Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") begins with an executive level overview, which provides a general description of our company today, a synopsis of industry market trends, insight into management's perspective of the opportunities and challenges we face and our outlook for the remainder of 2008 and into 2009. Next, we analyze the results of our operations for the three and nine months ended September 30, 2008 and 2007, including the trends in our overall business. Then we review our liquidity and capital resources. We conclude with a discussion of our critical accounting judgments and estimates and a summary of recently issued accounting pronouncements.
Overview
General
The following discussion should be read in conjunction with our financial statements included with this report and our financial statements and related Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2007 included in our Annual Report on Form 10-K. Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, you should refer to the section entitled "Forward-Looking Statements."
We provide equipment and services used for drilling, completion and production of oil and natural gas wells throughout the world. We conduct operations in approximately 100 countries and have service and sales locations in nearly all of the oil and natural gas producing regions in the world. Our product offerings can be grouped into ten service lines: 1) artificial lift systems; 2) drilling services; 3) well construction; 4) drilling tools; 5) completion systems; 6) wireline and evaluation services; 7) re-entry and fishing; 8) stimulation and chemicals; 9) integrated drilling; and 10) pipeline and specialty services.
Industry Trends
Changes in the current price and expected future prices of oil and natural gas influence the level of energy industry spending. Changes in expenditures result in an increased or decreased demand for our products and services. Rig count is an indicator of the level of spending for the exploration for and production of oil and natural gas reserves.
The following chart sets forth certain statistics that reflect historical market conditions:

                                            Henry Hub     North American     International
                           WTI Oil (1)       Gas (2)      Rig Count (3)      Rig Count (3)
     September 30, 2008    $    100.64      $   7.44             2,449              1,209
     December 31, 2007           95.98          7.48             2,171              1,122
     September 30, 2007          81.66          6.87             2,128              1,114

(1) Price per barrel as of September 30 and December 31
- Source:
Thomson
Reuters

(2) Price per MM/BTU as of September 30 and December 31
- Source:
Thomson
Reuters

(3) Average rig count for the applicable month - Source:
Baker Hughes
Rig Count
and other
third-party
data

Oil prices increased during the first nine months of 2008, ranging from a low of $86.99 per barrel in mid-January to a high of $145.29 per barrel early in July. Natural gas prices remained relatively flat comparing September 30, 2008 to December 31, 2007, but ranged from a low of $7.22 MM/BTU near the end of September to a high of $13.58 MM/BTU in early July. Since September 30, 2008, oil and natural gas prices have experienced significant declines due to the recent economic downturn reaching $67.81 per barrel and $6.78 MM/BTU as of October 31, 2008. Factors influencing oil and natural gas prices during the period include hydrocarbon inventory levels, realized and expected economic growth, realized and expected levels of hydrocarbon demand, levels of spare production capacity within the Organization of Petroleum Exporting Countries ("OPEC"), weather and geopolitical uncertainty.

The North American rig count has increased approximately 13% during 2008. The international rig count has increased approximately 8% since the end of 2007. Latin America and Middle East/North Africa/Asia regions were the most significant contributors to the increase in international rig count during 2008.
According to Spears & Associates, 2007 drilling and completion spending was relatively flat in North America and increased 19% in international markets as compared to 2006 levels. Drilling and completion spending growth during 2008 is anticipated to be driven by both the international and North American markets. According to a June 2008 study by Barclays Capital (formerly Lehman Brothers), 2008 international exploration and production expenditures are forecast to increase 22% over 2007 levels while expenditures in North America are expected to rise 14%.
Opportunities and Challenges
The nature of our industry offers many opportunities and challenges. We have created a long-term strategy aimed at growing our business, servicing our customers, and most importantly, creating value for our shareholders. The success of our long-term strategy will be determined by our ability to manage effectively any industry cyclicality, respond to industry demands and successfully maximize the benefits from our acquisitions.
The cyclicality of the energy industry impacts the demand for our products and services. Certain of our products and services, such as our drilling and evaluation services, well installation services and well completion services, depend on the level of exploration and development activity and the completion phase of the well life cycle. Other products and services, such as our production optimization and artificial lift systems, are dependent on production activity. We believe that decline rates, a measure of the fall in production from a well over time, are accelerating. We also believe that there has been, and will continue to be, a deterioration in the quality of incremental hydrocarbon formations that our customers develop and that these formations will require more of our products and services than higher quality formations. The market for oilfield services will grow year-on-year relative to the decline rates and the implicit rate of demand growth. We are aggressively, but methodically, growing our employee base, manufacturing capacity and equipment capacity to meet the demands of the industry.
2008 and 2009 Outlook
We believe the long-term outlook for our businesses is favorable. As decline rates accelerate and reservoir productivity complexities increase, our clients will face growing challenges securing desired rates of production growth. The acceleration of decline rates and the increasing complexity of the reservoirs increase our customers' requirements for technologies that improve productivity and efficiency. These phenomena provide us with a positive outlook over the longer term.
Looking into the remainder of 2008 and into 2009, the near-term outlook is more difficult to assess given the dramatically weakened picture of the global economy stemming from a severe dislocation in credit markets and money flows around the world. Beginning in the fourth quarter of 2008, we anticipate a pull back in North American average rig activity compared to third quarter 2008 levels principally due to existing natural gas storage levels, lower natural gas prices and a dampened prognosis for the U.S. economy. We would expect this pull back in rig count to persist during 2009, with the North American rig count averaging levels below 2008 levels. In contrast, we expect international rig activity to increase in 2009 at levels similar to those achieved thus far in 2008, unless the price of crude oil falls materially below its current trading levels for an extended period of time. We expect our rate of international growth in 2008 to finish strong, at levels similar to that achieved during 2007. In 2009, we anticipate a similar level of growth in the international markets, with the Eastern Hemisphere and Latin America both making significant contributions. These improvements should be driven by the strength of our technology and our global infrastructure. We expect our newer technologies to continue to gain traction across a wider breadth of geographic markets in both 2008 and 2009, similar to our performance in 2007.
Geographic Markets. Climate, natural gas storage levels and commodity prices, as well as expectations for the U.S. economy, will dictate the level of oilfield service activity in North America for the remainder of 2008 and into 2009. While these factors are difficult to predict with any certainty over short periods of time, we anticipate a pull back in drilling activity in both the U.S. and Canada. We anticipate the pull back will be in the natural gas segment and that oil will be relatively immune to the recent economic downturn.

We expect most of our growth in 2008, and all of our growth in 2009, will come out of the international markets. We expect Eastern Hemisphere growth rates for 2008 to be similar to our growth rates achieved for 2007 as compared to 2006. We expect North Africa, Russia, Middle East, China and Central Europe to show the largest year-on-year growth. We also expect volume increases in Latin America with the larger growth improvements stemming from Brazil, Mexico, Venezuela and Argentina. For our international markets combined, we expect to realize revenue growth similar to the levels achieved during 2007 and 2008.
Pricing. The overall pricing outlook is positive. During 2008, overall pricing has been trending upwards, concurrently with raw material and labor cost inflation. Pricing in the U.S. and Canada has been leveling with no discernable movement up or down. In the event of a pull back in activity in North America, we would expect pricing in general to come under pressure, with the magnitude dependant upon the extent to which activity declines. In the international markets, price improvements have been realized on a contract-by-contract basis and have occurred in different classes of products and service lines depending upon the region. We expect international pricing to remain positive for the remainder of 2008, net of cost increases.
Overall, the level of improvements for our businesses for 2008 will continue to depend heavily on our ability to further penetrate existing markets with our younger technologies and to successfully introduce these technologies to new markets. The recruitment, training and retention of personnel will also be a critical factor in growing our business. The continued strength of the industry will be highly dependent on many external factors, such as world economic and political conditions, member country quota compliance within OPEC and weather conditions. The extreme volatility of our markets makes predictions regarding future results difficult.

   Results of Operations
   The following charts contain selected financial data comparing our
consolidated and segment results from operations for the three and nine months
ended September 30, 2008 and 2007.

                                                          Three Months                              Nine Months
                                                       Ended September 30,                      Ended September 30,
                                                   2008                   2007                2008               2007
                                                         (In thousands, except percentages and per share data)
Revenues:
North America                                 $    1,179,605         $      993,828        $ 3,282,211        $ 2,883,825
Middle East/North Africa/Asia                        637,872                455,932          1,716,007          1,286,022
Europe/West Africa/CIS                               408,993                308,587          1,146,185            844,184
Latin America                                        314,326                213,644            821,535            626,190

                                                   2,540,796              1,971,991          6,965,938          5,640,221

Operating Income:
North America                                        312,887                264,183            828,792            756,661
Middle East/North Africa/Asia                        146,450                103,839            397,774            284,310
Europe/West Africa/CIS                               102,385                 77,886            294,614            202,911
Latin America                                         69,521                 45,453            188,374            139,784
Research and Development                             (52,026 )              (43,199 )         (139,095 )         (124,413 )
Corporate                                            (30,750 )              (24,945 )          (99,657 )          (75,565 )
Exit and Restructuring                               (13,727 )               (3,628 )          (23,604 )          (20,944 )

                                                     534,740                419,589          1,447,198          1,162,744

Interest Expense, Net                                (60,521 )              (50,194 )         (175,723 )         (119,258 )

Other, Net                                            (8,243 )                1,282            (13,026 )           (7,024 )

Effective Tax Rate                                      17.8 %                 19.0 %             17.0 %             25.8 %

Net Income per Diluted Share from
Continuing Operations                         $         0.53         $         0.42        $      1.46        $      1.09

Loss from Discontinued Operation, Net of
Taxes                                                      -                 (2,211 )          (12,928 )          (15,628 )

Net Income per Diluted Share                  $         0.53         $         0.42        $      1.44        $      1.06

Depreciation and Amortization                        187,131                158,977            528,129            439,034

   Revenues
   The following chart contains consolidated revenues by product line for the
three and nine months ended September 30, 2008 and 2007:

                                            Three Months                  Nine Months
                                         Ended September 30,          Ended September 30,
                                          2008           2007         2008           2007
   Artificial Lift Systems                    17 %         18 %          17 %            17 %
   Well Construction                          15           16            16              16
   Drilling Services                          17           16            16              15
   Drilling Tools                             11           11            11              12
   Completion Systems                          9           10            10              10
   Re-entry & Fishing                          9            8             8               8
   Wireline                                    7            7             7               8
   Stimulation & Chemicals Services            6            6             5               7
   Integrated Drilling                         6            5             7               5
   Pipeline & Specialty Services               3            3             3               2

                                             100 %        100 %         100 %           100 %

Consolidated revenues increased $569 million, or 29%, in the third quarter of 2008 as compared to the third quarter of 2007. The increase resulted primarily from organic growth as our businesses continued to benefit from increasing market activity and share gains. Approximately 67% of our revenue growth was derived outside of North America. International revenues increased $383 million, or 39%, in the third quarter of 2008 as compared to the third quarter of 2007. This increase outpaced the 8% increase in average international rig count over the comparable period. All product lines grew compared to the levels achieved in the third quarter of 2007.
For the first nine months of 2008, consolidated revenues increased $1,326 million, or 24%, as compared to the first nine months of 2007. Similar to what was experienced in the third quarter of 2008, the increase in revenues during the first nine months of 2008 was driven by our international businesses. Approximately 70% of our revenue growth was from our international regions.
Operating Income
Consolidated operating income increased $115 million, or 27%, in the third quarter of 2008 as compared to the third quarter of 2007. Our operating segments contributed $140 million of incremental operating income during the current quarter as compared to the same quarter of the prior year while corporate and research and development expenditures were $15 million higher over the same period. The increase in corporate and research and development expenses was primarily attributable to higher employee compensation costs. In addition, current quarter results include $14 million in costs incurred in connection with our on-going investigations by the U.S. government. The three months ended September 30, 2007 included $4 million incurred in connection with the investigations by the U.S. government.
Consolidated operating income for the first nine months of 2008 increased $284 million, or 24%, as compared to the first nine months of 2007. Our operating segments contributed $326 million of incremental operating income during the first nine months of 2008 as compared to the same period of the prior year while corporate and research and development expenditures were $39 million higher as compared to the same period of the prior year. In addition, results for the first nine months of 2008 include exit and restructuring charges of $24 million compared to charges of $21 million during the first nine months of 2007.
Exit and restructuring charges during the first nine months of 2008 include $57 million for costs incurred in connection with our withdrawal from sanctioned countries, $15 million for severance costs incurred associated with reorganization activities and $33 million incurred in connection with our on-going investigations. These charges were offset by an $81 million gain recognized in the second quarter of 2008 as a result of selling our 50% interest in a subsidiary we control to Qatar Petroleum for cash consideration of $113 million. Exit and restructuring charges during the first nine months of 2007 include $17 million in severance charges associated with reorganization activities and $4 million incurred in connection with the investigations by the U.S. government.

Interest Expense, Net
Interest expense, net increased $10 million, or 21%, and $56 million, or 47% during the three and nine months ended September 30, 2008 as compared to the same periods of the prior year, respectively. The increase in interest expense was due to an increase in our total debt. The incremental borrowings period-over-period were used to fund capital expenditures and acquisitions.
Income Taxes
Our effective tax rates were 17.8% and 19.0% for the third quarter of 2008 and 2007, respectively, and 17.0% and 25.8% for the first nine months of 2008 and 2007, respectively. The decrease in our effective tax rates was due primarily to withholding taxes of $50 million that were required to be paid on a distribution made to one of our foreign subsidiaries during the second quarter of 2007. In addition, we recognized a gain of $81 million, with no related tax effect, from the sale of a 50% interest in a subsidiary during the second quarter of 2008. The remainder of the decrease is due to the net benefits realized from the refinement of our international tax structure and changes in our geographic earnings mix.
Segment Results
North America
North America revenues increased $186 million, or 19%, in the third quarter of 2008 as compared to the third quarter of 2007 and outpaced a 13% increase in average North American rig count over the comparable period. Revenues from our artificial lift, wireline and drilling services product lines were the strongest contributors to the quarter-over-quarter increase.
North America revenues increased $398 million, or 14%, during the first nine months of 2008 as compared to the first nine months of 2007. Revenues from our artificial lift, well construction and stimulation and chemicals product lines were the strongest contributors to the year-to-date revenue growth.
Operating income increased $49 million, or 18%, in the third quarter of 2008 as compared to the third quarter of 2007. Operating margins were 27% in both the third quarter of 2008 and 2007. During the first nine months of 2008, operating income increased $72 million, or 10%, over the comparable period of 2007 with operating margins at 25% for the first nine months of 2008 and 26% for the first nine months of 2007. The decline in operating margin during the first nine months of 2008 was primarily due to weakness in the Canadian market during the first half of 2008.
Middle East/North Africa/Asia
Middle East/North Africa/Asia revenues increased $182 million, or 40%, in the third quarter of 2008 as compared to the third quarter of 2007. This increase outpaced the 7% increase in rig count over the comparable period. Middle East/North Africa/Asia was the strongest contributor to our year-to-date revenue growth. Revenues increased $430 million, or 33%, during the first nine months of 2008 as compared to the first nine months of 2007. Our drilling services, integrated drilling, wireline and well construction product lines were the strongest contributors to both the quarterly and year-to-date increase in revenue over the same periods of the prior year.
Operating income increased $43 million, or 41%, during the third quarter of 2008 compared to the same quarter of the prior year and $113 million, or 40%, during the first nine months of 2008 compared to the first nine months of 2007. Operating margins were 23% for both the third quarter of 2008 and 2007. On a year-to-date basis, operating margins were 23% for the first nine months of 2008 as compared to 22% for the first nine months of 2007.
Europe/West Africa/CIS
Revenues in our Europe/West Africa/CIS segment increased $100 million, or 33%, in the third quarter of 2008 as compared to the same quarter of the prior year, which outpaced the 17% rig count increase over the comparable period. On a year-to-date basis, revenues grew $302 million, or 36%, compared to the same period of 2007. Our drilling services, well construction and wireline product lines were the strongest contributors to both the quarterly and year-to-date increase in revenue over the same periods of the prior year.
Operating income increased $24 million, or 32%, during the third quarter of 2008 compared to the same quarter of the prior year and $92 million, or 45%, during the first nine months of 2008 compared to the first nine months of

2007. Operating margins were 25% for both the third quarter of 2008 and 2007. On a year-to-date basis, margins increased from 24% during the first nine months of 2007 to 26% for the first nine months of 2008. Both the quarterly and year-to-date improvement in operating income and margins was primarily the result of higher revenues absorbing the region's fixed cost base as well as the performance of equity investments.
Latin America
Revenues in our Latin America segment increased $101 million, or 47%, in the third quarter of 2008 as compared to the same quarter of the prior year, which outpaced the average Latin American rig count increase of 8% over the comparable period. Revenues increased $195 million, or 31%, during the first nine months of 2008 compared to the same period of the prior year. Revenue growth was generated in all product lines during the three and nine month periods ended September 30, 2008 as compared to the comparable periods of the prior year.
Operating income increased $24 million, or 53%, and $49 million, or 35%, for the three and nine months ended September 30, 2008, respectively, over the comparable periods of the prior year. Operating margins increased by one percent in both the three and nine months ended September 30, 2008 as compared to the same periods of the prior year.
Discontinued Operations
We finalized the divestiture of our discontinued operation consisting of our oil and gas development and production company during the second quarter of 2008. We recorded a gain of $11 million, net of taxes, in connection with the finalization of the divestiture. On a year-to-date basis, we had a loss from our discontinued operation, net of taxes, of $13 million, which included approximately $21 million incurred in connection with the settlement of a legal dispute regarding the business. This loss was partially offset by the gain recognized in the second quarter.
Liquidity and Capital Resources
Sources of Liquidity
Our sources of liquidity include current cash and cash equivalent balances, cash generated from operations and committed availabilities under bank lines of credit. We maintain a shelf registration statement covering the future issuance of various types of securities, including debt, common shares, preferred shares and warrants.
Committed Borrowing Facilities
We maintain a $1.5 billion revolving credit agreement with a syndicate of banks. This facility allows for a combination of borrowings, support for our commercial paper program and issuances of letters of credit.
On March 19, 2008, we entered into an additional $250 million revolving credit facility with a syndicate of banks. This facility also allows for a combination of borrowings, support for our commercial paper program and issuances of letters of credit.
Both committed borrowing facilities require us to maintain a debt-to-capitalization ratio of less than 60% and contain other covenants and representations customary for an investment-grade commercial credit. We were in compliance with these covenants at September 30, 2008. Both facilities mature in May 2011.
The following is a recap of our availability under our committed borrowing facilities at September 30, 2008 (in millions):

                           Facilities          $ 1,750

                           Less:
                           Amount drawn          1,030
                           Commercial paper          -
                           Letters of credit        28


                           Availability        $   692

In October 2008, we entered into an additional $550 million in revolving credit facilities with a syndicate of banks. These facilities allow for a combination of borrowings and issuances of letters of credit. These facilities mature in October 2009.
Commercial Paper . . .