining Hydril in 1985, Mr. Seaver was a corporate and securities attorney for Paul, Hastings, Janofsky & Walker, and was a Foreign Service Officer in the U.S. Department of State, with postings in Kinshasa, Congo and Bogota, Colombia.

      Charles E. Jones is our Executive Vice President and Chief Operating Officer, a position he was appointed to beginning in May 2003. Previously, he served as our Vice President-Pressure Control from November 2001 to May 2003 and as our Managing Director-Pressure Control from March 1998 to November 2001. From March 1996 to March 1998, Mr. Jones served as Director of Subsea Business for Cooper Cameron Corporation, a provider of oil and gas drilling equipment. Mr. Jones served as Engineering Manager for Subsea Offshore, formerly Dresser Industries, a manufacturer of oil and gas drilling equipment from April 1995 to March 1996. Prior to holding these positions, Mr. Jones had 11 years of service with us. Mr. Jones is a graduate of the Harvard Business School Advanced Management Program.

      Neil G. Russell is our Senior Vice President-Premium Connections and Senior Vice President-Business Development, positions he was appointed to in May 2003. Previously, he was Vice President-Premium Connection, from November 2001 to May 2003 and Managing Director-Eastern Hemisphere Premium Connection, from March 1995 to November 2001. Overall, Mr. Russell has 27 years of service with our company, in which he has held various management positions in our premium connection and pressure control businesses with assignments in Singapore, Switzerland, the United Kingdom and the United States.

      E. Charles Chauviere III is our Vice President-Pressure Control, a position he was appointed to beginning in May 2003. Mr. Chauviere joined Hydril in 1998, and previously served as Director of Engineering beginning in February 2001. Prior to joining Hydril he was employed for 10 years with Cooper Cameron Corporation. Mr. Chauviere is a graduate of the Stanford University Executive Program.

      Chris D. North is our Chief Financial Officer and Secretary. Mr. North was appointed Chief Financial Officer in August 2004 and previously served as acting Chief Financial Officer beginning in March 2004 in addition to his role as the Controller. Mr. North served as Controller from February 1997 to August 2004. Mr. North has a total of 26 years of service with Hydril in which he has held various positions.

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PART II

ITEM 5 — MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Our common stock is traded on the Nasdaq National Market under the symbol “HYDL”. The following table shows the high and low sale prices of our common stock as reported by the Nasdaq National Market for 2004 and 2005.

	High		Low
2004
First Quarter	$	28.00	$	22.98
Second Quarter		31.95		24.37
Third Quarter		44.16		30.70
Fourth Quarter		47.62		38.82
2005
First Quarter	$	63.18	$	41.36
Second Quarter		64.58		46.37
Third Quarter		70.66		53.59
Fourth Quarter		71.48		55.43

      As of December 31, 2005, the closing sales price per share of our common stock as reported by the Nasdaq National Market was $62.60. Based on inquiries made in connection with preparations for our 2006 Annual Meeting of Stockholders, Hydril estimates that there are at least 5,819 beneficial holders of our common stock. Substantially all of these beneficial holders maintain their shares in “street name” or “nominee” accounts with brokerage firms or other institutions and accordingly are not, individually, stockholders of record. As of February 28, 2006, our common stock was held by 21 holders of record and there were 30 holders of record of our class B common stock.

      We have not paid any dividends on our common stock or our class B common stock since prior to our initial public offering in October 2000. We have no plans to declare or pay any dividends in the immediate future. Any declaration of a dividend would be dependent upon Hydril’s results of operations, financial condition, cash position and requirements, investment and acquisition opportunities, future prospects, contractual restrictions and other factors deemed relevant by the Board of Directors.

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ITEM 6 — SELECTED FINANCIAL DATA

      The following selected consolidated financial data of Hydril should be read in conjunction with “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

					Years Ended December 31,
					2005		2004			2003			2002			2001
					(In thousands, except per share data)
Operating Data:
	Revenue:
		Premium connection			$	246,470	$	184,782		$	110,270		$	127,116		$	138,887
		Pressure control				130,254		100,571			101,747			114,408			100,674
				Total revenue		376,724		285,353			212,017			241,524			239,561
	Gross profit					163,563		118,413			81,893			90,670			84,217
	Selling, general and administration Expenses					58,607		52,007			47,730			46,345			41,887
	Operating income					104,956		66,406			34,163			44,325			42,330
	Interest expense(1)					—		—			1,101			4,831			4,403
	Interest income					3,900		1,113			724			1,477			2,874
	Other income (expense)(2)					724		(335	)		(135	)		(214	)		(1,082	)
	Net income(3)				$	73,243	$	46,487		$	25,578		$	26,492		$	25,619
	Earnings per share:
			Basic		$	3.12	$	2.02		$	1.13		$	1.18		$	1.15
			Diluted		$	3.05	$	1.98		$	1.11		$	1.16		$	1.13
	Weighted average shares outstanding:
			Basic			23,501		22,996			22,711			22,414			22,211
			Diluted			24,019		23,432			23,001			22,833			22,575
Other Data:
	Capital expenditures				$	17,144	$	12,356		$	8,558		$	17,928		$	29,525
	Depreciation and amortization					13,687		12,637			11,900			10,827			9,207
Balance Sheet Data:
	Working capital				$	260,761	$	176,222		$	116,495		$	90,483		$	130,728
	Property, net					105,138		102,368			105,047			107,031			100,038
	Total assets					450,562		343,646			267,116			278,208			292,171
	Long-term debt and capital leases, excluding current portion					—		—			—			—			60,000
	Other long-term liabilities					16,771		14,100			14,464			16,370			15,575
	Total stockholders’ equity					360,835		274,783			217,010			187,137			160,185

(1)	Includes a $1.2 million pre-tax make-whole premium attributable to the Company’s prepayment of $30.0 million on its senior unsecured notes during the third quarter of 2002.
(2)	Other income for 2005 includes a $2.2 million gain recorded from the sale of real estate not used in operations. Other expense for 2001 includes $0.6 million in expenses incurred in facilitating the offering of common stock by certain of the Company’s stockholders, pursuant to a registration rights agreement.
(3)	Net income for 2004 includes a U.S. research and experimentation income tax credit of $0.9 million related to qualified spending for the two-year period from 2002 through 2003, and a U.S. income tax benefit (extraterritorial income exclusion) of $1.3 million related to export shipments for the years 2002 and 2003. Net income for 2003 includes a U.S. research and experimentation income tax credit of $3.7 million related to qualified spending for the ten-year period from 1992 through 2001.

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ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following discussion of Hydril’s historical results of operations and financial condition should be read in conjunction with Hydril’s consolidated financial statements and notes thereto included elsewhere in this report.

OVERVIEW

      We are engaged worldwide in engineering, manufacturing and marketing premium connection and pressure control products used for oil and gas drilling and production. Our premium connection products are marketed primarily to exploration and production company operators, who are the end-users. We sell our pressure control products primarily to drilling contractors for use in oil and gas drilling and to a lesser extent to exploration and production companies for oil and gas production.

      Demand for our products and services is cyclical and substantially dependent on the activity levels in the oil and gas industry and our customers’ willingness to spend capital on the exploration and development of oil and gas reserves. The level of these capital expenditures is highly sensitive to current and expected oil and gas prices, which have historically been characterized by significant volatility. Generally, increasing commodity prices result in increased oil and gas exploration and production, which translates into greater demand for oilfield products and services. Conversely, falling commodity prices generally result in reduced demand for oilfield products and services. Historically, changes in budgets and activity levels by oil and gas exploration and production companies have lagged significant movements in commodity prices.

      The level of worldwide drilling activity, in particular, the number of rigs drilling at target depths greater than 15,000 feet and the number of rigs drilling offshore generally drive the level of demand for our premium connection products, although the rate of consumption varies widely among markets based on specific geological formations, customer history and preference, and available alternatives. The main factors that affect sales of pressure control capital equipment products are the level of construction of new drilling rigs and the rate at which existing rigs are refurbished. Demand for new rig construction and the refurbishment of existing rigs is highly cyclical and typically does not increase until utilization of the drilling fleet assets of major drilling contractors reaches a high level for a sustained period of time. Demand for our pressure control aftermarket replacement parts, repair and field services primarily depends upon the level of worldwide offshore drilling activity, as well as the total U.S. rig count.

      Over the past three years, oil and natural gas prices, usually referred to as “commodity prices” have steadily increased. Average U.S. crude oil prices for 2003 increased 19% from the 2002 average, 2004 average prices increased 33% and 2005 average prices increased 37%. Average natural gas prices increased 64% in 2003 from the 2002 average, average 2004 prices increased 8% and average 2005 prices increased 46%. As a result of these higher commodity prices, drilling activity in the United States rose throughout this three-year period. The U.S. rig count ended 2003 at 1,126, which was 31% above the year-ended 2002. The U.S rig count ended 2004 up 10% from the prior year and ended 2005 up 18%. The U.S. deep formation rig count (rigs drilling to a target depth greater than 15,000 feet) ended 2003 at 173, an increase of 40% over the year-ended 2002, and averaged 170 in 2004 and 186 in 2005. Internationally, drilling activity overall also increased, although not to the same extent as domestic levels. The international rig count (rigs drilling outside of the United States and Canada) ended 2003 at 803, up 7% from the year-ended 2002, ended 2004 up 8% and ended 2005 up 9%.

      The worldwide offshore rig count for 2003 averaged 338 and was down 2% compared to the 2002 average and the 2004 average was up 1% from the previous year. The worldwide offshore rig count ended the year of 2005 at 348, down from 356 at the end of 2004. This decrease was primarily attributable to a decline in the number of rigs drilling in the Gulf of Mexico due to damage sustained in hurricanes Katrina and Rita in the third quarter. Despite this decline, the average worldwide offshore rig count in 2005 increased 6% compared to 2004.

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      Despite higher commodity prices and rising rig counts in the United States during 2003, there was lower demand for premium connections in the United States market as a result of distributors reducing inventory stocking levels and placing only limited replenishment orders. In addition deep-formation and deep-water drilling activity did not recover proportionately to the overall rig count increase. Many of the rigs returning to work in the United States and Canada during 2003 were for shallow wells that do not require premium connection products.

      While the international rig count increased overall in 2003, certain of our key markets such as Nigeria and Venezuela had lower rig counts which diminished our revenue opportunities. Political and civil uncertainties in these markets dampened the level of spending by oil and gas companies operating there.

      The level of pressure control capital equipment orders received during 2003 remained weak. While commodity prices and rig counts increased during the year, these increases had not been sustained over a long enough period of time to cause demand for new rig construction and refurbishment of existing rigs to rise. As a result, our pressure control capital equipment revenue decreased in 2003 and was down 26% from 2002. However, due to the rising rig counts and the increased utilization of existing rigs our spare parts and repair services increased 7% during 2003 as compared to 2002.

      During 2004, rising rig counts in the United States, and in particular the increase in the deep formation rig count, resulted in higher demand for our premium connections in the U.S. In addition to the improvement in demand due to increased drilling activity, during the year customers generally stopped drawing down inventories of our products, which resulted in an additional incremental increase in customer orders and revenues.

      For 2004, demand in certain of our key international markets was considerably better than indicated by the slight increase in the overall international rig count. In particular, demand in Latin America was much stronger than the previous year. Announced plans to increase oil and gas drilling in Venezuela and Mexico helped to increase demand for our products in those countries.

      During 2004, the pressure control capital equipment market continued to be weak. As was the case in 2003, the improvements in market conditions for major drilling contractors were not yet sufficient to support the construction of new rigs and rig refurbishments. As a result, capital equipment revenue decreased during 2004 and was down 16% compared to 2003. In contrast, the gradual increase in the total U.S. rig count and the worldwide offshore rig count caused an increase in our pressure control aftermarket business of 11% in 2004 as compared to 2003.

      With commodity prices and rig counts increasing for the third straight year during 2005, worldwide demand for our premium connection products and aftermarket spare parts and services continued its strong upward trend. In addition to the improvement in demand due to increased drilling activity, in 2005 customers generally increased their levels of premium connection inventories which resulted in an additional incremental increase in customer orders and revenues. This is compared to 2004 when customers maintained inventory levels and 2003 when customers decreased their inventories. Also, demand in 2005 in most of our key international markets was considerably better than indicated by the small increase in the overall international rig count.

      During 2005 the capital equipment market improved significantly as major drilling contractors issued a significant number of purchase orders for the construction of new drilling rigs and the refurbishment of existing rigs. The major factors that led to this improvement were the return to higher sustained level of profitability and cash flow for the major drilling contractors. During the year both land and offshore rig counts continued to rise which led drilling contractors to begin to anticipate potential rig shortages for future periods. This resulted in day rates, the daily rates that drilling contractors charge for their drilling services, to increase significantly. As a result, our backlog of capital equipment orders ended 2005 at $156.7 million versus $14.6 million at the end of 2004. The delivery of orders in the backlog at December 31, 2005 extends to mid-year 2008. This increased activity caused our capital equipment revenue to increase 45% in 2005 as compared to 2004.

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      Higher average worldwide offshore and U.S. rig counts, caused our revenue for pressure control aftermarket spare parts and repairs services to increase 20% compared to 2004.

Revenue

      With the exception of revenue from pressure control long-term projects, we record revenue for all products and services at the time such products are delivered or services are provided. In 2005, 94% of our revenue was recorded on this basis. For our pressure control long-term projects (which are generally contracts from six to eighteen months in duration and an estimated contract price in excess of $1 million), we recognize revenue using the percentage-of-completion method, measured by the percentage of cost incurred to estimated final cost. We use this method because we consider expended contract costs to be the best available measure of progress on these contracts. If a long-term contract was anticipated to have an estimated loss, such loss would be recognized in the period in which the loss becomes apparent. See “CRITICAL ACCOUNTING ESTIMATES” for more information regarding estimates and assumptions relating to revenue recognition.

Gross Profit

      Our gross profit is the difference between our revenue and our cost of sales. Cost of sales for our products include purchased raw materials and components, manufacturing labor, plant overhead expenses, and building and equipment depreciation. Some of the costs are fixed cost and cause our margins to suffer when demand is low and manufacturing capacity is underutilized. Also included in cost of sales are the costs of product warranty, product liability insurance and inventory valuation adjustments, including last in, first out inventory valuation adjustments and adjustments for obsolete and slow-moving inventory. We do not take title to the tubulars we thread for the United States and Canadian market, and therefore, own no inventories of tubulars for sales in these countries. However, we purchase tubulars for fulfilling a portion of our existing orders outside of the United States and Canada. The revenue from the sale of those tubulars is generally less than 15% of our total revenue. For our pressure control products, we have inventory for existing orders in process as well as a replacement parts inventory both internationally and domestically. A majority of our inventory is for our pressure control segment.

Selling, General and Administration Expenses

      Our selling, general and administration expenses include engineering expenses that relate to research, product design, development and maintenance; as well as sales and marketing expenses, which consist mostly of personnel and related expenses, and commissions paid to third-party agents selling our products. Also included are general and administration expenses that relate to accounting, treasury, information technology, human resources, legal expenses and corporate overhead.

Operating Income (Loss)

      Our operating income (loss) is gross profit less selling, general and administration expenses. Operating income (loss) is comprised of the operating income of each of our premium connection and pressure control segments and the portion of selling, general and administration expenses, referred to as corporate administration, which is not allocated to either segment.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

Revenue

      Total revenue increased $91.4 million, or 32%, to $376.7 million for 2005 from $285.3 million in 2004. Premium connection revenue increased 33%, to $246.5 million. The increase in our premium connection revenue was primarily the result of higher demand for our products worldwide, including pipe purchased by us for threading and resale in certain international markets. In North America, which was responsible for about half of the increase, higher levels of deep formation drilling activity drove higher production volumes and higher pricing throughout the year. During the third quarter, three hurricanes in the Gulf of Mexico

30

temporarily shut down our Gulf Coast plants which resulted in slightly lower revenue from premium connections in the third and fourth quarters. Pressure control revenue increased 30% to $130.3 million. Pressure control capital equipment revenue increased 45% driven by higher levels of new and refurbished rig construction in the industry which increased demand for the type of equipment we manufacture. Aftermarket pressure control revenue increased 20% primarily due to higher worldwide offshore and U.S. total rig counts, resulting in increases in the consumption of spare parts in the drilling process.

Gross Profit

      Gross profit increased $45.2 million, or 38%, to $163.6 million for 2005 from $118.4 million in 2004. Gross profit for our premium connection segment increased 34% due primarily to higher demand for our products worldwide which led to higher plant utilization, lower manufacturing costs per unit and higher pricing levels in the U.S. and select international markets. Gross profit for our pressure control segment increased 46% from the prior year due primarily to increased demand for higher-margin aftermarket products, increased production volume for our pressure control capital equipment and lower excess and obsolete inventory reserve requirements due to an improving business environment.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses increased $6.6 million to $58.6 million for 2005 compared to $52.0 million for 2004. This increase was primarily the result of higher agent commissions associated with higher international sales, increases in sales and marketing expenses, amortization of deferred compensation related to awards of restricted stock units and higher legal and engineering expenses. As a percentage of sales, selling, general and administrative expenses decreased to 16% for 2005 from 18% for 2004.

Operating Income

      Operating income increased $38.6 million to $105.0 million for 2005, compared to $66.4 million for 2004. Operating income for our premium connection segment increased 40% to $85.1 million for 2005 compared to $60.9 million for 2004. Operating income for our pressure control segment increased $16.4 million, or 78%, from $21.0 million for 2004 to $37.4 million for 2005. Corporate and administration expenses were $17.5 million for 2005 compared to $15.5 million in 2004.

Interest Expense

      There was no interest expense in 2005 or 2004 as there were no borrowings or outstanding debt.

Other Income and Expense

      Other income for 2005 was $0.7 million compared to other expense of $0.3 million in 2004. The 2005 period included a $2.2 million gain recorded from the sale of real estate not used in operations. Also included was expense of $0.7 million for an increase in environmental reserves on non-operational real estate assets and $0.5 million of expense to maintain non-operational real estate assets. Other expense in 2004 of $0.3 million was primarily to maintain non-operational real estate assets.

Provision for Income Taxes

      The provision for income taxes was $36.3 million for 2005 compared to $20.7 million for 2004. The year ended 2004 included a $1.3 million U.S. income tax benefit (extraterritorial income exclusion), related to export shipments and a $0.9 million research and experimentation U.S. tax credit. The extraterritorial income exclusion deduction recorded in 2004 is for years 2002 and 2003. The research and experimentation credit recorded in 2004 covers qualified spending for the two-year period from 2002 to 2003. Prior to 2003, the Company was an alternative minimum tax payer and accordingly could not benefit from the research and experimentation tax credit.

31

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

Revenue

      Total revenue increased $73.3 million, or 35%, to $285.3 million for 2004 from $212.0 million in 2003. Premium connection revenue increased 68% to $184.8 million and pressure control revenue decreased 1% to $100.6 million. The increase in premium connection revenue was primarily the result of higher demand in certain markets, primarily Latin America, which included some restocking orders for Venezuela. In addition, increases in North America were due to higher sustained levels of deep formation drilling activity, operator mix within that sector and the cessation in general of distributor’s drawing down their inventory, which had negatively impacted order levels in 2003. The decrease in pressure control revenue was attributable to a 16% decrease in revenue from capital equipment due to lower revenue from long-term projects consistent with the low level of new rig construction and refurbishment in the industry. This decrease was partially offset by an 11% increase in pressure control aftermarket revenue, primarily repair and service activity, which resulted from increasing rig counts and drilling activity worldwide.

Gross Profit

      Gross profit increased $36.5 million, or 45%, to $118.4 million for 2004 from $81.9 million in 2003. Gross profit in our premium connection segment increased 86% due primarily to higher demand in both our international and domestic markets and price increases in selected international markets. This higher demand led to higher plant utilization, and accordingly lower, manufacturing costs per unit. Pressure control gross profit increased 2% from the prior year period due to increased revenue from higher-margin aftermarket products and was partially offset by a decline in capital equipment revenue which resulted in lower plant utilization and higher manufacturing costs per unit.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses increased $4.3 million to $52.0 million for 2004 compared to $47.7 million for 2003. This increase was primarily the result of employee incentive plan accruals related to the improved financial performance, higher expenses related to the compliance with the Sarbanes-Oxley Act requirements, and higher agent commissions due to increased international sales. As a percentage of sales, selling, general and administrative expenses decreased to 18% for 2004 from 23% for 2003.

Operating Income

      Operating income increased $32.2 million to $66.4 million for 2004, compared to $34.2 million for 2003. Operating income for our premium connection segment increased 120% to $60.9 million for 2004 compared to $27.6 million for 2003. Operating income for our pressure control segment increased $0.7 million, or 3%, from $20.3 million for 2003 to $21.0 million for 2004. Corporate and administration expenses were $15.5 million for 2004 compared to $13.7 million in 2003.

Interest Expense

      There was no interest expense in 2004 compared to $1.1 million in 2003. During the second quarter of 2003, our remaining debt of $30.0 million was repaid.

Provision for Income Taxes

      The provision for income taxes was $20.7 million for 2004 compared to $8.1 million for 2003. The year-ended 2004 included a $1.3 million U.S. income tax benefit (extraterritorial income exclusion), related to export shipments and a $0.9 million research and experimentation U.S. tax credit, while the prior year included a research and experimentation U.S. tax credit of $3.7 million. The extraterritorial income exclusion deduction recorded in 2004 is for years 2002 and 2003. The research and experimentation credit recorded in 2004 covers qualified spending for the two-year period from 2002 to 2003, while the credit recorded in 2003 covers qualified spending for the ten-year period from 1992 through 2001. Prior to 2003, the Company was an

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alternative minimum tax payer and accordingly could not benefit from the research and experimentation tax credit.

LIQUIDITY AND CAPITAL RESOURCES

      Our primary liquidity needs are to fund capital expenditures, fund new product development and provide additional working capital. Our primary source of funds is cash flow from operations. In addition, we had available cash, cash equivalents and investments of $181.6 million at December 31, 2005. At December 31, 2005, we had no outstanding indebtedness and $12.1 million in outstanding letters of credit which are comprised primarily of performance bonds related to customer orders in our backlog.

      We believe that cash from operations and existing cash, cash equivalents and investment balances will be sufficient to meet anticipated cash requirements, including working capital needs, contractual obligations and planned capital expenditures, for at least the next 12 months. In the longer term, if we were to need additional cash, we anticipate that we could enter into credit facilities and also raise additional funds through issuing debt or equity securities.

      In March 2006, the Company’s Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock over the next twelve months. The Company intends to repurchase its shares, beginning in the second quarter of 2006, in the open market or in privately negotiated transactions based on, among other things, its ongoing capital requirements, expected cash flows, regulatory restraints and general market conditions. Future repurchases are expected to be funded with cash flows from operations. The repurchase program may be suspended or discontinued at any time.

Operating Activities

      Cash provided by operating activities was $69.8 million for 2005 compared to $68.0 million for 2004. Cash provided by operating activities in 2005 was primarily from earnings and contractual cash payments received on long-term capital equipment projects, which was partially offset by higher working capital requirements which included increases in inventories of approximately $22.8 million to support higher product demand in both of our segments.

      Cash provided by operating activities in 2004 was primarily the result of earnings and contractual cash payments received on long-term capital equipment projects, which was partially offset by slightly higher working capital requirements. Cash provided by operations in 2003 was primarily due to earnings and contractual cash payments received from customers on long-term capital equipment projects, which was partially offset by a $7.0 million contribution to the U.S. defined benefit pension plan.

Investing Activities

      Net cash used in investing activities for 2005 was $64.2 million compared to $72.3 million in 2004. The investment of cash in 2005 includes net investments in marketable securities of $43.6 million, capital spending of $17.1 million, the purchase of a pressure control product line for $3.6 million, proceeds from the sale of real estate not used in operations of $2.9 million and $2.8 million for investments in business development including the purchase of a product line for our premium connections segment. The investment of cash in 2004 was primarily for net investments in marketable securities of $59.2 million and capital spending of $12.4 million. The investment of cash in 2003 of $13.8 million was primarily for capital spending of $8.6 million and net investments in marketable securities of $4.2 million. For more information on capital expenditures for the three years ended December 31, 2005 see “Capital Expenditures” below.

Financing Activities

      During 2005, we received net proceeds from the exercise of stock options of $7.5 million compared to $7.6 million and $2.0 million for the years ended 2004 and 2003, respectively. During 2003, we repaid $30.0 million of senior notes at maturity and as a result have no outstanding indebtedness.

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Credit Facilities

      During the first six months of 2005 we had two unsecured revolving lines of credit for working capital requirements that provided up to $20.0 million in total committed revolving credit borrowings. On June 30, 2005 these revolving lines of credit expired in accordance with their stated maturities.

      The Company’s banking institutions currently issue letters of credit on the Company’s behalf based on its credit worthiness. At December 31, 2005, there was approximately $12.1 million outstanding in letters of credit, which included $8.2 million of performance bonds related to customer orders in our backlog. In addition, the Company has agreed to guarantee half of the total outstanding borrowings of our premium connection Indian joint venture, an unconsolidated entity of which we own 50%, up to a maximum of approximately $3.1 million by issuing irrevocable standby letters of credit. As of December 31, 2005, the total amount of borrowings of the joint venture was approximately $2.1 million, of which $1.1 million was subject to the Company’s guarantee. The Company does not expect this guarantee to have a material adverse effect on its financial condition or results of operations.

Contractual Cash Obligations

      The following paragraph summarizes the Company’s contractual cash obligations as of December 31, 2005.

	Payments Due by Period
	Total		2006		2007-2008		2009-2010		Thereafter
	(In millions)
Operating leases(1)	$	3.6	$	1.7	$	1.8	$	0.1	$	—
Purchase Obligations(2)		80.3		74.4		5.4		0.5		—
Other long-term liabilities(3)		17.6		0.6		1.1		1.2		14.7
Total	$	101.5	$	76.7	$	8.3	$	1.8	$	14.7

(1)	Represents obligations for minimum payments under noncancelable operating leases. The Company’s lease commitments are primarily for operating facilities, vehicles and equipment.
(2)	Represents obligations under outstanding purchase orders and other commitments and estimated future cash payments pursuant to contractual obligations related to investments in joint ventures.
(3)	Represents estimated future cash payments for post-retirement health and life benefits, pension plan benefits and deferred compensation.

Other Indebtedness

      In June 1998, the Company issued $60.0 million of 6.85% senior notes due June 30, 2003. During the third quarter of 2002, the Company prepaid $30.0 million of the aggregate principal amount of the unsecured notes plus a make-whole premium of $1.2 million relating to this prepayment. The make-whole premium was included as interest expense in the consolidated statement of operations. The Company repaid the remaining $30.0 million at maturity on June 30, 2003.

Capital Expenditures

      Capital expenditures for 2005 were $17.1 million, which included $12.0 million for our premium connection segment, $4.5 million for our pressure control segment and $0.6 million for general corporate purposes. The majority of the expenditures were to support plant and equipment machine tool upgrades, to increase capacity in our premium connection segment and to purchase land and buildings for a new pressure control plant in Mexico.

      Capital expenditures for 2004 were $12.4 million, which included $8.2 million for our premium connection segment and $2.4 million for our pressure control segment, in both cases primarily to support plant equipment replacements and upgrades, and $1.8 million for general corporate purposes.

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      Capital expenditures for 2003 were $8.5 million, which included $3.7 million for our premium connection segment and $3.5 million for our pressure control segment, in both cases primarily to support plant and equipment for our manufacturing operations, and $1.3 million for general corporate purposes.

      If current industry conditions continue, we expect our 2006 capital expenditures to be approximately $30 to $45 million, which includes a level of spending of approximately $8 to $10 million necessary to maintain our existing operations. The remaining expenditures are anticipated to be used to continue to gradually increase our premium connection manufacturing capacity, acquire equipment for our new pressure control plant under construction in Mexico, fund business investments in emerging international markets and for additional manufacturing capacity at our Houston pressure control plant.

Dividends

      We have not paid any dividends on our common stock or our class B common stock since prior to our initial public offering in October 2000. We have no plans to declare or pay any dividends in the immediate future. Any declaration of a dividend would be dependent upon Hydril’s results of operations, financial condition, cash position and requirements, investment and acquisition opportunities, future prospects, contractual restrictions and other factors deemed relevant by the Board of Directors.

BACKLOG

      Pressure control capital equipment backlog which includes orders for capital equipment and long-term projects, at December 31, 2005 and 2004 was $156.7 million and $14.6 million, respectively. The increase in our backlog reflects $147.1 million of new long-term capital equipment project orders received in 2005. This increase is the attributable to a significant rise in new rig construction and refurbishment worldwide.

      We recognize the revenue and gross profit from pressure control long-term projects using the percentage-of-completion accounting method. As revenue is recognized under the percentage-of-completion method, the order value in backlog is reduced. We expect to recognize revenue from orders in our backlog at December 31, 2005 over the next three years. It is possible for orders to be cancelled; however, in the event of cancellations all costs incurred would be billable to the customer. Our backlog of premium connection and pressure control aftermarket parts and service is not a meaningful measure of business prospects due to the quick turnover of such orders and the majority of such orders are cancelable at will by the purchaser without penalty.

CRITICAL ACCOUNTING ESTIMATES

      Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements in Item 8. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the year. Actual results could differ from those estimates. We consider the estimates in the following areas to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.

Revenue Recognition

      Revenue for most of our products and services is recognized at the time those products are delivered or services are performed. For the years ended December 31, 2005, 2004 and 2003 approximately 94%, 95% and 87%, respectively, of our total revenues were recognized on this basis.

      A smaller portion of our revenue is generated from long-term contracts in our pressure control segment. These long-term contracts are generally contracts from six to eighteen months with a contract price in excess of $1.0 million. Revenue from long-term contracts was approximately 6%, 5% and 13% of total revenue for the years ended December 31, 2005, 2004 and 2003, respectively. Pressure control capital equipment backlog,

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which includes future long-term contract revenue, was $156.7 million, $14.6 million and $11.5 million for the years ended December 31, 2005, 2004 and 2003, respectively.

      Revenue and profit from long-term contracts are recognized as work progresses using the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Under this method, estimated contract income and resulting revenue is generally accrued based on costs incurred to date as a percentage of total estimated costs. This requires us to estimate the contract costs, which include all direct material, labor, subcontract costs and those indirect costs related to contract performance. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in estimates are charged to income or expense in the period in which the facts and circumstances that give rise to the revision become known. If a long-term contract were anticipated to have an estimated loss, such loss would be recognized in the period in which the loss became apparent.

      For the years 2003 through 2005, our estimates of total costs and costs to complete have approximated actual costs incurred to complete contracts. However, there are many factors that impact future costs, including but not limited to the cost of labor and materials and other factors as outlined in our “RISK FACTORS.” Unexpected changes in these factors could affect the accuracy of our estimates and materially impact our future reported earnings.

Inventories

      Our inventories are stated at the lower of cost or market. Inventory costs include material, labor and production overhead. Cost is determined by the last in, first out (“LIFO”) method for substantially all pressure control products (approximately 69% and 73% of total gross inventories at December 31, 2005 and 2004, respectively) and by the first-in, first-out (“FIFO”) method for all other inventories. If the FIFO method had been used to value all inventories, the cost of inventory would have been $14.7 million, $13.5 million and $13.4 million higher at December 31, 2005, 2004 and 2003, respectively.

      The Company provides a reserve for the difference between the carrying value of excess or obsolete inventory items and their estimated net realizable value (market price). The reserve was $9.3 million, $9.8 million and $11.1 million at each of December 31, 2005, 2004 and 2003. Additions to the reserve were $0.6 million, $2.8 million and $4.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. Our industry is cyclical in nature, which can cause some inventory items to be slow-moving and in excess between industry cycles. As a result, our provision for excess and obsolete inventory was higher for the 2002 through 2004 periods when our industry, and especially the pressure control capital equipment market, was weaker than in prior periods and lower in 2005 as the capital equipment market improved.

      In order to determine the appropriate reserve for excess and obsolete inventory, we perform a detailed review of inventory at least annually and review the reserve on a more generalized basis at least quarterly. Reserves for inventory obsolescence are determined based on our historical usage of inventory on-hand as well as our estimates regarding future market demand and other factors. We could be required to increase or decrease our reserve as a result of unexpected change in market demand for specific products or changes in customer purchasing decisions due to a shift in market activity. We could be required to increase our reserve as a result of new technology that renders certain products obsolete. Changes to the reserve are recorded as an expense and included in cost of sales. We believe that our reserves are adequate to cover anticipated losses under current conditions; however, significant or unanticipated changes to our estimates and forecasts, either adverse or positive, could impact the amount and timing of any additional provisions for excess or obsolete inventory that may be required. If an additional 1% of our gross inventories had been determined to be excess or obsolete inventory during 2005, our pre-tax income would have been reduced by approximately $0.8 million.

Product Warranties

      The Company sells most of its products to customers with a product warranty. This warranty provides that customers can return a defective product during a specified warranty period, generally one year, following

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the purchase, or in some instances, one year following commissioning. In such event, we would exchange the defective product for a replacement product, repair the defective product at no cost to the customer or issue a credit to the customer. The cost of product warranties is estimated and recorded as an accrued liability at the time of delivery of a product, or in some cases, when specific warranty claims are made. The estimates of exposure for product warranties are based on known warranty claims as well as current and historical warranty costs incurred. Additions to the reserve are recorded as an expense and included in cost of goods sold.

      The reserve for product warranties was $1.6 million, $2.3 million and $2.2 million as of December 31, 2005, 2004 and 2003, respectively, and there were no net additions to the warranty reserve in 2005 compared to $0.7 million and $0.3 million in 2004 and 2003 respectively. Actual warranty claims paid were $0.6 million, $0.5 million and $1.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. We believe that our reserve for product warranties is sufficient based on our current estimates. However, because we manufacture complex products that are subjected to harsh drilling environments, our experience with warranty claims may vary from period to period. Should actual product claims or repair costs be higher than the Company’s current estimates, increases in the estimated warranty liability could be required.

Pension Plan

      The Company has a frozen defined benefit pension plan covering substantially all of its U.S. employees. Benefits are based on the employees’ years of service and compensation. No additional benefits are being accrued under this plan, which was frozen effective December 31, 2001. At December 31, 2005, the Company had an estimated unfunded pension obligation under the plan of $2.8 million. Net periodic pension cost was $0.1 million for each of the years ended December 31, 2005, 2004 and 2003. The Company contributed $39,000 to the pension plan in 2005 and made no contributions in 2004, however $7.0 million was contributed in 2003. Based on current expectations, the Company plans to make a contribution of approximately $0.2 million during 2006.

      The Company’s pension costs and obligations recorded in the financial statements are determined on an actuarial basis. In order to estimate the pension obligation, management must make assumptions regarding the discount rate used to determine the present value of liabilities and the rate of return on pension assets. We use third-party specialists to assist management in evaluating our assumptions, which are reviewed annually. The assumed discount rate used in determining the benefit obligation was 5.75%, 6.0% and 6.0% at December 31, 2005, 2004 and 2003, respectively. The assumed discount rate used in determining the net periodic cost was 6.0% at December 31, 2005 and 2004 and 6.5% at December 31, 2003. Discount rates are based on the yield of high quality corporate bonds. Significant changes in the discount rate, such as those caused by changes to the yield curve, the mix of bonds available in the market, the maturity of selected bonds, and the timing of expected benefit payments may result in volatility. Plan assets consist primarily of investments in equities and fixed income funds. The expected long-term rate of return on pension plan assets at December 31, 2005, 2004 and 2003 was 6.0%, 6.0% and 8.0%, respectively. The expected long-term rate of return is based on anticipated future returns in each of the plan’s asset categories. Changes in any of the assumptions used, as well as differences between actual results and estimates, could impact our projected benefit obligation and benefit costs.

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      The following table illustrates the sensitivity to a change in certain assumptions used in the calculation of pension expense for the year ending December 31, 2005 and the calculation of the projected benefit obligation (PBO) at December 31, 2005 for the Company’s pension plan:

	Impact on 2005			Impact on
	Pre-tax Pension			December 31,
	Expense			2005 PBO
	(In millions)
Change in Assumption:
50 basis point decrease in discount rate	$	0.2		$	2.6
50 basis point increase in discount rate		*			(2.4	)
50 basis point decrease in expected return on assets		0.2			n/a
50 basis point increase in expected return on assets		(0.2	)		n/a

*  Amount was negligible.

Post Retirement Health and Life Benefits

      The Company provides certain medical, life insurance and/or dental benefits for eligible employees, hired before December 31, 1989, who have or will retire under one of the Company’s pension plans. At December 31, 2005, the Company had an estimated unfunded obligation for retiree life and health of approximately $7.5 million. The Company recognized post-retirement benefit income for the years ended December 31, 2005, 2004 and 2003 of approximately $105,000, $91,000 and $29,000, respectively. The Company made cash payments to pay for post-retirement health and life benefits of $0.6 million, $0.6 million and $0.7 million for the years ended December 31, 2005, 2004 and 2003, respectively.

      The Company’s costs and obligations related to its post-retirement health and life benefits that are recorded in the financial statements are determined on an actuarial basis. In order to estimate the obligation, management must make many assumptions including the discount rate (discussed above under “Pension Plan”), healthcare cost trends and certain employee-related factors, such as turnover, retirement age and mortality. We use third-party specialists to assist management in evaluating our assumptions, which are reviewed annually. The assumed health care cost trend rates have a significant effect on the amounts reported for the post-retirement health and life plan. A 10% annual rate of increase in the per capita cost of both pre-age 65 and post-age 65 covered health care benefits was assumed for 2005 in determining the benefit obligation for the post-retirement health and life plan. This rate is assumed to decrease gradually to 5% for 2011 and remain at that level thereafter. Changes in any of the assumptions used, as well as differences between actual results and estimates, could impact our projected obligation and costs as well as other calculations.

      The following table illustrates the sensitivity to a change in certain assumptions used in the calculation of components of post-retirement health and life costs for the year ended December 31, 2005 and the calculation of benefit obligation at December 31, 2005 for the Company’s post-retirement health and life benefits:

			Impact on
	Impact on 2005		December 31,
	Service and		2005 Benefit
	Interest		Obligation
	(In millions)
Change in Assumption:
50 basis point decrease in discount rate		*	$	0.2
50 basis point increase in discount rate		*		(0.2	)
50 basis point decrease in expected return on assets		n/a		n/a
50 basis point increase in expected return on assets		n/a		n/a

* Amount was negligible.

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Tax Matters

      The Company follows the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and (ii) operating loss and tax credit carryforwards for tax purposes. Deferred tax assets are reduced by a valuation allowance when, based upon management’s estimates, it is more likely than not that a portion of the deferred tax assets will not be realized in a future period. United States deferred income taxes have been provided on unremitted earnings of foreign subsidiaries.

      As of December 31, 2005, 2004 and 2003 we had deferred tax assets, net of deferred tax liabilities, of $2.0 million, $9.0 million and $12.4 million, respectively. These assets are benefits to us as long as we expect to have sufficient future income in the United States. Management projections indicate that sufficient income will be generated in future years to realize the tax assets, and therefore, no valuation allowance was required.

      We are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Our operations in these different jurisdictions are taxed on various bases. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions on our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income taxes that we provide during any given year.

      Our tax filings are subjected to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the authorities or potentially through the courts. We believe that these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of these situations inevitably includes some degree of uncertainty; accordingly we provide taxes in accordance with Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies”, only for the amounts we believe will ultimately result from these proceedings. We believe that the amount currently provided for potential assessments will not be settled in the next twelve months and such amount does not have a significant impact on our liquidity. Our experience has been that the estimates and assumptions we have used to provide for future tax assessments have proven to be appropriate. However, past experience is only a guide, and the potential exists, however limited, that the tax resulting from the resolution of current and potential future tax controversies may differ materially from the amount accrued. See additional discussion of tax matters in the notes to our financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

      In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB statement No. 3.” SFAS 154 replaces APB No. 20, “Accounting Changes” and FASB No. 3, “Reporting Accounting Changes in Interim Financial Statements” and provides guidance on the accounting and reporting of accounting changes and error corrections. The statement applies to all voluntary changes in accounting principles as well as all changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company believes the implementation of SFAS 154 will not have a material effect on the Company’s results of operations or financial condition.

      In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143.” This interpretation defines the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity, in which the timing, and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 requires that an obligation to perform an asset retirement activity is

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unconditional even though uncertainty exists about the timing and (or) method of settlement. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did not have a material impact on our results of operations or financial condition.

      In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123-Revised 2004 (“SFAS 123(R)”), “Share-Based Payment”. This is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB No. 25, “Accounting for Stock Issued to Employees”. Under SFAS 123(R), the Company will be required to measure the cost of employee services received in exchange for stock based on the grant-date fair value (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123(R), will be recognized as an addition to paid-in capital. We must adopt SFAS 123(R), effective January 1, 2006, which is consistent with the standard’s effective date. The Company is currently in the process of evaluating the impact of SFAS 123(R).

      In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29, to address the measurement of exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring after June 30, 2005. We adopted SFAS No. 153 on July 1, 2005. The adoption of SFAS 153 did not have a material effect on the Company’s results of operations or financial condition.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB 43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Paragraph 5 of Accounting Research Bulletin (“ARB”) 43, Chapter 4 “Inventory Pricing,” previously stated that “... under certain circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current-period charges ....” SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company believes the implementation of SFAS 151 did not have a material effect on the Company’s results of operations or financial condition.

      In May 2004, the FASB issued Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2 provides guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) for employers that sponsor postretirement health care plans that provide prescription drug benefits. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. The adoption of FSP 106-2 did not have a material effect on the Company’s results of operations or financial condition.

      In December 2003, we adopted SFAS No. 132 (Revised 2003), “Employees’ Disclosures about Pensions and Other Post Retirement Benefits.” The statement requires additional disclosures relating to pensions and other post-retirement benefits, which we have included in the notes to our financial statements.

      On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. The statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered

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into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS 150 effective July 1, 2003, which had no material impact on the results of operations or financial condition.

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign currency exchange rate risk

      Our operations are conducted in certain countries around the world in a number of different currencies. As such, future earnings are subject to change due to changes in foreign currency exchange rates when transactions are denominated in currencies other than our functional currency, the U.S. dollar. In order to mitigate the effect of exchange rate changes, a substantial portion of our contracts provide for collections from customers in U.S. dollars. In 2005, revenue from our international subsidiaries was $190.7 million, with $77.9 million denominated in foreign currency. Of these foreign currency denominated sales, $44.5 million were in local currency, but based on the exchange rate for the U.S. dollar at the time of shipment. In 2004, revenue from our international subsidiaries was $143.8 million, with $54.7 million denominated in foreign currency. Of these foreign currency denominated sales, $30.2 million were in local currency, but based on the exchange rate for the U.S. dollar at the time of shipment.

      We had no foreign currency denominated borrowings outstanding at December 31, 2005 or 2004.

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ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HYDRIL

INDEX TO FINANCIAL STATEMENTS AND REPORTS

		Page
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING			43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (REGARDING MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING)			44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (REGARDING AUDIT OF FINANCIAL STATEMENTS)			46
FINANCIAL STATEMENTS:
	Consolidated Balance Sheets — December 31, 2005 and 2004		47
	Consolidated Statements of Operations — Years Ended December 31, 2005, 2004 and 2003		49
	Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income — Years Ended December 31, 2005, 2004 and 2003		50
	Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 and 2003		51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			52

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Hydril’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Hydril’s internal control system was designed to provide reasonable assurance to Hydril’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

      All internal control systems, no matter how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement presentation and preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

      Management assessed the effectiveness of Hydril’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control-Integrated Framework.” Based on this assessment, management believes Hydril maintained effective internal control over financial reporting as of December 31, 2005.

      Management’s assessment of the effectiveness of Hydril’s internal control over financial reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP. Their attestation report on management’s assessment of Hydril’s internal control over financial reporting is also included on page 44 of this report.

Houston, Texas

March 13, 2006

43

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Hydril Company

Houston, Texas

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Hydril Company and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

44

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2005 of the Company and our report dated March 13, 2006 expressed an unqualified opinion on those financial statements.

Deloitte & Touche LLP

Houston, Texas

March 13, 2006

45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Hydril Company

Houston, Texas

      We have audited the accompanying consolidated balance sheets of Hydril Company and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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, such consolidated financial statements present fairly, in all material respects, the financial position of Hydril Company and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

      We have also 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, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Deloitte & Touche LLP

Houston, Texas

March 13, 2006

46

HYDRIL COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share information)

				December 31,
				2005			2004
CURRENT ASSETS:
	Cash and cash equivalents			$	65,145		$	51,733
	Investments and marketable securities				108,084			69,365
	Receivables:
		Trade, less allowance for doubtful accounts: 2005, $759; 2004, $1,214			67,523			56,053
		Contract costs and estimated earnings in excess of billings			8,803			4,860
		Other			1,878			1,528
			Total receivables		78,204			62,441
	Inventories:
		Finished goods			28,917			21,179
		Work-in-process			18,828			8,854
		Raw materials			9,901			4,787
			Total inventories		57,646			34,820
	Deferred tax asset				11,390			8,794
	Other current assets				3,669			3,422
			Total current assets		324,138			230,575
PROPERTY:
	Land and improvements				21,846			21,314
	Buildings and improvements				52,620			54,718
	Machinery and equipment				178,145			162,785
	Construction-in-progress				5,004			5,710
			Total		257,615			244,527
	Less accumulated depreciation and amortization				(152,477	)		(142,159	)
			Property, net		105,138			102,368
OTHER LONG-TERM ASSETS:
	Investments				8,387			3,501
	Deferred tax asset				212			588
	Other assets				12,687			6,614
			TOTAL	$	450,562		$	343,646

See notes to consolidated financial statements

47

HYDRIL COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share information)

				December 31,
				2005			2004
CURRENT LIABILITIES:
	Accounts payable			$	23,443		$	23,292
	Billings in excess of contract costs and estimated earnings				4,482			342
	Accrued liabilities				26,791			24,817
	Income taxes payable				8,661			5,902
			Total current liabilities		63,377			54,353
LONG-TERM LIABILITIES:
	Deferred tax liability				9,579			410
	Other				16,771			14,100
			Total long-term liabilities		26,350			14,510
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY:
	Capital stock:
		Preferred stock — authorized, 10,000,000 shares of $1 par value; none issued or outstanding			—			—
		Common stock — authorized 75,000,000 shares of $.50 par value; 20,182,531 and 18,651,458 shares issued and outstanding at December 31, 2005 and 2004, respectively			10,091			9,326
		Class B common stock — authorized, 32,000,000 shares of $.50 par value; 3,479,920 and 4,620,130 shares issued and outstanding at           December 31, 2005 and 2004, respectively			1,740			2,310
	Additional paid in capital				79,356			61,810
	Retained earnings				279,789			206,546
	Deferred compensation				(6,980	)		(3,325	)
	Accumulated other comprehensive loss				(3,161	)		(1,884	)
			Total stockholders’ equity		360,835			274,783
			TOTAL	$	450,562		$	343,646

See notes to consolidated financial statements

48

HYDRIL COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

			Year Ended December 31,
			2005		2004			2003
REVENUE			$	376,724	$	285,353		$	212,017
COST OF SALES				213,161		166,940			130,124
GROSS PROFIT				163,563		118,413			81,893
SELLING, GENERAL & ADMINISTRATION EXPENSES:
	Engineering			12,075		11,618			13,455
	Sales and marketing			21,516		18,473			16,287
	General and administration			25,016		21,916			17,988
		Total		58,607		52,007			47,730
OPERATING INCOME				104,956		66,406			34,163
INTEREST EXPENSE				—		—			(1,101	)
INTEREST INCOME				3,900		1,113			724
OTHER INCOME (EXPENSE), NET				724		(335	)		(135	)
INCOME BEFORE INCOME TAXES				109,580		67,184			33,651
PROVISION FOR INCOME TAXES				36,337		20,697			8,073
NET INCOME			$	73,243	$	46,487		$	25,578
EARNINGS PER SHARE:
	BASIC		$	3.12	$	2.02		$	1.13
	DILUTED		$	3.05	$	1.98		$	1.11
WEIGHTED AVERAGE SHARES OUTSTANDING:
	BASIC			23,500,620		22,996,401			22,710,838
	DILUTED			24,019,273		23,432,493			23,000,621

See notes to consolidated financial statements

49

HYDRIL COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

For the Years Ended December 31, 2003, 2004 and 2005

(In thousands, except share amounts)

								Class B Common														Accumulated
				Common Stock				Stock						Additional								Other
														Paid In			Retained		Deferred			Comprehensive
				Shares		Amount		Shares			Amount			Capital			Earnings		Compensation			Loss			Total
Balance, December 31, 2002					15,369,638	$	7,685		7,192,427		$	3,596		$	43,898		$	134,481	$	—		$	(2,523	)	$	187,137
	Net Income				—	$	—		—		$	—		$	—		$	25,578	$	—		$	—		$	25,578
	Other Comprehensive Loss, net of tax
		Minimum pension liability adjustment																		—			555			555
			Total Comprehensive Income (Loss)		—		—		—			—			—			25,578					555			26,133
Issuance of Common stock-employee stock purchase plan and exercise of stock options					239,448		119		—			—			2,011			—		—			—			2,130
Tax benefit on option exercises					—		—		—			—			1,295			—		—			—			1,295
Issuance of Class B Common stock-exercise of stock options					—		—		15,000			8			64			—		—			—			72
Conversion of Class B Common stock to Common stock					449,706		225		(449,706	)		(225	)		—			—		—			—			—
Awards of Restricted units/stock					—		—		—			—			2,066			—		(2,066	)		—			—
Amortization of deferred compensation					—		—		—			—			—			—		243			—			243
Forfeitures of restricted units					—		—		—			—			(22	)		—		22			—			—
Balance, December 31, 2003					16,058,792	$	8,029		6,757,721		$	3,379		$	49,312		$	160,059	$	(1,801	)	$	(1,968	)	$	217,010
	Net Income				—	$	—		—		$	—		$	—		$	46,487	$	—		$	—		$	46,487
	Other Comprehensive Loss, net of tax
		Minimum pension liability adjustment																		—			84			84
			Total Comprehensive Income (Loss)		—		—		—			—			—			46,487		—			84			46,571
Issuance of Common stock-employee stock purchase plan, exercise of stock options, restricted stock and vested restricted units					446,218		224		—			—			7,546			—		—			—			7,770
Tax benefit on option exercises					—		—		—			—			2,773			—		—			—			2,773
Issuance of Class B Common stock-exercise of stock options					—		—		8,857			4			37			—		—			—			41
Conversion of Class B Common stock to Common stock					2,146,448		1,073		(2,146,448	)		(1,073	)		—			—		—			—			—
Awards of Restricted units/stock					—		—		—			—			2,374			—		(2,374	)		—			—
Amortization of deferred compensation					—		—		—			—			—			—		618			—			618
Forfeitures of restricted units					—		—		—			—			(232	)		—		232			—			—
Balance, December 31, 2004					18,651,458	$	9,326		4,620,130		$	2,310		$	61,810		$	206,546	$	(3,325	)	$	(1,884	)	$	274,783
	Net Income				—	$	—		—		$	—		$	—		$	73,243	$	—		$	—		$	73,243
	Other Comprehensive Loss, net of tax
		Minimum pension liability adjustment																		—			(1,277	)		(1,277	)
			Total Comprehensive Income (Loss)		—		—		—			—			—			73,243		—			(1,277	)		71,966
Issuance of Common stock-employee stock purchase plan, exercise of stock options, restricted stock and vested restricted units					390,863		195		—			—			7,591			—		—			—			7,786
Tax benefit on option exercises					—		—		—			—			4,667			—		—			—			4,667
Conversion of Class B Common stock to Common stock					1,140,210		570		(1,140,210	)		(570	)		—			—		—			—			—
Awards of Restricted units/stock					—		—		—			—			5,433			—		(5,433	)		—			—
Amortization of deferred compensation					—		—		—			—			—			—		1,633			—			1,633
Forfeitures of restricted units					—		—		—			—			(145	)		—		145			—			—
Balance, December 31, 2005					20,182,531	$	10,091		3,479,920		$	1,740		$	79,356		$	279,789	$	(6,980	)	$	(3,161	)	$	360,835

See notes to consolidated financial statements

50

HYDRIL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

					Year Ended December 31,
					2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	73,243		$	46,487		$	25,578
	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization of deferred compensation				1,633			618			243
		Depreciation and amortization				13,687			12,637			11,900
		Deferred income taxes				7,552			3,127			(1,539	)
		Provision for doubtful accounts				33			81			236
		Gain on sale of real estate holdings not used in operations				(2,199	)		—			(104	)
		Change in operating assets and liabilities:
			Receivables			(11,853	)		(20,934	)		(1,175	)
			Contract costs and estimated earnings in excess of billings			(3,943	)		(494	)		463
			Inventories			(22,826	)		1,596			5,068
			Other current and noncurrent assets			4,091			6,276			95
			Accounts payable			151			9,811			(242	)
			Billings in excess of contract costs and estimated earnings			4,140			(145	)		(4,494	)
			Accrued liabilities			1,974			7,717			(3,917	)
			Income taxes payable			2,759			1,552			587
			Other long-term liabilities			1,394			(364	)		(4,470	)
				Net cash provided by operating activities		69,836			67,965			28,229
NET CASH FROM INVESTING ACTIVITIES:
	Purchase of held-to-maturity investments					(20,787	)		(29,508	)		(18,931	)
	Proceeds from held-to-maturity investments					27,043			15,095			20,705
	Purchase of available for sale investments					(110,535	)		(47,495	)		(7,925	)
	Proceeds from available for sale investments					60,674			2,755			2,000
	Capital expenditures					(17,144	)		(12,356	)		(8,558	)
	Proceeds from the sale of real estate not used in operations					2,935			—			149
	Purchase of a product line					(3,640	)		—			—
	Other, net					(2,756	)		(750	)		(1,246	)
				Net cash used in investing activities		(64,210	)		(72,259	)		(13,806	)
NET CASH FROM FINANCING ACTIVITIES:
	Repayment of debt					—			—			(30,000	)
	Net proceeds from issuance of common stock					265			242			230
	Net proceeds from exercise of stock options					7,521			7,571			1,971
				Net cash provided by (used in) financing activities		7,786			7,813			(27,799	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						13,412			3,519			(13,376	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD						51,733			48,214			61,590
CASH AND CASH EQUIVALENTS AT END OF PERIOD					$	65,145		$	51,733		$	48,214
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Interest paid				$	—		$	—		$	1,044
	Income taxes paid:
		Domestic				4,406			2,530			—
		Foreign				15,981			8,678			7,685

See notes to consolidated financial statements

51

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Nature of Operations — Hydril Company (the “Company”) operates principally in the oilfield equipment industry on a worldwide basis. Operations involve engineering, manufacturing and marketing high performance specialty equipment for use in the exploration and production of oil and gas. The Company’s customer base consists primarily of steel pipe distributors, major oil companies, independent oil and gas producers, state-owned oil and gas companies and drilling contractors. The Company operates in two business segments — Premium Connection and Pressure Control (see Note 14 for further information).

      Principles of Consolidation — The consolidated financial statements include the accounts of Hydril Company and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated in consolidation.

      Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

      Revenue Recognition — Revenue for all products and services is recognized at the time such products are delivered or services are performed, except as described below. For the years ended December 31, 2005, 2004 and 2003 approximately 94%, 95% and 87%, respectively, of our total revenues were recognized on this basis.

      The Company’s pressure control segment includes revenue from long-term contracts. These contracts generally have a term of six to eighteen months, an estimated contract price in excess of $1,000,000, and are recognized using the percentage-of-completion method measured by the percentage of cost incurred to estimated final cost. Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance. If a long-term contract were anticipated to have an estimated loss, such loss would be recognized in the period in which the loss became apparent. It is possible, but not contemplated, that estimates of contract costs could be revised significantly higher in the near term as a result of unforeseen engineering and manufacturing changes. Revenue from long-term contracts was approximately 6%, 5% and 13% of total revenue for the years ended December 31, 2005, 2004 and 2003, respectively.

      Cash and Cash Equivalents — Cash equivalents are highly liquid investments including commercial paper, time deposits and money market mutual funds having original maturities of three months or less.

      Investments — The Company invests excess cash in various securities and money market mutual funds rated as the highest quality by a nationally recognized rating agency.

      The Company has investment securities classified as “available for sale” in accordance with Statement of Financial Accounting Standards No. 115 (“SFAS 115”), “Accounting for Certain Investments in Debt and Equity Securities.” At December 31, 2005 and 2004, the Company held $100,525,000 and $50,664,000 in “available for sale” securities, respectively. The fair value of these securities as of December 31, 2005 and 2004 approximates the carrying value. The realized and unrealized gains and losses related to these available for sale investments were immaterial to the results of operations. The contractual maturities of these investments vary with none maturing within one year, $1,050,000 maturing in one to five years, $12,445,000 maturing in six to ten years, and the balance maturing after ten years. While the contractual maturities of these investments can be greater than one year, they are classified as short-term investments because they are redeemable in less than one year and it is management’s intent that they be available for use in current operations. The interest rates on these instruments typically reprice every seven to 35 days depending on the contractual terms.

      Additionally, the Company has investments classified as “held-to-maturity” and measured at amortized cost in accordance with SFAS 115. Management has the positive intent and ability to hold those securities to

52

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

maturity. As of December 31, 2005 and 2004, the Company held $15,946,000 and $22,202,000, respectively of corporate investment securities classified as “held to maturity.” Contractual maturities of these securities at December 31, 2005 consist of $7,559,000 which mature in 2006, with the balance of $8,387,000 maturing in 2007.

      Allowance for Doubtful Accounts — The Company maintains an allowance for doubtful accounts based on its best estimate of accounts receivable considered to be uncollectible. An analysis of the activity in the allowance for doubtful accounts for the years ended December 31, 2005, 2004 and 2003 is as follows:

	2005			2004			2003
	(In thousands)
Beginning balance	$	1,214		$	1,127		$	1,039
Additions charged to expense		33			81			141
Accounts written off		(24	)		(37	)		(45	)
Other adjustments		(464	)		43			(8	)
Ending balance	$	759		$	1,214		$	1,127

      Other adjustments consist of the collection of a customer’s account previously determined as doubtful for collection, and other adjustments reflecting current industry economic conditions.

      Inventories — Inventories are stated at the lower of cost or market. Inventory costs include material, labor and production overhead. Cost is determined by the last in, first out (“LIFO”) method for substantially all pressure control products (approximately 69% and 73% of total gross inventories at December 31, 2005 and 2004, respectively) and by the first-in, first-out (“FIFO”) method for all other inventories. If the FIFO method had been used to value all inventories, the cost would have been $14,742,000, $13,502,000 and $13,369,000 higher at December 31, 2005, 2004 and 2003, respectively.

      The Company periodically reviews its inventory for excess or obsolete items and provides a reserve for the difference in the carrying value of excess or obsolete items and their estimated net realizable value. An analysis of the excess and obsolete inventory reserve for the years ended December 31, 2005, 2004 and 2003 is as follows:

	2005			2004			2003
	(In thousands)
Beginning balance	$	9,810		$	11,103		$	7,727
Provision for excess and obsolete inventory		620			2,753			4,022
Inventory disposed of during the year		(1,092	)		(4,046	)		(646	)
Ending balance	$	9,338		$	9,810		$	11,103

      Property  — Property, plant and equipment is recorded at cost. Expenditures for renewals, replacements and improvements are capitalized. Maintenance and repairs are charged to operating expenses as incurred. Depreciation of property, including that under capital leases, is based on the straight-line method. Rates are based upon the estimated useful lives of the various classes of property, generally as follows:

Buildings and improvements	15 - 45 years
Machinery and equipment	3 - 12 years

      Upon retirement or other disposal of fixed assets, the costs and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations.

      Included in other assets within the consolidated balance sheets at December 31, 2005 and 2004 are $2,494,000 and $2,082,000 respectively, of real estate holdings. These holdings are composed of land and

53

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

buildings in the United States not currently used in operations, which may be sold if prices acceptable to the Company can be obtained. Such holdings are reported at the lower of their carrying amount or fair value less estimated costs to sell.

      Impairment of Long-Lived Assets — The Company reviews its long-lived assets for impairment when circumstances indicate that the carrying amount of an asset may not be recoverable. The determination of recoverability is made based upon the estimated undiscounted future cash flows of the related asset. If the sum of the future undiscounted cash flows is less than the carrying amount of the asset, the amount of the impairment loss is measured as the excess of the carrying amount over the fair value of the asset.

      In the third quarter of 2004, the Company tested for recoverability the carrying value of its assets included in the Advanced Composite product line, after concluding that it was more likely than not that these assets would be sold or disposed of significantly before the end of their estimated useful lives. Advanced Composite was a product line included within the Company’s Premium Connection segment. Revenue for the two years ended 2004 and 2003 for this product line was $1,505,000 and $1,562,000, respectively. An impairment charge of $727,000 pretax was recorded as a component of cost of sales as a result of this recoverability test. In December 2004, the Company sold the fixed assets, inventory and intellectual property rights of Advanced Composites at an amount approximating the net book value of such assets.

      Product warranties — The Company sells certain of its products to customers with a product warranty that provides that customers can return a defective product during a specified warranty period following the purchase in exchange for a replacement product, or for repair at no cost to the customer, or the issuance of a credit to the customer. The Company accrues its estimated exposure for product warranties based on known warranty claims as well as current and historical warranty costs incurred. See Note 2 for further information on product warranties.

      Research and Development Costs — The Company engages in research and development activities to develop new products and to significantly improve existing products. The Company expenses as incurred all research and development costs that are not reimbursable by other parties. Research and development expenses, net of reimbursement, were $3,044,000, $3,553,000 and $3,939,000, for the years ended December 31, 2005, 2004 and 2003, respectively.

      Stock-Based Compensation — The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized for the Company’s stock option plans to the extent that the quoted market price of the stock at the measurement date was equal to or less than the amount the employee is required to pay for the stock. In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 148 “Accounting for Stock-Based Compensation-Transition and Disclosure.” The statement requires pro forma disclosures that reflect the difference in stock-based employee compensation cost, if any, included in net income and the total cost measured by the fair value based method per SFAS 123 “Accounting for Stock-Based Compensation”, if any, that would have been recognized in the income statement if the fair value based method had been applied to all awards.

      Had compensation costs for the Company’s stock option plans been determined based on the fair value at the grant date consistent with provisions of SFAS 123, the Company’s net income would have been decreased by $1,687,000, $1,888,000, and $1,827,000 in 2005, 2004 and 2003, respectively.

54

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 for the years ended December 31, 2005, 2004 and 2003:

	Year Ended December 31,
	2005			2004			2003
	(In thousands, except per share data)
Net income, as reported	$	73,243		$	46,487		$	25,578
Add: Total stock-based employee compensation for restricted stock awards included in reported net income, net of tax		1,091			407			158
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(2,778	)		(2,295	)		(1,985	)
Proforma net income	$	71,556		$	44,599		$	23,751
Earnings per share:
Basic-as reported	$	3.12		$	2.02		$	1.13
Basic-proforma	$	3.04		$	1.94		$	1.05
Diluted-as reported	$	3.05		$	1.98		$	1.11
Diluted-proforma	$	2.98		$	1.90		$	1.03

      The pro forma fair value of options at the date of the grant was estimated using the Black-Scholes model and the following assumptions:

	2005*		2004			2003
Expected life (years)		—		3.71			5.50
Interest rate		—		3.67	%		2.75	%
Volatility		—		36.00	%		49.83	%
Dividend yield		—		0.00	%		0.00	%
Weighted-average fair value per share at grant date		—	$	9.34		$	13.12

*  No stock option grants were awarded in 2005.

      Environmental Liabilities — The costs to remediate and monitor environmental matters are accrued when such liabilities are considered probable and a reasonable estimate of such costs is determinable.

      Income Taxes — The Company follows the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and (ii) operating loss and tax credit carryforwards for tax purposes. Deferred tax assets are reduced by a valuation allowance when, based upon management’s estimates, it is more likely than not that a portion of the deferred tax assets will not be realized in a future period. United States deferred income taxes have been provided on unremitted earnings of foreign subsidiaries.

      Our tax filings are subjected to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the authorities or potentially through the courts. We believe that these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of these situations inevitably includes some degree of uncertainty; accordingly we provide taxes in accordance with Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies”, only for the amounts we believe will ultimately result from these proceedings. We believe that the amount currently provided for potential assessments will not be settled in the

55

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

next twelve months and such amount does not have a significant impact on our liquidity. Our experience has been that the estimates and assumptions we have used to provide for future tax assessments have proven to be appropriate. However, past experience is only a guide, and the potential exists, however limited, that the tax resulting from the resolution of current and potential future tax controversies may differ materially from the amount accrued.

      Foreign Currencies Translation — The Company’s foreign operations are closely integrated with and are extensions of the Company’s U.S. operations. Accordingly, the U.S. dollar is the functional currency for all of the Company’s foreign operations. Inventory, property, plant and equipment, cost of sales and depreciation are remeasured from the local currency to U.S. dollars at historical exchange rates. Monetary assets and liabilities are remeasured at current exchange rates on the balance sheet date. Income and expense accounts, other than cost of sales and depreciation, are remeasured at weighted average exchange rates during the year. Gains and losses resulting from those remeasurements are included in the statements of operations.

      Concentration of Credit and Customer Risk — The Company sells its products to steel pipe distributors, major and independent domestic and international oil and gas companies, steel mills, state-owned oil and gas companies and national oil companies, as well as domestic and international drilling contractors and rental companies. See Note 14 for further information on major customers. The Company performs ongoing credit evaluations of its customers and provides allowance for probable credit losses where necessary.

      Reclassifications — Certain prior year amounts within the consolidated financial statements have been reclassified to conform to the current year’s presentation.

2. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES

      Accrued liabilities and other long-term liabilities as of December 31, 2005 and 2004 consisted of the following:

			December 31,
			2005		2004
			(In thousands)
Accrued liabilities:
	Accrued payroll, bonus and related		$	8,061	$	7,270
	Taxes (property, sales, payroll, other)			5,145		6,145
	Employee benefits			4,783		4,031
	Product warranties			1,552		2,341
	Other			7,250		5,030
		Total	$	26,791	$	24,817
Other long-term liabilities:
	Post retirement health and life benefits		$	7,245	$	7,952
	Deferred compensation			3,869		2,745
	Pension plan benefits			3,093		839
	Income tax obligation			2,564		2,564
		Total	$	16,771	$	14,100

56

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The changes in the aggregate product warranty liability is as follows for the years ended December 31:

	2005			2004			2003
	(In thousands)
Beginning balance	$	2,341		$	2,192		$	3,274
Claims paid		(568	)		(530	)		(1,337	)
Additional warranty charged (credited) to expense		(221	)		679			255
Ending balance	$	1,552		$	2,341		$	2,192

3. LONG-TERM CONTRACTS

      The components of long-term contracts as of December 31, 2005 and 2004 consist of the following:

		December 31,
		2005			2004
		(In thousands)
Costs and estimated earnings on uncompleted contracts		$	19,321		$	23,860
Less: billings to date			(15,000	)		(19,342	)
Excess of billings over costs and estimated earnings		$	4,321		$	4,518
Included in the accompanying balance sheets under the following captions:
Contract costs and estimated earnings in excess of billings		$	8,803		$	4,860
Billings in excess of contract costs and estimated earnings			(4,482	)		(342	)
	Total	$	4,321		$	4,518

4. LINES OF CREDIT

      Revolving lines of credit — During the first six months of 2005 we had two unsecured revolving lines of credit for working capital requirements that provided up to $20,000,000 in total committed revolving credit borrowings. On June 30, 2005 these revolving lines of credit expired in accordance with their stated maturities.

      The Company’s banking institutions currently issue letters of credit on the Company’s behalf based on its credit worthiness. The letters of credit vary in amount with maturities ranging from March 2006 to March 2011. At December 31, 2005, there was approximately $12,100,000 outstanding in letters of credit comprised primarily of performance bonds related to customer’s orders, approximately $8,200,000, and irrevocable letters of credit issued to guarantee the borrowings of an unconsolidated entity, approximately $3,100,000. (See additional discussion concerning this debt guarantee in Note 11, Commitments and Contingencies).

5. INCOME TAXES

      The geographical sources of income before income taxes for the years ended December 31, 2005, 2004 and 2003 were as follows:

	2005		2004		2003
	(In thousands)
United States	$	54,232	$	28,804	$	15,952
Foreign		55,348		38,380		17,699
Income before income taxes	$	109,580	$	67,184	$	33,651

57

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The provision (benefit) for income taxes for the years ended December 31, 2005, 2004 and 2003 consisted of the following:

			2005			2004		2003
			(In thousands)
United States:
	Current		$	12,425		$	5,563	$	3,959
	Deferred			7,596			1,965		(1,945	)
Foreign:
	Current			16,359			12,007		5,653
	Deferred			(43	)		1,162		406
		Total	$	36,337		$	20,697	$	8,073

      Tax benefits of $4,667,000, $2,773,000 and $1,295,000 associated with the exercise of employee stock options were allocated to equity and recorded in paid in capital in excess of par value in the years ended December 31, 2005, 2004, 2003, respectively.

      The consolidated effective income tax rates (as a percentage of income before income taxes) for the years ended December 31, 2005, 2004 and 2003 varies from the United States statutory income tax rate for the reasons set forth below:

		2005			2004			2003
Statutory rate			35.0	%		35.0	%		35.0	%
Nondeductible expenses			0.1	%		0.1	%		0.2	%
Research and experimentation tax credit			(0.7	)%		(2.1	)%		(11.0	)%
Extraterritorial income exclusion			(0.3	)%		(2.3	)%		(0.2	)%
Manufacturing deduction			(0.2	)%		—			—
Tax exempt interest			(0.7	)%		—			—
	Effective rate		33.2	%		30.7	%		24.0	%

58

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2005 and 2004 were as follows:

		2005			2004
		(In thousands)
Deferred tax assets:
Inventory capitalization cost		$	3,622		$	2,433
Accrued expenses and other items not deductible for tax purposes			7,583			7,823
Alternative minimum tax and research credits			701			12,624
Other			4,932			2,568
	Total deferred tax assets		16,838			25,448
Deferred tax liabilities:
Property, plant and equipment			(5,776	)		(7,267	)
Unrepatriated foreign earnings and other foreign deferred taxes			(9,039	)		(9,208	)
	Total deferred tax liability		(14,815	)		(16,475	)
Net deferred tax asset		$	2,023		$	8,973

      During the first quarter of 2004, the Company completed a research and experimentation tax study which resulted in a $920,000 credit to the Company’s income tax provision. The research and experimentation tax credit covers qualified spending for the two-year period from 2002 through 2003. Expenses of $125,000 associated with the study are included in general and administrative expenses for that quarter. Additionally, during the third quarter of 2004, the Company recorded a $1,350,000 U.S. income tax benefit (extraterritorial income exclusion), related to export shipments for the years 2002 and 2003. The extraterritorial income exclusion provides an exemption of gross income in computing the U.S. taxable income of eligible taxpayers. In general, only those goods sold or leased for use outside of the U.S. are eligible for the exclusion.

      During the third quarter of 2003, the Company completed a research and experimentation tax study which resulted in a $3,705,000 credit to the Company’s income tax provision. The research and experimentation tax credit covers qualified spending for the ten-year period from 1992 through 2001. Prior to 2003, the Company was an alternative minimum tax payer and accordingly could not benefit from this type of tax credit. Expenses associated with the study of $442,000 are included in general and administrative expenses for 2003.

      During the fourth quarter of 2005, the Company settled an income tax audit covering the tax years of 2001 and 2002 with the Mexican tax authorities for $420,000 of additional tax, plus a $173,000 surcharge which is deductible for Mexican tax purposes. As a result, the Company increased its 2005 expenses for this surcharge and reflected the agreed-upon Mexican tax assessment in its foreign tax provision with an equal offsetting benefit in its domestic tax provision for the foreign tax credits resulting from the settlement. The Company is currently under an income tax audit by the United States Internal Revenue Service with respect to the 2003 tax year and by the Nigerian authorities for tax years 1999 through 2003, with results yet to be released. We do not expect the outcome of these audits to have a material impact on our financial position or results from operations.

      At December 31, 2005, the Company had approximately $701,000 of alternative minimum tax credits that may be carried forward indefinitely under U.S. law.

59

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. EMPLOYEE BENEFITS

      Post Retirement Benefits — The Company has a defined benefit pension plan covering substantially all of its U.S. employees. Benefits are based on the employees’ years of service and compensation. Plan assets consist primarily of investments in equities and money market funds. Effective December 31, 2001, this plan was frozen, and no additional benefits have been accrued under this plan since that date. Beginning January 1, 2002, the Company initiated a new retirement contribution plan to replace the previous plan covering substantially all of its U.S. employees. The new retirement contribution plan is discussed below under Defined Contribution Plan.

      Additionally, the Company provides certain medical, life insurance and/or dental benefits for eligible employees, hired before December 31, 1989, who have or will retire under one of the Company’s pension plans.

      The benefit obligation, value of plan assets, and funded status component costs of the plans are as follows:

									Post Retirement
			Defined Benefit Plan						Health and Benefits
			2005			2004			2005			2004
			(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year			$	31,998		$	30,589		$	5,858		$	6,902
	Service cost			—			—			56			50
	Interest cost			1,920			1,828			326			347
	Participant contributions			—			—			61			60
	Benefits paid			(798	)		(674	)		(615	)		(711	)
	Actuarial (gain)/loss			1,359			255			145			(790	)
		Benefit obligation at end of year	$	34,479		$	31,998		$	5,831		$	5,858
Change in plan assets:
Fair value of plan assets at beginning of year			$	31,159		$	29,710		$	—		$	—
	Actual return on plan assets			1,315			2,160			—			—
	Employer contributions			39			—			554			651
	Participant contributions			—			—			61			60
	Benefits paid			(797	)		(674	)		(615	)		(711	)
	Administrative expenses			(40	)		(37	)		—			—
		Fair value of plan assets at end of year	$	31,676		$	31,159		$	—		$	—
Reconciliation of plan funded status:
	Funded status		$	(2,803	)	$	(839	)	$	(5,831	)	$	(5,858	)
	Unrecognized actuarial loss			—			—			(33	)		(177	)
	Unamortized prior service benefit			—			—			(1,651	)		(2,139	)
		Net amount recognized at year-end	$	(2,803	)	$	(839	)	$	(7,515	)	$	(8,174	)

60

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

												Post Retirement Health and
			Defined Benefit Plan									Life Benefits
			2005			2004			2003			2005			2004			2003
			(In thousands)
Components of net periodic benefit cost:
	Service cost		$	—		$	—		$	—		$	56		$	50		$	56
	Interest cost			1,920			1,828			1,747			326			347			403
	Expected return on plan assets			(1,843	)		(1,760	)		(1,755	)		—			—			—
	Amortization of prior service cost (benefit)			16			16			16			(487	)		(488	)		(488	)
	Amortization of net loss			14			20			129			—			—			—
		Net periodic benefit cost	$	107		$	104		$	137		$	(105	)	$	(91	)	$	(29	)

      The Company’s pension plan weighted average asset allocations at December 31, 2005 and 2004, by asset category are as follows:

			Defined Benefit Plan
			2005			2004
Percentage of Plan Assets:
	Equity			32	%		31	%
	Fixed income			68	%		69	%
		Total		100	%		100	%

      The amounts recognized in the consolidated balance sheet are as follows:

	Defined Benefit Plan
	2005			2004
	(In thousands)
Accrued benefit liability	$	(2,803	)	$	(839	)
Intangible asset		103			119
Accumulated other comprehensive income		4,863			2,899
Net amount recognized at the end of the year	$	2,163		$	2,179

      The additional year-end information for plans with accumulated benefit obligations in excess of plan assets are as follows:

	Defined Benefit Plan
	2005		2004
	(In thousands)
Projected benefit obligation	$	34,479	$	31,998
Accumulated benefit obligation		34,479		31,998
Fair value of plan assets at end of year		31,676		31,159

      The assumed discount rate used in determining the benefit obligation was 5.75%, 6.00% and 6.00% at December 31, 2005, 2004 and 2003, respectively. The assumed discount rate used in determining the net periodic benefit cost was 6.00%, 6.00% and 6.50% at December 31, 2005, 2004 and 2003, respectively. The expected long-term rate of return on pension plan assets at December 31, 2005, 2004 and 2003 was 6.00%, 6.00% and 8.00%, respectively. Based on current expectations, the Company does not plan to make any additional contributions to its defined benefit pension plan during 2006.

61

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      A 10% annual rate of increase in the per capita cost of both pre-age 65 and post-age 65 covered health care benefits was assumed for 2005 in determining the benefit obligation for the post retirement health and life plan. This rate is assumed to decrease gradually to 5.0% for 2011 and to remain at that level thereafter.

      The assumed health care cost trend rates have a significant effect on the amounts reported for the post retirement health and life plan. A one percent change in the assumed health care cost trend rates would have the following effects:

	One Percent
	Increase		Decrease
	(In thousands)
Effect on total of service and interest cost components for 2005	$	7	$	(7	)
Effect on December 31, 2005 benefit obligation		117		(112	)

      Defined Contribution Plans — The Company has an employee savings plan under which U.S. employees can invest up to $14,000 of their earnings pre-tax, matched by an amount from the Company equal to one-half of the first 6% of the employees’ contributions. The Company’s contributions were $1,094,000, $984,000 and $955,000 in 2005, 2004 and 2003, respectively.

      Effective January 1, 2002, the Company initiated a new defined contribution retirement plan, in which the Company makes monthly contributions to a separate retirement contribution account for each employee as an addition to the savings plan discussed above. The contributions are a percentage of compensation ranging from 2% — 7%, based on age. During 2005, 2004 and 2003, the Company’s contributions were $1,994,000, $1,796,000 and $1,784,000, respectively.

      Nonqualified Deferred Compensation Arrangement — Effective April 1, 2001, the Company implemented the Hydril Company Restoration Plan (“the Plan”, a nonqualified, deferred compensation arrangement for a select group of management or highly compensated employees. Under the terms of the Plan, participants can defer up to 15% of their regular base pay and 100% of bonuses that would otherwise be paid in cash. Additionally, the Plan allows participants to retain the benefits to which they would have been entitled under the Company’s savings plan except for the federally mandated limits on these benefits or on the level of salary on which these benefits may be calculated. The Company will make contributions to a rabbi trust to assist in meeting the liabilities of the Plan. A rabbi trust sets aside assets to pay for benefits under a nonqualified plan, but those assets remain subject to claims of Hydril’s general creditors in preference to the claims of plan participants and beneficiaries.

      Other — Substantially all of the Company’s employees in foreign locations are covered by either governmental-sponsored or Company-sponsored benefit plans. The aggregate liabilities and expenses of these foreign plans are not material to the consolidated financial statements.

7. STOCKHOLDERS’ EQUITY

      Common Stock — The Company’s Restated Certificate of Incorporation authorizes the issuance of up to 75,000,000 shares of common stock, par value $.50 per share, and 32,000,000 shares of class B common stock, par value $.50 per share. At December 31, 2005 and 2004, 20,182,531 and 18,651,458 shares of common stock were issued and outstanding, and 3,479,920 and 4,620,130 shares of class B common stock were issued and outstanding, respectively.

      The holders of class B common stock are entitled to ten votes per share and the holders of common stock are entitled to one vote per share on all matters to be voted on by the Company’s stockholders generally, including the election of directors. Holders of common stock have no conversion rights while holders of class B common stock may convert each share of class B common stock into one share of common stock at any time. In addition, shares of class B common stock automatically convert into the same number of shares of common

62

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

stock if the shares of class B common stock are transferred other than to a holder of class B common stock or a person related to such a holder. All class B common stock will convert into common stock if the outstanding shares of class B common stock represent less than 10% of the combined outstanding shares of class B common stock and common stock.

      Preferred Stock — The Company’s Restated Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock, par value $1.00 per share. At December 31, 2005 and 2004, there were no shares of preferred stock issued or outstanding.

      Registration Rights Agreement — In connection with the Company’s initial public offering, the Company entered into a registration rights agreement with stockholders holding more than 5% of the Company’s common stock prior to the initial public offering. The registration rights agreement provides such stockholders with, subject to defined restrictions, certain demand, shelf and piggyback rights to require the Company to register the sale of their common stock. The Company is required to pay all expenses incident to its performance or compliance with the registration rights agreement except for underwriting commissions and discounts related to shares of common stock sold by stockholders. The last day on which registration rights may be exercised under the agreement is April 26, 2006.

      Rights Agreement — During 2002, the Company’s Board of Directors approved and the Company entered into a Rights Agreement. Under the terms of the Rights Agreement, the Company declared a dividend of one Right for each outstanding share of the Company’s common stock and class B common stock to holders of record as of April 12, 2002 and authorized the issuance of one Right for each share of common stock and class B common stock issued after April 12, 2002 until the Rights become exercisable, all of the Rights are redeemed or exchanged, or April 9, 2012, whichever is the earliest.

      The Rights will trade with the Company’s common stock and class B common stock until exercisable. The Rights would be “triggered” and exercisable ten days following a public announcement that a person or group has acquired 15% of the Company’s common stock or voting rights or ten business days after a person or group begins a tender offer that would result in ownership of 15% of the Company’s common stock or voting rights. Once triggered, the Rights would entitle the holders to purchase from the Company a unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $100 per share or, upon the occurrence of certain events, either the Company’s common stock or shares of common stock of an acquiring entity for a payment equal to half of market value.

      The Rights may be redeemed by the Company for $.01 per Right at any time until an acquirer has acquired the level of ownership that “triggers” the Rights Plan. The Rights extend for ten years and will expire on April 9, 2012.

      Employee Stock Purchase Plan — The Hydril Company Employee Stock Purchase Plan (the “Stock Purchase Plan”) was terminated effective January 1, 2006. The Stock Purchase Plan was implemented November 1, 2000, and 220,000 shares of common stock were originally reserved for this plan. Under the Stock Purchase Plan, employees could purchase shares of the Company’s common stock at the lower of 85% of market value at the closing price on the first or last business day of each six-month period beginning on each July 1 and January 1, except that the first offering period was an eight-month period commencing on November 1, 2000 and ending on June 30, 2001. Purchases were limited to 10% of the employee’s regular pay. For the years ended December 31, 2005 and 2004, 8,589 and 12,400 shares respectively, were issued under this plan. In January 2006, a final 3,250 shares were issued for the offering period July 2005 through December 2005.

      Other — In March 2006, subsequent to the balance sheet date, the Company’s Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock over the next twelve months. The Company intends to repurchase its shares, beginning in the second quarter of 2006, in the open market or in privately negotiated transactions based on, among other things, its ongoing capital requirements, expected

63

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

cash flows, regulatory restraints and general market conditions. Future repurchases are expected to be funded with cash flows from operations. The repurchase program may be suspended or discontinued at any time.

8. OTHER COMPREHENSIVE LOSS

      SFAS 130 “Reporting Comprehensive Income” requires minimum pension liability adjustments to be included in other comprehensive income. At December 31, 2005, 2004 and 2003 the Company had an unfunded accumulated benefit obligation in excess of the accrued pension expense. The Company recorded a loss of $1,277,000 for the year ended December 31, 2005 and gains of $84,000 and $555,000 for the years ended December 31, 2004 and 2003, respectively, in other comprehensive loss, net of income tax at a rate of 35%.

9. OTHER INCOME AND EXPENSE

      Other income and expense is primarily related to real estate holdings in the United States composed of land and buildings not currently used in operations, which may be sold if prices acceptable to the Company can be obtained. Other income in 2005 was $724,000 and included a $2,201,000 gain from the sale of real estate not used in operations and was partially offset by expense of $662,000, recorded to increase an environmental reserve on non-operational real estate assets and expense of $531,000 for routine maintenance of the real estate holdings. Other expense in 2004 and 2003 was $335,000 and $135,000, respectively and included expense of $358,000 and $349,000, respectively, for routine maintenance of the non-operational real estate holdings.

10. EARNINGS PER SHARE

      The Company has presented basic and diluted income per share (“EPS”) on the consolidated statement of operations. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive EPS is based on the weighted average number of shares outstanding during each period plus the assumed exercise of dilutive stock options and vesting of restricted stock and restricted stock units, less the number of treasury shares from the proceeds using the average market price for the Company’s common stock for each of the periods presented. When potentially dilutive securities are anti-dilutive, they are not included in dilutive EPS.

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HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes the computation of basic and diluted net income per share:

			Weighted
	Net		Average		Earnings
	Income		Shares		Per Share
	(In thousands except per share data)
For the year ended December 31, 2003
Basic net income	$	25,578		22,711	$	1.13
Effect of dilutive stock options		—		290		—
Diluted net income	$	25,578		23,001	$	1.11
For the year ended December 31, 2004
Basic net income	$	46,487		22,996	$	2.02
Effect of dilutive stock options		—		436		—
Diluted net income	$	46,487		23,432	$	1.98
For the year ended December 31, 2005
Basic net income	$	73,243		23,501	$	3.12
Effect of dilutive stock options		—		518		—
Diluted net income	$	73,243		24,019	$	3.05

11. COMMITMENTS AND CONTINGENCIES

      Leases — The Company’s lease commitments are principally for operating facilities, vehicles and equipment.

      Obligations for minimum payments under noncancelable operating leases for the years ended December 31 are as follows:

		Operating
		(In thousands)
2006		$	1,697
2007			1,152
2008			688
2009			139
2010			—
Greater than five years			—
	Total minimum lease payments	$	3,676

      Rental expense was $1,672,000, $1,667,000 and $1,421,000, for the years ended December 31, 2005, 2004 and 2003, respectively.

      Litigation — The Company is involved in legal proceedings arising in the ordinary course of business. In the opinion of management these matters are such that their outcome will not have a material adverse effect on the financial position or results of operations of the Company.

      The Company has also been identified as a potentially responsible party at a waste disposal site near Houston, Texas. Based on the number of other potentially responsible parties, the total estimated site cleanup costs and its estimated share of such costs, the Company continues to believe this matter will not have a material adverse effect on the financial position or results of operations of the Company.

65

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Other — The Company has agreed to guarantee 50% of the total outstanding borrowings of our premium connection Indian joint venture, an unconsolidated entity, up to a maximum of $3,070,000 by issuing irrevocable standby letters of credit. As of December 31, 2005, the total amount of borrowings of the joint venture was $2,135,000, of which $1,067,000 was subject to the Company’s guarantee. The Company does not expect this guarantee to have a material adverse effect on its financial condition or results of operations. As of December 31, 2005, the Company’s investment in this joint venture was approximately $1,000,000 and the joint venture, which began operations in the fourth quarter of 2005, recorded an after-tax net loss for the year of less than $100,000.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

      The Company’s financial instruments at December 31, 2005 and 2004 consisted of cash and cash equivalents, investments, accounts receivable, and accounts payable. The carrying amounts of these items are a reasonable estimate of their fair values because of the short maturity of such instruments or because their interest rates approximate comparable market rates available to the Company.

13. EQUITY COMPENSATION PLANS

      During 2005, stockholders approved the 2005 Incentive Plan (the “2005 Plan”), which allows for the granting of various types of awards to officers, directors and key employees of the Company. The 2005 Plan provides for a maximum of 1,200,000 shares of common stock as to which awards may be granted, of which 550,000 were authorized for awards other than options or stock appreciation rights. As of December 31, 2005, no awards had been made under the 2005 Plan. The Company’s 2000 Incentive Plan (the “2000 Plan”) was adopted in 2000 and allows for the granting to officers, employees, and non-employee directors of stock-based awards covering a maximum of 1,950,000 shares of common stock, of which 194,979 shares remain available for awards at December 31, 2005.

      During 2005, no options for the purchase of common stock were granted under the 2000 Plan. During 2004, 212,200 options were granted to officers and key employees for the purchase of common stock. Of these, 202,800 were granted at an exercise price of $28.79 per share and 9,400 were granted at an exercise price of $33.39 per share. During 2003, 189,140 options were granted to officers and key employees for the purchase of common stock. Of these 185,459 were granted at an exercise price of $27.165 and 3,681 were granted at an exercise price of $29.8815. Options granted to officers and employees under the 2000 Plan generally have a term of ten years and vest and become exercisable in cumulative annual installments of one-fifth each beginning on the first anniversary of the date of grant.

      Under the 2000 Plan, each nonemployee director is automatically granted nonqualified stock options each year following the annual meeting of stockholders. During 2005, however, in lieu of stock options, each of the Company’s non-employee directors received a grant of deferred share units as discussed below. During 2004, each of the Company’s non-employee directors received a grant of non-qualified stock options to purchase 3,000 shares of common stock for a total of 24,000 shares at an exercise price of $28.79 per share. During 2003, each of the Company’s nonemployee directors received a grant of non-qualified stock options to purchase 3,000 shares of common stock for a total of 24,000 shares at an exercise price of $27.165 per share. Options granted to non-employee directors have a term of ten years, are fully vested upon the completion of one year of service as a non-employee director, have an exercise price equal to the fair market value of the Company’s common stock on the date of grant, and become exercisable in cumulative annual installments of one-third each, beginning on the first anniversary of the date of grant.

      The Company’s 1999 Stock Option Plan (the “1999 Plan”) provided for the granting of options for the purchase of the Company’s class B common stock to officers and key employees of the Company. Such options vested over a four-year period and are exercisable for a ten-year period. An aggregate of 1,050,000 shares of class B common stock was reserved for grants of which a total of 702,000 shares were

66

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

awarded. During 2003, the 1999 Plan was amended to provide that no further awards were to be made under the 1999 Plan.

      A summary of the status of the Company’s stock option activity, and related information for the years ended December 31, 2005, 2004 and 2003, is presented below:

				Weighted Average
	Shares			Exercise Price
Outstanding at December 31, 2002		1,426,652		$	17.02
Granted		213,140			27.21
Exercised		(243,034	)		8.11
Forfeited		(56,161	)		19.35
Outstanding at December 31, 2003		1,340,597		$	20.16
Granted		236,200			28.97
Exercised		(432,971	)		17.49
Forfeited		(74,220	)		22.76
Outstanding at December 31, 2004		1,069,606		$	23.01
Granted		—			—
Exercised		(381,063	)		19.74
Forfeited		(28,200	)		23.26
Outstanding at December 31, 2005		660,343		$	24.89
Options exercisable at December 31, 2003		515,523		$	17.02
Options exercisable at December 31, 2004		344,006		$	19.52
Options exercisable at December 31, 2005		243,135		$	22.59

      The following table summarizes information about stock options outstanding as of December 31, 2005:

									Weighted Average
			Weighted Average						Exercise Price of
			Remaining		Weighted Average		Exercisable		Exercisable
Range of Exercise Prices	Shares		Contractual Life		Exercise Price		Shares		Shares
$16.70-$21.20		213,188		5.5	$	18.84		131,188	$	18.49
$23.37-$26.71		83,224		6.4		25.42		31,747		25.49
$26.71-$30.05		349,543		7.9		28.14		73,332		27.89
$30.05-$33.39		14,388		7.5		32.24		6,868		30.98
		660,343		6.9	$	24.89		243,135	$	22.59

      During 2005, the Company granted a total of 85,400 restricted stock units to officers and key employees. A stock unit represents the right to receive a share of common stock on the date the restrictions on the unit lapse. The restrictions on restricted stock units lapse over a five year period with sixty percent of the units vesting on the third anniversary of the date of grant and twenty percent vesting on each of the fourth and fifth anniversary dates of the grant. In the event a grantee terminates employment with the Company, any restricted stock units remaining subject to restrictions are forfeited. Restricted unit awards result in the recognition of deferred compensation. Deferred compensation is a contra-equity account with an offset to additional paid in capital and is amortized to operating expense over the vesting period of the award.

67

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In addition, during 2005 the Company granted a total of 19,000 performance-based restricted stock units to executive officers. The vesting of these awards is dependent upon whether, and the extent to which, specified performance objectives relating to Return on Capital Employed (“ROCE”) are attained for the three-year period ending December 31, 2007. ROCE is the Company’s average annual after-tax operating income divided by average capital employed (total assets and short-term debt, including current maturities of long-term debt minus current liabilities). None of these restricted stock units will vest unless the Company achieves a minimum ROCE as specified by the Board of Directors for the three-year period and the ROCE achieved is equal to or greater than the average ROCE for a specified peer group of companies. If these two minimum thresholds are met, then between twenty percent and one hundred percent of the units will vest upon completion of the three-year period, depending on the Company’s ROCE relative to that of the peer group for that period. The units will vest completely if the minimum thresholds are met and the Company’s ROCE is in the top quartile of its peer group for the period. Performance-based restricted stock units settle automatically in shares of common stock on a one-for-one basis upon vesting.

      During 2004, the Company granted a total of 81,900 in restricted stock units and shares of restricted stock to officers and key employees. During 2005 and 2004, 2,400 and 600 of these awards were forfeited, respectively.

      During 2003, the Company granted a total of 76,054 in restricted stock units and shares of restricted stock to officers and key employees. During 2005, 2004 and 2003, 2,800, 7,900 and 800 of these awards were forfeited, respectively.

      Included in operating income in 2005, 2004 and 2003 is $1,633,000, $618,000 and $243,000, respectively for amortization expense of deferred compensation related to the 2005, 2004 and 2003 grants.

      During 2005 and 2004, each of the Company’s non-employee directors received a grant of 2,000 and 2,500, deferred share units, for a total of 14,000 and 20,000 units, respectively. Each deferred share unit represents one hypothetical share of common stock. The deferred share units vest and become payable three years from the date of grant if the director remains a member of the Company’s Board of Directors at such time, or earlier under specified circumstances. Upon vesting, the deferred share units are settled in cash at the fair market value of common stock on a one-for-one basis.

14. SEGMENT AND RELATED INFORMATION

      In accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”, the Company has identified the following reportable segments: Premium Connection and Pressure Control.

      Hydril is engaged worldwide in engineering, manufacturing and marketing of premium connection and pressure control products for oil and gas drilling and production. The Company sells its products to steel pipe distributors, major and independent, domestic and international oil and gas companies and drilling contractors. The Company’s products are used in drilling environments where extreme pressure, temperature, corrosion and mechanical stress are encountered, as well as in environmentally sensitive drilling. These harsh conditions are typical for deepwater, deep-formation and horizontal or extended reach oil and gas wells.

      The Company’s premium connection segment manufactures premium connections that are used in drilling environments where extreme pressure, temperature, corrosion and mechanical stress are encountered, as well as in environmentally sensitive drilling. These harsh drilling conditions are typical for deepwater, deep-formation and horizontal or extended reach wells. Hydril applies premium threaded connections to tubulars owned by its customers and purchases pipe in certain international markets for threading and resale. Hydril manufactures premium threaded connections and provides services at facilities located in Bakersfield, California; Westwego, Louisiana; Houston, Texas; Nisku, Alberta, and Dartmouth, Nova Scotia, Canada; Maharashtra, India; Batam, Indonesia; Veracruz, Mexico; Warri, Nigeria and Aberdeen, Scotland.

68

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company’s pressure control segment manufactures a broad range of pressure control equipment used in oil and gas drilling and well completion typically employed in harsh environments. The Company’s pressure control products are primarily safety devices that control and contain fluid and gas pressure during drilling, completion and maintenance in oil and gas wells. The Company also provides aftermarket replacement parts, repair and field services for its installed base of pressure control equipment. Hydril manufactures pressure control products at two plant locations in Houston, Texas and one plant location in New Mills, England.

      The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on operating income or loss.

      Financial data for the Company’s business segments for the years ended December 31, 2005, 2004 and 2003 is as follows:

			Year Ended December 31,
			2005			2004			2003
			(In thousands)
Revenue
	Premium Connection		$	246,470		$	184,782		$	110,270
	Pressure Control			130,254			100,571			101,747
		Total	$	376,724		$	285,353		$	212,017
Operating income (loss)
	Premium Connection		$	85,054		$	60,899		$	27,611
	Pressure Control			37,381			20,971			20,261
	Corporate Administration			(17,479	)		(15,464	)		(13,709	)
		Total	$	104,956		$	66,406		$	34,163
Depreciation and amortization
	Premium Connection		$	8,587		$	7,815		$	7,367
	Pressure Control			3,116			2,920			2,769
	Corporate Administration			1,984			1,902			1,764
		Total	$	13,687		$	12,637		$	11,900
Capital expenditures
	Premium Connection		$	12,041		$	8,188		$	3,699
	Pressure Control			4,475			2,390			3,548
	Corporate Administration			628			1,778			1,311
		Total	$	17,144		$	12,356		$	8,558
Total assets
	Premium Connection		$	142,414		$	121,333		$	98,071
	Pressure Control			96,193			68,900			73,375
	Corporate Administration			211,955			153,413			95,670
		Total	$	450,562		$	343,646		$	267,116

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HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

			Year Ended December 31,
			2005		2004		2003
			(In thousands)
Revenue(1)
	United States		$	185,990	$	141,418	$	132,960
	Other Western Hemisphere			72,987		59,656		35,355
		Subtotal Western Hemisphere		258,977		201,074		168,315
	Eastern Hemisphere			117,747		84,279		43,702
		Total	$	376,724	$	285,353	$	212,017
Long-lived assets(2)
	United States		$	86,248	$	81,063	$	83,447
	Other Western Hemisphere			19,450		18,337		15,961
		Subtotal Western Hemisphere		105,698		99,400		99,408
	Eastern Hemisphere			9,302		9,583		11,288
		Total	$	115,000	$	108,983	$	110,696

(1)	Revenue is presented on the basis of selling location.
(2)	Includes net property and other long-term assets, (excludes investments and deferred tax assets).

      For the year ended December 31, 2005, revenue from one customer of the Company’s premium connection segment represented 13% of the Company’s consolidated revenue.

      For the year ended December 31, 2004, revenue from two customers of the Company’s premium connection segment represented 15% and 11% of the Company’s consolidated revenue.

      For the year ended December 31, 2003, revenue from one customer of the Company’s pressure control segment represented 13% of the Company’s consolidated revenue and revenue from one customer of the Company’s premium connection segment represented 11% of the Company’s consolidated revenue.

15. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)

		Year Ended December 31, 2005
		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
		(In thousands, except per share data)
Revenue		$	78,817	$	91,607	$	92,974	$	113,326
Gross profit			35,407		40,465		41,284		46,407
Operating income			22,099		24,997		27,175		30,685
Net income(1)			15,012		17,249		19,612		21,370
Earnings per share:
	Basic	$	0.64	$	0.74	$	0.83	$	0.90
	Diluted	$	0.63	$	0.72	$	0.81	$	0.88

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HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Year Ended December 31, 2004
		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
		(In thousands, except per share data)
Revenue		$	57,497	$	62,905	$	78,427	$	86,524
Gross profit			22,350		26,071		33,076		36,916
Operating income			10,457		13,368		19,768		22,813
Net income(2)			7,874		9,023		14,441		15,149
Earnings per share:
	Basic	$	0.34	$	0.39	$	0.63	$	0.65
	Diluted	$	0.34	$	0.39	$	0.61	$	0.64

(1)	The third quarter 2005 includes a $2,199,000 gain on the sale of real estate not used in operations.
(2)	The first quarter 2004 includes a U.S. research and experimentation income tax credit of $920,000 related to qualified spending for the two-year period from 2002 and 2003. The third quarter 2004 includes a U.S. income tax benefit (extraterritorial income exclusion) of $1,300,000 related to export shipments for the years 2002 through 2003.

16. RECENT ACCOUNTING PRONOUNCEMENTS

      In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB statement No. 3.” SFAS 154 replaces APB No. 20, “Accounting Changes” and FASB No. 3, “Reporting Accounting Changes in Interim Financial Statements” and provides guidance on the accounting and reporting of accounting changes and error corrections. The statement applies to all voluntary changes in accounting principles as well as all changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company believes the implementation of SFAS 154 will not have a material effect on the Company’s results of operations or financial condition.

      In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143.” This interpretation defines the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity, in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 requires that an obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did not have a material impact on our results of operations or financial condition.

      In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 — Revised 2004 (“SFAS 123(R)”), “Share-Based Payment”. This is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB No. 25, “Accounting for Stock Issued to Employees”. Under SFAS 123(R), the Company will be required to measure the cost of employee services received in exchange for stock based on the grant-date fair value (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123(R), will be recognized as an addition to paid-in capital. We must adopt SFAS 123(R), effective

71

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

January 1 2006, which is consistent with the standard’s effective date. The Company is currently in the process of evaluating the impact of SFAS 123(R).

      In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29, to address the measurement of exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring after June 30, 2005. We adopted SFAS No. 153 on July 1, 2005. The adoption of SFAS 153 did not have a material effect on the Company’s results of operations or financial condition.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB 43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Paragraph 5 of Accounting Research Bulletin (“ARB”) 43, Chapter 4 “Inventory Pricing,” previously stated that “... under certain circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current-period charges . . .” SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company believes the implementation of SFAS 151 will not have a material effect on the Company’s results of operations or financial condition and will adopt SFAS 151 on January 1, 2006.

      In May 2004, the FASB issued Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2 provides guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) for employers that sponsor postretirement health care plans that provide prescription drug benefits. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. The adoption of FSP 106-2 on July 1, 2004 did not have a material effect on the Company’s results of operations or financial condition.

      In December 2003, the Company adopted SFAS No. 132 (Revised 2003), “Employees’ Disclosures about Pensions and Other Post Retirement Benefits.” The statement requires additional disclosures relating to pensions and other post-retirement benefits, which we have included in Note 6.

72

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

      None.

ITEM 9A — CONTROLS AND PROCEDURES

      Hydril’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of December 31, 2005, and they have concluded that these controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s management report on internal control over financial reporting is included at page 43 of this Form 10-K and the attestation report of Deloitte & Touche LLP on management’s assessment is included at page 44 of this Form 10-K.

ITEM 9B — OTHER INFORMATION

      None.

PART III

      Except as indicated below, information with respect to the following items are incorporated by reference to Hydril’s definitive 2006 Annual Meeting Proxy Statement (the “Proxy Statement”) to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held on May 16, 2006.

ITEM 10 — DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Pursuant to General Instruction G to Form 10-K, the information regarding the Registrant’s executive officers called for by Part III Item 10 is set forth in at the end of Part I herein under the caption “Item S-K 401(b) — Executive Officers of the Registrant.” The other information required by this item will be set forth under the captions “Election of Directors”, “Corporate Governance” and “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement, which sections are incorporated herein by reference.

      Hydril’s code of ethics, known as its Code of Business Conduct and Ethics, applies to all officers and employees of Hydril, including its principal executive officer, principal financial officer, principal accounting officer and controller. The Code of Business Conduct and Ethics satisfies the requirements for a code of ethics under Item 406 of Regulation S-K and is available on Hydril’s website, http://www.hydril.com. In addition, Hydril intends to satisfy the disclosure requirements of Item 5.05 of Form 8-K regarding any amendments to, or waiver from, a provision of the Code of Business Conduct and Ethics that applies to Hydril’s principal executive officer, principal financial officer, principal accounting officer or controller and relates to any element of the definition of code of ethics set forth in Item 406(b) of Regulation S-K by posting such information on its website.

ITEM 11 — EXECUTIVE COMPENSATION

      The information required by this item will be set forth under the captions “Corporate Governance — Compensation of Directors”, “Corporate Governance — Compensation Committee Interlocks and Insider Participation” and “Compensation of Executive Officers” in the Proxy Statement, which sections are incorporated herein by reference.

73

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

      The information required by this item will be set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement, which sections are incorporated herein by reference.

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item will be set forth under the caption “Certain Relationships and Related Transactions” in the Proxy Statement, which section is incorporated herein by reference.

ITEM 14 — PRINCIPAL ACCOUNTING FEES AND SERVICES

      The information required by this item will be set forth under the caption “Independent Registered Public Accounting Firm” in the Proxy Statement, which section is incorporated herein by reference.

PART IV

ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (a) The following documents are filed as part of this report:

      1. Financial Statements

      All financial statements of the Registrant as set forth under Item 8 of this Annual Report on Form 10-K.

      2. Financial Statement Schedules

      All schedules have been omitted because either they are not applicable or the required information is shown in the financial statements.

      3. Exhibits

Exhibit
No.
	3	.1*	—	Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed with the Commission on November 14, 2000).
	3	.2*	—	Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	4	.1*	—	Form of Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	4	.2*	—	Registration Rights Agreement among the Company and the stockholders named therein (incorporated by reference to Exhibit 4.2 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.1*	—	Loan Agreement dated as of June 30, 2003 among Hydril Company, Banc One Capital Markets, Inc. and Bank One, NA. (incorporated by reference to exhibit 10.1 of the Company’s Form 10-Q dated June 30, 2003).
	10	.2*+	—	Employment Agreement with Neil Russell dated October 1, 2002 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the quarter ended September 30, 2002).
	10	.3*+	—	Employment Agreement with Neil Russell dated March 12, 2004 (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-K for the year-ended December 31, 2004).

74

Exhibit
No.
	10	.4*+	—	Hydril Company 1999 Stock Option Plan (incorporated by reference to Exhibit 10.1 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.5*+	—	Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.3 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.6*+	—	Amendment to Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.5 of the Company’s Form 10-K for the year-ended December 31, 2003).
	10	.7*+	—	Form of Stock Option Award Agreement for Employees under the Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.7 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.8*+	—	Form of Stock Option Award Agreement for Non-employee Directors under the Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.8 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.9*+	—	Form of Restricted Stock Unit Award Agreement for Employees under the Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.10*+	—	Form of Restricted Stock Award Agreement for Employees under the Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.11*+	—	Form of Indemnification Agreement (incorporated by reference to Exhibit 10.5 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.12*+	—	Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.13*+	—	Hydril Company Restoration Plan (incorporated by reference to Exhibit 10.13 of the Company’s Form 10-K for the year-ended December 31, 2001).
	10	.14*+	—	Form of Change in Control Agreement (incorporated by reference to Exhibit 10.14 of the Company’s Form 10-Q for the quarter ended June 30, 2004).
	10	.15+	—	Description of Non-employee Director Compensation.
	10	.16*+	—	Executive Officer 2006 Bonus Criteria under the 2006 Management Incentive Plan (incorporated by reference to the Company’s Form 8-K filed with the Commission on March 10, 2006).
	10	.17*+	—	2006 Management Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the Commission on March 10, 2006).
	10	.18*+	—	Executive Officer Salaries (incorporated by reference to the Company’s Form 8-K filed with the Commission on March 10, 2006).
	10	.19*+	—	Form of Restricted Stock Unit Agreement (Performance-Based) for Employees under the Hydril 2000 Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the quarter ended June 30, 2005).
	10	.20*+	—	Hydril Company 2005 Incentive Plan (incorporated by reference to Annex A to our Definitive Proxy Statement on Schedule 14A filed with the Commission on April 8, 2005).
	10	.21*+	—	Form of Deferred Share Unit Award Agreement between Hydril and Non-employee Directors (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed with the Commission on May 23, 2005).
	10	.22*+	—	Form of Change in Control Renewal Agreement for Executive Officers (through December 31, 2006) (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the Commission on March 10, 2006).
	21	.1	—	Subsidiaries of the Registrant.
	23	.1	—	Consent of Independent Registered Public Accounting Firm.

75

Exhibit
No.
	24	.1	—	Powers of Attorney.
	31	.1	—	Certification by Christopher T. Seaver, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
	31	.2	—	Certification by Chris D. North, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
	32	.1	—	Certification by Christopher T. Seaver, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
	32	.2	—	Certification by Chris D. North, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

*	Incorporated by reference as indicated.
+	Denotes management compensatory plan or agreement.

76

SIGNATURE

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 13th day of March 2006.

HYDRIL COMPANY

By:  /s/ Chris D. North

Chris D. North

Chief Financial Officer (Authorized officer and principal accounting and financial officer)

      Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated below on the 13th day of March 2006.

Signature		Title
/s/ Christopher T. Seaver Christopher T. Seaver		President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Chris D. North Chris D. North		Chief Financial Officer (Authorized Officer and Principal Accounting and Financial Officer)
* Richard C. Seaver		Chairman of the Board
* Jerry S. Cox		Director
* Roger Goodan		Director
* Gordon T. Hall		Director
* Kenneth S. McCormick		Director
* Patrick T. Seaver		Director
* T. Don Stacy		Director
* Lew O. Ward		Director
*By:	/s/ Christopher T. Seaver Christopher T. Seaver Attorney-in-fact

77

INDEX TO EXHIBITS

Exhibit
No.
	3	.1*	—	Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed with the Commission on November 14, 2000).
	3	.2*	—	Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	4	.1*	—	Form of Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	4	.2*	—	Registration Rights Agreement among the Company and the stockholders named therein (incorporated by reference to Exhibit 4.2 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.1*	—	Loan Agreement dated as of June 30, 2003 among Hydril Company, Banc One Capital Markets, Inc. and Bank One, NA. (incorporated by reference to exhibit 10.1 of the Company’s Form 10-Q dated June 30, 2003).
	10	.2*+	—	Employment Agreement with Neil Russell dated October 1, 2002 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the quarter ended September 30, 2002).
	10	.3*+	—	Employment Agreement with Neil Russell dated March 12, 2004 (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.4*+	—	Hydril Company 1999 Stock Option Plan (incorporated by reference to Exhibit 10.1 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.5*+	—	Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.3 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.6*+	—	Amendment to Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.5 of the Company’s Form 10-K for the year-ended December 31, 2003).
	10	.7*+	—	Form of Stock Option Award Agreement for Employees under the Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.7 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.8*+	—	Form of Stock Option Award Agreement for Non-employee Directors under the Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.8 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.9*+	—	Form of Restricted Stock Unit Award Agreement for Employees under the Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.10*+	—	Form of Restricted Stock Award Agreement for Employees under the Hydril Company 2000 Incentive Plan (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K for the year-ended December 31, 2004).
	10	.11*+	—	Form of Indemnification Agreement (incorporated by reference to Exhibit 10.5 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.12*+	—	Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 of Amendment No. 1 to the Registration Statement on Form S-1 of the Company filed with the Commission on July 31, 2000).
	10	.13*+	—	Hydril Company Restoration Plan (incorporated by reference to Exhibit 10.13 of the Company’s Form 10-K for the year-ended December 31, 2001).
	10	.14*+	—	Form of Change in Control Agreement (incorporated by reference to Exhibit 10.14 of the Company’s Form 10-Q for the quarter ended June 30, 2004).
	10	.15+	—	Description of Non-employee Director Compensation.
	10	.16*+	—	Executive Officer 2006 Bonus Criteria under the 2006 Management Incentive Plan (incorporated by reference to the Company’s Form 8-K filed with the Commission on March 10, 2006).

Exhibit
No.
	10	.17*+	—	2006 Management Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the Commission on March 10, 2006).
	10	.18*+	—	Executive Officer Salaries (incorporated by reference to the Company’s Form 8-K filed with the Commission on March 10, 2006).
	10	.19*+	—	Form of Restricted Stock Unit Agreement (Performance-Based) for Employees under the Hydril 2000 Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the quarter ended June 30, 2005).
	10	.20*+	—	Hydril Company 2005 Incentive Plan (incorporated by reference to Annex A to our Definitive Proxy Statement on Schedule 14A filed with the Commission on April 8, 2005).
	10	.21*+	—	Form of Deferred Share Unit Award Agreement between Hydril and Non-employee Directors (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed with the Commission on May 23, 2005).
	10	.22*+	—	Form of Change in Control Renewal Agreement for Executive Officers (through December 31, 2006) (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the Commission on March 10, 2006).
	21	.1	—	Subsidiaries of the Registrant.
	23	.1	—	Consent of Independent Registered Public Accounting Firm.
	24	.1	—	Powers of Attorney.
	31	.1	—	Certification by Christopher T. Seaver, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
	31	.2	—	Certification by Chris D. North, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
	32	.1	—	Certification by Christopher T. Seaver, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
	32	.2	—	Certification by Chris D. North, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

*	Incorporated by reference as indicated.
+	Denotes management compensatory plan or agreement.

EX-10.15

Exhibit 10.15

Compensation of Directors

Nonemployee Directors: Compensation of Nonemployee Directors, aside from that provided pursuant to the Company’s incentive plans, is as follows:

     Retainer:

Base: $33,000 per year

Serving as a committee chair: Additional $15,000 per year

     Compensation for Attendance at Meetings:

$1,100 for each Board meeting

$1,100 for each Committee meeting

     Deferred Share Units: The Hydril Company 2000 Incentive Plan provides for an automatic annual nonqualified stock option award to each non-employee director for 3,000 shares of common stock. In 2005, the non-employee directors waived the automatic grant and, in lieu of the options, each non-employee director was awarded 2,000 deferred share units. The awards will vest and become payable in full on June 1, 2008. Upon vesting, the deferred share units are settled in cash at the then fair market value of the common stock on a one-for-one basis. As the deferred share units cannot result in the issuance of shares of Hydril common stock, they are not issued in connection with any Hydril incentive plan. See the form of deferred share unit agreement filed as an exhibit to the Company’s reports under the Securities Exchange Act of 1934 for more information.

Employee Directors: As Chairman of the Board, Richard Seaver is regarded as an employee of Hydril and was paid $154,167 by Hydril. Directors who are employees of Hydril receive no additional compensation for serving on the Board of Directors. See the Company’s other disclosures in its reports under the Securities Exchange Act of 1934 and exhibits filed therewith regarding executive compensation for a description of compensation.

Reimbursement of Expenses: All directors are reimbursed for transportation, lodging, meals and other out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof, including for their spouse for one meeting each year, and for other expenses incurred in their capacity as directors.

EX-21.1

Exhibit 21.1

Subsidiaries of Hydril Company

Percentage of Voting Securities Owned by Hydril Company

Hydril General LLC (Delaware)			100%
	Hydril Company LP (Delaware)		1%
Hydril Limited LLC (Delaware)			100%
	Hydril Company LP (Delaware)		99%
		Hydril Jindal International Private Ltd. (India)	50%	(5)
Hydril India JV, LLC (Delaware)			100%
	Hydril India Private Ltd. (India)		49%	(6)
Hydril Acquisition Sub, Inc. LP (Delaware)			100%
	3084408 Nova Scotia Company		100%
		RF Ironworks Limited Partnership	99%	(1)
		Hydril Canadian Company Limited Partnership	99.9%	(4)
		3078778 Nova Scotia Company	100%
		3083489 Nova Scotia Company	100%
Hydril S.A. (Switzerland)			53%	(2)
Hydril U.K. Ltd. (England, U.K.)			100%
	Panelglen, Ltd. (England, U.K.)		100%
		Flowguard, Ltd. (England, U.K.)	100%
Hydril Private Ltd. (Republic of Singapore)			100%
	Technical Drilling & Production Services Nigeria, Ltd. (Nigeria)		60%
	P.T. Hydril Indonesia		99%	(3)
Hydril S.A. de C.V. (Mexico)			100%
Bettis de Mexico S.A. de C.V. (Mexico)			100%
Hydril Pressure Control S. de R.L. de C.V. (Mexico)			99.6%	(7)

(1)	3078778 Nova Scotia Company owns the remaining 1% equity interest in RF Ironworks Limited Partnership.
(2)	Hydril Private Ltd. owns the remaining 47% equity interest in Hydril S.A.
(3)	Hydril Company owns the remaining 1%.
(4)	3083489 Nova Scotia Company owns the remaining 0.1% equity interest in Hydril Canadian Company Limited Partnership.
(5)	Joint venture 50% owned by Hydril Company LP.
(6)	Joint venture 49% owned by Hydril India JV, LLC.
(7)	Hydril Acquisition Sub, Inc. owns the remaining 0.4%.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

      We consent to the incorporation by reference in Registration Statement No. 333-46706 on Form S-8 of our reports dated March 13, 2006, relating to the financial statements of Hydril Company and management’s report on the effectiveness of internal control over financial reporting appearing in the Annual Report on Form 10-K of Hydril Company for the year ended December 31, 2005.

/s/ Deloitte & Touche LLP

Houston, Texas

March 13, 2006

EX-24.1

Exhibit 24.1

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint CHRISTOPHER T. SEAVER and CHRIS D. NORTH, and each of them severally, as his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorneys or either of them shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Kenneth S. McCormick

Kenneth S. McCormick

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint CHRISTOPHER T. SEAVER and CHRIS D. NORTH, and each of them severally, as his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorneys or either of them shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Richard C. Seaver

Richard C. Seaver

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint CHRISTOPHER T. SEAVER and CHRIS D. NORTH, and each of them severally, as his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorneys or either of them shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Jerry S. Cox

Jerry S. Cox

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint CHRISTOPHER T. SEAVER and CHRIS D. NORTH, and each of them severally, as his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorneys or either of them shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Patrick T. Seaver

Patrick T. Seaver

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint CHRISTOPHER T. SEAVER and CHRIS D. NORTH, and each of them severally, as his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorneys or either of them shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ T. Don Stacy

T. Don Stacy

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint CHRISTOPHER T. SEAVER and CHRIS D. NORTH, and each of them severally, as his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorneys or either of them shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Lew O. Ward

Lew O. Ward

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned, in his capacity as an officer of the Company, does hereby appoint CHRISTOPHER T. SEAVER as his true and lawful attorney, with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as an officer of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorney shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Said attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Chris D. North

Chris D. North

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director and officer of the Company, does hereby appoint CHRIS D. NORTH as his true and lawful attorney, with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director and officer of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorney shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Said attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Christopher T. Seaver

Christopher T. Seaver

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint CHRISTOPHER T. SEAVER and CHRIS D. NORTH, and each of them severally, as his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorneys or either of them shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Roger Goodan

Roger Goodan

POWER OF ATTORNEY

      WHEREAS, HYDRIL COMPANY, a Delaware corporation (the “Company”), intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), an Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with such amendments, supplements or appendices thereto as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Annual Report;

      NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint CHRISTOPHER T. SEAVER and CHRIS D. NORTH, and each of them severally, as his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report and any and all amendments, supplements or appendices thereto and all instruments necessary or incidental in connection therewith as said attorneys or either of them shall deem necessary or incidental in connection therewith and to file the same or cause the same to be filed with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them.

      IN WITNESS WHEREOF, the undersigned has executed this instrument on this 7th day of March, 2006.

/s/ Gordon T. Hall

Gordon T. Hall

EX-31.1

Exhibit 31.1

I, Christopher T. Seaver, certify that:

      1. I have reviewed this Annual Report on Form 10-K of Hydril Company;

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

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

      4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Christopher T. Seaver

Christopher T. Seaver

Chief Executive Officer

Date: March 3, 2006

EX-31.2

Exhibit 31.2

I, Chris D. North, certify that:

      1. I have reviewed this Annual Report on Form 10-K of Hydril Company;

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

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

      4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Chris D. North

Chris D. North

Chief Financial Officer

Date: March 3, 2006

EX-32.1

Exhibit 32.1

Certification Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

      Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Christopher T. Seaver, Chief Executive Officer of Hydril Company, a Delaware corporation (the “Company”), hereby certify, to my knowledge, that:

      (1) the Company’s Annual Report on Form 10-K for the year-ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Christopher T. Seaver

Christopher T. Seaver

Chief Executive Officer

Dated: March 3, 2006

EX-32.2

Exhibit 32.2

Certification Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

      Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Chris D. North, Chief Financial Officer of Hydril Company, a Delaware corporation (the “Company”), hereby certify, to my knowledge, that:

      (1) the Company’s Annual Report on Form 10-K for the year-ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Chris D. North

Chris D. North

Chief Financial Officer

Dated: March 3, 2006