I would like to welcome everyone to the Baker Hughes Second Quarter 2007 earnings conference call. (Operator Instructions) I'll now turn the conference over to Mr. Gary Flaharty, Director of Investor Relations. Sir, you may proceed.

Thank you, Luanne. Good morning, everyone. Welcome to the Baker Hughes second quarter 2007 earnings conference call. Here with me this morning are Chad Deaton, Baker Hughes' Chief Executive Officer and Chairman; Rod Clark, Baker Hughes' President and Chief Operating Officer’ and Peter Ragauss, Baker Hughes' Senior Vice President and Chief Financial Officer. Following managements comments we'll open the line for your questions. Reconciliation of operating profits and non-GAAP measures to GAAP results for periods referenced in today's news release and for historic periods can be found on our website at www.bakerhughes.com in the investor relations section under financial information. Last, I caution you that any company outlooks discussed this morning are subject to various risk factors. We'll try to highlight these risk factors as we make any forward-looking statements, however, the format of the call prevents a thorough discussion of these risk factors. For a full discussion of these risk factors, please refer to our annual report 10-K, 10-Q, and in particular the forward-looking disclosure in this morning's news release. With that I'll conclude our discussion of the administrative details and turn the call over to Chad Deaton. Chad Deaton : Thank you, Gary and good morning, everyone. This morning we reported income from continuing operations for the second quarter of 2007 at $349 million or $1.09 per share. This $1.09 per share is down $0.08 or 7% from the $1.17 we reported in the first quarter in '07, and is up $0.02 or 2% from the $1.07 we reported for the second quarter of 2006, which is on a 500-basis point higher tax rate. Revenue is $2.5 billion, up $334 million or 15% from the second quarter of '06 and was up $65 million or 3% sequentially. Non-North American revenue was up 21% compared to a year ago…

Thanks, Chad. In Q2, Baker Hughes' quarterly revenue exceeded $2.5 billion for the first time ever. Revenue was up $334 million or 15% compared to the second quarter of 2006 and was up $65 million or 3% sequentially. North American revenue was up 8% year over year. U.S. revenue increased 11% year on year compared to a rig count that was down 1%. U.S. land revenue was up 16% year on year. Revenue growth in U.S. land was particularly strong for INTEQ, Centrilift, and Baker Hughes Drilling Fluids. U.S. offshore revenue was down 4% year on year compared to the offshore rig count, which fell 20% from the year-ago quarter. Canadian revenue was down 12% year on year compared to a rig count down 50%. As expected, less favorable economics for Canadian natural gas projects continue to impact activity, particularly for businesses in our Drilling and Evaluation segment. Within D&E, revenue declines were greatest in Hughes Christensen and INTEQ due to their high correlation to the rig count. Our completion of production segment demonstrated resilient with nice year-on-year revenue gains in all regions, even Canada, where our 2% year-on-year revenue gain ran counter to activity declines that affected our D&E segment. North American revenue was down 2% sequentially compared to a 16% decline in the rig count. U.S. revenue was up 4% sequentially, as higher revenue in U.S. land operations served to offset declines in U.S. offshore. Canadian revenue was down 34% sequentially, whereas the rig count declined 72%. Latin America revenue was up 20% year on year compared to a rig count up 8%. INTEQ's revenue was up 81% year on year, driven by share gains in Brazil, and Baker Oil Tools delivered solid revenue growth in Venezuela and Mexico. Latin American revenue was up 2% sequentially, led by…

Thanks, Rod. On a fully diluted basis, our operating earnings per share from continuing operations were $1.09 for the quarter. There are a number of factors that had an impact on our second quarter results. The following should help clarify the deltas between this quarter and the prior quarter and the same quarter last year. Bridging from last quarter's $1.17, subtract $0.03 for the increase in tax rates arising from the disallowance of deductions related to the settlement of our FCPA issues. Subtract $0.01 for higher corporate costs. Subtract $0.02 for the increased repair and maintenance costs at INTEQ. Subtract $0.07 for the impact of lower activity in Canada. Operations excluding Canada added about $0.05, which includes the impact of activity increases, pricing, and raw material costs. This gets us to the $1.09 per share we reported for Q2. From the $1.07 we reported in Q2 of last year, subtract $0.09 for the significantly higher tax rate this year. Subtract $0.02 for higher corporate spending. Operations added about $0.13, of which $0.07 was from pricing net of labor and raw material inflation. This gets us to the $1.09 per share we are reporting for Q2. Our balance sheet remains very, very strong. At quarter end we had cash and short-term investments of $840 million. In comparison, our outstanding debt was just under 1.1 billion. Our long-term debt to cap ratio at the end of the second quarter was 15%. With our strong balance sheet, our primary use for capital remains growing our business through capital expenditures for rental tools, machine tools, and global infrastructure. We intend to return cash in excess of our needs to our shareholders. In that context, the board has authorized a $1 billion addition to our share repurchase program, increasing our total share repurchase authorization to…

Thank you, Chad. At this point I'll ask Luanne to open the lines to your questions. To give everyone a fair chance to ask a question, we ask that you limit yourself to a single question and a related follow-up. Luanne, can we have the first question, please?

Your first question comes from Dan Pickering - Pickering Energy Partners. Dan Pickering - Pickering Energy Partners : A couple of product line questions, just to make sure I understand. Could you talk a little bit more about mix in the Fluids business? I assume that means offshore versus land. And then you talked about the INTEQ business. Help me understand there, are we seeing any issues around the reliability in new tools that's raising costs, or is it they're new, they cost more than you thought and you're kind of tweaking that process on the R&M side? Chad Deaton: It's the latter. Rod's got some stuff to go through that. It's not problems with reliability on the tools. It's the new technologies being added and from what you said on the second part. As far as INTEQ itself, if you look at the quarter, I think it was more of a mix with INTEQ. We had some shifting of rigs, deepwater, Gulf of Mexico, Petrobras. We're supposed to be up to nine, ten rigs on that. We went up to nine in Q1, we dropped back to six in Q2. Of course, we're geared up to handle ten and as of yesterday morning we were back up on ten. So in the second quarter we saw a little drop-off in rigs as Petrobras moved some of those rigs over to production. Their production has been falling off, they've been talking about, they wanted to get some of that back, but they're moving back to drilling. A little bit of a similar thing in Qatar. Some of the rigs moved over for production, but moving back to the drilling side as well. Rod, you have some comments on the R&M? Rod Clark: Yes, it's definitely not a reliability issue. It's…

Your next question comes from Jim Crandell - Lehman Brothers.

Chad, where do you think you still need to make investments, both in terms of international expansion and geography-wise? You certainly invested a lot here in the last 18 months and we're beginning to see some strong revenue growth coming out of some of the developing countries. Where do you see the most investments here going forward? Chad Deaton: Well, I hate to signal my competitors where we may go next, Jim, but let me just look at where I think we've built up to a point where we can now refocus a little bit. Brazil, the new base will open the end of this year; that will be able to handle all the activity increase in Brazil, so we're pretty well built out there. That will be done. Russia is an area where you're going to continue to see us build out. With the success we're having with Gazprom, Rosneft and the others, we're looking at Eastern Siberia. We've got some projects working with them in those areas coping up. So Russia is going to be a continual build out. India, we should be built out by the end of this year, early next year, but we can see India will probably require a little bit more. Saudi, we started the second facility in Saudi. That should be done by mid-next year. Mexico is one that you'll see that we'll be focusing on. So we'll be doing some things in Mexico. Then in general, Asia itself, I think we've now positioned ourselves very strongly in the Middle East and that's working well for us. Now we need to move a little further east and take a look at some key areas there. Malaysia has been very strong for us. Latin America in general, we're in good shape. So we don't need much there. West Africa, and again, Angola, you'll probably see in the next couple years some things happening for us in Angola regarding infrastructure build. I think those are the key areas.

By product line, Chad, would you see it being primarily focused on INTEQ and Atlas? Chad Deaton: Well, I think, INTEQ, Atlas, BOT. I think that one as well is going to be strong. I think, if you look at Atlas, Jim, year on year outside North America, Atlas did not have a good quarter in North America, but outside North America, Atlas has grown significantly. In fact, year-on-year growth outside North America was 34%. So Atlas, INTEQ, BOT. The other thing we're going, those, these bases are joint facilities. It's not like three years ago where we were building individual. Libya, built out facility, all divisions will be in there. Same thing we're looking at in Russia, Dubai, Saudi. We're going to get a little help in that area as well.

Rod, could you talk to pricing trends for your different product lines in the U.S. market over the quarter and how things have changed for the first few months of the year? Rod Clark: Well, you probably know the answers, Jim, you follow this pretty closely. North America has been somewhat a mixed bag across the divisions although certainly we're facing headwinds as operators delay projects hoping for lower pricing in future periods. We are seeing the realities, as I mentioned, for example, the bit business where there's been some share swings arising from people who are willing to push the pedal on price before we have been. On a year-over-year basis though, INTEQ's pricing in North America is almost just shy of double-digits. Hughes' is about half of that. Atlas is nearly 6. So for the D&E group, excluding Baker Hughes Drilling Fluids, you're looking probably gross numbers, by the way, you're looking at 7% kind of numbers, whereas in the Completion and Production segment, it's about half that; I'm talking North America overall.

Your next question comes from Robin Shoemaker - Bear Stearns. Robin Shoemaker - Bear Stearns: In other conference calls, we've heard some venture an outlook on Canada. I just wanted to see what your take is on the situation there, and when we might see the next change, if there is one, in the demand for Canadian services or for all of your products? Chad Deaton: Well, Robin, this is Chad. I think we're already seeing Canada come back. I think in Q1 it was 540 rigs got down to 70 rigs or whatever, it's back up to 377. Our outlook for Q3 is to probably stay in that range, so it's obviously not bouncing back to the same level. And then we see another step change in Q4, but again, not back as high as Q1. Canada hurt us, obviously. The detrimentals in Canada were tough, it's a pretty big area for us. So that will help us as this thing comes back. We're seeing in Canada as well, not as much gas was used for some of the heavy oil projects. There's a little bit of a gas build there. Canada, we just have to assume it's going to have a second half that will be okay, but it's going to be a little soft compared to previous year. What we've done there, Rob, and as we've already adjusted some of the product lines, INTEQ shipped some people, Hughes Christensen took some action, we've got people overseas that shipped out to either Nam or to Brazil and other places. We're sizing Canada what we think the rest of the year will be. Robin Shoemaker - Bear Stearns: When you said that some operators are delaying projects to see if they can get better pricing, are you referring to all of North America in that statement? Chad Deaton: I think it's primarily Canada. We're not seeing a lot of softness in the lower U.S. Pricing is holding in the U.S. The exception would probably be, and I think Rod mentioned it, Hughes Christensen . There's been a little bit of a nibbling around there in terms of market share on Hughes Christensen . The other one is Drilling Fluids. Drilling Fluids has had some pressure on pricing, all other divisions are holding up. In fact, INTEQ got a little bit of a price improvement. So the pricing in the U.S. is hanging in there, with those exceptions.

Your next question comes from Geoff Kieburtz - Citigroup.

As Peter said, most of your guidance comments were unchanged or at least only refined from what you had said last quarter with the exception of North America comments, which were omitted. You've said in the press release, you see things continuing at the current level, but as you just discussed, Canada looks like it's getting better. Are you thinking U.S. declines to offset the sequential improvement in Canada, or could you help us understand what you do see at this point? Chad Deaton: Well, we still see the U.S., second half, with slight growth. And we see Canada what I just described, so not coming back as strong as the year before, but the U.S. year on year will be up over 2006, slightly. I think the reason why you're hearing the guidance the way you're hearing it, Geoff, is I don't think anybody is really comfortable to layout on the U.S. with a basically flat to slightly up rig count and it's almost beginning to sound like last year. We all start talking about the weather and everything else.

No, I appreciate that. Just interested to understand, I could see several different interpretations of what you've said and I think you've clarified that with that. Come back on maybe a slightly re-worded question in terms of the pricing. Outside of North America, are you seeing pricing pressures? Chad Deaton: No. Spot markets. There's been a couple places where we've picked up some rigs and a competitor here and there has come back in to talk to the customer about a discount if they get a rig. The isolated thing, but in general, if you look, no, we're not.

Okay. So in the context of the dissatisfaction with the incremental margins, the two things we've heard is pricing and cost control. Can we assume, then, that the primary focus of the efforts to raise incrementals is on the cost control side? Peter Ragauss: Yes. I think that's fair. I think what we have to do is go back and look at what we've been doing for the last 18 months. Part of that was the shift in order to strengthen these four regions around the world, as I said, to get closer to where our customers are and where the action is. Now we've built those areas out. I think, now what we're doing is looking at it and now let's rationalize some of those support costs and other things and get focused back on some of the business. The other thing, Geoff, that clearly for the last couple years, we have been focused in this area of the build out of our compliance team and making sure that we strengthen that. We've now settled with, as you know, the DOJ, SEC, we've got the teams in place. There's quite a bit of build out, there are costs that come with that. It's, clearly, it's an increasing focus in the oil field service sector, as you've seen recently in the press. So, we feel we're in very good shape, we've got those people in a place out there and we can focus now in terms of good activities and now let's work on our margins.

Your next question comes from Kurt Hallead - RBC Capital Markets. Kurt Hallead - RBC Capital Markets: A couple of your competitors, obviously reported within the past week and discuss their viewpoints on the drill bit market. Obviously, neither of the other companies had suggested any pricing pressures in drill bits. Can you kind of help us sort out this competitive landscape and is this a competitive issue, primarily? You may have referenced it earlier, if I missed it, I apologize. Is this primarily North American issue on drill bits? Chad Deaton: Yes. It's totally North America, stronger in Canada, it's there in the U.S., and we do see it. I don't know if they see it, but we do see the pricing pressure, it's happening.

Your next question comes from Ken Sill - Credit Suisse. Ken Sill - Credit Suisse: Chad, you guys have been doing the build out internationally. When you speak and when we go to meetings, you guys seem very confident about the contract awards and the wins and how much business is coming. I'm wondering if there's just an issue here of the timing between when you're getting these awards and talking about them and when we're putting them in our models or when investors expect them? Could you talk about how the lag between the investment and the flow through to revenue and what you see may be evolving over the next four to six quarters? Because you've been sitting here with flat earnings for a year now, and there are obviously different reasons for it, but how should we look at that going forward? Chad Deaton: I agree with you, we probably talk about them and you guys plug them in a model and the problem is some of these big contracts take six, eight, nine months, a year in order to get them beefed up and built up to the point we're actually on the rigs. Brazil to me is a perfect example. We started talking about winning Brazil last October, even before that when we first won it. I think in October is actually when we started to ramp up to get the people. I don't remember the numbers right now, but it's something like 240 people just for INTEQ in order to get ramped to go from two rigs to ten. As I said, we got up to nine in the Q1 and we clearly are double loaded when we're doing that, because we had a lot of people from Europe and North America down there…

Your next question comes from Michael LaMotte - JP Morgan. Michael LaMotte - JP Morgan: First question, Rod, if I could follow-up, I think, on your comments on the Gulf of Mexico, deepwater market in particular and just the volatility there. It seemed to have showed up in your numbers as well as some others, just the mix between development and exploration drilling on the INTEQ side. But can you talk about what that means for BOT, in the second half, and sort of how we can think about that market impacting? Rod Clark: Yes. I'll tell you. What I feel like is that we've lost share in the deepwater in Atlas and in BOT. And we're very focused on reasserting ourselves to reverse that trend, and we plan on seeing a response to those efforts in the second half of the year. INTEQ's done a nice job. They've actually picked up some share in the deepwater gulf this last quarter. But we've had two disappointments. The rig count has not moved over 80 and we also have seen a share loss in a couple of our very important product lines and that's our backyard, and should be the perfect venue for us to display our capability for both technology and reliability. So we're not happy about it. Michael LaMotte - JP Morgan: In terms of that share battle, is that a concession on price? Can you make up margin by getting volume back? Rod Clark: Well, it's always the case with Oil Tools or any of the manufacturing business that volume helps you absorb the fixed cost of your manufacturing base. But we are trying to lead in price, and inevitably you get to the question of when do you start trading your margin for share? So far, we've…

Your next question comes from Brad Handler - Wachovia. Brad Handler - Wachovia: I was hoping you could just delve in another layer with respect to the initiatives at INTEQ. It just seems very interesting. You talk about a step change in reliability, for example. Could you just share some metrics with us around that, perhaps? And in terms of other product lines or other divisions where a similar diagnostic review might be being considered or undertaken? Chad Deaton: Brad, first off, what we think one of our strengths at INTEQ is our reliability. I think this is one of the reasons why we've won some of the big contracts that we've seen. This is why we have 9 out of 12 of the world's longest extended that are drilled in that area. And we believe that if we can take that to another level with $1 million a day rig rates and everything else, it's just going to really be able to help us provide even further value to the customer and therefore even greater improved pricing. From that, what we want to do is exactly what you said. We think we can learn from that and we'll be able to take that and apply it across to some of the other product lines, like Atlas, like Baker Oil Tools. So this is a strategy we're looking at. If we can get to the point where we can keep an LWD or a BHA in the hole longer and we can almost predict failure to the client, we think that's a step change. So this is the whole push behind this next level of reliability stage we're going to. Brad Handler - Wachovia: My guess is that you would say that that's unique in the industry, some of the approaches you're taking from that review perspective? Do you think that's a fair statement? Chad Deaton: Yes, we do. Some of our people said we shouldn't even discuss it during the call because we think it can be an advantage as time goes on. But we think we're far enough into it and our reliability is strong enough at INTEQ that we think we're ahead on this area right now. So we can even advance it faster now. Brad Handler - Wachovia: Do you think you have the same edge with respect to reliability in terms of Atlas and Baker and Oil Tools? Chad Deaton: Yes. I think definitely Oil Tools, without a doubt. I think Atlas has made some very good strides over these last couple years. I think Atlas was more a matter of upgrading tools and updated trucks and things like that and just getting some newer technology out there. I think that was more the issue in Atlas, in order to be able to improve on that. Clearly, you're exactly right. At BOT, we think one out of our strengths is our reliability of down hole completions.

Your next question comes from Alan Laws - Merrill Lynch. Alan Laws - Merrill Lynch : I have sort of a follow-up to Jeff's question. Your incremental margin target is 30% and you said that the incrementals are going to be driven mostly by cost reduction. Is that right? Chad Deaton: No. We said it's a combination of cost reductions, price improvement. Obviously other efficiency gains. You can't put it back to cost. Alan Laws - Merrill Lynch : But it's your big focus? Chad Deaton: Yes. It's clearly a focus. Alan Laws - Merrill Lynch : If you had to rank them, that's the primarily place where you think? Chad Deaton: It's where you can actually make an impact. Pricing, you can talk about it, but if you just talked about Hughes Christensen , we can say we're going to go improve pricing at Hughes, but if the market's not playing that game, you're not going to do it. So you have to come back to reliability and have the customer pay you more for your tools, via your technology, or your execution. You've got to work on that, you've got to work on the pricing, and you've got to work on just overhead costs in general. The margins were weak in Q2. I think some of the regions, clearly, Canada, I think INTEQ's been a very, very strong performer for the last 11 quarter, and because of some of these rig delays that Rod talked about and I talked about and some other issues, the incremental wasn't as strong in INTEQ. I have no doubt in Q3, Q4, it will be back. But we just think we've reached a level now we can start fine tuning the organization and bring some additional cost to the bottom line. Alan…

Your final question comes from James Stone - Cambridge Investments. James Stone - Cambridge Investments: Good morning, guys. I hear what you're saying about focusing on margins and efficiencies in the quarter, but I guess what struck me is outside of North America, if I compare your growth across the space to what everybody else has reported, you guys, both on a sequential and year-over-year basis, kind of fall down at the bottom of the range. I'm just a little surprised to see that given all the investments that you have made and all the effort that you've made over the last couple of years to really ramp that up. I'm wondering, as you look at that and look at your competitor's growth, where do you think you're missing and where do you think that gap is coming from? Chad Deaton: Jamie, I don't want this to sound like an excuse, and maybe it will as I go through it. If we look at it, for one thing, we're kind of comparing company to company and none of us have the same portfolio mix. We're growing at, last year, 25%, 26% internationally, we said we're going to grow at 19% to 21% this year. If you look at our D&E product line, a couple of our product lines. For example, one of them is up 34% in growth, another one is up 27%. But if you look at Petrolite, which is a very steady, on going business that generates, almost like a dividend every quarter, its growth is 16%. I'm talking international growth now. So blended it puts us at 21%, individual product line, which we kind of try to compare to and our competitors look at, anywhere from 27% to 34%. I go back to this point. We've tried to target our countries as we go into them, and where we target those countries, we're in excess of anywhere from 40% to triple-digit growth in some of those countries. It goes back to making sure we establish ourselves, get our facilities in place, and the people and go target another country so that we don't end up having some issues out there. So I don't know if that answers your question, but that's how we kind of look at it. James Stone - Cambridge Investments: So I guess what you're saying is it is more a structural thing, in terms of the mix of your business, as you compare yourselves to your competitors than a competitive issue? Chad Deaton: Yes. You just can't look at company to company and try to compare it. I think, to me, you have to look at product line by product line. We don't compare Petrolite to one of our traditional Halliburton, we try to look at what Petrolite's competitors are and what they're doing on an international growth. Same thing with Atlas or INTEQ or BOT and try to break it down and see how they're doing.

Thank you, Jamie. Thank you, Chad, Rod, and Peter. I want to thank everyone, all our participants this morning for your time and your thoughtful questions. Following the conclusion of today's call, both Gene and I will be available to answer any additional calls that you may have. Once again, thank you for your participation.