10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

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

Commission File Number 1-9397

Baker Hughes Incorporated

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	76-0207995 (I.R.S. Employer Identification No.)
2929 Allen Parkway, Suite 2100, Houston, Texas (Address of principal executive offices)	77019-2118 (Zip Code)

Registrant’s telephone number, including area code: (713) 439-8600

     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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

     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 October 24, 2008, the registrant has outstanding 307,530,773 shares of Common Stock, $1 par value per share.

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Condensed Statements of Operations (Unaudited) - Three months and nine months ended September 30, 2008 and 2007		2
	Consolidated Condensed Balance Sheets (Unaudited) - September 30, 2008 and December 31, 2007		3
	Consolidated Condensed Statements of Cash Flows (Unaudited) - Nine months ended September 30, 2008 and 2007		4
	Notes to Unaudited Consolidated Condensed Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		31
Item 1A.	Risk Factors		31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3.	Defaults Upon Senior Securities		32
Item 4.	Submission of Matters to a Vote of Security Holders		32
Item 5.	Other Information		32
Item 6.	Exhibits		32
Signatures			34
EX-3.2
EX-31.1
EX-31.2
EX-32

1

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Baker Hughes Incorporated
Consolidated Condensed Statements of Operations
(In millions, except per share amounts)
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues:
Sales	$	1,446.2		$	1,359.5		$	4,164.5		$	3,819.4
Services and rentals		1,563.4			1,318.1			4,513.0			3,868.5
Total revenues		3,009.6			2,677.6			8,677.5			7,687.9
Costs and expenses:
Cost of sales		1,031.9			906.7			2,951.8			2,600.0
Cost of services and rentals		995.9			859.1			2,842.0			2,437.5
Research and engineering		103.2			94.2			311.9			278.4
Marketing, general and administrative		278.2			235.0			798.6			692.1
Litigation settlement		—			—			62.0			—
Total costs and expenses		2,409.2			2,095.0			6,966.3			6,008.0
Operating income		600.4			582.6			1,711.2			1,679.9
Equity in income (loss) of affiliates		(0.2	)		—			1.5			0.4
Gain on sale of product line		—			—			28.2			—
Interest expense		(20.5	)		(16.7	)		(53.3	)		(49.7	)
Interest and dividend income		9.9			10.5			22.1			32.7
Income before income taxes		589.6			576.4			1,709.7			1,663.3
Income taxes		(160.7	)		(187.3	)		(506.5	)		(549.9	)
Net income	$	428.9		$	389.1		$	1,203.2		$	1,113.4
Basic earnings per share	$	1.40		$	1.23		$	3.91		$	3.49
Diluted earnings per share	$	1.39		$	1.22		$	3.89		$	3.47

See accompanying notes to unaudited consolidated condensed financial statements.

2

Baker Hughes Incorporated
Consolidated Condensed Balance Sheets
(In millions)

	September 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	1,127.0		$	1,054.4
Accounts receivable, net		2,794.6			2,382.9
Inventories		1,988.8			1,714.4
Deferred income taxes		212.2			181.5
Other current assets		175.9			122.4
Total current assets		6,298.5			5,455.6
Property, plant and equipment		2,623.1			2,344.6
Goodwill		1,397.1			1,354.2
Intangible assets, net		180.7			176.6
Other assets		508.2			525.6
Total assets	$	11,007.6		$	9,856.6
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	824.8		$	704.2
Short-term borrowings and current portion of long-term debt		589.1			15.4
Accrued employee compensation		515.6			456.8
Income taxes payable		130.5			190.9
Other accrued liabilities		260.1			250.6
Total current liabilities		2,320.1			1,617.9
Long-term debt		1,041.4			1,069.4
Deferred income taxes and other tax liabilities		435.3			415.6
Liabilities for pensions and other postretirement benefits		323.6			332.1
Other liabilities		101.3			116.0
Commitments and contingencies
Stockholders’ Equity:
Common stock		307.9			315.4
Capital in excess of par value		713.3			1,216.1
Retained earnings		5,894.9			4,818.3
Accumulated other comprehensive loss		(130.2	)		(44.2	)
Total stockholders’ equity		6,785.9			6,305.6
Total liabilities and stockholders’ equity	$	11,007.6		$	9,856.6

See accompanying notes to unaudited consolidated condensed financial statements.

3

Baker Hughes Incorporated
Consolidated Condensed Statements of Cash Flows
(In millions)
(Unaudited)

	Nine Months Ended
	September 30,
	2008			2007
Cash flows from operating activities:
Income from continuing operations	$	1,203.2		$	1,113.4
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Depreciation and amortization		460.6			380.3
Amortization of net deferred gains on derivatives		(3.8	)		(3.8	)
Stock-based compensation costs		47.2			40.0
Benefit for deferred income taxes		(7.7	)		(28.4	)
Gain on sale of product line		(28.2	)		—
Gain on disposal of assets		(73.5	)		(70.3	)
Equity in income of affiliates		(1.5	)		(0.4	)
Changes in operating assets and liabilities:
Accounts receivable		(415.8	)		(257.6	)
Inventories		(277.8	)		(160.8	)
Accounts payable		141.5			(31.6	)
Accrued employee compensation and other accrued liabilities		23.2			(203.1	)
Income taxes payable		(66.2	)		103.5
Income taxes paid on sale of interest in affiliate		—			(111.7	)
Other		(35.7	)		20.1
Net cash flows from operating activities		965.5			789.6
Cash flows from investing activities:
Expenditures for capital assets		(839.4	)		(811.1	)
Proceeds from disposal of property, plant and equipment		141.6			146.2
Proceeds from sale of product line		31.0			—
Acquisition of businesses, net of cash acquired		(81.5	)		—
Purchases of short-term investments		—			(2,520.7	)
Proceeds from maturities of short-term investments		—			2,812.2
Net cash flows from investing activities		(748.3	)		(373.4	)
Cash flows from financing activities:
Net borrowings of short-term debt		547.2			3.2
Repurchases of common stock		(610.6	)		(280.0	)
Proceeds from issuance of common stock		51.4			50.8
Dividends		(126.6	)		(124.5	)
Excess tax benefits from stock-based compensation		2.4			6.1
Net cash flows from financing activities		(136.2	)		(344.4	)
Effect of foreign exchange rate changes on cash		(8.4	)		24.0
Increase in cash and cash equivalents		72.6			95.8
Cash and cash equivalents, beginning of period		1,054.4			750.0
Cash and cash equivalents, end of period	$	1,127.0		$	845.8
Income taxes paid (net of refunds)	$	578.0		$	580.8
Interest paid	$	73.8		$	67.9

See accompanying notes to unaudited consolidated condensed financial statements.

4

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements

NOTE 1. GENERAL

Nature of Operations

     Baker Hughes Incorporated (“we,” “our” or “us”) is engaged in the oilfield services industry. We are a major supplier of wellbore related products and technology services and systems and provide products and services for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the worldwide oil and natural gas industry.

Basis of Presentation

     Our unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited consolidated condensed financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. These unaudited consolidated condensed financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

     In the notes to the unaudited consolidated condensed financial statements, all dollar and share amounts in tabulations are in millions of dollars and shares, respectively, unless otherwise indicated.

Reclassifications

     During the fourth quarter of 2007, we began classifying certain expenses as cost of sales and cost of services and rentals that were previously classified as selling, general and administrative expenses. The change was the result of an internal review to improve management reporting. The reclassified expenses relate to selling and field service costs which are closely related to operating activities. In addition, we have renamed selling, general and administrative expenses on the statement of operations to marketing, general and administrative expenses to more accurately describe the costs included therein. The impact of these reclassifications for the three months ended September 30, 2007 is to increase cost of sales by $92.8 million; increase cost of services and rentals by $32.5 million and decrease marketing, general and administrative expenses by $125.3 million and for the nine months ended September 30, 2007 is to increase cost of sales by $269.9 million; increase cost of services and rentals by $88.5 million and decrease marketing, general and administrative expenses by $358.4 million. These reclassifications had no impact on total costs and expenses as these changes offset one another. All prior periods have been reclassified to conform to this new presentation.

New Accounting Standards

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. SFAS 157 was originally effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In November 2007, the FASB placed a one year deferral for the implementation of SFAS 157 for nonfinancial assets and liabilities; however, SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities. We adopted all requirements of SFAS 157 on January 1, 2008, except as they relate to nonfinancial assets and liabilities, which will be adopted on January 1, 2009, as allowed under SFAS 157. See “Note 9. Fair Value of Certain Financial Assets” for further information on the impact of this standard to financial assets and liabilities. We have not yet determined the impact, if any, on our consolidated condensed financial statements for nonfinancial assets and liabilities.

     In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Additionally, it requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006; however, the requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year end statement of

5

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

financial position is effective for fiscal years ending after December 15, 2008. We adopted all requirements of SFAS 158 on December 31, 2006, except for the funded status measurement date requirement, which will be adopted on December 31, 2008, as allowed under SFAS 158. We estimate the impact of moving our funded status measurement date from our current measurement date of October 1^st to December 31^st to be a reduction of approximately $1.6 million to beginning retained earnings which will be recorded in December 2008.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure eligible financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008, and there was no impact on our consolidated condensed financial statements as we did not choose to measure any eligible financial assets or liabilities at fair value.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary in an effort to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS 160 on January 1, 2009, and have not yet determined the impact, if any, on our consolidated condensed financial statements.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R replaces FASB Statement No. 141, Business Combinations (“SFAS 141”). The statement retains the purchase method of accounting used in business combinations but replaces SFAS 141 by establishing principles and requirements for the recognition and measurement of assets, liabilities and goodwill, including the requirement that most transaction and restructuring costs related to the acquisition be expensed. In addition, the statement requires disclosures to enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will adopt SFAS 141R on January 1, 2009 for acquisitions on or after this date.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in hedged positions. The statement also requires enhanced disclosures regarding how and why entities use derivative instruments, how derivative instruments and related hedged items are accounted and how derivative instruments and related hedged items affect entities’ financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We will adopt the new disclosure requirements of SFAS 161 in the first quarter of 2009.

     In April 2008, the FASB issued FASB Staff Position SFAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations, and other U.S. GAAP principles. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008. We will adopt FSP SFAS 142-3 on January 1, 2009 and have not yet determined the impact, if any, on our consolidated condensed financial statements.

NOTE 2. GAIN ON SALE OF PRODUCT LINE

     In February 2008, we sold the assets associated with the Completion and Production segment’s Surface Safety Systems (“SSS”) product line and received cash proceeds of $31.0 million. The SSS assets sold included hydraulic and pneumatic actuators, bonnet assemblies and control systems. We recorded a pre-tax gain of $28.2 million ($18.4 million after-tax).

NOTE 3. ACQUISITIONS

     In April 2008, we acquired two reservoir consulting firms – Gaffney, Cline & Associates (“GCA”) and GeoMechanics International (“GMI”) – for $76.9 million in cash, including $3.5 million of direct transaction costs. These firms provide consulting services related to reservoir engineering, technical and managerial advisory services and reservoir geomechanics. As a result of these acquisitions, we recorded $42.9 million of goodwill and $18.9 million of intangibles, both subject to final purchase accounting

6

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

adjustments. Pro forma results of operations have not been presented because the effect of these acquisitions was not material to our consolidated condensed financial statements. Under the terms of the purchase agreements, we may be required to make additional payments of up to approximately $46.0 million based on the performance of the businesses during 2008, 2009 and 2010.

NOTE 4. STOCK-BASED COMPENSATION

     We grant various forms of equity based awards to directors, officers and other key employees. These equity based awards consist primarily of stock options, restricted stock awards and restricted stock units. We also have an Employee Stock Purchase Plan available for eligible employees to purchase shares of our common stock at a 15% discount. We recorded total stock-based compensation expense of $18.1 million and $15.9 million for the three months ended September 30, 2008 and 2007, respectively, and $47.2 million and $40.0 million for the nine months ended September 30, 2008 and 2007, respectively.

Stock Options

     Our stock option plans provide for the issuance of incentive and non-qualified stock options to directors, officers and other key employees at an exercise price equal to the market price of our common stock on the date of grant. We typically grant options twice a year in the first and third quarters.

     The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions used in the option pricing model for the nine months ended September 30, 2008 and 2007.

	2008			2007
Expected life (years)		5.5			5.1
Risk-free interest rate		3.1	%		4.8	%
Volatility		31.3	%		28.6	%
Dividend yield		0.8	%		0.7	%
Weighted-average fair value per share at grant date	$	23.72		$	24.20

     We granted 694,800 options during the nine months ended September 30, 2008 at a weighted-average exercise price per option of $73.84.

Restricted Stock Awards and Units

     In addition to stock options, the directors, officers and key employees may be granted restricted stock awards (“RSA”), which is an award of common stock with no exercise price, or restricted stock units (“RSU”), where each unit represents the right to receive at the end of a stipulated period one unrestricted share of stock with no exercise price. We typically grant RSAs and RSUs once a year in January. We determine the fair value of restricted stock awards and restricted stock units based on the market price of our common stock on the date of grant.

     We granted 524,528 RSAs and 255,438 RSUs during the nine months ended September 30, 2008 at a weighted-average value per award or unit of $73.01 and $76.31, respectively.

Employee Stock Purchase Plan

     Our Employee Stock Purchase Plan (“ESPP”) allows eligible employees to elect to contribute on an after-tax basis between 1% and 10% of their annual pay to purchase our common stock; provided, however, an employee may not contribute more than $25,000 annually to the plan pursuant to Internal Revenue Service restrictions. Shares are purchased at a 15% discount of the fair market value of our common stock on January 1^st or December 31^st, whichever is lower. We determined the fair value of our ESPP shares using the Black-Scholes option pricing model with the following assumptions.

7

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

	2008			2007
Expected life (years)		1.0			1.0
Risk-free interest rate		3.2	%		4.9	%
Volatility		32.8	%		30.5	%
Dividend Yield		0.6	%		0.7	%
Weighted-average fair value per share	$	11.43		$	10.39

     Based on contributions as currently elected by eligible employees and based on our stock price at the end of September 2008 of $63.40, we estimate we will issue approximately 756,000 shares under the ESPP on or around January 1, 2009.

NOTE 5. EARNINGS AND CASH DIVIDENDS PER SHARE

     A reconciliation of the number of shares used for the basic and diluted EPS calculation is as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Weighted average common shares outstanding for basic EPS		306.7		317.6		307.7		318.6
Effect of dilutive securities — stock plans		1.6		2.2		1.6		2.1
Adjusted weighted average common shares outstanding for diluted EPS		308.3		319.8		309.3		320.7
Future potentially dilutive shares excluded from diluted EPS:
Options with an exercise price greater than the average market price for the period		0.9		—		0.9		0.6
Cash dividends per share	$	0.15	$	0.13	$	0.41	$	0.39

NOTE 6. INVENTORIES

     Inventories are comprised of the following:

	September 30,		December 31,
	2008		2007
Finished goods	$	1,642.1	$	1,414.0
Work in process		205.5		177.5
Raw materials		141.2		122.9
Total	$	1,988.8	$	1,714.4

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment are comprised of the following:

	September 30,			December 31,
	2008			2007
Land	$	72.0		$	62.0
Buildings and improvements		834.5			774.7
Machinery and equipment		2,995.0			2,745.0
Rental tools and equipment		1,943.8			1,739.3
Subtotal		5,845.3			5,321.0
Accumulated depreciation		(3,222.2	)		(2,976.4	)
Total	$	2,623.1		$	2,344.6

8

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

NOTE 8. GOODWILL AND INTANGIBLE ASSETS

     The changes in the carrying amount of goodwill are detailed below by segment:

	Drilling			Completion
	and			and
	Evaluation			Production		Total
Balance as of December 31, 2007	$	914.0		$	440.2	$	1,354.2
Goodwill from acquisitions during the period		42.9			2.0		44.9
Translation adjustments and other		(2.2	)		0.2		(2.0	)
Balance as of September 30, 2008	$	954.7		$	442.4	$	1,397.1

     Intangible assets are comprised of the following:

	September 30, 2008							December 31, 2007
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Amount		Amortization			Net		Amount		Amortization			Net
Technology-based	$	250.9	$	(117.6	)	$	133.3	$	240.6	$	(105.1	)	$	135.5
Contract-based		15.2		(10.3	)		4.9		15.1		(9.2	)		5.9
Marketing-related		9.9		(6.0	)		3.9		5.7		(5.7	)		—
Customer-based		18.0		(4.9	)		13.1		13.6		(3.8	)		9.8
Other		0.3		(0.3	)		—		0.3		(0.3	)		—
Total amortizable intangible assets		294.3		(139.1	)		155.2		275.3		(124.1	)		151.2
Marketing-related intangible assets with indefinite useful lives		25.5		—			25.5		25.4		—			25.4
Total	$	319.8	$	(139.1	)	$	180.7	$	300.7	$	(124.1	)	$	176.6

     Intangible assets with finite useful lives are amortized either on a straight-line basis with estimated useful lives ranging from 1 to 20 years, or on a basis that reflects the pattern in which the estimated economic benefits of the intangible assets are consumed, which range from 15 to 30 years.

     Amortization expense for intangible assets included in net income for the three and nine months ended September 30, 2008 was $5.2 million and $15.3 million, respectively, and is estimated to be $20.4 million for the year 2008. Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows: 2009 – $19.9 million; 2010 – $16.5 million; 2011 – $14.8 million; 2012 – $13.4 million; and 2013 – $13.1 million.

NOTE 9. FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

     On January 1, 2008, we adopted the methods of fair value as described in SFAS 157 to value certain of our financial assets and liabilities. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The statement establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:

• Level 1 inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs).

• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or vary substantially).

• Level 3 inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available).

     SFAS 157 requires the use of observable market inputs (quoted market prices) when measuring fair value whenever possible and requires a Level 1 quoted price be used to measure fair value whenever possible.

9

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

     Financial assets and liabilities included in our financial statements and measured at fair value as of September 30, 2008 are classified based on the valuation technique level in the table below:

			Fair Value Measurement at September 30, 2008
Description	Total		Level 1		Level 2		Level 3
Assets:
Auction rate securities	$	28.1	$	—	$	—	$	28.1
Non-qualified defined contribution plan assets		124.4		124.4		—		—
Total assets at fair value	$	152.5	$	124.4	$	—	$	28.1
Liabilities:
Non-qualified defined contribution plan liabilities	$	124.4	$	124.4	$	—	$	—

Auction Rate Securities

     Our auction rate securities (“ARS”) have been designated as “available-for-sale” securities. As of September 30, 2008, our ARS investments, which consist of credit linked notes, carried split ratings ranging from AAA to A-, as provided by Standard & Poor’s and Fitch rating agencies. These notes generally combine low risk assets and credit default swaps (“CDS”) to create a security that pays interest from the assets’ coupon payments and the periodic sale proceeds of the CDS. Our ARS investments do not include any mortgage-backed securities. Since September 2007, we have been unable to sell our ARS investments because of unsuccessful auctions. As a result of the unsuccessful auctions and the downgrade in credit quality, the interest rate for each certificate resets every 28 days at one month LIBOR plus a spread determined by each certificate’s lowest assigned rating.

     We utilized Level 3 inputs to estimate the fair value of our ARS investments based on the underlying structure of each security and their collateral values, including assessments of counterparty credit quality, default risk underlying the security, expected cash flows, discount rates and overall capital market liquidity. Based on this analysis, we estimate the fair value of our ARS investments to be $28.1 million as of September 30, 2008. The fair value of the securities at September 30, 2008, did not change from the beginning of the quarterly period. The valuation of our ARS investments is subject to uncertainties that are difficult to predict and require significant judgment. The fair value of our ARS investments could change significantly in the future based on various factors including changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and counterparty risk. Based on our ability and intent to hold such investments for a period of time sufficient to allow for any anticipated recovery in the fair value, we have classified all of our auction rate securities as noncurrent investments.

Non-qualified Defined Contribution Plan Assets and Liabilities

     We have a non-qualified defined contribution plan that provides basically the same benefit as our Thrift Plan for certain non-U.S. employees who are not eligible to participate in the Thrift Plan. In addition, we provide a non-qualified supplemental retirement plan for certain officers and employees whose benefits under the Thrift Plan and/or U.S. defined benefit pension plan are limited by federal tax law. The assets of both plans consist primarily of mutual funds and to a lesser extent equity securities. We hold the assets of these plans under a grantor trust and have recorded the assets along with the related deferred compensation liability at fair value. The assets and liabilities were valued using Level 1 inputs at the reporting date and were based on quoted market prices from various major stock exchanges.

Nonfinancial Assets and Liabilities

     In November 2007, the FASB placed a one year deferral for the implementation of SFAS 157 for nonfinancial assets and liabilities. Accordingly, we will adopt the methods of fair value described in SFAS 157 for nonfinancial assets and liabilities on January 1, 2009. We have not yet determined the impact, if any, on our consolidated condensed financial statements for these nonfinancial assets and liabilities, which include, but are not limited to, goodwill, assets held for sale and asset retirement obligations.

NOTE 10. FINANCIAL INSTRUMENTS

Foreign Currency Forward Contracts

     At September 30, 2008, we had entered into several foreign currency forward contracts with notional amounts aggregating $125.0 million to hedge exposure to currency fluctuations in various foreign currencies, including British Pound Sterling, Euro, Norwegian

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Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

Krone and the Brazilian Real. These contracts are designated and qualify as fair value hedging instruments. Based on quoted market prices as of September 30, 2008 for contracts with similar terms and maturity dates, we recorded a gain of $0.9 million to adjust these foreign currency forward contracts to their fair market value. This gain offsets designated foreign exchange losses resulting from the underlying exposures and is included in marketing, general and administrative expenses in our consolidated condensed statement of operations.

NOTE 11. INDEBTEDNESS

     On March 3, 2008, we initiated a commercial paper program (the “Program”) under which we may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $500.0 million. On April 2, 2008, we increased the Program to an aggregate of $1.0 billion. The proceeds of the Program are used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. Commercial paper issued under the Program is scheduled to mature within approximately 270 days of issuance. The commercial paper is not redeemable prior to maturity and will not be subject to voluntary prepayment. At September 30, 2008, we had $557.5 million outstanding in commercial paper at a weighted average interest rate of 2.03%.

     On April 1, 2008, we entered into a credit agreement (the “2008 Credit Agreement”) for a committed $500.0 million revolving credit facility that expires in March 2009. The 2008 Credit Agreement contains certain covenants, which, among other things, require the maintenance of a funded indebtedness to total capitalization ratio (a defined formula per the agreement) of less than or equal to 0.60, restrict certain merger transactions or the sale of all or substantially all of our assets or a significant subsidiary and limit the amount of subsidiary indebtedness. Upon the occurrence of certain events of default, our obligations under the 2008 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2008 Credit Agreement, covenant defaults and other customary defaults.

     At September 30, 2008, we had $1,535.7 million of credit facilities with commercial banks, of which $1.0 billion are committed revolving credit facilities, which includes the 2008 Credit Agreement. The committed facilities expire on July 7, 2012 ($500.0 million), unless extended, and on March 31, 2009 ($500.0 million). There were no direct borrowings under the facilities during the nine months ended September 30, 2008; however, to the extent we have outstanding commercial paper, our ability to borrow under the facilities is reduced.

     At September 30, 2008, we have short-term borrowings and current portion of long-term debt of $1,089.1 million. When applicable, based on our liquidity and other requirements, we classify short-term borrowings and current portion of long-term debt as long-term to the extent of our long-term committed facility that expires in 2012 because we have the ability under this facility and the intent to maintain these obligations for longer than one year. Accordingly, we have classified $500.0 million as long-term debt and $589.1 million as short-term debt at September 30, 2008.

     On October 28, 2008, we sold $500.0 million of 6.50% Senior Notes that will mature November 15, 2013, and $750.0 million of 7.50% Senior Notes that will mature November 15, 2018. See “Note 17. Subsequent Event” for a more detailed description of the issuance of the notes.

NOTE 12. SEGMENT AND RELATED INFORMATION

     We are a major supplier of wellbore related products and technology services and systems and provide products and services for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the worldwide oil and natural gas industry. We report results for our product-line focused divisions under two segments: the Drilling and Evaluation segment and the Completion and Production segment. We have aggregated the divisions within each segment because they have similar economic characteristics and because the long-term financial performance of these divisions is affected by similar economic conditions. They also operate in the same markets, which includes all of the major oil and natural gas producing regions of the world. The results of each segment are evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance.

• The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids (drilling fluids), Hughes Christensen (oilfield drill bits), INTEQ (drilling, measurement-while-drilling and logging-while-drilling) and Baker Atlas (wireline formation evaluation and wireline completion services) divisions and also includes GCA and GMI, our newly acquired reservoir consulting firms. The Drilling and Evaluation segment provides products and services used to drill and evaluate oil and natural gas wells as well as consulting services used in the analysis of oil and gas reservoirs.

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Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

• The Completion and Production segment consists of the Baker Oil Tools (workover, fishing and completion equipment), Baker Petrolite (oilfield specialty chemicals), Centrilift (electric submersible pumps and progressing cavity pumps) divisions, the ProductionQuest (production optimization and permanent monitoring) business unit, and Integrated Operations and Project Management. The Completion and Production segment provides equipment and services used from the completion phase through the productive life of oil and natural gas wells.

     The performance of our segments is evaluated based on segment profit (loss), which is defined as income before income taxes, interest expense, and interest and dividend income. The “Corporate and Other” segment loss includes corporate expenses, interest expense, interest and dividend income and certain gains and losses not allocated to the segments. During the fourth quarter of 2007, we started allocating certain expenses, previously reported in “Corporate and Other” to the Drilling and Evaluation and Completion and Production segments. These expenses consist of administrative operations support costs that are more closely related to operating activities. The impact of this allocation was a reduction to “Corporate and Other” segment loss of $4.2 million for the three months ended September 30, 2007 and $10.6 million for the nine months ended September 30, 2007. All prior periods have been reclassified to conform to this new presentation.

	Drilling and		Completion and		Total		Corporate
	Evaluation		Production		Oilfield		and Other			Total
Revenues
Three months ended September 30, 2008	$	1,558.1	$	1,451.4	$	3,009.5	$	0.1		$	3,009.6
Three months ended September 30, 2007		1,356.0		1,321.8		2,677.8		(0.2	)		2,677.6
Nine months ended September 30, 2008	$	4,476.1	$	4,201.3	$	8,677.4	$	0.1		$	8,677.5
Nine months ended September 30, 2007		3,923.2		3,764.7		7,687.9		—			7,687.9
Segment profit (loss)
Three months ended September 30, 2008	$	346.6	$	322.8	$	669.4	$	(79.8	)	$	589.6
Three months ended September 30, 2007		357.1		287.2		644.3		(67.9	)		576.4
Nine months ended September 30, 2008	$	1,062.9	$	908.5	$	1,971.4	$	(261.7	)	$	1,709.7
Nine months ended September 30, 2007		1,048.8		797.4		1,846.2		(182.9	)		1,663.3
Total assets
As of September 30, 2008	$	5,365.1	$	4,524.5	$	9,889.6	$	1,118.0		$	11,007.6
As of December 31, 2007		4,720.4		4,095.9		8,816.3		1,040.3			9,856.6

     The following table presents the details of the segment profit (loss) for “Corporate and Other”:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Corporate and other expenses	$	(69.2	)	$	(61.7	)	$	(196.7	)	$	(165.9	)
Litigation settlement		—			—			(62.0	)		—
Gain on sale of product line		—			—			28.2			—
Interest expense		(20.5	)		(16.7	)		(53.3	)		(49.7	)
Interest and dividend income		9.9			10.5			22.1			32.7
Total	$	(79.8	)	$	(67.9	)	$	(261.7	)	$	(182.9	)

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Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

NOTE 13. EMPLOYEE BENEFIT PLANS

     We have noncontributory defined benefit pension plans (“Pension Benefits”) covering employees primarily in the U.S., the U.K. and Germany. We also provide certain postretirement health care benefits (“other postretirement benefits”), through an unfunded plan, to substantially all U.S. employees who retire and have met certain age and service requirements.

     The components of net periodic benefit cost are as follows for the three months ended September 30:

													Other Postretirement
	U.S. Pension Benefits						Non-U.S. Pension Benefits						Benefits
	2008			2007			2008			2007			2008		2007
Service cost	$	7.6		$	7.9		$	0.7		$	0.7		$	2.1	$	1.9
Interest cost		4.3			3.9			4.4			4.4			2.3		2.2
Expected return on plan assets		(9.6	)		(8.6	)		(5.5	)		(4.8	)		—		—
Amortization of prior service cost		0.1			0.2			—			—			0.3		0.3
Amortization of net loss		0.1			0.1			0.3			0.7			—		—
Net periodic benefit cost/(income)	$	2.5		$	3.5		$	(0.1	)	$	1.0		$	4.7	$	4.4

     The components of net periodic benefit cost are as follows for the nine months ended September 30:

													Other Postretirement
	U.S. Pension Benefits						Non-U.S. Pension Benefits						Benefits
	2008			2007			2008			2007			2008		2007
Service cost	$	22.8		$	23.7		$	2.1		$	2.1		$	6.3	$	5.7
Interest cost		12.9			11.7			13.2			13.2			6.9		6.6
Expected return on plan assets		(28.8	)		(25.8	)		(16.5	)		(14.4	)		—		—
Amortization of prior service cost		0.3			0.6			—			—			0.9		0.9
Amortization of net loss		0.3			0.3			0.9			2.1			—		—
Net periodic benefit cost	$	7.5		$	10.5		$	(0.3	)	$	3.0		$	14.1	$	13.2

NOTE 14. GUARANTEES

     In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds, performance letters of credit and other bank issued guarantees, which totaled approximately $639.9 million at September 30, 2008. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our consolidated condensed financial statements.

     We sell certain products 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, repair at no cost to the customer or the issuance of a credit to the customer. We accrue amounts for estimated warranty claims based upon current and historical product sales data, warranty costs incurred and any other related information known to us.

     The changes in the aggregate product warranty liabilities for the nine months ended September 30, 2008 are as follows:

Balance as of December 31, 2007	$	14.8
Claims paid or settled		(8.1	)
Additional warranties issued		3.9
Revisions in estimates of previously issued warranties		(0.3	)
Other		(0.3	)
Balance as of September 30, 2008	$	10.0

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Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

NOTE 15. COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by and distributions to owners. The components of our comprehensive income (loss), net of related tax, are as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2007		2008			2007
Net income	$	428.9		$	389.1	$	1,203.2		$	1,113.4
Other comprehensive income (loss):
Foreign currency translation adjustments during the period		(101.3	)		38.4		(81.4	)		79.5
Pension and other postretirement benefits		5.0			0.1		2.9			(0.5	)
Unrealized loss on available-for-sale securities		—			—		(7.5	)		—
Total comprehensive income	$	332.6		$	427.6	$	1,117.2		$	1,192.4

     Total accumulated other comprehensive loss consisted of the following:

	September 30,			December 31,
	2008			2007
Foreign currency translation adjustments	$	(69.5	)	$	11.9
Pension and other postretirement benefits		(53.2	)		(56.1	)
Unrealized loss on available-for-sale securities		(7.5	)		—
Total accumulated other comprehensive loss	$	(130.2	)	$	(44.2	)

NOTE 16. LITIGATION

     We are involved in litigation or proceedings that have arisen in our business activities. We insure against these risks to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation. We record accruals for the uninsured portion of losses. The accruals for losses are calculated by estimating losses for claims using historical claim data, specific loss development factors and other information as necessary.

     On March 29, 2002, we announced that we had been advised that the SEC and the Department Of Justice (“DOJ”) were conducting investigations into allegations of violations of law relating to Nigeria and other related matters. The SEC issued a formal order of investigation into possible violations of provisions under the Foreign Corrupt Practices Act (“FCPA”) regarding antibribery, books and records and internal controls. In connection with the investigations, the SEC issued subpoenas seeking information about our operations in Angola (subpoena dated August 6, 2003) and Kazakhstan (subpoenas dated August 6, 2003 and April 22, 2005) as part of its ongoing investigation. We provided documents to and cooperated fully with the SEC and DOJ. In addition, we conducted internal investigations into these matters. Our internal investigations identified issues regarding the propriety of certain payments and apparent deficiencies in our books and records and internal controls with respect to certain operations in Angola, Kazakhstan and Nigeria, as well as potential liabilities to government authorities in Nigeria. Evidence obtained during the course of the investigations was provided to the SEC and DOJ.

     On April 26, 2007, the United States District Court, Southern District of Texas, Houston Division (the “Court”) unsealed a three-count criminal information that had been filed against us as part of the execution of a Deferred Prosecution Agreement (the “DPA”) between us and the DOJ. The three counts arise out of payments made to an agent in connection with a project in Kazakhstan and include conspiracy to violate the FCPA, a substantive violation of the antibribery provisions of the FCPA, and a violation of the FCPA’s books-and-records provisions. All three counts relate to our operations in Kazakhstan during the period from 2000 to 2003. Although we did not plead guilty to that information, we face prosecution under that information, and possibly under other charges as well, if we fail to comply with the terms of the DPA. Those terms include, for the two-year term of the DPA, full cooperation with the government; compliance with all federal criminal law, including but not limited to the FCPA; and adoption of a Compliance Code containing specific provisions intended to prevent violations of the FCPA. The DPA also requires us to retain an independent monitor for a term of three years to assess and make recommendations about our compliance policies and procedures and our implementation of those procedures. Provided that we comply with the DPA, the DOJ has agreed not to prosecute us for violations of the FCPA based

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Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

on information that we have disclosed to the DOJ regarding our operations in Nigeria, Angola, Kazakhstan, Indonesia, Russia, Uzbekistan, Turkmenistan, and Azerbaijan, among other countries.

     On the same date, the Court also accepted a plea of guilty by our subsidiary Baker Hughes Services International, Inc. (“BHSII”) pursuant to a plea agreement between BHSII and the DOJ (the “Plea Agreement”) based on similar charges relating to the same conduct. Pursuant to the Plea Agreement, BHSII agreed to a three-year term of organizational probation. The Plea Agreement contains provisions requiring BHSII to cooperate with the government, to comply with all federal criminal law, and to adopt a Compliance Code similar to the one that the DPA requires of the Company.

     Also on April 26, 2007, the SEC filed a Complaint (the “SEC Complaint”) and a proposed order (the “SEC Order”) against us in the Court. The SEC Complaint and the SEC Order were filed as part of a settled civil enforcement action by the SEC, to resolve the civil portion of the government’s investigation of us. As part of our agreement with the SEC, we consented to the filing of the SEC Complaint without admitting or denying the allegations in the SEC Complaint, and also consented to the entry of the SEC Order. The SEC Complaint alleges civil violations of the FCPA’s antibribery provisions related to our operations in Kazakhstan, the FCPA’s books-and-records and internal-controls provisions related to our operations in Nigeria, Angola, Kazakhstan, Indonesia, Russia, and Uzbekistan, and the SEC’s cease and desist order of September 12, 2001. The SEC Order became effective on May 1, 2007, which is the date it was confirmed by the Court. The SEC Order enjoins us from violating the FCPA’s antibribery, books-and-records, and internal-controls provisions. As in the DPA, it requires that we retain the independent monitor to assess our FCPA compliance policies and procedures for the three-year period.

     Under the terms of the settlements with the DOJ and the SEC, the Company and BHSII paid in the second quarter of 2007, $44.1 million ($11 million in criminal penalties, $10 million in civil penalties, $19.9 million in disgorgement of profits and $3.2 million in pre-judgment interest) to settle these investigations. In the fourth quarter of 2006, we recorded a financial charge for the potential settlement.

     We retained in 2007 and the SEC and DOJ approved an independent monitor to assess our FCPA compliance policies and procedures for the specified three-year period. During March 2008, the independent monitor provided us with his initial recommendations relating to our compliance policies and procedures, primarily in the areas of internal controls, internal audit, agent due diligence, customs, training, human resources, and related matters. Consistent with the monitor’s recommendations, we are continuing the comprehensive compliance activities we already have in place, enhancing and streamlining some of those activities, initiating additional activities and expediting the introduction of certain previously planned compliance related activities.

     On May 4, 2007 and May 15, 2007, The Sheetmetal Workers’ National Pension Fund and Chris Larson, respectively, instituted shareholder derivative lawsuits for and on the Company’s behalf against certain current and former members of the Board of Directors and certain current and former officers, and the Company as a nominal defendant, following the Company’s settlement with the DOJ and SEC in April 2007. On August 17, 2007, the Alaska Plumbing and Pipefitting Industry Pension Trust also instituted a shareholder derivative lawsuit for and on the Company’s behalf against certain current and former members of the Board of Directors and certain current and former officers, and the Company as a nominal defendant. On June 6, 2008, the Midwestern Teamsters Pension Trust Fund and Oppenheim Kapitalanlagegesellschaft Mbh instituted a shareholder derivative lawsuit for and on the Company’s behalf against certain current and former members of the Board of Directors and certain current and former officers, and the Company as a nominal defendant. The complaints in all four lawsuits allege, among other things, that the individual defendants failed to implement adequate controls and compliance procedures to prevent the events addressed by the settlement with the DOJ and SEC. The relief sought in the lawsuits includes a declaration that the defendants breached their fiduciary duties, an award of damages sustained by the Company as a result of the alleged breach and monetary and injunctive relief, as well as attorneys’ and experts’ fees. On May 15, 2008, the consolidated complaint of the Sheetmetal Workers’ National Pension Fund and The Alaska Plumbing and Pipefitting Industry Pension Trust was dismissed for lack of subject matter jurisdiction by the Houston Division of the United States District Court for the Southern District of Texas. The lawsuit brought by Chris Larson in the 215th District Court of Harris County, Texas was dismissed on September 15, 2008. The lawsuit brought by the Midwestern Teamsters Pension Trust Fund and Oppenheim Kapitalanlagegesellschaft Mbh is pending in the Houston Division of the United States District Court for the Southern District of Texas. An estimate of the possible loss or range of loss in connection with this lawsuit cannot be made. However, we do not expect this lawsuit to have a material adverse effect on our consolidated condensed financial statements.

     On May 12, 2006, Baker Hughes Oilfield Operations, Inc. (“BHOO”), a subsidiary of the Company, was named as a defendant in a lawsuit in the United States District Court, Eastern District of Texas brought by ReedHycalog against BHOO and other third parties arising out of alleged patent infringement relating to the sale of certain diamond drill bits utilizing certain types of polycrystalline diamond cutters sold by our Hughes Christensen division (the “ReedHycalog Claims”). On May 22, 2008, we reached an agreement for reciprocal licenses with ReedHycalog, now a division of National Oilwell Varco, Inc. regarding the ReedHycalog Claims and

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Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

related Baker Hughes counter-claims. As part of the agreement, the Company and ReedHycalog have agreed to a cross-license of the disputed technologies. As a result, in June 2008, the Company paid ReedHycalog $70.0 million in royalties for prior use of certain patented technologies, and ReedHycalog paid the Company $8.0 million in royalties for the license of certain Company patented technologies. The net pre-tax charge of $62.0 million for the settlement of this litigation is reflected in the consolidated condensed statement of operations for the nine months ended September 30, 2008. In addition, the Company will pay a minimum of $30.0 million in royalties for future use. Pursuant to the agreement, BHOO is dismissed from all claims and has released ReedHycalog from all counter-claims, in connection with the previously disclosed litigation.

NOTE 17. SUBSEQUENT EVENT

     On October 28, 2008, we sold $500.0 million of 6.50% Senior Notes that will mature November 15, 2013, and $750.0 million of 7.50% Senior Notes that will mature November 15, 2018 (collectively, the “Notes”). We intend to use a portion of the net proceeds of the Notes to repay $325.0 million aggregate principal amount of our outstanding 6.25% notes, which mature on January 15, 2009, and $200.0 million aggregate principal amount of our outstanding 6.00% notes, which mature on February 15, 2009. We will use the remaining net proceeds from the offering for general corporate purposes, which could include repaying outstanding commercial paper and funding on-going operations, business acquisitions and repurchases of our common stock. Net proceeds from the offering were approximately $1,235.5 million after deducting the underwriting discounts and estimated expenses of the offering. Interest on the Notes is payable May 15 and November 15 of each year. The first interest payment will be made on May 15, 2009, and will consist of accrued interest from October 28, 2008. The Notes are senior unsecured obligations and rank equal in right of payment to all of our existing and future senior indebtedness; senior in right of payment to any future subordinated indebtedness; and effectively junior to our future secured indebtedness, if any, and to all existing and future indebtedness of our subsidiaries. We may redeem, at our option, all or part of the Notes at any time, at the applicable make-whole redemption prices plus accrued and unpaid interest to the date of redemption.

16

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated condensed financial statements and the related notes thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Annual Report).

EXECUTIVE SUMMARY

     We are a major supplier of wellbore related products and technology services and systems and provide products and services for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the worldwide oil and natural gas industry. We report our results under two segments – Drilling and Evaluation and Completion and Production – which are aligned by product line based upon the types of products and services provided to our customers and upon the business characteristics of the divisions during business cycles. In April 2008, we acquired two reservoir consulting firms – Gaffney, Cline & Associates (“GCA”) and GeoMechanics International (“GMI”). These firms provide consulting services related to reservoir engineering, technical and managerial advisory services and reservoir geomechanics and are included in the Drilling and Evaluation segment.

• The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids (drilling fluids), Hughes Christensen (oilfield drill bits), INTEQ (drilling, measurement-while-drilling and logging-while-drilling) and Baker Atlas (wireline formation evaluation and wireline completion services) divisions and also includes GCA and GMI, our newly acquired reservoir consulting firms. The Drilling and Evaluation segment provides products and services used to drill and evaluate oil and natural gas wells as well as consulting services used in the analysis of oil and gas reservoirs.

• The Completion and Production segment consists of the Baker Oil Tools (workover, fishing and completion equipment), Baker Petrolite (oilfield specialty chemicals), Centrilift (electric submersible pumps and progressing cavity pumps) divisions, the ProductionQuest (production optimization and permanent monitoring) business unit, and Integrated Operations and Project Management. The Completion and Production segment provides equipment and services used from the completion phase through the productive life of oil and natural gas wells.

     The business operations of our divisions are organized around four primary geographic regions: North America; Latin America; Europe, Africa, Russia and the Caspian; and Middle East, Asia Pacific. Each region has a council comprised of regional vice presidents from each division and representatives from various functions as deemed necessary. The regional vice presidents report directly to each division president. Through this structure, we have placed our management close to our customers, improving our customer relationships and allowing us to react more quickly to local market conditions and needs.

     We operate in over 90 countries around the world and our corporate headquarters are in Houston, Texas. We have significant manufacturing operations in various countries, including, but not limited to, the United States (Texas, Oklahoma and Louisiana), the U.K. (Aberdeen, East Kilbride and Belfast), Germany (Celle), and Venezuela (Maracaibo). As of September 30, 2008, we had approximately 38,300 employees. Approximately 57% of our employees work outside the U.S.

BUSINESS ENVIRONMENT

     Our business environment and its corresponding operating results are significantly affected by the level of energy industry spending for the exploration, development, and production of oil and natural gas reserves. Spending by oil and natural gas exploration and production companies is dependent upon their forecasts regarding the expected future supply and future demand for oil and natural gas products and their estimates of risk-adjusted costs to find, develop, and produce reserves; and their forecasts of available cash from sales of oil and gas as well as access to debt and equity markets to fund their exploration and production spending. Changes in oil and natural gas exploration and production spending will normally result in increased or decreased demand for our products and services, which will be reflected in the rig count and other measures.

     The credit crisis, declining oil prices, lower natural gas prices, and a weakening global economic outlook are all impacting our business environment. Our customers typically fund their activity through a combination of borrowed funds and internally-generated cash flow. The limited availability of commercial credit is having a negative effect on both the general economy and the ability of our customers to continue to operate at pre-crisis levels. The decline in oil prices and natural gas prices from mid-summer highs has also negatively impacted our customers’ operational cash flow, further challenging their ability to continue to operate at recent levels as well as their future spending for our products and services. Last, the economic slowdown is also negatively impacting the incremental demand for hydrocarbon products especially in OECD (“Organization for Economic Cooperation and Development”) countries.

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Oil and Natural Gas Prices

     Oil (West Texas Intermediate (WTI) Cushing Crude Oil Spot Price) and natural gas (Henry Hub Natural Gas Spot Price) prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Oil prices ($/Bbl)	$	118.23	$	75.24	$	113.54	$	66.18
Natural gas prices ($/mmBtu)		9.06		6.18		9.71		6.96

     Oil prices averaged $118.23/Bbl in the third quarter of 2008. Prices ranged from a high of $145.29/Bbl in early July to a quarter low of $91.15/Bbl in mid September. Subsequent to the end of the third quarter of 2008, oil prices dropped to the mid $60s/Bbl closing on October 24, 2008 at $63.15/Bbl. The decrease in oil prices reflects concerns about slowing worldwide demand. In its October 2008 Oil Market Report, the International Energy Agency (“IEA”) lowered its forecast for global oil demand in 2008 and 2009 due to weaker demand in OECD countries. Reflecting at least some of the changes in the global economic outlook, the IEA now expects global oil demand to increase 0.5% to 86.5 million barrels per day in 2008, up 0.4 million barrels per day from an estimated 86.1 million barrels per day in 2007.

     Natural gas prices averaged $9.06/mmBtu in the third quarter of 2008. Natural gas prices decreased from a quarter high of $13.28/mmBtu in early July to a low of $7.10/mmBtu at September quarter end. Subsequent to the end of the third quarter of 2008, gas prices dropped to close at $6.27/mmBtu on October 24, 2008. The decrease in natural gas prices reflects strong year-on-year production growth from development of onshore fields, mild weather and lower oil prices. The increase in production has more than offset the impact of moderate demand growth and lower imports of liquefied natural gas (“LNG”) in 2008 compared to 2007. In its October 2008 Short-term Energy and Winter Fuels Outlook, the U.S. Department of Energy’s Energy Information Administration (“EIA”) projected that U.S. marketed natural gas production would increase by 6.7% in 2008 compared to 2007. Reflecting at least some of the changes in the global economic outlook, the EIA expects U.S. total natural gas consumption to increase by 2.4% in 2008 compared to 2007.

Rig Counts

     We have been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors or other outside sources. This data is then compiled and distributed to various wire services and trade associations and is published on our website. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international and U.S. workover rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian and onshore China, because this information cannot be readily obtained.

     Rigs in the U.S. are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth, which may change from time to time and may vary from region to region, to be a potential consumer of our drill bits. Rigs in Canada are counted as active if data obtained by the Canadian Association of Oilwell Drillers and Contractors indicates that drilling operations have occurred during the week and we are able to verify this information. In most international areas, rigs are counted as active if drilling operations have taken place for at least 15 days during the month. In some active international areas where better data is available, a weekly or daily average of active rigs is taken. In those international areas where there is poor availability of data, the rig counts are estimated from third party data. The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities, including production testing, completion and workover, or not significant consumers of drill bits.

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     Our rig counts are summarized in the table below as averages for each of the periods indicated.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
U.S. – land and inland waters		1,910		1,717		1,806		1,683
U.S. – offshore		69		72		65		77
Canada		433		347		372		338
North America		2,412		2,136		2,243		2,098
Latin America		386		357		380		355
North Sea		47		50		44		50
Other Europe		54		29		52		28
Africa		64		67		66		65
Middle East		287		273		279		264
Asia Pacific		257		244		254		239
Outside North America		1,095		1,020		1,075		1,001
Worldwide		3,507		3,156		3,318		3,099

Third Quarter of 2008 Compared to the Third Quarter of 2007

     In North America, the rig count increased 13%. The U.S. – land and inland waters rig count increased 11% due to the increase in drilling for both oil and natural gas. The U.S. – offshore rig count decreased 5% primarily due to the ongoing migration of rigs out of the Gulf of Mexico to more attractive international markets. The Canadian rig count was up 25% as higher average natural gas prices relative to the year-ago quarter provided improved economics for natural gas producers.

     Outside North America, the rig count increased 7%. The rig count in Latin America increased 8% with activity increases in Brazil, Mexico and Argentina. The North Sea rig count decreased 6% due to lower activity in the U.K. sector. The rig count in Africa decreased 4% driven primarily by lower activity in Nigeria and Algeria. The Middle East rig count increased 5%, driven primarily by activity increases in Egypt and Oman. The rig count in the Asia Pacific region was up 6% primarily due to increased activity in Indonesia and Australia.

RESULTS OF OPERATIONS

     The discussions below relating to significant line items from our consolidated condensed statements of operations are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items. The discussions are based on our consolidated financial results, as individual segments do not contribute disproportionately to our revenues, profitability or cash requirements. In addition, the discussions below for revenues and cost of revenues are on a combined basis as the business drivers for the individual components of product sales and services and rentals are similar.

     The table below details certain consolidated condensed statement of operations data and their percentage of revenues for the three months and nine months ended September 30, 2008 and 2007, respectively.

	Three Months Ended September 30,
	2008				2007
Revenues	$	3,009.6	100.0	%	$	2,677.6	100.0	%
Cost of revenues		2,027.8	67	%		1,765.8	66	%
Research and engineering		103.2	3	%		94.2	4	%
Marketing, general and administrative		278.2	9	%		235.0	9	%

	Nine Months Ended September 30,
	2008				2007
Revenues	$	8,677.5	100.0	%	$	7,687.9	100.0	%
Cost of revenues		5,793.8	67	%		5,037.5	66	%
Research and engineering		311.9	4	%		278.4	4	%
Marketing, general and administrative		798.6	9	%		692.1	9	%

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Revenues

	Three Months Ended
	September 30,					Increase
	2008		2007			(decrease)		% Change
Geographic Revenues:
North America	$	1,311.7	$	1,140.7		$	171.0		15	%
Latin America		285.1		240.3			44.8		19	%
Europe, Africa, Russia, and the Caspian		874.1		799.1			75.0		9	%
Middle East, Asia Pacific		538.6		497.7			40.9		8	%
Oilfield Operations revenues		3,009.5		2,677.8			331.7		12	%
Other revenue		0.1		(0.2	)		0.3		—
Total revenues	$	3,009.6	$	2,677.6		$	332.0		12	%

	Nine Months Ended
	September 30,				Increase
	2008		2007		(decrease)		% Change
Geographic Revenues:
North America	$	3,767.1	$	3,307.6	$	459.5		14	%
Latin America		786.2		663.1		123.1		19	%
Europe, Africa, Russia, and the Caspian		2,541.9		2,273.3		268.6		12	%
Middle East, Asia Pacific		1,582.2		1,443.9		138.3		10	%
Oilfield Operations revenues		8,677.4		7,687.9		989.5		13	%
Other revenue		0.1		—		0.1		—
Total revenues	$	8,677.5	$	7,687.9	$	989.6		13	%

Third Quarter of 2008 Compared to the Third Quarter of 2007

     Revenues for the three months ended September 30, 2008 increased 12% compared with the three months ended September 30, 2007, primarily due to increases in activity in certain geographic areas as evidenced by an 11% increase in the worldwide rig count and to a lesser degree price improvement and net changes in market share in selected product lines and geographic areas. These increases were partially offset by the impact of hurricanes in the Gulf of Mexico.

     North America

     Revenues in North America, which accounted for 44% of total revenues, increased 15% for the three months ended September 30, 2008 compared with the three months ended September 30, 2007, despite the unfavorable impact on our U.S. offshore revenues of approximately $55.0 million from hurricane-related disruptions in 2008. The improvement in North America revenue was led by our Completion and Production segment and directional drilling. Revenues from our U.S. land and inland waters operations increased 25% compared to an 11% increase in the rig count due to the increase in drilling for both oil and natural gas. U.S. offshore revenues decreased 14% compared to a 5% decrease in the U.S. offshore rig count. The U.S. offshore rig count continues to decline due to the ongoing migration of rigs out of the Gulf of Mexico to more attractive international markets. Canada revenues increased 12% compared to a 25% increase in the rig count as increases in natural gas prices provided improved economics for natural gas producers.

     Outside North America

     Revenues outside North America, which accounted for 56% of total revenues, increased 10% for the three months ended September 30, 2008 compared with the three months ended September 30, 2007. This increase reflected the improvement in international drilling activity, as evidenced by the 7% increase in the rig count outside North America.

     Latin America revenues increased 19% compared to an 8% increase in the rig count. The improved revenue in Latin America was led by directional systems in Brazil and Colombia; completion systems in Mexico and Venezuela; and drill bits in several countries. In Colombia, we began work on our first integrated operations contract in that country.

     Europe, Africa, Russia and the Caspian (“EARC”) revenues increased 9% compared with the third quarter of 2007. The improved revenue in the region was led by all product lines in Norway, drilling and evaluation in Libya, and completion systems and wireline in

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Kazakhstan. In the third quarter of 2008, we were awarded over $800.0 million in contract awards for future work, including a $450.0 million award for multiple product lines for BP Norway.

     Activity in the Middle East, Asia Pacific (“MEAP”) region continued to expand, reflected by an 8% increase in revenues. Middle East revenues increased 15% compared to a 5% increase in the rig count and Asia Pacific revenues were up 3% compared to a 5% increase in the rig count. The improvement in revenues from the region was led by our Drilling and Evaluation segment in Saudi Arabia and India, the Completion and Production segment in Egypt and sales of various other product lines in Oman, Pakistan, Yemen, Brunei, Malaysia, Singapore and Vietnam. In the third quarter of 2008, we were awarded several contracts for future work, including the artificial lift and completion systems for the Manifa project in Saudi Arabia; drilling fluids and completion systems for Cairn in India; a significant wireline award for ONGC India; and oilfield chemicals in Qatar.

First Nine Months of 2008 Compared to the First Nine Months of 2007

     Revenues for the nine months ended September 30, 2008 increased 13% compared with the nine months ended September 30, 2007 driven primarily by both activity increases, as evidenced by a 7% increase in the worldwide rig count, and price improvement and to a lesser degree net changes in market share partially offset by the impact of hurricanes in the Gulf of Mexico in 2008. Revenues in North America increased 14% as they were positively impacted by the increased activity from land rigs drilling for oil and natural gas in the U.S., driven by investment in drilling for oil and natural gas prospects. Revenues outside North America increased 12% reflecting increased activity in all three regions. Latin America revenues increased 19%; EARC revenues increased 12% and MEAP revenues increased 10%.

Cost of Revenues

     Cost of revenues for the three months ended September 30, 2008 increased 15% compared with the three months ended September 30, 2007. Cost of revenues as a percentage of consolidated revenues was 67% and 66% for the three months ended September 30, 2008 and 2007, respectively. Cost of revenues for the nine months ended September 30, 2008 increased 15% compared with the nine months ended September 30, 2007. Cost of revenues as a percentage of consolidated revenues was 67% and 66% for the nine months ended September 30, 2008 and 2007, respectively. The increase in cost of revenues as a percentage of consolidated revenues resulted primarily from a change in the geographic and product mix from the sale of our products and services and higher raw material and labor costs which were not fully offset by pricing increases.

Research and Engineering

     Research and engineering expenses increased 10% in the three months ended September 30, 2008 compared with the three months ended September 30, 2007 and increased 12% in the nine months ended September 30, 2008 compared with the nine months ended September 30, 2007. The increase reflects our continued commitment to developing and commercializing new technologies as well as investing in our core product offerings.

Marketing, General and Administrative

     Marketing, general and administrative expenses increased 18% in the three months ended September 30, 2008 compared with the three months ended September 30, 2007 and increased 15% in the nine months ended September 30, 2008 compared with the nine months ended September 30, 2007. The increase corresponds with increased activity and resulted primarily from higher employee related costs including compensation, training and benefits, higher marketing expenses as a result of increased activity, and an increase in legal, tax and other compliance-related expenses partially offset by higher foreign exchange gains.

Litigation Settlement

     In connection with the settlement of litigation with ReedHycalog, in June 2008, the Company paid ReedHycalog $70.0 million in royalties for prior use of certain patented technologies, and ReedHycalog paid the Company $8.0 million in royalties for the license of certain Company patented technologies. The net pre-tax charge of $62.0 million for the settlement of this litigation is reflected in the consolidated condensed statement of operations for the nine months ended September 30, 2008.

Interest Expense, and Interest and Dividend Income

     Interest expense increased $3.8 million and $3.6 million in the three and nine months ended September 30, 2008, respectively, compared with the three and nine months ended September 30, 2007. The increase is due primarily to higher average total debt levels. Interest and dividend income decreased $0.6 million and $10.6 million in the three and nine months ended September 30, 2008,

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respectively, compared with the three and nine months ended September 30, 2007. These decreases were primarily due to lower interest rates on our short-term investments in 2008 compared to 2007.

Income Taxes

     Our effective tax rate in the third quarter of 2008 is 27.3%, which is lower than the U.S. statutory income tax rate of 35% due to lower rates of tax on certain international operations, a decrease in tax reserves as a result of favorable audit settlements and the expiration of statute of limitations in various taxing jurisdictions, offset by state income taxes. The tax rate for the year 2008 is expected to be between 30.0% and 30.5%.

     Our effective tax rate in the third quarter of 2007 was 32.5%, which was lower than the U.S. statutory income tax rate of 35% due to lower rates of tax on certain international operations offset by state income taxes.

     Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. We believe we have substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. However, resolution of these matters involves uncertainties and there are no assurances that the outcomes will be favorable. We provide for uncertain tax positions pursuant to Financial Interpretation 48, Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109.

OUTLOOK

Worldwide Oil and Natural Gas Industry Outlook

     This section should be read in conjunction with the factors described in “Part II, Item 1A. Risk Factors” and in the “Forward-Looking Statements” section in this Part I, Item 2, both contained herein. These factors could impact, either positively or negatively, our expectation for: oil and natural gas demand; oil and natural gas prices; exploration and development spending and drilling activity; and production spending.

     The credit crisis, declining oil prices, lower natural gas prices, and a weakening global economic outlook are all impacting our business environment. Our customers typically fund their activity through a combination of borrowed funds and internally-generated cash flow. The limited availability of commercial credit is having a negative effect on both the general economy and the ability of our customers to continue to operate at pre-crisis levels. The decline in oil prices and natural gas prices from mid-summer highs has also negatively impacted our customers’ operational cash flow, further challenging their ability to continue to operate at recent levels, as well as their future spending for our products and services. Last, the economic slowdown is also negatively impacting the incremental demand for hydrocarbon products especially in OECD countries.

     Our outlook for exploration and development spending is based upon our expectations for customer spending in the markets in which we operate, and is driven primarily by our perception of industry expectations for oil and natural gas prices and their likely impact on customer capital and operating budgets as well as other factors that could impact the economic return oil and gas companies expect for developing oil and gas reserves. We base our energy price forecasts on information provided by our customers as well as market research and analyst reports including the Short Term Energy Outlook (“STEO”) published by the Energy Information Administration of the U.S. Department of Energy (“DOE”), the Oil Market Report published by the IEA and the Monthly Oil Market Report published by the Organization for Petroleum Exporting Countries (“OPEC”). These reports are revised monthly to reflect changes in the overall business environment. We base our outlook for production spending primarily on energy price forecasts and forecasts of expected oil and natural gas production levels.

     Our outlook for activity outside of North America is heavily influenced by our expectations for oil prices and our outlook for activity in North America is heavily influenced by our expectations for North American natural gas prices.

     Expectations for Oil Prices – Demand for oil is expected to increase between 330,000 and 800,000 barrels per day in 2008 compared to 2007. The change in non-OPEC supply in 2008 compared to 2007 is expected to be in a range between a decline of 200,000 and an increase of 400,000 barrels per day. The gap between increased demand and non-OPEC supply is expected to be met with increased OPEC supply and changes in oil inventories. Inventories and spare productive capacity, which buffer oil markets from supply disruptions, are expected to remain relatively low reflecting the continuing tight balance between supply and demand.

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     In its October 2008 STEO, the DOE forecasted oil prices to average $106/Bbl in 2008 and $107/Bbl in 2009. Subsequent to the end of the third quarter of 2008, oil prices dropped to the mid $60s/Bbl closing on October 24, 2008 at $63.15/Bbl.

     We believe that many of our customers had based their capital spending plans on oil forecasts that are similar to the IEA’s forecast. Most of our customers’ projects are expected to result in attractive economic returns at current prices. However, we believe that our customers are revising their current budgets to account for lower energy prices and reduced cash flow and that these revisions will impact their future spending plans.

     The risks to oil prices falling significantly from current levels include (1) a deeper or longer than expected recession in the U.S., and/or OECD; (2) slower than expected economic growth in China, India, developing Asia or the Middle East regions; (3) any other significant disruption to worldwide demand; (4) reduced geo-political tensions; (5) poor OPEC quota discipline; or (6) other factors that result in spare productive capacity and higher oil inventory levels or decreased demand. If oil prices rise significantly (above $100/Bbl) there is a risk that the high energy price environment could destroy demand and significantly slow economic growth. This risk is higher for the economies that are most closely tied to the U.S. Dollar. The primary risk of oil prices increasing significantly are a supply disruption in a major oil exporting country including Iran, Saudi Arabia, Iraq, Venezuela, Nigeria or Norway and continued weakening of the U.S. Dollar.

     Expectations for North America Natural Gas Prices – In its October 2008 STEO, the DOE forecasted that U.S. natural gas demand would increase 2.4% in 2008 compared to 2007. The demand for U.S. natural gas is expected to be met by production from fields in the U.S., pipeline imports from Canada, and imports of LNG with natural gas storage buffering demand and supply. At current U.S. drilling activity levels, additions of new supply have more than offset production declines and U.S. supply is expected to increase 6.7% in 2008 compared to 2007. Canadian imports are expected to decrease as a result of lower activity levels in Canada over the past two years and increased demand within Canada. LNG imports are dependent on global demand for LNG with the U.S. playing the role of the market of last resort, accepting gas into storage if it is not needed in other international markets. As a result of increasing worldwide demand for LNG cargoes, particularly in the Asia Pacific region and Europe, U.S. imports of LNG in 2008 are expected to decline by more than 50% compared to 2007 levels. In its October 2008 STEO, the DOE forecasted that U.S. natural gas prices are expected to average approximately $9.71/mmBtu in 2008. Subsequent to the end of the third quarter of 2008, gas prices dropped to close at $6.27/mmBtu on October 24, 2008.

     We believe that our customers’ forecasts are similar to the DOE’s. Prices are expected to remain volatile through 2008 with weather-driven demand, imports of Canadian gas, LNG imports and production from lower 48 gas fields playing significant roles in determining price volatility. Variations in the supply demand balance will be reflected in gas storage levels. Based on industry data regarding production decline rates, we believe that a significant reduction in drilling activity in the U.S. or Canada would result in decreased production within one or two quarters helping to rebalance supply and demand quickly.

     Industry Activity and Customer Spending – Based upon our discussions with major customers, review of published industry reports and our outlook for oil and natural gas prices described above, our outlook for drilling activity, as measured by the Baker Hughes rig count and anticipated customer spending trends are as follows:

• Outside North America – Customer spending, primarily directed at developing oil supplies, is expected to increase approximately 15% to 20% in 2008 compared with 2007. Drilling activity outside of North America is expected to increase approximately 8% to 10% in 2008 compared with 2007. Our expectations for spending could decrease if there are disruptions in key oil and natural gas production markets.

• North America – Customer spending in North America is expected to moderate in the fourth quarter of 2008 compared to the third quarter of 2008 as the restricted access to the credit markets and economic slowdown combined with lower gas prices drive customers to reduce spending to levels supported by internal cash flow. Drilling activity is expected to decrease 3% to 5% in the fourth quarter compared to the third quarter, and we expect to end the year with 1,800 to 1,840 rigs drilling. Drilling in Canada is expected to be comparable to last year’s fourth quarter.

     For additional risk factors and cautions regarding forward-looking statements, see “Part II, Item 1A. Risk Factors” and the “Forward-Looking Statements” section in this Part I, Item 2, both contained herein. This list of risk factors is not intended to be all inclusive.

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Company Outlook

     This section should be read in conjunction with the factors described in “Part II, Item 1A. Risk Factors” and in the “Forward-Looking Statements” section in this Part I, Item 2, both contained herein. These factors could impact, either positively or negatively, our expectation for oil and natural gas demand, oil and natural gas prices and drilling activity.

     North America – In the fourth quarter of 2008, we expect customers to adjust their budgets to reflect their ability to access the credit markets, the impact of lower oil and gas prices on their free cash flow, and reduced expectations for economic growth. We expect many customers in North America to reduce their planned spending in the fourth quarter of 2008 relative to the third quarter of 2008.

     Outside North America – In the fourth quarter of 2008, we expect revenues outside North America to increase 14% to 15% compared with the fourth quarter of 2007. In the second quarter of 2008, we were awarded more than $1.6 billion in project awards and extensions in Brazil and Mexico. We will incur incremental start up costs in the fourth quarter of 2008 as we invest to support these projects.

     Other factors that could have a significant positive impact on profitability include: increasing prices for our products and services; lower than expected raw material and labor costs; and/or higher than planned activity. Conversely, less than expected price increases or price deterioration, higher than expected raw material and labor costs and/or lower than expected activity would have a negative impact on profitability. Our ability to improve pricing is dependent on demand for our products and services and our competitors’ strategies of managing capacity. While the commercial introduction of new technology is an important factor in realizing pricing improvement, without capital discipline throughout the industry as a whole, meaningful improvements in our prices are not likely to be realized.

     Our 2008 capital budget supports the continuation of the infrastructure expansion we began in late 2006 and early 2007. In 2007, we opened new or expanded facilities in many regions and/or countries including Latin America, the Middle East, and Russia. In addition, we opened the first phase of our Center for Technology Innovation in Houston, a research and engineering facility to design advanced completion systems for high pressure, high temperature hostile environments. In early 2008, we opened our new campus in Dubai which includes our Middle East and Asia Pacific region headquarters, a regional operations center, a regional manufacturing center and a center which expands our Eastern Hemisphere training capabilities. Capital expenditures are expected to be approximately $1.3 billion for 2008, including approximately $250.0 million to $300.0 million that we expect to spend on infrastructure, primarily outside of North America.

     The execution of our 2008 business plan and the ability to meet our 2008 financial objectives are dependent on a number of factors. Key factors include: the strength of the oilfield services market outside North America and our ability to realize price increases commensurate with the value we provide to our customers and in excess of the increase in raw material and labor costs; our ability to meet our growth objectives in areas where the lack of transparency in the market makes operating under the Deferred Prosecution Agreement more difficult; the strength of the North America markets and our ability to maintain pricing in markets in which demand for oilfield services and industry capacity are more closely balanced. Other factors include, but are not limited to, our ability to: recruit, train and retain the skilled and diverse workforce necessary to meet our business needs; expand our business in areas that are growing rapidly with customers whose spending is expected to increase substantially, such as National Oil Companies, and in areas where we have market share opportunities (such as the Middle East, Russia and the Caspian area and India); manage raw material and component costs (especially steel alloys, chromium, copper, tungsten carbide, lead, nickel, titanium, beryllium, synthetic and natural diamonds, chemicals, barite and electronic components); continue to make ongoing improvements in the productivity of our manufacturing organization and manage our spending in the North America market depending on the relative strength or weakness of this market.

Compliance

     In connection with our settlements with the DOJ and SEC, we retained an independent monitor to assess and make recommendations about our compliance policies and procedures. In response to the monitor’s initial recommendations, we are continuing our reduction of the use of commercial sales representatives (“CSRs”) and processing agents, including the reduction of customs agents. We are also enhancing our channels of communication regarding agents while streamlining our compliance due diligence process for agents, including more clearly delineating the responsibilities of participants in the compliance due diligence process. We are adopting a risk-based compliance due diligence procedure for professional agents, enhancing our process for classifying distributors and creating a formal policy to guide business personnel in determining when subcontractors should be subjected to compliance due diligence. We are also instituting a program to ensure that each of our internal sponsors regularly reviews their CSRs, including a review with senior management.

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     In addition, we are reviewing and expanding the use of our centralized finance organization including further implementation of our enterprise-wide accounting system and company-wide policies regarding expense reporting, petty cash, the approval of invoice payments and general ledger account coding. We also have consolidated our divisional audit functions and redeployed some of these resources for corporate audits. Further, we have restructured our corporate audit function, and are incorporating additional anti-corruption procedures into some of our audits, which are applied on a country-wide basis. We are also continuing to refine and enhance our procedures for Foreign Corrupt Practices Act (“FCPA”) compliance reviews, risk assessments, and legal audit procedures.

     Further, we are working to ensure that we have adequate legal compliance coverage around the world, including the coordination of compliance advice and training across the divisions in each of our regions. We are also creating simplified summaries, flow charts, and FAQs (Frequently Asked Questions) to accompany each of our compliance related policies and we are supplementing our existing policies. At the same time, we are taking steps to achieve further centralization of our customs and logistics function including the development of uniform and simplified customs policies and procedures. We are also developing uniform procedures for the verification and documentation of services provided by customs agents and a training program in which customs and logistics personnel receive specialized training focused specifically on risks associated with the customs process. We are also adopting a written plan for reviewing and reducing the number of our customs agents and freight forwarders.

     We are continuing to centralize our human resources function, including creating consistent standards for pre-hire screening of employees, the screening of existing employees prior to promoting them to positions where they may be exposed to corruption-related risks, and creating a uniform policy for on-boarding training. We are implementing a training program that identifies employees for compliance training and sets appropriate training schedules based on job function and risk profile in addition to employment grade. Further, the contents of our training programs will be tailored to address the different risks posed by different categories of employees. We are supplementing our FCPA electronic training module while taking steps to ensure that training is available in the principal local languages of our employees and that local anti-corruption laws are discussed as part of our compliance training. We are also working to ensure that our helpline is easily accessible to employees in their own language as well as taking actions to counter any cultural norms that might discourage employees from using the helpline. We continue to provide a regular and consistent message from senior management of zero tolerance for FCPA violations, and emphasize that compliance is a positive factor in the continued success of our business.

     For a further description of our compliance programs see, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Compliance in our 2007 Annual Report.

LIQUIDITY AND CAPITAL RESOURCES

     Our objective in financing our business is to maintain adequate financial resources and access to additional liquidity. During the nine months ended September 30, 2008, cash flows from operations were the principal sources of funding. We anticipate that cash flows from operations will be sufficient to fund our liquidity needs in 2008. At September 30, 2008, we had cash and cash equivalents of $1,127.0 million, $1.0 billion of committed revolving credit facilities and a commercial paper program that provides additional liquidity. See further discussion below under “Available Credit Facilities.” Additionally, on October 28, 2008, we sold $500.0 million of 6.50% Senior Notes that will mature November 15, 2013, and $750.0 million of 7.50% Senior Notes that will mature November 15, 2018. For additional information see Note 17 of the Notes to Unaudited Consolidated Condensed Financial Statements for a more detailed description of the issuance of the notes.

     Our capital planning process is focused on utilizing our existing cash and cash flows generated from operations in ways that enhance the value of our company. During the nine months ended September 30, 2008, we used cash for a variety of activities including working capital needs, acquisition of businesses, payment of dividends, share repurchases and capital expenditures.

Cash Flows

     Cash flows provided (used) by operations by type of activity were as follows for the nine months ended September 30:

	2008			2007
Operating activities	$	965.5		$	789.6
Investing activities		(748.3	)		(373.4	)
Financing activities		(136.2	)		(344.4	)

     Statements of cash flows for entities with international operations that are local currency functional exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are noncash charges. As a result, changes

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reflected in certain accounts on the consolidated condensed statements of cash flows may not reflect the changes in corresponding accounts on the consolidated condensed balance sheets.

Operating Activities

     Cash flows from operating activities provided $965.5 million in the nine months ended September 30, 2008 compared with $789.6 million in the nine months ended September 30, 2007. This increase in cash flows of $175.9 million is primarily due to an increase in net income after adding back non cash items partially offset by the change in net operating assets and liabilities that used more cash in the nine months ended September 30, 2008 compared to the same period in 2007.

     The underlying drivers of the changes in net operating assets and liabilities are as follows:

• An increase in accounts receivable in the nine months ended September 30, 2008 used $415.8 million in cash compared with using $257.6 million in cash in the nine months ended September 30, 2007. This increase was primarily due to the increase in revenues and an increase in the quarterly days sales outstanding of approximately four days.

• Inventory used $277.8 million in cash in the nine months ended September 30, 2008 compared with using $160.8 million in cash in the nine months ended September 30, 2007 due to activity increases.

• An increase in accounts payable in the nine months ended September 30, 2008 provided $141.5 million in cash compared with using $31.6 million in cash in the nine months ended September 30, 2007. This increase in accounts payable was primarily due to an increase in operating assets to support increased activity.

• Accrued employee compensation and other accrued liabilities provided $23.2 million in cash in the nine months ended September 30, 2008 compared with using $203.1 million in cash in the nine months ended September 30, 2007. The decrease was primarily due to payments made in the first nine months of 2007 that were greater than payments made in the first nine months of 2008 including payments related to employee bonuses, non income tax liabilities and the payment of $44.1 million related to the settlement of the investigations by the SEC and DOJ.

Investing Activities

     Our principal recurring investing activity is the funding of capital expenditures to ensure that we have the appropriate levels and types of rental tools in place to generate revenues from operations. Expenditures for capital assets totaled $839.4 million and $811.1 million for the nine months ended September 30, 2008 and 2007, respectively. While the majority of these expenditures were for rental tools, including wireline tools, and machinery and equipment, we have also increased our spending on new facilities, expansions of existing facilities and other infrastructure projects.

     Proceeds from the disposal of assets were $141.6 million and $146.2 million for the nine months ended September 30, 2008 and 2007, respectively. These disposals relate to rental tools that were lost-in-hole, as well as machinery, rental tools and equipment no longer used in operations that were sold throughout the period.

     We routinely evaluate potential acquisitions of businesses of third parties that may enhance our current operations or expand our operations into new markets or product lines. We may also from time to time sell business operations that are not considered part of our core business.

     In February 2008, we sold the assets associated with the Completion and Production segment’s Surface Safety Systems product line and received cash proceeds of $31.0 million.

     During the nine months ended September 30, 2008, we paid an aggregate of $81.5 million for acquisition of businesses, the most significant of which were the acquisitions of GCA and GMI. In April 2008, we acquired GCA and GMI and paid cash of $71.7 million, including $3.5 million of direct transaction costs, and net of cash acquired of $5.2 million. As a result of these acquisitions, we recorded $42.9 million of goodwill and $18.9 million of intangible assets.

     During the nine months ended September 30, 2007, we purchased $2,520.7 million of and received proceeds of $2,812.2 million from maturing auction rate securities (“ARS”), which are variable-rate debt securities. While the underlying security has a long-term maturity, the interest rate is reset through Dutch auctions that are typically held every 7, 28 or 35 days. We discontinued additional investments in auction rate securities in September 2007.

     At September 30, 2008 and at December 31, 2007, the fair value of the ARS investments held was $28.1 million and $35.6 million, respectively. The change of $7.5 million reflects a temporary impairment recorded as an unrealized loss in accumulated other comprehensive loss, a component of stockholders’ equity, in the three months ended June 30, 2008. Since September 2007, we have

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been unable to sell our ARS investments because of unsuccessful auctions. As a result of the unsuccessful auctions and the downgrade in credit quality, the interest rate for each certificate resets every 28 days at one month LIBOR plus a spread determined by each certificate’s lowest assigned rating. Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash including our credit facilities with commercial banks, we do not anticipate that the lack of liquidity on these investments will affect our ability to operate our business. Based on our ability and intent to hold such investments for a period of time sufficient to allow for any anticipated recovery in the fair value, we have classified all of our auction rate securities as noncurrent investments.

Financing Activities

     We had net borrowings of commercial paper and other short-term debt of $547.2 million and $3.2 million in the nine months ended September 30, 2008 and 2007, respectively. Total debt outstanding at September 30, 2008 was $1,630.5 million, an increase of $545.7 million compared with December 31, 2007. The total debt to total capitalization (defined as total debt plus stockholders’ equity) ratio was 0.19 at September 30, 2008 and 0.15 at December 31, 2007. The increase in short-term debt was to fund expenses, capital expenditures and additional stock repurchases in the U.S. until cash can be cost effectively transferred to the U.S. from our international operations.

     On October 28, 2008, we sold $500.0 million of 6.50% Senior Notes that will mature November 15, 2013, and $750.0 million of 7.50% Senior Notes that will mature November 15, 2018. For additional information see Note 17 of the Notes to Unaudited Consolidated Condensed Financial Statements for a more detailed description of the issuance of the notes.

     We received proceeds of $51.4 million and $50.8 million in the nine months ended September 30, 2008 and 2007, respectively, from the issuance of common stock from the exercise of stock options.

     Our Board of Directors has authorized a program to repurchase our common stock from time to time. During the nine months ended September 30, 2008, we repurchased 8.8 million shares of our common stock at an average price of $69.22 per share for a total of $610.6 million. At September 30, 2008, we had authorization remaining to repurchase up to a total of $1.2 billion of our common stock.

     We paid dividends of $126.6 million and $124.5 million in the nine months ended September 30, 2008 and 2007, respectively.

Available Credit Facilities

     On March 3, 2008, we initiated a commercial paper program (the “Program”) under which we may issue from time to time unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $500.0 million. On April 2, 2008, we increased the Program to an aggregate of $1.0 billion. The proceeds of the Program are used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. Commercial paper issued under the Program is scheduled to mature within approximately 270 days of issuance. The commercial paper is not redeemable prior to maturity and will not be subject to voluntary prepayment. At September 30, 2008, we had $557.5 million outstanding in commercial paper at a weighted average interest rate of 2.03%.

     At September 30, 2008, we had $1,535.7 million of credit facilities with commercial banks, of which $500.0 million is a committed revolving credit facility (the “2005 Facility”), which expires on July 7, 2012, unless extended, and $500.0 million is a committed revolving credit facility which expires on March 31, 2009 (the “2008 Credit Agreement”). The 2005 Facility provides for a one-year extension, subject to the approval and acceptance by the lenders, among other conditions. In addition, the 2005 Facility contains a provision to allow for an increase of an additional $500.0 million, subject to the approval and acceptance by the lenders, among other conditions. The 2005 Facility contains certain covenants which, among other things, require the maintenance of a funded indebtedness to total capitalization ratio (a defined formula per the 2005 Facility) of less than or equal to 0.60, restrict certain merger transactions or the sale of all or substantially all of the assets of the company or a significant subsidiary and limit the amount of subsidiary indebtedness. Upon the occurrence of certain events of default, our obligations under the 2005 Facility may be accelerated. Such events of default include payment defaults to lenders under the 2005 Facility, covenant defaults and other customary defaults.

     The 2008 Credit Agreement, which we entered into on April 1, 2008, contains certain covenants, which, among other things, require the maintenance of a funded indebtedness to total capitalization ratio (a defined formula per the agreement) of less than or equal to 0.60, restrict certain merger transactions or the sale of all or substantially all of our assets or a significant subsidiary and limit the amount of subsidiary indebtedness. Upon the occurrence of certain events of default, our obligations under the 2008 Credit Agreement may be accelerated. Such events of default include payment defaults to lenders under the 2008 Credit Agreement, covenant defaults and other customary defaults.

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     At September 30, 2008, we were in compliance with all of the covenants of both facilities. Additionally, there were no direct borrowings under either facility during the nine months ended September 30, 2008; however, to the extent we have outstanding commercial paper, our ability to borrow under these facilities is reduced.

     If market conditions were to change and revenues were to be significantly reduced or operating costs were to increase, our cash flows and liquidity could be reduced. Additionally, it could cause the rating agencies to lower our credit rating. We do not have any ratings triggers in the facilities that would accelerate the maturity of any borrowings under the facilities. However, a downgrade in our credit ratings could increase the cost of borrowings under the facilities and could also limit or preclude our ability to issue commercial paper. Should this occur, we would seek alternative sources of funding, including borrowing under the facilities.

Cash Requirements

     In 2008, we believe existing cash, cash flows generated from operations and the cash proceeds from the sale of long-term notes in October 2008 will provide us with sufficient capital resources and liquidity to manage our working capital needs, meet contractual obligations including the repayment of our long-term debt maturities due in the first quarter of 2009, fund capital expenditures, pay dividends, repurchase common stock and support the development of our short-term and long-term operating strategies.

     In 2008, we expect capital expenditures to be approximately $1.3 billion excluding acquisitions. The expenditures are expected to be used primarily for normal, recurring items necessary to support the growth of our business and operations.

     In 2008, we expect to make interest payments of between $73.0 million and $75.0 million. This is based on our current expectations of debt levels during 2008. During the third quarter of 2008, we revised our estimate for income tax payments for 2008 and now we anticipate making income tax payments of between $690.0 million and $740.0 million in 2008.

     On July 24, 2008, our Board of Directors authorized a program to repurchase up to $1.0 billion of our common stock (the “2008 Repurchase Program”) in addition to the existing stock repurchase authorization. As of September 30, 2008, we had authorization remaining to repurchase up to $1.2 billion in common stock. We may repurchase our common stock in the open market, in privately negotiated transactions or block transactions from time to time depending on market conditions, applicable legal requirements, our liquidity and other considerations. We may enter into Rule 10b5-1 plans to facilitate repurchases under the programs. A Rule 10b5-1 plan would generally permit us to repurchase the shares at any time when we might otherwise be prevented from doing so under certain securities laws. Shares repurchased under the programs will be retired. The programs do not require us to acquire any particular amounts of common stock and may be suspended or discontinued at any time.

     On October 23, 2008, our Board of Directors authorized a dividend of $0.15 per share. We anticipate paying dividends of between $170.0 million and $175.0 million in 2008; however, our Board of Directors can change the dividend policy at anytime.

     In 2008, we expect to contribute between $2.0 million and $3.0 million to our nonqualified U.S. pension plans and between $13.0 million and $15.0 million to the non-U.S. pension plans. We will also make benefit payments related to postretirement welfare plans of between $13.0 million and $15.0 million, and we estimate we will contribute between $142.0 million and $153.0 million to our defined contribution plans. We are currently evaluating the decline in the stock market and other assets held in our pension plans to determine the impact on any additional future funding requirements.

NEW ACCOUNTING STANDARDS

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. SFAS 157 was originally effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In November 2007, the FASB placed a one year deferral for the implementation of SFAS 157 for nonfinancial assets and liabilities; however, SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities. We adopted all requirements of SFAS 157 on January 1, 2008, except as they relate to nonfinancial assets and liabilities, which will be adopted on January 1, 2009, as allowed under SFAS 157. See Note 9 of Notes to Unaudited Consolidated Condensed Financial Statements for further information on the impact of this standard to financial assets and liabilities. We have not yet determined the impact, if any, on our consolidated condensed financial statements for nonfinancial assets and liabilities.

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     In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Additionally, it requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006; however, the requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year end statement of financial position is effective for fiscal years ending after December 15, 2008. We adopted all requirements of SFAS 158 on December 31, 2006, except for the funded status measurement date requirement, which will be adopted on December 31, 2008, as allowed under SFAS 158. We estimate the impact of moving our funded status measurement date from our current measurement date of October 1^st to December 31^st to be a reduction of approximately $1.6 million to beginning retained earnings which will be recorded in December 2008.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure eligible financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008, and there was no impact on our consolidated condensed financial statements as we did not choose to measure any eligible financial assets or liabilities at fair value.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary in an effort to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS 160 on January 1, 2009, and have not yet determined the impact, if any, on our consolidated condensed financial statements.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R replaces FASB Statement No. 141, Business Combinations (“SFAS 141”). The statement retains the purchase method of accounting used in business combinations but replaces SFAS 141 by establishing principles and requirements for the recognition and measurement of assets, liabilities and goodwill, including the requirement that most transaction and restructuring costs related to the acquisition be expensed. In addition, the statement requires disclosures to enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will adopt SFAS 141R on January 1, 2009 for acquisitions on or after this date.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in hedged positions. The statement also requires enhanced disclosures regarding how and why entities use derivative instruments, how derivative instruments and related hedged items are accounted and how derivative instruments and related hedged items affect entities’ financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We will adopt the new disclosure requirements of SFAS 161 in the first quarter of 2009.

     In April 2008, the FASB issued FASB Staff Position SFAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations, and other U.S. GAAP principles. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008. We will adopt FSP SFAS 142-3 on January 1, 2009 and have not yet determined the impact, if any, on our consolidated condensed financial statements.

FORWARD-LOOKING STATEMENTS

     MD&A and certain statements in the Notes to Consolidated Condensed Financial Statements include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (each a “forward-looking statement”). The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “would,” “may,” “likely” and similar

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expressions, and the negative thereof, are intended to identify forward-looking statements. Our forward-looking statements are based on assumptions that we believe to be reasonable but that may not prove to be accurate. The statements do not include the potential impact of future transactions, such as an acquisition, disposition, merger, joint venture or other transaction that could occur. We undertake no obligation to publicly update or revise any forward-looking statement. Our expectations regarding our business outlook, including changes in revenue, pricing, expenses, capital spending, backlogs, profitability, tax rates, strategies for our operations, impact of our common stock repurchases, oil and natural gas market conditions, market share and contract terms, costs and availability of resources, economic and regulatory conditions, and environmental matters are only our forecasts regarding these matters.

     All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors identified in “Part II, Item 1A. Risk Factors” section contained herein, as well as the risk factors described in our 2007 Annual Report, the Company’s Form 10-Q for the quarter ended March 31, 2008 and June 30, 2008, this filing and those set forth from time to time in our filings with the SEC. These documents are available through our web site or through the SEC’s Electronic Data Gathering and Analysis Retrieval System (“EDGAR”) at http://www.sec.gov.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We conduct operations around the world in a number of different currencies. The majority of our significant foreign subsidiaries have designated the local currency as their functional currency. 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 currencies. To minimize the need for foreign currency forward contracts to hedge this exposure, our objective is to manage foreign currency exposure by maintaining a minimal consolidated net asset or net liability position in a currency other than the functional currency.

Foreign Currency Forward Contracts

     At September 30, 2008, we had entered into several foreign currency forward contracts with notional amounts aggregating $125.0 million to hedge exposure to currency fluctuations in various foreign currencies, including British Pound Sterling, Euro, Norwegian Krone and the Brazilian Real. These contracts are designated and qualify as fair value hedging instruments. Based on quoted market prices as of September 30, 2008 for contracts with similar terms and maturity dates, we recorded a gain of $0.9 million to adjust these foreign currency forward contracts to their fair market value. This gain offsets designated foreign exchange losses resulting from the underlying exposures and is included in marketing, general and administrative expenses in our consolidated condensed statement of operations.

     The counterparties to the forward contracts are major financial institutions. The credit ratings and concentration of risk of these financial institutions are monitored on a continuing basis. In the unlikely event that the counterparties fail to meet the terms of a foreign currency contract, our exposure is limited to the foreign currency rate differential.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     As of the end of the period covered by this quarterly report, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act of 1934, as amended (the “Exchange Act”). This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that, as of September 30, 2008, our disclosure controls and procedures, as defined by Rule 13a-15(e) of the Exchange Act, are effective at a reasonable assurance level. There has been no change in our internal controls over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

     Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We are subject to a number of lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. See a further discussion of litigation matters in Note 16 of Notes to Unaudited Consolidated Condensed Financial Statements.

     For additional information see also, “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook” of this Form 10-Q and Item 3 of Part I of our 2007 Annual Report for additional discussion of legal proceedings.

ITEM 1A. RISK FACTORS

     As of the date of this filing, the Company and its operations continue to be subject to the risk factors previously disclosed in our “Risk Factors” in the 2007 Annual Report and the Form 10-Q for the period ended March 31, 2008 and the Form 10-Q for the period ended June 30, 2008, as well as the following risk factors:

     Recent changes in the financial and credit markets may impact economic growth, and volatility of oil and natural gas prices can also impact our customers’ activity levels and spending for our products and services.

     Based on a number of economic indicators, it appears that growth in global economic activity has slowed substantially. At the present time, the rate at which the global economy will slow has become increasingly uncertain. A slowing of global economic growth, and in particular in the U.S. or China, will likely reduce demand for oil and natural gas, increase spare productive capacity and result in lower prices and adversely impact the demand for our services.

     Additionally, oil and natural gas prices have been extremely volatile and have declined substantially. On October 24, 2008, oil prices (West Texas Intermediate (WTI) Cushing Crude Oil Spot Price), closed at $63.15/Bbl, down from a high of $145.29/Bbl on July 3, 2008. Volatility in oil and natural gas prices can also impact our customers’ activity levels and spending for our products and services. While current energy prices are important contributors to positive cash flow for our customers, expectations about future prices and price volatility are generally more important for determining future spending levels. While higher oil and natural gas prices generally lead to increased spending by our customers, sustained high energy prices can be an impediment to economic growth, and can therefore negatively impact spending by our customers. Our customers also take into account the volatility of energy prices and other risk factors by requiring higher returns for individual projects if there is higher perceived risk. Any of these factors could affect the demand for oil and natural gas and could have a material adverse effect on our results of operations.

     Many of our customers’ activity levels and spending for our products and services may be impacted by the current deterioration in the credit markets.

     Many of our customers finance their exploration and development activities through cash flow from operations, the incurrence of debt or the issuance of equity. Recently, there has been a significant decline in the credit markets and the availability of credit. Additionally, many of our customers’ equity values have substantially declined. The combination of a reduction of cash flow resulting from declines in commodity prices, a reduction in borrowing bases under reserve based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in our customers’ spending for our products and services and may impact the ability of our customers to pay amounts owed to us. For example, a number of our customers have announced reduced capital expenditure budgets for the remainder of 2008 and 2009. This reduction in spending could have a material adverse effect on our operations.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     The following table contains information about our purchases of equity securities during the three months ended September 30, 2008.

Issuer Purchases of Equity Securities

					Total Number of
					Shares						Maximum Number (or
					Purchased as						Approximate Dollar
	Total Number				Part of a Publicly				Total Number of		Value) of Shares that
	of Shares		Average Price		Announced		Average Price Paid		Shares Purchased		May Yet Be Purchased
Period	Purchased(1)		Paid Per Share(1)		Program(2)		Per Share(3)		in the Aggregate		Under the Program(4)
July 1-31, 2008		533	$	84.48		88,200	$	82.72		88,733		—
August 1-31, 2008		—		—		110,700		78.80		110,700		—
September 1-30, 2008		2,228		65.28		340,000		65.83		342,228		—
Total		2,761	$	68.99		538,900	$	71.26		541,661	$	1,213,341,883

(1)	Represents shares purchased from employees to pay the option exercise price related to stock-for-stock exchanges in option exercises or to satisfy the tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock units.
(2)	Repurchases were made under Stock Purchase Plans with an agent that complied with the requirements of Rule 10b5-1 of the Exchange Act (the “Plans”) as well as open market purchases that complied with Rule 10b-18 of the Exchange Act. We entered into a Plan as of May 23, 2008 that ran from June 2, 2008 through July 24, 2008. We also entered into a Plan as of August 25, 2008 that ran from September 2, 2008 through October 23, 2008. Under the Plans, the agent repurchased a number of shares of our common stock determined under the terms of the Plans each trading day based on the trading price of the stock on that day. Shares were repurchased under the Plans by the agent at the prevailing market prices, in open market transactions which complied with Rule 10b-18 of the Exchange Act.
(3)	Average price paid includes commissions.
(4)	Our Board of Directors has authorized a program to repurchase our common stock from time to time. On July 24, 2008, our Board of Directors authorized a program to repurchase up to $1.0 billion of our common stock (the “2008 Repurchase Program”) in addition to the existing stock repurchase program. As of July 24, 2008, we had authorization remaining to repurchase approximately $1.246 billion of common stock, including the 2008 Repurchase Program. During the third quarter of 2008, we repurchased 538,900 shares of our common stock at an average price of $71.26 per share, for a total of $38.4 million with authorization remaining to repurchase up to a total of $1.2 billion of our common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

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

     None.

ITEM 5. OTHER INFORMATION

     The following event occurred subsequent to the period covered by this Form 10-Q and is reportable under Form 8-K:

Item 5.03 Amendments to Articles of Incorporation or Bylaws:

     On October 23, 2008, the Board of Directors of the Company amended and restated the Company’s Bylaws to further clarify the (i) duties of the Inspectors of Election at annual and special meetings of stockholders; (ii) procedures for bringing business before an annual meeting, which included the advance notice of stockholder proposals required; and (iii) procedures for nominating directors. A copy of the Restated Bylaws are attached hereto and filed as Exhibit 3.2.

ITEM 6. EXHIBITS

3.2	Bylaws of Baker Hughes Incorporated restated as of October 23, 2008.
4.1	Bylaws of Baker Hughes Incorporated restated as of October 23, 2008 (filed as Exhibit 3.2 to this Form 10-Q for the quarter ended September 30, 2008).
31.1	Certification of Chad C. Deaton, Chief Executive Officer, dated October 29, 2008, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32

31.2	Certification of Peter A. Ragauss, Chief Financial Officer, dated October 29, 2008, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32	Statement of Chad C. Deaton, Chief Executive Officer, and Peter A. Ragauss, Chief Financial Officer, dated October 29, 2008, furnished pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

33

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BAKER HUGHES INCORPORATED (Registrant)
Date: October 29, 2008	By:	/s/PETER A. RAGAUSS
	Peter A. Ragauss
	Senior Vice President and Chief Financial Officer
Date: October 29, 2008	By:	/s/ALAN J. KEIFER
	Alan J. Keifer
	Vice President and Controller

34

EX-3.2

Exhibit 3.2

BYLAWS
OF
BAKER HUGHES INCORPORATED

Restated as of
October 23, 2008

Table of Contents

	Page No.
ARTICLE I — Offices		1
Section 1. Registered Office		1
Section 2. Other Offices		1
ARTICLE II — Meetings of Stockholders		1
Section 1. Place of Meetings		1
Section 2. Annual Meeting of Stockholders		1
Section 3. Quorum; Adjourned Meetings and Notice Thereof		1
Section 4. Proxies		2
Section 5. Special Meetings		2
Section 6. Notice of Stockholders’ Meetings		2
Section 7. Waiver of Notice		2
Section 8. Maintenance and Inspection of Stockholder List		2
Section 9. Stockholder Action by Written Consent Without a Meeting		3
Section 10. Inspectors of Election		3
Section 11. Procedure for Stockholders’ Meetings		3
Section 12. Order of Business		3
Section 13. Procedures for Bringing Business before an Annual Meeting		4
Section 14. Procedures for Nominating Directors		6
ARTICLE III — Directors		11
Section 1. Number and Qualification of Directors		11
Section 2. Election and Term of Office		11
Section 3. Resignation and Removal of Directors		11
Section 4. Vacancies and Newly Created Directorships		12
Section 5. Powers		12
Section 6. Place of Directors’ Meetings		12
Section 7. Regular Meetings		12
Section 8. Special Meetings		13
Section 9. Quorum		13
Section 10. Action Without Meeting		13
Section 11. Telephonic Meetings		13
Section 12. Meetings and Action of Committees		14
Section 13. Special Meetings of Committees		14
Section 14. Minutes of Committee Meetings		14
Section 15. Compensation of Directors		14
Section 16. Indemnification		15

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	Page No.
ARTICLE IV — Officers		18
Section 1. Officers		18
Section 2. Election of Officers		18
Section 3. Subordinate Officers		18
Section 4. Removal and Resignation of Officers		18
Section 5. Vacancies in Offices		18
Section 6. Chairman of the Board		18
Section 7. Chief Executive Officer		18
Section 8. President		19
Section 9. Chief Operating Officer		19
Section 10. Vice Presidents		19
Section 11. Secretary		19
Section 12. Chief Financial Officer		20
Section 13. Treasurer and Controller		20
Section 14. Delegation of Authority		20
ARTICLE V — Certificate of Stock		20
Section 1. Certificates		20
Section 2. Signatures on Certificates		21
Section 3. Statement of Stock Rights, Preferences, Privileges		21
Section 4. Lost, Stolen or Destroyed Certificates		21
Section 5. Transfers of Stock		21
Section 6. Fixing Record Date		21
Section 7. Registered Stockholders		22
ARTICLE VI — General Provisions		22
Section 1. Dividends		22
Section 2. Payment of Dividends		22
Section 3. Checks		22
Section 4. Corporate Contracts and Instruments		22
Section 5. Fiscal Year		23
Section 6. Manner of Giving Notice		23
Section 7. Waiver of Notice		23
ARTICLE VII — Amendments		23
Section 1. Amendment by Directors		23
Section 2. Amendment by Stockholders		23

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BYLAWS
OF
BAKER HUGHES INCORPORATED

ARTICLE I

Offices

          Section 1. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

          Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE II

Meetings of Stockholders

          Section 1. Place of Meetings. All meetings of the stockholders shall be held at such place, if any, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.

          Section 2. Annual Meetings of Stockholders. An annual meeting of stockholders shall be held at such date and time as may be determined from time to time by resolution adopted by the Board of Directors, for the purpose of electing the directors of the Corporation, and transacting such business as may properly be brought before the meeting.

          Section 3. Quorum; Adjourned Meetings and Notice Thereof. A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, without regard to class or series, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws. If a separate vote by a class or classes or series is required, a majority of the outstanding shares of such class or classes or series present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy or the chairman of the meeting may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled

to vote thereat.

          Section 4. Proxies. At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy authorized by an instrument in writing or by a transmission, including by telephone and electronic transmission, permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the Corporation on the record date set by the Board of Directors as provided in Article V, Section 6 hereof.

          Section 5. Special Meetings. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called at any time by the Board of Directors or by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in these Bylaws, include the power to call such meetings. Special meetings of stockholders of the Corporation may not be called by any other person or persons. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

          Section 6. Notice of Stockholders’ Meetings. If mailed, notice to stockholders shall be deemed given when deposited in the mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in, and subject to the provisions of, Section 232 of the Delaware General Corporation Law (or any successor provision thereof).

          Section 7. Waiver of Notice. Attendance of a person at a meeting shall constitute a waiver of notice to such person of such meeting, except when the person attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.

          Section 8. Maintenance and Inspection of Stockholder List. The officer or agent who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten days prior to the meeting, in the manner provided by law. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger of the Corporation shall be the only evidence

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as to who are the stockholders entitled to examine such list or to vote at any meetings of stockholders.

          Section 9. Stockholder Action by Written Consent Without a Meeting. No action shall be taken by stockholders except at an annual or special meeting of stockholders, and stockholders may not act by written consent.

          Section 10. Inspectors of Election. Before any meeting of stockholders, the Board of Directors may, and to the extent required by law, shall appoint inspectors to act at the meeting or its adjournment and make written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. The number of inspectors shall be either one or three. If no inspector or alternate is able to act at the meeting, the chairman of the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of the duties of inspector, shall take and sign an oath to faithfully execute the duties of inspector with strict impartiality and to the best of such inspector’s ability.

The duties of these inspectors shall be as follows:

(a) To ascertain the number of shares outstanding and the voting power of each;

(b) To determine the shares represented at a meeting and the validity of proxies and ballots;

(c) To count all votes and ballots;

(d) To determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and

(e) To certify their determination of the number of shares represented at the meeting and their count of all votes and ballots.

          Section 11. Procedure for Stockholders’ Meetings. Meetings of the stockholders shall be presided over by the Chairman of the Board of Directors, or in his absence, by the Chief Executive Officer, the President or by any Vice President, or, in the absence of any of such officers, by a chairman to be chosen by a majority of the stockholders entitled to vote at the meeting who are present in person or by proxy. The Secretary, or, in his absence, any person appointed by the chairman, shall act as secretary of all meetings of the stockholders.

          Section 12. Order of Business. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. The chairman shall also determine the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The chairman of the meeting shall have the power to adjourn the meeting to another place, if any, date and time. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting.

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          Section 13. Procedures for Bringing Business before an Annual Meeting.

                 1. Generally.

          At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (1) specified in the notice of such meeting (or any supplement thereto), (2) properly brought before the meeting by or at the direction of the Board, or (3) otherwise properly brought before the meeting by a stockholder of record of the Corporation at the time of the giving of notice required in this Section 13, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 13. For the avoidance of doubt, clause (3) above shall be the exclusive means for a stockholder to propose business (other than business included in the Corporation’s proxy materials pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934, as amended (such act, and the rules and regulations promulgated thereunder, the “Exchange Act”)) before an annual meeting of stockholders.

                 2. Advance Notice of Stockholder Proposals Required.

          For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation (a “Business Proposal Notice”), and any such business must be a proper matter for stockholder action under Delaware law. The Business Proposal Notice must be in strict compliance with the requirements set forth as follows or it will not be accepted by the Corporation.

                 3. Deadline for Submitting a Business Proposal Notice.

                    A. If an annual meeting was held in the previous year: A Business Proposal Notice must be received by the Secretary not less than 120 days, nor more than 150 days, before the one year anniversary of the date on which the Corporation’s proxy statement was released to stockholders in connection with the previous year’s annual meeting of stockholders. Notwithstanding the foregoing, if the date of the annual meeting has been changed by more than 30 days from the one year anniversary of the date of the preceding year’s annual meeting, a Business Proposal Notice must be received by the time set forth in subsection C below.

                    B. If no annual meeting was held in the previous year: A Business Proposal Notice must be received by the Secretary not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the tenth day following the day on which such notice of the date of the annual meeting was mailed or a public announcement announcing such meeting date was made.

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                    C. If the date of the annual meeting has been changed by more than 30 days from the one year anniversary of the date of the preceding year’s annual meeting: A Business Proposal Notice must be received by the Secretary not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the tenth day following the day on which such notice of the date of the annual meeting was mailed or a public announcement announcing such meeting date was made. If a meeting date has been changed by less than 30 days from the one year anniversary of the date of the preceding year’s annual meeting, the Business Proposal Notice must be received as set forth in subsection A above.

                    D. Timing in case of adjournments: An adjournment of an annual meeting shall not affect the timing requirements of the Business Notice Proposal. Thus, if an annual meeting is adjourned to a later date, such Business Proposal Notice must still be received as set forth above without regard to any adjournment that may occur.

          4. Contents of a Business Proposal Notice.

      All of the following information must be included in a Business Proposal Notice:

                    A. Description of Business Proposed. A Business Proposal Notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting:

                         (i) a brief description of the business desired to be brought before the annual meeting,

                         (ii) the reasons for conducting such business at the annual meeting, and

                         (iii) any material interest in such business of (1) the record stockholder giving the Business Proposal Notice, and (2) the beneficial owner, if any, on whose behalf the proposal is made (each, a “proposing party”).

                    B. Name and Address of Each Proposing Party. A Business Proposal Notice shall set forth the name and record address of each proposing party.

                    C. Description of Ownership Interests of Each Proposing Party. A Business Proposal Notice shall set forth:

                         (i) the class, series and number of shares of the Corporation which are owned beneficially and of record, directly or indirectly, by each proposing party; and

                         (ii) all other related ownership interests, including, but not limited to, derivatives, hedged positions, synthetic and temporary ownership techniques, swaps, securities loans, timed purchases and other economic and voting interests directly or indirectly owned beneficially by each proposing party.

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                    D. Description of Interests in Proposed Business. A Business Proposal Notice shall set forth any interest of each proposing party in the business the proposing party is seeking to propose, including, but not limited to, any interest that each proposing party may have in the proposal or any benefits that each proposing party may derive from the outcome of the proposal.

               5. Chairman of Meeting Must Ultimately Determine if Business Was Properly Brought.

          The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 13, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

               6. Exchange Act Requirements Also Must Be Complied With.

          Notwithstanding the foregoing provisions of this Section 13, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this Section 13. Nothing in this Section 13 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

               7. Definition of Public Announcement.

          For purposes of these Bylaws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

          Section 14. Procedures for Nominating Directors.

               1. Generally.

          Notwithstanding anything in these Bylaws to the contrary, only persons who are nominated in accordance with the procedures hereinafter set forth in this Section 14 shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation may be made at the annual meeting of stockholders only (1) by or at the direction of the Board of Directors or (2) by any stockholder of record of the Corporation at the time of the giving of notice required in this Section 14, who is entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 14.

               2. Advance Notice of Stockholder Nominations Required.

          For nominations to be properly brought before an annual meeting by a

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stockholder, such nominations shall be made pursuant to timely notice in writing to the Secretary of the Corporation (a “Nomination Notice”). The Nomination Notice must be in strict compliance with the requirements set forth as follows or it will not be accepted by the Corporation.

               3. Deadline for Submitting a Nomination Notice.

                    A. If an annual meeting was held in the previous year: A Nomination Notice must be received by the Secretary not less than 120 days, nor more than 150 days, before the one year anniversary of the date on which the Corporation’s proxy statement was released to stockholders in connection with the previous year’s annual meeting of stockholders. Notwithstanding the foregoing, if the date of the annual meeting has been changed by more than 30 days from the one year anniversary of the date of the preceding year’s annual meeting, a Nomination Notice must be received by the time set forth in subsection C below.

                    B. If no annual meeting was held in the previous year: A Nomination Notice must be received by the Secretary not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the tenth day following the day on which such notice of the date of the annual meeting was mailed or a public announcement announcing such meeting date was made.

                    C. If the date of the annual meeting has been changed by more than 30 days from the one year anniversary of the date of the preceding year’s annual meeting: A Nomination Notice must be received by the Secretary not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the tenth day following the day on which such notice of the date of the annual meeting was mailed or a public announcement announcing such meeting date was made. If a meeting date has been changed by less than 30 days from the one year anniversary of the date of the preceding year’s annual meeting, the Nomination Notice must be received as set forth in subsection A above.

                    D. Timing in case of adjournments. An adjournment of an annual meeting shall not affect the timing requirements of the Nomination Notice. Thus, if an annual meeting is adjourned to a later date, such Nomination Notice must still be received as set forth above without regard to any adjournment that may occur.

                    E. Timing if board size increased close to meeting date. In the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least ten days prior to the date on which a stockholder would otherwise be required to timely give a Nomination Notice as set forth above, a Nomination Notice with respect to nominees for any new positions created by such increase must be received by the Secretary not later than the close of business on the tenth day following the day on which such public announcement announcing the Board increase or naming all of the nominees for director is first made by the Corporation.

               4. Contents of the Nomination Notice.

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               All of the following information must be included in a Nomination Notice:

                    A. Information about Each Proposed Nominee. A Nomination Notice shall set forth as to each person whom the stockholder proposes to nominate for election or re-election as a director:

                         (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to be named in the proxy statement as a nominee and to serve as a director if elected), and

                         (ii) such person’s independence, any voting commitments and/or other obligations such person will be bound by as a director, and any material relationships between such person and (1) the nominating stockholder, or (2) the beneficial owner, if any, on whose behalf the nomination is made (each nominating party and each beneficial owner, a “nominating party”), including compensation and financial transactions.

                    B. Name and Address of Nominating Parties. The Nomination Notice shall set forth the name and record address of each nominating party.

                    C. Description of Ownership and Voting Interests of Nominating Parties. The Nomination Notice shall set forth:

                         (i) the class, series and number of shares of the Corporation that are owned beneficially and of record, directly or indirectly, by each nominating party;

                         (ii) all other related ownership interests, including, but not limited to, derivatives, hedged positions, synthetic and temporary ownership techniques, swaps, securities loans, timed purchases and other economic and voting interests directly or indirectly owned beneficially by each nominating party; and

                         (iii) any interest of each nominating party in such nomination, including but not limited to any interest that each nominating party may have in the nomination or any benefits that each nominating party may derive from the outcome of the nomination.

               5. Information Required for Board Nominees.

          At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder’s Nomination Notice that pertains to the nominee.

               6. Nominations at a Special Meeting.

                    A. Generally.

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          Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of record of the Corporation who is a stockholder of record at the time of the giving of notice, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in the following paragraphs. A person shall not be eligible for election or reelection as a director at a special meeting unless the person is nominated in accordance with this paragraph.

                    B. Advance Notice of Stockholder Nominations Required.

          For nominations to be properly brought before a special meeting by a stockholder, such nominations shall be made pursuant to timely notice in writing to the Secretary of the Corporation (a “Special Meeting Notice”). The Special Meeting Notice must be in strict compliance with the requirements set forth as follows or it will not be accepted by the Corporation.

                    C. Deadline for Submitting a Special Meeting Notice.

                         (i) Generally: Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the Special Meeting Notice shall be received by the Secretary not later than the close of business on the later of the 90th day prior to such special meeting or the tenth day following the day on which public announcement is first made that announces the date of the special meeting and the nominees proposed by the Board of Directors to be elected at such meeting.

                         (ii) Timing in case of adjournments: An adjournment of the special meeting shall not affect the timing requirements of the Special Meeting Notice. Thus, if a special meeting is adjourned to a later date, such Special Meeting Notice must still be received as set forth above without regard to any adjournment that may occur.

                         (iii) Timing if board size increased close to meeting date: In the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least ten days prior to the date on which a stockholder would otherwise be required to timely give a Special Meeting Notice as set forth above, a Special Meeting Notice with respect to nominees for any new positions created by such increase must be received by the Secretary not later than the close of business on the tenth day following the day on which such public announcement announcing the Board increase or naming all of the nominees for director is first made by the Corporation.

                    D. Contents of Special Meeting Notice.

          All of the following information must be included in a Special Meeting Notice:

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                    (i) Description of Proposed Nominee. A Special Meeting Notice shall set forth as to each person whom the stockholder proposes to nominate for election or re-election as a director:

                         (a) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to be named in the proxy statement as a nominee and to serve as a director if elected), and

                         (b) such person’s independence, any voting commitments and/or other obligations such person will be bound by as a director, and any material relationships between such person and (1) the nominating stockholder, or (2) the beneficial owner, if any, on whose behalf the nomination is made (each nominating stockholder and each beneficial owner, a “nominating party”), including compensation and financial transactions.

                    (ii) Name and Address of Nominating Parties. A Special Meeting Notice shall set forth the name and record address of each nominating party.

                    (iii) Description of Ownership and Voting Interests of Nominating Parties. A Special Meeting Notice shall set forth:

                         (a) the class, series and number of shares of the Corporation that are owned beneficially and of record, directly or indirectly, by each nominating party;

                         (b) all other related ownership interests, including, but not limited to, derivatives, hedged positions, synthetic and temporary ownership techniques, swaps, securities loans, timed purchases and other economic and voting interests directly or indirectly owned beneficially by each nominating party; and

                         (c) any interest of each nominating party in such nomination, including but not limited to any interest that each nominating party may have in the nomination or any benefits that each nominating party may derive from the outcome of the nomination.

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               7. Chairman of Meeting Must Ultimately Determine if Nomination Was Properly Brought.

          The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 14, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

               8. Definition of Public Announcement.

     For purposes of these Bylaws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

ARTICLE III

Directors

          Section 1. Number and Qualification of Directors. The Board of Directors shall consist of 12 directors. No officer of the Corporation may serve on a board of directors of any company having a present or retired employee on the Corporation’s Board of Directors. No person associated with an organization whose services are contracted by the Corporation shall serve on the Corporation’s Board of Directors; provided, however, that a majority of the Whole Board may waive this prohibition if the Board in its judgment determines that such waiver would be in the best interest of the Corporation. The term “Whole Board”, where used in these Bylaws, refers to the 12 authorized directorships constituting the Board of Directors whether or not there exist any vacancies.

          Section 2. Election and Term of Office. Each Director shall be elected for a term of one year and shall hold office until such director’s successor is elected and qualified or until his earlier death, retirement, resignation or removal.

          Section 3. Resignation and Removal of Directors. No person who is concurrently a director and an employee of the Corporation shall be qualified to serve as a director of the Corporation from and after the time of any diminution in such person’s duties or responsibilities as an officer, the time they leave the employ of the Corporation for any reason or their 72nd birthday; provided, however, that if any such person resigns from the Board of Directors upon such event, such person shall thereafter be deemed qualified to serve as a director of the Corporation for so long as such person is otherwise qualified to so serve pursuant to the following sentence. No person shall be qualified to serve as a director of the corporation on or after the date of the annual meeting of stockholders following: (i) his 72nd birthday or (ii) any fiscal year in which he has failed to attend at least 66% of the meetings of the Board of Directors and any committees of the Board of Directors on which such director serves, provided that such

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a person shall be deemed to be qualified to serve as a director if so determined by a majority of the Whole Board (excluding the director whose resignation would otherwise be required) if the Board of Directors in its judgment determines that such waiver would be in the best interest of the Corporation. Any director may be removed with or without cause by the holders of a majority of the shares of the Corporation entitled to vote in the election of directors. The Board of Directors may not remove any director with or without cause, and no recommendation by the Board of Directors that a director be removed with or without cause may be made to the stockholders except by the affirmative vote of not less than 75% of the Whole Board.

          Section 4. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any series of preferred stock then outstanding and except as otherwise provided by statute or the Certificate of Incorporation, (i) in the case of any increase in the number of directors, such additional director or directors shall be elected by a majority vote of the directors then in office, although less than a quorum, or by a sole remaining director (and not by stockholders), or (ii) in the case of any vacancy in the Board of Directors, however created, the vacancy or vacancies shall be filled by a majority vote of the directors then in office, although less than a quorum, or by a sole remaining director (and not by stockholders). Notwithstanding the preceding sentence of this Article III, Section 4, if, by the affirmative vote of a majority of the directors then in office the Board determines that a newly created directorship or vacancy should be filled by the stockholders, the stockholders shall elect a nominee to fill such newly created directorship or vacancy. In the event one or more directors shall resign, effective at a future date, such vacancy or vacancies shall be filled by a majority of the directors then in office, including those who have so resigned, the vote thereon to take effect when such resignation or resignations shall become effective. A director chosen or elected pursuant to this Section 4 shall hold office until the annual meeting next following his election or until his successor is elected and qualified or until his earlier death, retirement, resignation or removal.

          In the event of any decrease in the authorized number of directors, each director then serving as such shall nevertheless continue as a director until the expiration of his current term, or his prior death, retirement, resignation or removal.

          Section 5. Powers. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

          Section 6. Place of Directors’ Meetings. The directors may hold their meetings and have one or more offices, and keep the books of the Corporation outside the State of Delaware.

          Section 7. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Except as otherwise provided by statute, any business may be transacted at any regular meeting of the Board of Directors.

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          Section 8. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the Chief Executive Officer on at least 24 hours’ notice, or such shorter period as the person calling deems appropriate, to each director. Special meetings shall be called by the Chairman of the Board, the Chief Executive Officer or the Secretary in like manner and on like notice on the written request of a majority of the Whole Board. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting.

          Section 9. Quorum. At all meetings of the Board of Directors a majority of the Whole Board shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action is approved by at least a majority of the required quorum for such meeting.

          Section 10. Action Without Meeting. Unless otherwise restricted by statute, the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

          Section 11. Telephonic Meetings. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in a meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.

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          Section 12. Meetings and Action of Committees. The Board of Directors may from time to time designate committees of the Board of Directors, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board of Directors and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The Board of Directors shall, by resolution passed by a majority of the Whole Board, designate one member of each committee as chairman of such committee. Each such chairman shall hold such office for a period not in excess of five years, and shall upon surrender of such chairmanship resign from membership on such committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law (other than the election of directors) to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation.

          Section 13. Special Meetings of Committees. Special meetings of committees may be called by the Chairman of such committee, the Chairman of the Board or the Chief Executive Officer, on at least 24 hours’ notice, or such shorter period as the person calling deems appropriate, to each member. Alternate members shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules of the government of any committee not inconsistent with the provisions of these Bylaws. If a committee is comprised of an odd number of members, a quorum shall consist of a majority of that number. If the committee is comprised of an even number of members, a quorum shall consist of 1/2 of that number. If a committee is comprised of two members, a quorum shall consist of both members; all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all the members thereof consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be electronic form if the minutes are maintained in electronic form.

          Section 14. Minutes of Committee Meetings. Each Committee shall keep regular minutes of its meetings and report the same to the Board of Directors when requested.

          Section 15. Compensation of Directors. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance

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at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

          Section 16. Indemnification. (a) The Corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director, officer or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries or, while a director, officer or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries, is or was serving at the request of the Corporation or any of its direct or indirect wholly owned subsidiaries, as a director, officer or employee, of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law; provided that the Corporation shall not be obligated to indemnify any such person against any such action, suit or proceeding which is brought by such person against the Corporation or any of its direct or indirect wholly owned subsidiaries or the directors of the Corporation or any of its direct or indirect wholly owned subsidiaries, other than an action brought by such person to enforce his rights to indemnification hereunder, unless a majority of the Board of Directors of the Corporation shall have previously approved the bringing of such action, suit or proceeding, and provided further that the Corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person.

          (b) The Corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was licensed to practice law and an employee (including an employee who is or was an officer) of the Corporation or any of its direct or indirect wholly owned subsidiaries and, while acting in the course of such employment committed or is alleged to have committed any negligent acts, errors or omissions in rendering professional legal services at the request of the Corporation or pursuant to his employment (including, without limitation, rendering written or oral legal opinions to third parties) against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law; provided that the Corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person.

          (c) The Corporation shall indemnify every person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was

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a director, officer, or employee of the Corporation, or any of its direct or indirect wholly owned subsidiaries or, while a director, officer, or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries, is or was serving at the request of the Corporation or any of its direct or indirect wholly owned subsidiaries, as a director, officer, or employee of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

          (d) To the extent that a director, officer, or employee of the Corporation, or any of its direct or indirect wholly owned subsidiaries, has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a), (b) and (c) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

          (e) Any indemnification under subsections (a), (b) and (c) of this section (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a), (b) and (c) of this section. Such determination shall be made (1) by a majority vote of the directors who were not parties to such action, suit or proceeding, (2) by a committee or such directors designated by majority vote of such directors even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. If a claim under this Section 16 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has

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met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section 16 or otherwise shall be on the Corporation.

          (f) Expenses (including attorneys’ fees) incurred by an present or former officer or director of the Corporation or any of its direct or indirect wholly owned subsidiaries in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Section 16. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate.

          (g) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 16 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any provision of law, the Corporation’s Certificate of Incorporation, the Certificate of Incorporation or Bylaws or other governing documents of any direct or indirect wholly owned subsidiary of the Corporation, or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding any of the positions or having any of the relationships referred to in this Section 16.

          (h) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 16 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person.

          (i) Any amendment, alteration or repeal of this Section 16 that adversely affects any right of an indemnitee or its successors shall be prospective only and shall not limit or eliminate any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal.

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ARTICLE IV

Officers

          Section 1. Officers. The officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, a Vice President, a Secretary, a Treasurer and a Controller. The Corporation may also have, at the discretion of the Board of Directors, a Chief Operating Officer, one or more additional Vice Presidents, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. Any two (2) or more offices may be held by the same person.

          Section 2. Election of Officers. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of any officer under any contract of employment.

          Section 3. Subordinate Officers. The Board of Directors may appoint, and may empower the Chief Executive Officer to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine.

          Section 4. Removal and Resignation of Officers. Any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors, provided that such removal shall not prejudice the remedy of such officer for breach of any contract of employment.

          Any officer may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect on receipt of such notice or at any later time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party.

          Section 5. Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office.

          Section 6. Chairman of the Board. The Chairman of the Board shall, if present, preside at all meetings of the Board of Directors and of the stockholders, and shall exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. In the absence of the Chairman of the Board, the Lead Director shall preside at all meetings of the stockholders and the Board of Directors.

          Section 7. Chief Executive Officer. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision, direction and control of the

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business and officers, other than the Chairman of the Board of the Corporation with all such powers as may be reasonably incident to such responsibilities. He shall perform all other duties normally incident to the office of Chief Executive Officer, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws.

          Section 8. President. The President shall be the Chief Operating Officer of the Corporation and shall, subject to the control of the Chief Executive Officer and the Board of Directors, have general supervision, direction and control of the business and the officers, other than the Chairman of the Board, of the Corporation. In the absence of the Chairman of the Board and the Chief Executive Officer, the President shall preside at all meetings of the stockholders and the Board of Directors. He shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Chief Executive Officer, the Board of Directors or the Bylaws.

          Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation.

          Section 9. Chief Operating Officer. The Chief Operating Officer of the Corporation shall have general management of the business unit operations of the Corporation, subject to the direction and control of the Chief Executive Officer and the Board of Directors. The Chief Operating Officer shall sign all papers and documents to which such officer’s signature may be necessary or appropriate in connection with the operations of the Corporation, make reports to the Board of Directors or the Chief Executive Officer and have such further powers and duties as may, from time to time, be prescribed by the Board of Directors or the Chief Executive Officer.

          Section 10. Vice Presidents. If there be more than one Vice President, the Board of Directors may designate one or more of them as Executive Vice President or Senior Vice President among the Vice Presidents and may also grant to such officers and other Vice Presidents such titles as shall be descriptive of their respective functions or indicative of their relative seniority. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the President, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws or the President.

          Section 11. Secretary. The Secretary shall keep or cause to be kept, at the principal office or such other place as the Board of Directors may order, a book of minutes of all meetings and actions of directors, committees of directors and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors’ and committee meetings, the number of shares

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present or represented at stockholders’ meetings, and the proceedings thereof.

          The Secretary shall keep, or cause to be kept, at the principal office or at the office of the Corporation’s transfer agent or registrar, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.

          The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by these Bylaws or by law to be given, and he shall keep the seal of the Corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws.

          Section 12. Chief Financial Officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall be open at all times to inspection by any director.

          The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the Chief Executive Officer, President and Directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws.

          Section 13. Treasurer and Controller. The Treasurer and the Controller shall each have such powers and perform such duties as from time to time may be prescribed for him by the Board of Directors, the President or these Bylaws.

          Section 14. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.

ARTICLE V

Certificate of Stock

          Section 1. Certificates. Shares of the stock of the Corporation may be represented by certificates or the Board of Directors may provide by resolution or resolutions that some or all of any class or classes or series of stock shall be uncertificated shares. Owners of shares of the stock of the Corporation shall be recorded in the share register of the Corporation, and ownership of such shares shall be evidenced by a certificate or book-entry notation in the share register of the Corporation. Any certificates representing such shares shall

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be signed by, or in the name of the Corporation by, the Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or any Assistant Secretary, if one be appointed, or the Treasurer or an Assistant Treasurer of the Corporation, certifying the number of shares represented by the certificate owned by such stockholder in the Corporation.

          Section 2. Signature on Certificates. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

          Section 3. Statement of Stock Rights, Preferences, Privileges. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided by statute, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

          Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors, the Secretary and the Treasurer each may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the owner of such certificate, or his legal representative. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to furnish the Corporation a bond in such form and substance and with such surety as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

          Section 5. Transfers of Stock. Upon surrender to the Corporation, or the transfer agent of the Corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate or other evidence of such new shares to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Uncertificated shares shall be transferred in the share register of the Corporation upon the written instruction originated by the appropriate person to transfer the shares.

          Section 6. Fixing Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any

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adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

          Section 7. Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware.

ARTICLE VI

General Provisions

          Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the Corporation’s capital stock, subject to the provisions of the Certificate of Incorporation.

          Section 2. Payment of Dividends. Before declaration of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation, and the Board of Directors may thereafter abolish any such reserve in its absolute discretion.

          Section 3. Checks. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation shall be signed by such officer or officers as the Board of Directors or the President or any Vice President, acting jointly, may from time to time designate.

          Section 4. Corporate Contracts and Instruments. The Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer may enter into contracts and execute instruments on behalf of the Corporation. The Board of Directors, the President or any Vice President may authorize any officer or officers, and any employee or employees or agent or agents of the Corporation or any of its subsidiaries, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.

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          Section 5. Fiscal Year. The fiscal year of the Corporation shall be January 1 through December 31, unless otherwise fixed by resolution of the Board of Directors.

          Section 6. Manner of Giving Notice. Whenever, under the provisions of the statutes, the Certificate of Incorporation or these Bylaws, notice is required to be given to any director, it shall not be construed to require personal notice, but such notice may be given in writing, by mail, addressed to such director, at his address as it appears on the records of the Corporation (unless prior to mailing of such notice he shall have filed with the Secretary a written request that notices intended for him be mailed to some other address, in which case such notice shall be mailed to the address designated in the request) with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail; provided, however, that, in the case of notice of a special meeting of the Board of Directors, if such meeting is to be held within seven calendar days after the date of such notice, notice shall be deemed given as of the date such notice shall be accepted for delivery by a courier service that provides “opening of business next day” delivery, so long as at least one attempt shall have been made, on or before the date such notice is accepted for delivery by such courier service, to provide notice by telephone to each director at his principal place of business and at his principal residence. Notice to directors may also be given by telegram, by personal delivery, by telephone, by facsimile or by other electronic transmission.

          Section 7. Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes, the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE VII

Amendments

          Section 1. Amendment by Directors. Except any amendment to this Article VII and to Article II, Section 5, Article II, Section 9, Article III, Section 1 (as it relates to changes in the number of directors), Article III, Section 2, the last sentence of Article III, Section 3 (as it relates to removal of directors), Article III, Section 4, Article III, Section 16 and Article VI, Section 6 of these Bylaws, or any of such provisions, which shall require approval by the affirmative vote of directors representing at least 75% of the Whole Board, the directors, by the affirmative vote of a majority of the Whole Board and without the assent or vote of the stockholders, may at any meeting, make, repeal, alter, amend or rescind any of these Bylaws, provided that the substance of the proposed amendment or other action shall have been stated in a notice of the meeting.

          Section 2. Amendment by Stockholders. These Bylaws shall not be made, repealed, altered, amended or rescinded by the stockholders of the Corporation except by the vote of the holders of not less than a majority of the stock issued and outstanding and entitled to vote in the election of directors, considered for such purpose as one class.

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Chad C. Deaton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Baker Hughes Incorporated;

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 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 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.

Date: October 29, 2008	By:	/s/ Chad C. Deaton
		Chad C. Deaton
		Chairman of the Board, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Peter A. Ragauss, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Baker Hughes Incorporated;

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 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 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.

Date: October 29, 2008	By:	/s/ Peter A. Ragauss
		Peter A. Ragauss
		Senior Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Baker Hughes Incorporated (the “Company”) on Form 10-Q for the period ended September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Chad C. Deaton, Chief Executive Officer of the Company, and Peter A. Ragauss, the Chief Financial Officer of the Company, each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

The certification is given to the knowledge of the undersigned.

/s/ Chad C. Deaton
Name:	Chad C. Deaton
Title:	Chief Executive Officer
Date:	October 29, 2008

/s/ Peter A. Ragauss
Name:	Peter A. Ragauss
Title:	Chief Financial Officer
Date:	October 29, 2008