Dril-Quip (DRQ)

Report of Compensation Committee on Executive Compensation

The Compensation Committee approves remuneration arrangements and compensation plans involving the Company’s directors and executive officers, including any revisions to the employment agreements of the Co-Chief Executive Officers. The Compensation Committee acts on the granting of awards to executive officers and other eligible employees under the Company’s incentive plan (except for formula grants pursuant to the employment agreements of the Co-Chief Executive Officers), and reviews annually and approves certain matters relating to each of the Co-Chief Executive Officer’s employment agreements, including the automatic extension of such agreements.

The Company’s policy is to provide executive compensation packages that attract and retain talented executive officers and deliver rewards for superior corporate performance. The Compensation Committee seeks to provide a balanced mix of cash and equity-based compensation that the Committee believes appropriate to align the short-and long-term interests of the Company’s executive officers with that of its shareholders. Achievement of short-term interests of the Company is rewarded through base salary and annual incentive compensation in the form of a cash bonus, while long-term interests are encouraged through long-term equity based compensation.

There are three basic components to the compensation of the Company’s executives: base pay; annual incentive compensation in the form of a cash bonus; and long-term equity-based compensation. Factors taken into account in determining compensation are the executive’s responsibilities, experience, leadership, potential future contributions and demonstrated individual performance.

In the past, long-term equity-based compensation was generally provided in the form of stock options, which are tied directly to stockholder return. Stock options align the interests of the Company’s executives with those of its stockholders by encouraging executives to enhance the value of the Company, and hence, the price of the Common Stock and each stockholder’s return. Long-term equity-based compensation is provided through the Company’s incentive plans. The objectives of the incentive plans are to (i) attract and retain key employees, (ii) encourage a sense of proprietorship of these persons in the Company and (iii) stimulate the active interest of these persons in the development and financial success of the Company. Awards to employees under the Company’s incentive plan may be made in the form of (i) stock options, (ii) rights to receive a payment, in cash or Common Stock, equal to the excess of the fair market value or other specified value of a number of shares of Common Stock on the date the right is exercised over a specified strike price, (iii) grants of restricted or unrestricted Common Stock or units denominated in Common Stock, (iv) grants denominated in cash and (v) grants denominated in cash, Common Stock or units denominated in Common Stock or any other property which are made subject to the attainment of one or more performance goals (“Performance Awards”). Performance

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Awards may include more than one performance goal, and a performance goal may be based on one or more business criteria applicable to the grantee, the Company as a whole or one or more of the Company’s business units and may include one or more of the following: increased revenues, net income, stock price, market share, earnings per share, return on equity or assets, or decrease in costs.

In 2004, the Company granted no options to purchase shares of Common Stock or any other long-term equity based compensation to executive officers of the Company, in part due to the uncertainty surrounding the expensing of stock options. The Committee is currently reviewing how best to structure its long-term equity-based compensation. The Company may decide to grant new options or other long-term equity-based incentives to provide continuing incentive for future performance. In making the decision to grant additional options, the Compensation Committee would expect to consider factors such as the size of previous grants and the number of options held. In addition, the Compensation Committee may consider factors including the executive’s current ownership stake in the Company, the degree to which increasing that ownership stake would provide the executive with additional incentives for future performance, the likelihood that the grant of those options would encourage the executive to remain with the Company and the value of the executive’s service to the Company.

In 2004, Mr. Brooks received base salary of $175,308, which reflects an increase of $5,269 from 2003. For 2004, Mr. Brooks received a bonus of $50,000, based on the Company’s and his performance in 2004. Mr. Brooks’ base salary and bonus are determined by the Co-Chief Executive Officers and approved by the Compensation Committee.

Each of the Company’s Co-Chief Executive Officers is compensated pursuant to an employment agreement which was entered into prior to the closing of the Company’s initial public offering and therefore prior to the formation of the Compensation Committee. Such employment agreements were approved by the Board of Directors as a whole, at a time when the Company’s Board consisted of the Co-Chief Executive Officers and Mr. Loveless. See “—Employment Agreements” for a description of such agreements. Each of the agreements includes compensation in the form of base salary, annual bonus and annual option grants. The annual bonus and option grants payable pursuant to such agreements are determined by formulas that are tied to the Company’s performance and stockholder return.

In accordance with the employment agreements, the Compensation Committee reviews annually the amount of the base salary, annual bonus and annual option grants for each of the Co-Chief Executive Officers, and may increase (but not decrease) such amounts on a basis determined by the Compensation Committee in its sole discretion. In 2004, the Co-Chief Executive Officers received base salary of $461,731, which reflects an increase of $12,069 from 2003. This increase in base salary was the result of the Committee’s evaluation of the performance of the Co-Chief Executive Officers in relation to the achievement of the Company’s financial and non-financial goals.

Under the employment agreements, the amount of the executive’s annual bonus is determined by reference to (i) the Company’s performance (measured in terms of EBIT) compared to the Company’s annual budget and (ii) the Company’s annual return on capital compared to that of an industry peer group. In accordance with the employment agreements, at the beginning of 2004, the Compensation Committee approved the Company’s 2004 budget and the industry peer group for the purposes of calculating the bonuses for the 2004 bonus year for the Co-Chief Executive Officers. In calculating the bonuses for the 2004 bonus year, in accordance with the employment agreements, the Compensation Committee reviewed the Company’s EBIT and return on capital for the year ended December 31, 2004, as calculated by the Company’s independent registered public accountants, and calculated the return on capital for the Company’s peer group for the same period. The two performance factors were equally weighted as required by the employment agreements. For the 2004 bonus year, the Compensation Committee awarded a bonus of $269,000 to each Co-Chief Executive Officer.

In October 2004, each Co-Chief Executive Officer waived his right under his employment agreement to receive options to purchase shares of Common Stock of the Company in 2004. The employment agreements

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continue to provide that each Co-Chief Executive Officer shall receive an annual grant of options that is equal to the employee’s base salary multiplied by three and divided by the market price of the Common Stock on the grant date. Each of the Co-Chief Executive Officers is currently a significant stockholder of the Company, which provides effective long-term performance incentive tied directly to stockholder return. No decisions have been made to date by the Compensation Committee regarding the amendment, if any, of the employment agreements to compensate Messrs. Reimert, Smith and Walker for waiving their rights to receive options in 2004. This matter is under discussion with the Co-Chief Executive Officers and the Compensation Committee and will be resolved at a future date.

The Compensation Committee

Gary W. Loveless

Gary L. Stone

Alexander P. Shukis