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2003 WAS OUR most difficult year since Northwest Pipe  Company became a public company in 1995. The Tubular Products Group continued to fight through adverse market conditions, as the effects of the U.S. recession lingered. The Water Transmission Group also saw a down market in 2003—the second con secutive year that bidding activity was well below our expectations. In spite of these negative  conditions, Northwest Pipe has emerged from 2003 with a sense of optimism, albeit balanced with a degree of caution. As we start 2004, we see improving conditions in our mar kets, improved cost structures 

within each business group, and improved financial stability for the Company as a whole. Tempering our enthusiasm, somewhat, is the cost of steel, which is currently reaching unprecedented heights. Our ability to manage the increased cost of our raw materials will be a key factor in how 2004 develops. 

## Water Transmission 

We faced a down market for water transmission systems in 2003. The mar ket improved in the second half, but still did not meet our expectations. Delayed bidding and alternativ e material preferences limited our opportunities in the eastern half of the country. Market activit y and results were stronger in the western United States, where we exceeded sales and margin targets f or the year. Sales in the Water Transmission Group were $146.3 million for 2003, compared to $174.5 million for 2002. Gross profit as a percent of sales held steady at 22% of the segment’s sales. In spite of t he difficult market conditions, we were able to gain market share as we worked to keep our facilities busy during the year. 

The entrance of a new steel pipe competitor in the water transmission market supports our continued belief that there is 

## TO OUR SHAREHOLDERS 

opportunity in the segment. The presence of this and other competitors also strengthens our resolve to maintain leadership in the market by leveraging our experience and technical expertise to 

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achieve our objectives. We remain the only nationwide supplier of large-diameter , high-pressure steel pipe. While we continue to refine our approach, our strategy is sound. Our national network of facilities provides us with a freight advantage over regional competitors, flexibility in deciding which projects to produce at each plant, and increased purchasing power for raw materials and supplies. 

## Tubular Products 

The Tubular Products Group recorded sales of $98.7 million in 2003 compared to $91.6 million in 2002, and gross profit of 1.1% compared to 6.1% last year. The second half of the year was much better than the first half. In the second half of 2003, the Tubular Pr oducts Group’s volume increased 17% from the same period in 2002. Our ongoing productivity improvement initiatives yielded positive results, as we met the increased demand while lowering manufacturing costs. These positive strides could not fully offset the combination of lower mar ket prices and higher cost steel in our production cycle. The Tubular Products Group r eported gross profit as a percent of sales of 3.1% in the second half of the year. 

