• 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.

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.

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 %

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

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,

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 . . .