America increased 12% compared to 2007. In addition to the growth in our revenues from increased activity, our revenues were impacted by changes in market share in certain product lines and to a lesser extent pricing improvements. Net income for 2008 was $1.64 billion compared with $1.51 billion in 2007. As of December 31, 2008, we had approximately 39,800 employees, up 4,000 employees from December 31, 2007. Approximately 57% of our employees work outside the United States.
In early 2009, the global economy continued to weaken. Many of our customers have announced reductions in their planned 2009 spending, and we have seen continued decreases in drilling activity, particularly in the U.S. land market. During the nine weeks following the end of December 2008, the U.S. rig count declined 478 rigs or 28%. In January 2009, we began necessary actions to adjust our operating cost base including a reduction in workforce. We will continue to monitor market conditions and adjust our cost base as deemed necessary.
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. 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 2008 mid-summer highs has also negatively impacted our customers' operational cash flow, further challenging their ability to continue to operate at past levels as well as their future spending for our products and services. 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
Generally, changes in the current price and expected future price of oil or natural gas drive customers' expectations about their prospects from oil and natural gas sales and their expenditures to explore for or produce oil and natural gas. Accordingly, changes in these expenditures will normally result in increased or decreased demand for our products and services. Oil (Bloomberg West Texas Intermediate (WTI) Cushing Crude Oil Spot Price) and natural gas (Bloomberg 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.

                                               2008        2007        2006

              Oil prices ($/Bbl)             $ 99.92     $ 72.23     $ 66.09
              Natural gas prices ($/mmBtu)      8.89        6.96        6.73

Oil prices averaged a nominal historic high of $99.92/Bbl in 2008. The year 2008 began with oil prices trading near $100/Bbl in early January. Oil prices continued to increase through the first half of the year due to concerns about weak inventory levels, limited worldwide excess productive capacity and concerns that demand growth would outpace production growth. The weakening of the U.S. Dollar relative to other currencies also contributed to the increase in oil prices. Oil prices peaked in early July at $145.29/Bbl. Oil prices declined throughout the fourth quarter of 2008 on expectations that the weakening worldwide economy would adversely impact demand. Oil prices fell to a yearly low of $31.41/Bbl in late December.
Natural gas prices averaged $8.89/mmBtu for the year 2008. The year 2008 began with high levels of natural gas in storage and natural gas prices in the $8/mmBtu range. Cold weather provided price support through the first quarter of the year. Natural gas prices continued to strengthen through the first half of the year, reflecting lower LNG imports relative to 2007 and increasing oil prices. Natural gas prices reached a peak of over $13/mmBtu in early July. Through the balance of the year, growth in natural gas production, building inventories and concerns of weakening demand placed pressure on natural gas prices, which declined to a low of $5.37/mmBtu in late December. 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, are rigging up, are being used in non-drilling activities, including production testing, completion and workover, or are not significant consumers of drill bits.
Our rig counts are summarized in the table below as averages for each of the periods indicated.

                                               2008        2007        2006

             U.S. - land and inland waters     1,814       1,695       1,559
             U.S. - offshore                      65          73          90
             Canada                              382         343         471

             North America                     2,261       2,111       2,120

             Latin America                       384         355         324
             North Sea                            45          48          49
             Other Europe                         53          29          28
             Africa                               65          66          58
             Middle East                         280         265         238
             Asia Pacific                        252         241         228

             Outside North America             1,079       1,004         925

             Worldwide                         3,340       3,115       3,045

RESULTS OF OPERATIONS
The discussions below relating to significant line items from our consolidated 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 service and rentals are similar.
The table below details certain consolidated statement of operations data and their percentage of revenues (dollar amounts in millions).

                                       2008                              2007                              2006
                                 $                %               $                 %                $               %

Revenues                     $ 11,864            100 %        $ 10,428            100.0 %        $ 9,027            100 %
Cost of revenues                7,954             67 %           6,845               66 %          5,876             65 %
Research and
engineering                       426              4 %             372                4 %            339              4 %
Marketing, general and
administrative                  1,046              9 %             933                9 %            878             10 %

Revenues:
2008 Compared to 2007

                                            Twelve Months Ended
                                               December 31,            Increase
                                             2008          2007       (decrease)      % Change

Geographic Revenues:
North America                             $   5,178     $  4,441       $     737          17 %
Latin America                                 1,127          903             224          25 %
Europe, Africa, Russia and the Caspian        3,386        3,076             310          10 %
Middle East, Asia Pacific                     2,173        2,008             165           8 %

Total revenues                            $  11,864     $ 10,428       $   1,436          14 %

Revenues for 2008 increased 14% compared to 2007 primarily due to increases in activity in certain geographic areas, as evidenced by a 7% increase in the worldwide rig count, price improvement and 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 17% in 2008 compared to 2007, despite the unfavorable impact on our U.S. offshore revenues from hurricane-related disruptions in 2008. The improvement in North America revenues was led by our Completion and Production segment and directional drilling, as evidenced by a 7% increase in the U.S. rig count for land and inland water drilling. The U.S. offshore rig count was down 11% due to the continued migration of rigs out of the Gulf of Mexico to more attractive international markets and weather-related disruptions. Canada revenues increased 12% compared to an 11% increase in the rig count reflecting improved economics for Canadian natural gas producers. Outside North America
Revenues outside North America, which accounted for 56% of total revenues, increased 12% in 2008 compared to 2007. This increase reflected the improvement in international drilling activity, as evidenced by a 7% increase in the rig count outside North America, and market share gains in certain geographic areas.
Latin America revenues increased 25% compared to an 8% increase in the rig count. The improved revenue in Latin America was led by directional drilling systems in Brazil and Colombia; completions and production systems in Mexico; and drill bits throughout the region.
Europe, Africa, Russia and the Caspian revenues increased 10%. The improved revenue in the region was led by all product lines across both segments in Norway and Libya; and completion systems as well as multiple product lines in the Drilling and Evaluation segment in both Kazakhstan and Russia partially offset by lower drilling activity in the U.K.
Middle East, Asia Pacific revenues increased 8%. Middle East revenues increased 9% compared to a 6% increase in the rig count. Asia Pacific revenues were up 7% compared to a 5% increase in the rig count. The improvement in revenues from the region was led by our Completion and Production segment in China and sales of various other product lines throughout the region including Oman and United Arab Emirates.

2007 Compared to 2006

                                            Twelve Months Ended
                                               December 31,            Increase
                                             2007          2006       (decrease)      % Change

Geographic Revenues:
North America                             $    4,441     $ 4,076       $     365           9 %
Latin America                                    903         751             152          20 %
Europe, Africa, Russia and the Caspian         3,076       2,489             587          24 %
Middle East, Asia Pacific                      2,008       1,711             297          17 %

Total revenues                            $   10,428     $ 9,027       $   1,401          16 %

Revenues for 2007 increased 16% compared to 2006 primarily due to increases in activity in certain geographic areas and, to a lesser extent, improvement in price and net changes in market share.
North America
Revenues in North America, which accounted for 42% of total revenues, increased 9% as strength in land-based activity for natural gas in the U.S. offset the impact of a 19% decrease in the offshore rig count and a 27% decrease in the Canadian rig count. Canada revenues decreased 9% compared to a 27% decrease in the rig count, reflecting lower average natural gas prices in 2007 compared to 2006, and more challenging economics for natural gas producers. Outside North America
Revenues outside North America, which account for 58% of total revenues, increased 21% in 2007 compared to 2006. This increase reflected the improvement in international drilling activity, as evidenced by a 9% increase in the rig count outside North America.
Latin America revenues increased 20% compared to a 10% increase in the rig count. The increase was driven by higher activity and share in Brazil and activity increases in Colombia and Mexico. Europe, Africa, Russia and the Caspian revenues increased 24%. Revenues from Russia and the Caspian were up 50%, and revenues from Europe were up 21% on a 1% increase in the rig count, driven by increased activity in the U.K. and Norwegian sectors of the North Sea. Revenues in Africa were up 14%, in line with the increase in the rig count.
Middle East, Asia Pacific revenues increased 17%. Middle East revenues increased 19% compared to an 11% increase in the rig count, driven by our activities in Qatar, Egypt, and Saudi Arabia. Asia Pacific revenues increased 16% compared to a 6% increase in the rig count. Growth in the Asia Pacific region was led by Australia and Malaysia. Cost of Revenues
Cost of revenues for 2008 increased 16% compared with 2007. Cost of revenues as a percentage of revenues was 67% and 66% for 2008 and 2007, respectively. The increase in cost of revenues as a percentage of consolidated revenues was primarily due to a change in the geographic and product mix from the sale of our products and services and increasingly competitive conditions and pricing pressures, particularly in North America. In addition, higher raw material costs and labor costs contributed to the increase.
Cost of revenues for 2007 increased 17% compared with 2006. Cost of revenues as a percentage of revenues was 66% and 65% for 2007 and 2006, respectively. The increase in cost of revenues as a percentage of consolidated revenues was primarily due to a change in the geographic and product mix from the sale of our products and services and increasingly competitive conditions and pricing pressures, particularly in North America. In addition, higher raw material costs and labor costs contributed to the increase. Effective January 1, 2007, we increased the depreciable lives of certain assets of our Baker Atlas division resulting in a reduction to cost of services and rentals for 2007 of approximately $23 million.
Research and Engineering
Research and engineering expenses increased 15% in 2008 compared with 2007 and 10% in 2007 compared with 2006. The increase in both years reflects our increase in research and development expenses through our continued commitment in developing and commercializing new technologies as well as an increase in engineering expenses as we continue to invest in our core product offerings. Research and development costs increased 12% in 2008 compared with 2007 and 8% in 2007 compared with 2006. During 2007, we opened the first phase of the Center for Technology and Innovation in Houston, Texas. This facility focuses on research and development of completion and production systems in harsh environments. The second phase was completed in 2008. Marketing, General and Administrative
Marketing, general and administrative ("MG&A") expenses increased 12% in 2008 compared with 2007 and increased 6% in 2007 compared with 2006. These increases correspond 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. These increases were partially offset by foreign exchange gains.

Litigation Settlement
In connection with the settlement of litigation with ReedHycalog, in June 2008, the Company paid ReedHycalog $70 million in royalties for prior use of certain patented technologies, and ReedHycalog paid the Company $8 million in royalties for the license of certain Company patented technologies. The net pre-tax charge of $62 million for the settlement of this litigation is reflected in the 2008 consolidated statement of operations. See Note 15. "Commitment and Contingencies - Litigation" in the Notes to Consolidated Financial Statements in Item 8 herein.
Gain on Sale of Product Line and Interest in Affiliate 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 million. The SSS assets sold included hydraulic and pneumatic actuators, bonnet assemblies and control systems. We recorded a pre-tax gain of $28 million ($18 million after-tax).
On April 28, 2006, we sold our 30% interest in WesternGeco to Schlumberger for $2.4 billion in cash and recorded a pre-tax gain of $1,744 million ($1,035 million after-tax).
Impairment Loss on Investments
The Company has investments in auction rate securities ("ARS") that represent interests in three variable rate debt securities. These are credit linked notes and 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. Since September 2007, we have been unable to sell our ARS investments because of unsuccessful auctions. We estimated 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, in December 2008 we recorded an other-than-temporary impairment loss of $25 million, which is included in our consolidated statement of operations. As of December 31, 2008, we held ARS investments totaling $11 million.
Interest Expense and Interest and Dividend Income Interest expense increased $23 million in 2008 compared with 2007, due to the new long-term debt issuances of $1.25 billion in October 2008 along with higher average debt levels throughout 2008. Interest expense decreased $3 million in 2007 compared with 2006 primarily due to slightly lower average total debt levels.
Interest and dividend income decreased $17 million in 2008 compared with 2007, primarily due to lower interest rates throughout 2008 on our short-term investment balances compared with 2007. Interest and dividend income decreased $24 million in 2007 compared with 2006, primarily due to lower average cash and short-term investment balances in 2007 as a result of our share repurchase programs.
Income Taxes
Our effective tax rates in 2008 and 2007 are 29.5% and 32.9%, respectively, which are 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 effective tax rate in 2006 was 35.8%, which was higher than the U.S. statutory income tax rate of 35% due to taxes related to the sale of our interest in the WesternGeco venture and state income taxes, offset by lower rates of tax on our international operations. During 2006, we provided $708 million for taxes related to the sale of our interest in WesternGeco, which included an estimate of taxes related to the future repatriation of the non-U.S. proceeds.
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 . . .