Forward-Looking Statements
This document contains forward-looking statements within the meaning of the
Section 21E of the Securities Exchange Act of 1934, as amended, concerning, among other things, our outlook, financial projections and business strategies, all of which are subject to risks, uncertainties and assumptions. These forward-looking statements are identified by their use of terms such as "anticipate," "believe," "could," "estimate," "expect," "project," "should" and similar terms. These statements are based on certain assumptions and analyses that we believe are appropriate under the circumstances. Such statements are subject to, among other things, overall demand for and pricing of the Company's products and services, general economic and business conditions, the level of oil and natural gas exploration and development activities, global economic growth and activity, political stability of oil-producing countries, finding and development costs of operations, decline and depletion rates for oil and natural gas wells, seasonal weather conditions, compliance with domestic and international regulations in the markets we serve, industry conditions and changes in laws or regulations and other risk factors that are discussed beginning on page 27 of this Form 10-Q, in the Company's Form 10-K for the fiscal year ended December 31, 2008, and other documents filed with the Commission, many of which are beyond the control of the Company. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may differ materially from those expected, estimated or projected. Management believes these forward-looking statements are reasonable. However, you should not place undue reliance on these forward-looking statements, which are based only on our current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any of them in light of new information, future events or otherwise.

Results of Operations
Segment Discussion
Our business is segregated into three operating divisions, M-I SWACO, Smith Oilfield and Distribution, which is the basis upon which we report our results. The M-I SWACO segment consists of a majority-owned drilling fluid and environmental services joint venture operation. The Smith Oilfield segment is comprised of our wholly-owned drilling and completion services operations, which includes drill bits, directional drilling services and downhole tools. The Distribution segment consists of the Wilson distribution operations and a majority-owned interest in CE Franklin, Ltd., a publicly-traded Canadian distribution company. Finally, general corporate primarily reflects expenses related to corporate personnel, administrative support functions and long-term incentive compensation programs.

Three Months Ended September 30, Nine Months Ended September 30, 2009 2008 2009 2008 Amount % Amount % Amount % Amount % Financial Data: (Dollars in thousands)

Revenues:
M-I SWACO           $   994,634          53      $ 1,364,269          48      $ 3,166,987          51      $ 3,878,452          50
Smith Oilfield          505,852          27          724,173          25        1,708,719          27        1,891,487          25
Distribution            378,538          20          760,869          27        1,359,086          22        1,944,528          25

Total               $ 1,879,024         100      $ 2,849,311         100      $ 6,234,792         100      $ 7,714,467         100


Geographic
Revenues:
United States:
M-I SWACO           $   201,424          11      $   333,043          12      $   665,563          11      $   966,429          12
Smith Oilfield          241,027          13          419,932          15          912,716          14        1,059,438          14
Distribution            271,612          14          582,183          20          997,859          16        1,467,930          19

Total United
States                  714,063          38        1,335,158          47        2,576,138          41        3,493,797          45


Canada:
M-I SWACO                36,632           2           54,016           2          100,300           2          127,041           2
Smith Oilfield           22,124           1           44,584           2           77,587           1          116,757           1
Distribution             86,419           5          143,631           5          293,184           5          379,311           5

Total Canada            145,175           8          242,231           9          471,071           8          623,109           8


Non-North
America:
M-I SWACO               756,578          40          977,210          34        2,401,124          38        2,784,982          36
Smith Oilfield          242,701          13          259,657           9          718,416          12          715,292           9
Distribution             20,507           1           35,055           1           68,043           1           97,287           2

Total Non-North
America               1,019,786          54        1,271,922          44        3,187,583          51        3,597,561          47

Total Revenues      $ 1,879,024         100      $ 2,849,311         100      $ 6,234,792         100      $ 7,714,467         100


Operating
Income:
M-I SWACO           $   118,317          12      $   217,016          16      $   387,150          12      $   637,108          16
Smith Oilfield           36,618           7          188,168          26          190,005          11          514,038          27
Distribution            (20,887 )        (6 )         61,734           8          (15,165 )        (1 )        128,136           7
General
corporate               (32,749 )         *          (23,837 )         *          (85,709 )         *          (67,627 )         *

Total               $   101,299           5      $   443,081          16      $   476,281           8      $ 1,211,655          16

* not meaningful

United States           1,087            32         2,205          45          1,146           33         2,098          45
Canada                    163             5           365           7            178            5           318           7
Non-North
America                 2,138            63         2,326          48          2,188           62         2,225          48

Total                   3,388           100         4,896         100          3,512          100         4,641         100

Onshore                 2,837            84         4,287          88          2,934           84         4,053          87
Offshore                  551            16           609          12            578           16           588          13

Total                   3,388           100         4,896         100          3,512          100         4,641         100


Average
Commodity
Prices:
Crude Oil
($/Bbl) (2)         $   68.26                    $ 118.22                  $   57.32                   $ 113.52
Natural Gas
($/mcf) (3)              3.45                        8.99                       3.89                       9.75

(1) Source: M-I
SWACO.

(2) Average daily West Texas Intermediate ("WTI") spot closing prices, as quoted by NYMEX.

(3) Average daily Henry Hub, Louisiana spot closing prices, as quoted by NYMEX.

M-I SWACO
Revenues
M-I SWACO primarily provides drilling and completion fluid systems, engineering and technical services to the oil and gas industry. Additionally, these operations provide oilfield production chemicals and manufacture and market equipment and services used for solids control, particle separation, pressure control, rig instrumentation and waste management. M-I SWACO is significantly influenced by its exposure to the global offshore market, which constitutes 50 percent of revenues and to exploration and production spending for land-based projects outside of North America, which contributes approximately one-third of the segment's revenue base. Offshore drilling programs, which accounted for 16 percent of the worldwide rig count during the first nine months of 2009, are generally more revenue intensive than land-based projects due to the complex nature of the related drilling environment. The M-I SWACO segment reported revenues of $994.6 million for the three months ended September 30, 2009, a decline of 27 percent from the comparable 2008 quarter. The revenue decrease was primarily concentrated in the United States and the Europe/Africa region. The decline in U.S. volumes was driven by a 51 percent reduction in U.S. drilling activity as well as lower customer spending in the Gulf of Mexico. Revenues within the segment's Europe/Africa operations were influenced primarily by lower activity levels in the Caspian and North Sea markets and lower land-based drilling in Russia. For the first nine months of 2009, M-I SWACO reported revenues of $3.17 billion, 18 percent below the amounts reported in the first nine months of 2008. The revenue decline primarily reflects reduced shallow-water drilling programs in the Europe/Africa regions and lower demand in the U.S. onshore market, partially offset by an increase in deepwater business volumes.
Operating Income
Operating income for the M-I SWACO segment was $118.3 million for the three months ended September 30, 2009, reflecting operating margins of 12.0 percent. After excluding severance-related charges of $2.8 million recorded in the September 2009 quarter, operating income was 12.2 percent of revenues, a decline of 3.7 percentage points from the prior-year period. The decline in operating margins reflects the effect of reduced business volumes and, to a lesser extent, the loss of a higher proportion of environmental waste management and other service-based offerings, which generate better overall margins. On an absolute dollar basis, reported operating income declined $98.7 million from the prior-year level. After excluding severance-related charges, operating income was $95.9 million below the comparable prior-year period. For the nine months ended September 30, 2009, M-I SWACO operating income was $387.2 million or 12.2 percent of revenues. After excluding $25.1 million in charges incurred in connection with cost-control measures, operating margins declined 3.4 percentage points from the prior-year period, influenced by the sharp reduction in business volumes and product mix factors. On an absolute dollar basis, reported operating income was $250.0 million below the levels reported in the comparable prior-year period, reflecting lower business volumes and increased pricing pressures. After adjusting for charges associated with cost-reduction efforts, operating income declined $224.9 million from the first nine months of 2008 driven by the effect of lower revenue volumes on gross profit levels and partially offset by reduced variable-related operating expenses.

Smith Oilfield
Revenues
The Smith Oilfield segment provides three-cone and diamond drill bits, tubulars, borehole enlargement tools, drill motors, directional drilling, measurement-while-drilling, and logging-while-drilling services, as well as completions, coiled tubing, cased-hole wireline and drilling-related products and services. The Smith Oilfield segment has a high level of North American exposure, with over 50 percent of revenues concentrated in those markets, driven in part, by the significance of increased unconventional drilling projects in the U.S. land-based market and the complexity of drilling programs, which drive demand for a wider range of product offerings. Smith Oilfield revenues were $505.9 million for the quarter ended September 30, 2009, a 30 percent decline from the comparable prior-year period. The revenue comparison is influenced by the addition of the W-H operations in August 2008, which partially offset the impact of the 51 percent decline in North American drilling activity. Excluding the impact of acquired operations, base business revenues declined 36 percent from the prior-year period, attributable primarily to lower demand for drilling-related products and services, tubulars, and fishing and remedial services within the U.S. customer base. Increased competitive pricing pressures within the U.S. market also influenced the period-to-period revenue comparison. For the nine-month period, revenues for the Smith Oilfield segment were $1.71 billion, a 10 percent decline from the level reported in the first nine months of the prior year influenced by the inclusion of the W-H operations. Base business revenues were 29 percent below the levels generated in the first nine months of 2008, driven by the significant decline in North American business volumes together with lower U.S. product and service pricing. Operating Income
Operating income for the Smith Oilfield segment totaled $36.6 million for the three months ended September 30, 2009, translating into operating income of 7.2 percent of revenues. After excluding charges of $4.5 million associated with employee severance, operating income equaled 8.1 percent of revenues, which is 17.9 percentage points below amounts reported in the comparable 2008 quarter. The margin decline is primarily attributable to changes in the business mix and the impact of increased competitive pricing pressure in the U.S. market. Inclusion of the acquired W-H product and service lines, which contribute lower-relative margins, coupled with the loss of high-margin drill bit and premium tubular sales as well as high-fixed cost service revenues influenced the reported business mix. On an absolute dollar basis, reported operating income declined $151.6 million from the prior-year level. After excluding charges related to cost reduction measures, operating income was $147.1 million below the prior-year level due to the effect of lower business volumes on gross profit and reduced product and service pricing. For the nine months ended September 30, 2009, Smith Oilfield operating income was $190.0 million, or 11.1 percent of revenues. After excluding $25.4 million of charges associated with cost reduction measures, operating margins were 12.6 percent of revenues. Compared to the prior nine-month period, margins declined 16.1 percentage points, reflecting an unfavorable shift in the overall business mix and increased pricing pressure, primarily in the U.S. market. On an absolute dollar basis, reported operating income declined $324.0 million from the levels reported in the first nine months of 2008. After excluding charges related to cost reduction measures, operating income was $298.6 million below the comparable prior-year level influenced by the sharp decline in base business volumes and related competitive pricing pressures experienced in the U.S. market. Distribution
Revenues
The Distribution segment markets pipe, valves, fittings and mill, safety and other maintenance products to energy and industrial markets, primarily through an extensive network of supply branches in the United States and Canada. The segment has the most significant North American revenue exposure of any of the Company's operations with 95 percent of current year revenue generated in those markets. Moreover, approximately one-quarter of the segment's revenues relate to sales in the downstream energy sector, including petrochemical plants and refineries, whose spending is largely influenced by the general state of the U.S. economic environment. Additionally, certain customers in this sector utilize petroleum products as a base material and, accordingly, are impacted by crude oil and natural gas prices. The Distribution segment reported revenues of $378.5 million in the third quarter of 2009, 50 percent below the comparable prior-year period. Approximately one-half of the revenue decline is associated with reduced demand and market pricing for line pipe products in the United States. Reduced customer project spending for maintenance, repair and operating supplies ("MRO") within the energy and industrial sectors in both the U.S. and Canadian markets also influenced the period-to-period comparison. For the nine-months ended September 30, 2009, the Distribution segment revenues totaled $1.36 billion, down 30 percent from the comparable prior-year period. Approximately 80 percent of the revenue decline was reported in the United States market where continued weakness impacted completion activity, resulting in reduced customer spending for line pipe and MRO supplies in the energy sector operations. The revenue decline also reflects lower customer activity levels within the industrial and Canadian markets as well as reduced market pricing for line pipe.

Operating Income
The Distribution segment reported an operating loss of $20.8 million for the three months ended September 30, 2009. After excluding the impact of $0.4 million of severance-related charges included in the September 2009 period, the segment operating loss totaled $20.4 million. The period-to-period operating margin decline was influenced by the significant reduction in revenue volumes, which had an unfavorable impact on fixed-cost coverage and by increased competitive pricing pressures.. On an absolute dollar basis, reported operating results declined $82.6 million from the prior-year level. After excluding charges related to cost-reduction efforts, operating results were $82.2 million below the prior-year quarter with the gross profit impact of significant volume reductions and pricing erosion partially offset by lower variable-based operating expenses. For the first nine months of 2009, the Distribution segment operating loss equaled $15.2 million and, after adjusting for $2.4 million in severance-related charges, the operating loss totaled $12.8 million. Compared to the prior nine-month period, the margin deterioration was impacted by the year-over-year decline in business volumes and lower product pricing. On an absolute dollar basis, reported operating results declined $143.3 million from the amount reported in the first nine months of 2008. After excluding charges related to cost reduction efforts, operating results declined $140.9 million from the comparable prior-year period reflecting lower revenue levels and pricing, partially offset by a reduction in variable-based operating expenditures.
Consolidated Results
For the periods indicated, the following table summarizes the results of operations of the Company and presents these results as a percentage of total revenues (dollars in thousands):

                               Three Months Ended September 30,                          Nine Months Ended September 30,
                              2009                         2008                         2009                         2008
                       Amount           %           Amount           %           Amount           %           Amount           %
Revenues             $ 1,879,024         100      $ 2,849,311         100      $ 6,234,792         100      $ 7,714,467         100
Gross profit             499,740          27          906,798          32        1,721,072          28        2,495,734          32
Selling, general
and
administrative
expenses                 398,441          21          463,717          16        1,244,791          20        1,284,079          16

Operating income         101,299           6          443,081          16          476,281           8        1,211,655          16
Interest expense          40,479           2           24,169           1          110,806           2           56,714           1
Interest income             (581 )         -             (732 )         -           (1,668 )         -           (2,380 )         -

Income before
income taxes              61,401           4          419,644          15          367,143           6        1,157,321          15
Income tax
provision                 17,673           1          136,765           5          115,948           2          375,611           5
Noncontrolling
interests in net
income of
subsidiaries              36,693           2           73,036           3          122,839           2          213,603           3

Net income
attributable to
Smith                $     7,035           1      $   209,843           7      $   128,356           2      $   568,107           7

Consolidated revenues were $1.88 billion for the third quarter of 2009, a decline of 34 percent from the level reported in the prior-year period and 36 percent lower after excluding revenues from the retained W-H operations acquired in August of 2008. The majority of the decline related to a 46 percent reduction in North American business volumes driven by a substantial slowdown in land-based drilling and completion activity, reduced shallow-water drilling programs in the Gulf of Mexico and increased competitive pricing pressure in the U.S. market. Revenues outside North America declined 20 percent period-to-period primarily associated with the reduced number of offshore programs in the North Sea market as well as lower exploration and production spending in the Former Soviet Union. For the nine months ended September 30, 2009, consolidated revenues were $6.23 billion, a decline of 19 percent from the comparable 2008 period. Approximately three-quarters of the revenue decrease was reported in . . .