Good morning, ladies and gentlemen. And welcome to the ThirdQuarter 2007 Oil States International Earnings Conference Call. My name isMike, and I'll be your operator today. At this time, all participants are in alisten-only mode and we will be taking questions at the conclusion of today'spresentation. (Operator Instructions) As a reminder, ladies and gentlemen, this conference isbeing recorded for replay purposes. I would now like to turn the presentationover to your host for today's call, Bradley Dodson, VP and CFO. Please proceed,sir.

Thank you, Mike. Good morning. Welcome to the Oil StatesInternational third quarter 2007 earnings conference call. Our call today willbe led by Cindy Taylor, Oil States President and Chief Executive Officer. Before we begin, we would like to caution listenersregarding forward-looking statements. To the extent the remarks today containinformation other than historical information, we are relying on theSafe-Harbor protections afforded by Federal Law. Any such remarks should beweighed in the context of the many factors that affect our business includingthose risks disclosed in our Form 10-K and other SEC filings. I will now turn the call over to Cindy.

Thank you, Bradley. And thanks to all of you for dialinginto our call this morning. We're going to follow the same format that we havein prior conference calls and I'm going to lead off with some introductorycomments. Despite some softness in the quarter in selected NorthAmerican markets, Oil States posted third quarter results at the mid-point ofour previous guidance range led by continued strengthen our Offshore Productsand our oil sands driven accommodations businesses. Our reported earnings of $0.97 per diluted shareoperationally came in at the low-end of our guidance range due primarily tosoftness in the Permian Basin,which negatively impacted our drilling and rental tool operations serving thatmarket. We also reported an increased share count due to our convertible notesoffset by a lower effective tax rate. For the third quarter of 2007, Oil States reported recordrevenue of $527.4 million, EBITDA of $94.6 million and net income of $50.5million or $0.97 per diluted share. Our revenues and EBITDA were up 6% and 11%sequentially excluding the second quarter gain on the sale of Boots & Cootscommon stock. Our Offshore Products business continued to benefit fromrobust demand for deepwater capital equipment and our accommodations operationswere strong with increased activity in the Canadian oil sands region. The strength of these businesses coupled with contributionsfrom the two rental tool acquisitions completed in the quarter mitigatedsignificantly weaker year-over-year Canadian drilling and completion activityand softer tubular services margins. During the quarter we completed the Well Testing andSchooner acquisitions for total consideration of approximately $112 million.These acquisitions compliment our existing rental tool operations and followour strategy of expanding our completion and production services capabilities. Bradley is going to take over and go through details of ourconsolidated resulting and then I will return to the line and go through anddetail our individual business lines as well as give you some outlook supportand comments.

Thank you, Cindy. For the third quarter of 2007, we reportedoperating income of $74.8 million, revenues of $527.4 million and EBITDA of $94.6 million. Our net income for the third quarter of 2007 totaled $50.5million or $0.97 per diluted share. The comparable third quarter 2006 results were $75.5 millionof operating income on revenues of $479.5 million with EBITDA totaling $93.9million. The third quarter 2007 results represented 10% year-over-year increasein revenues, however EBITDA was only up slightly year-over-year, due to the 29%decline in Canadian drilling activity and $7.1 million year-over-year declinein Tubular Services EBITDA, due to lower margins. Depreciation and amortization in the third quarter of 2007totaled $18.8 million compared to $13.9 million in the third quarter of 2006.This increase was due to the acquisitions in capital expenditures made over thepast 12 months. D&A is expected to total $20.9 million in the fourthquarter. Net interest expense in the quarter totaled $3.3 million compared to$4.1 million in the third quarter of 2006. Fourth quarter 2007 net interestexpense is expected to be $ 4.1 million. The effective tax rate in the quarterwas 30.3% and is projected to be 34% in the fourth quarter of 2007. Our total debt at the end of the quarter was $433 million upfrom $344 million at the end of the second quarter due to $72 million of CapExspent in the quarter $112 million spent on two acquisitions completed in thequarter with the spending partially offset by operating cash flow. Our debt tocapitalization ratio was 29% as of September 30, 2007. At this time, I'd like to turn the call over to Cindy Taylorwho will review the activities of each of our business segments.

My comments will focus on our sequential performancecomparing our third quarter 2007 results to our second quarter 2007 results. Inorder to provide a more meaningful comparison of our operating results, I amexcluding the $12.8 million pre-tax gain that we recognized in the secondquarter of 2007 related to the sale of a portion of our investment in Boots& Coots. Our Well Site Services segment was up 20% in revenues and 24% in EBITDA sequentially when you exclude the Boots & Coots gain. Thesequential increase was primarily due to increased contributions from our oilsands assets and contributions from the two rental tool acquisitions completedin the quarter, partially offset by week conventional Canadian drilling andcompletion activity and softness in our West Texasoperations. Our accommodations revenue increased 7% sequentially and ourEBITDA increased $4.2 million or 23% due to contributions from our oil sandsaccommodations and a stronger Canadian Dollar. EBITDA margins improvedsequentially due to increased weighting from our oil sands operations coupledwith seasonal improvements coming out of spring breakup in Canada. Revenues and EBITDA from our oil sands accommodationsincreased sequentially by 42% and 75% respectively, due to increased capacityin our three major oil sands lodges in addition to improved utilization of ourmobile fleet. Our expansion plans for our Beaver Riverand Athabasca Lodges are now essentially complete and we remain at fulleffective utilization levels. Our Wapasu Creek lodge continues to progress onbudget and on schedule with an estimated completion date in February 2008. Ittoo has been at full utilization. On a sequential basis, our rental tool revenues increased45% and EBITDA increased $7.1 million or 37% due primarily throughcontributions from Schooner and Well Testing, which as we mentioned were closedduring the third quarter of 2007 coupled with sequential improvements in ourbase businesses. Both of these acquired operations carry lower EBITDApercentages due to the service-oriented nature of their…

(Operator Instructions) And the first question comes fromthe line of Stephen Gengaro with Jefferies & Company. Please proceed.

Thanks, good morning.

Good morning, Stephen.

I guess, two things. One, can you give us a sense on theWell Site Services division, particularly on the rental tools side. How is --are you seeing, how is pricing now versus the third quarter? Any trends that weshould focus on?

Stephen, I'm glad you asked the question because I got, butthere are some mixed signals there. But our rental tool margins in total forthe second quarter of 2007 were about 38%. Our rental tool EBITDA and these areEBITDA margins for the third quarter were 36%. However, all of this variance is really related to theaddition of the two acquired businesses that we've put in. The mix is a littledifferent there in particular one that carries higher service personnel contentwith the delivery of the equipment. When we bought them, we knew those margins were lower thanour mix of business and margins. So on balance, everything was flatsequentially as it relates to margins for the base business. What we have seenin the marketplace is very good growth in many activity regions and stablepricing. I won't say it's increasing, but it's stable pricing andwith capacity being added. Unfortunately, we have had offset in this quarter itstarted kind of in early August I would say and you never know, if it'stemporary or what's going on. But the Permian Basin has had activity reductions thataffected really our drilling rigs and it affected not only our rental tools butone of the acquired businesses as well so it's very regional at this stage andobviously it seems to be somewhat just level of customer activity right nowwhich it's hard to say whether this is temporary or longer term on that market. We've seen a little bit of firming and activity increasesbut again, it's just hard to say given the short nature of what we've seen,whether there's something greater going on in that market.

Okay. That's helpful and then my second question if youcould talk about a little bit, have you seen any change in the opportunitiesout there, as you look at acquisitions and some of these smaller operators morewilling sellers right now or do you think that hasn't changed much from whatyou see coming across your desk?

The activity in terms of acquisition opportunities remainspretty consistent. The willingness to sell has stayed pretty consistent. Idon't think there has been a significant change in entrepreneur or sellerexpectations in that regard.

Okay. That's helpful. Thank you.

Thanks, Stephen.

And the next question comes from the line of Jeff Tillerywith Tudor Pickering. Please proceed.

Hi. Good morning.

Good morning, Jeff.

In the rental tools segment, so margins in the basebusinesses were flat sequentially. I would have thought Canadaactivity on a sequential basis would have been up, so that should have been alittle bit aiding margins. Did the Permian essentially offset the Canadianincrease or did you guys not experience any sort of Canadian increasesequentially?

We did have a little bit of Canadian lift and the Permiandid basically offset that and realize that again the Canadian portion and theactivity levels in both Q2 and Q3 are not terribly strong anyway but you'reabsolutely right. We did have sequential improvements from the portion of Canada.It was offset by the weakness in the Permian broadly speaking.

And the Permian weakness, is that in oil directed activity,gas activity? Just trying to understand kind of the drivers and what we shouldlook for there?

Rental tools are generally more oriented towards gas butit's both, as it relates to our drilling rigs that is predominantly well basedand it's been a mystery to me all year long as to why the activity levels inthat market for drilling for oil has been off at these pricing. There is clearly some of it that in my opinion is kind ofcustomer specific issues. There are some of our customers that have been goingfairly significant, changes at their own corporate level. So again, it's justbeen a little bit hard to get your arms around. But it's just been a little bit of a more sloppier marketand we do have some competitors out there that have been a little moreaggressive at reducing prices than we have been.

My second question relates to kind of the acquisition impactin the third quarter. Bradley, could you help us with the, kind of, the orderof magnitude of revenue and EBITDA impact from the Schooner and Well Testacquisitions as what you'd expect just kind of active, the environmentincrement to be in Q4?

We had said that the acquisition impact in the quarter was$18.8 million of revenue and $5.2 million of EBITDA.

But realizing that one of those acquisitions we had for 2/3of a quarter, so it will be obviously just modestly up. One acquisition we hadfor the full quarter, one we acquired August 1.

Right.

But that should give you a pretty good barometer to measureQ4 also.

And my last question relates to the oil sands activity andkind of your plans for expansion. I know you guys have been exploringadditional capacity there potentially in the Southern part of the oil sandsregion. Does the change in royalties put a pause on that? Does that changeanything that you guys are doing in terms of pursuing those plans?

Right now, the near-term activities of course are prettywell laid out. As I mentioned on the call, Athabasca andBeaver River are essentially done. They're contracted.The visibility, a lot of that work is actually contracted work that goesthrough mid 2008 and in some cases, 2009. So those look to be in very goodshape. The demand for Wapasu right now is far in excess of therooms that we have available and that will be a step that we're going to haveto evaluate. Right now, what I want to do is more commentary and on the margin,the discussion on the royalties has been negative. Negatively, two of our analysts just did immediate downgrades on our stock just because of its passage but really we don't believethis is as negative on the oil sands as maybe the first reaction mightindicate, however we're talking to every individual customer about individualprojects that would be supported by lodges in the various regions that we'retalking about. We've gotten early indications, public indications thatPetro-Canada as an example has already stated they will move forward with theFort Hills project and the McKay River Expansion. Imperial Oil has come out and said they are still assessingthe impact on core but that is the type of analysis that I think we really needto do over the next 30 days but my view remains that this is going to be apositive environment for investment over time. I think if anything, this maycause some moderation of the inflationary pressures that have been created inthe environment. It may also give more of an impetus to our customers toout-source accommodations as opposed to building their own for every single oneof these projects which as you know, if you've followed us has kind of been ourprimary indirect competition for growth in this business but we remain verypositive at this stage. But we will absolutely do our due diligence on aproject specific basis before we would recommend significant capitalexpenditures going forward.

Okay. Thank you very much.

And the next question comes from the line of Ken Sill withCredit Suisse. Please proceed.

Good morning, Cindy.

Hi, Ken.

Wanted to try to look out a little bit. I know we've got apretty good view of what's going on in Q4 but you're running pretty high ratesin the Offshore Products business. There have been issues of are we at capacitythere or can that number kind of creep up as we move through '08? Do you haveany comments on that?

We're still working on several initiatives there. Our goalhas been to obviously be able to increase capacity. The near-term objectivewould be in the 5% to10% range on the revenue line item. We still have somework to do to get there but we're very focused on it as a management team totry to do that. But I know a lot of people sometimes don't even understandthe holiday down time but a lot of our engineers have been working mandatory60-70 hour weeks for an extended period of time. We will allow them to take offfor Thanksgiving and Christmas as well as people in the facility so we're doingthe best that we can to satisfy the timing demands of our customers. The environment here looks very strong and looks long termand we are doing everything we can to help de-bottleneck and be able to producemore obviously. So far, I think we've done an excellent job in growing thisbusiness and we're focused on it but I can't give you anymore tangible thingsother than what we've talked about on prior calls as it relates to out-sourcingrelationships and some capacity expansions in our Houstonoperation.

Well. I'm glad you're not going to be scrooge but on the 5%to 10% near term is that something we should expect in first or second quarternext year or can it gradually over the course of next year?

I would say probably gradually over the course of next year.

Okay. And then in the rental tool business, is the Gulf of Mexico being so weak, have much impact on your rental business?

It did have some impact but we have over the last five yearsreally moved a lot of equipment out of the Gulf Coast market. The offshore rigcount as you know has been a steady hard decline since 2002. So I won't say ithad a great impact. I'm sure it had some. What I think it had more impact in the quarter and again Ido think it's somewhat temporary, the Gulf has been bad but it wasextraordinarily bad in the third quarter was in our tubular business and again,the mix of high strength alloy versus the more carbon grade typically used inthe resource plays. Our pricing was softer particularly on alloy product duringthe quarter, which to me translates into lack of offshore demand in thequarter. Our volumes were up and again strong demand on land in these resourceplays, so sometimes you have to put two and two together because we don'talways know the destination of the pipe but that seems to me what's occurredduring the quarter.

So that might actually see some uptick as we bring some moredeep-water rigs and things into the Gulf over next year?

I can't imagine that it doesn't. I've actually been stunned.The industry inventory on the ground has declined steadily all year. We were atfive point, I think five-month supply last quarter we're at 4.7 now. These have historically been price inflection points to thepositive, yet we still continue to see soft pricing and I've tried my best tounderstand it more fully but I really think it's been a lack of offshoredrilling is one thing but part of it is because there's less lead times involvedfor the pipe and the mill consolidation coupled with the type of drilling we'vegone to more of a just in time inventory. Our inventory is down which I am very happy about, but we'renot losing customers by having that reduced inventory. All we're doing is cashflowing money to the company and improving our returns on capital. As you seethose mixed shifts and if we have any further reduction of inventory on theground again, I've got to think that pricing firms. It really surprised me thatit hasn't already.

Sorry. That can't makes sense though but the Gulf like yousaid inventories are down, lead times are down, activities not going up soeverybody seems kind of hesitant about the fourth quarter right now. Final question, looking at Well site accommodations whichseems to be the kind of wild card going in next year, if you could talk abouttwo things. One, where you tend to do these mobile camps up in Canada, arethese regions going to be as impacted by the weakness in gas prices, thestrength of the CAD $ as much as the Alberta shallow gas is going to be andwhat kind of early indications you're getting for activity levels on the mobilecamp side versus last year?

Yes. Let me -- there's really three pieces of the businessthere, two that relate to mobile camp. One is the large mobile camps which isyou'll recall we had a very good winter last year. Those were really tiedtoward the oil sands development of what we call 49 man dorms. We have good indications that that equipment will be veryfully utilized throughout the winter. That will start in the fourth quarter andpart of if you go through the commentary, that's one of the positives in thefourth quarter is the start of some of the mobilization of those 49 man dorms. My own view and what is baked into our fourth quarterforecast is that Canadian drilling activity as it relates to conventional oiland natural gas is going to be rough and there's not likely to be any materialactivity in the fourth quarter. We don't believe, as it relates to thetraditional side-by-side camp. Every day I wake up there seems to be another piece of newsthat I have to digest about drilling activity and it's generally negative and Ithink that the Alberta Royalty discussions have greater impact there in my viewthan it does on the oil sands activity. So we're not betting a whole lot obviously in the fourthquarter on the drilling related mobilizations, very little, and the realquestion mark that I've got to firm up over the next quarter is what the winterwill look like for that portion of the business. Again realizing last yearwasn't terribly good either.

I mean, but normally, don't the people start giving you anindication of what they're going to need for kind of January, February aboutthis time of year, I mean, any interest levels kind of similar to last year orare they worse than last year, better?

I would say that anything ahead of November 1st is early andit would be a high demand environment. There is nobody that I will tell you asit relates to traditional drilling activity that is worried about securing rigsnor are they worried about securing camps. As it relates to the 49 man, we'vegot very good visibility and indications there.

Okay. Thank you.

(Operator Instructions) Our next question comes from theline of Matt McGeary with Sentinel Asset Management. Please proceed.

Good morning.

Hi, Matt.

Could you -- you mentioned improving returns on investedcapital in your OCTG business. Have you talked about what those returns are andmaybe you don't want to give an exact number, maybe just what returns are inthat business relative to the rest of your business?

Of course we're speaking on returns on invested capital andwe have threshold returns that we try to manage off of which as relates tomanaging the businesses we have as well as doing acquisitions which are about12% after-tax returns being that threshold type. Our returns in the tubular business were very strong in'04,'05, kind of '06 time frame as the margins obviously were good. They havecome back but they are still above that threshold level. Now, realizing they were down, they were worse in the firstquarter because we're carrying more inventory in the second and furtherimproved in the third quarter and we are highly focused on that and part of thesegmental goals and objectives even in sometimes market circumstances preventyou from making the revenue and EBITDA generation But you can absolutely manage a return on invested capitaland we have a mix there, that inventiveness them to stay very focused on efficientmanagement of that inventory.

Okay. Thanks. And how much maybe in terms of revenue orprofits, whatever you want to disclose, how much of your business now is in Canada,if you exclude the oil sands accommodation part of the business?

I think Bradley.

Yes.

A lot of people have asked that. I think he has it if you'llbear with us.

Yes. We've got about on an LTM basis on September 30, 2007, traditional Canadian activityboth in rental tools and in accommodations including the third partymanufacturing of accommodations was about 5%.

It is obviously been a little bit higher than that but withthe weak activity that we've seen, it's at a lower level now.

Okay. And just lastly, balance sheet is in pretty goodshape. Do you guys have a buyback program and if not, are you -- how do youthink about that in terms of your general capital allocation strategy?

We have a total program of $100 million that's been approvedby the board. We have about $43 million remaining on that program. We did notpurchase any shares during the third quarter.

Okay. Thank you.

Our next question comes from the line of [KartikShrinivasan] with Giovine Capital. Please proceed.

Good morning.

Good morning.

Good morning.

I had a question just on the Canadian revenues and any kindof translation impact that we might see in the financial statements. Are all ofthe revenues and costs related to your Canadian business and denominatedCanadian dollars?

That's exactly right. That is pretty all-inclusive CanadianDollar based province so there was benefit we mentioned that in the conferencecall notes. I honestly we've drafted the 10-Q and we've put the sequentialimprovement in the Canadian exchange rate. I think it was 4% or 5% but don'thold me to that. But there is some benefit as you translate obviously therevenues over the cost that comes from that Canadian exchange rate.

My second question is on the sands accommodation business inparticular given the demand for the services that you provide. Whatopportunities do you have to raise pricing after contracts been signed with thecustomer?

Really what we have done particularly with these largelodges that we have a lot of our customers come in and negotiate take or paytype commitments. When they do that they're going to get the better end of therate. But there's a whole lot of third party engineering andconstruction companies and the like that come into those facilities just on aperiodic basis and those are charges spot market type rates based on demand. Soit's a mix of firm, contractual commitments and spot day rates if you will.

Great. Thank you.

Our next question is a follow-up from the line of Ken Sillwith Credit Suisse. Please proceed.

Figure if we got the availability I'll ask some more. On theshare buyback, Cindy do you guys have a philosophy on that, is it just tryingto do it opportunistically or do you guys see that more as a return toshareholders or is it more of, if it looks like the returns on buying stock aregood we'll do that rather than buying other companies?

That's exactly. We call it opportunistically but we'vealways measured the cash investment benefits of either doing organicinvestments which is obviously first choice, doing the type of acquisitions orI'm not going to buy an acquisition and pay a multiple in excess of what I'mtrading at so in those time frames, we're going to clearly want to be buyingthe stock back.

Okay. And then I heard Bradley say that you really haven'tseen much change in I guess the bid ask spreads from private companies for moreconsolidation in North America?

Well, part of it I think maybe the type we're still seeing alot of opportunities and the types of companies that we're talking about. Weobviously just closed two rental acquisitions that I thought were at favorablemultiples, particularly compared to what we saw last year. So it's in that environment that we're talking about but weare also looking at ways to expand some of our higher end businesses, OffshoreProducts business and accommodations business if there's anyway to do that. Sothere's always going to be a range of expectations in that environment. If you're saying, I mean, we're seeing a whole host ofthings that we're just probably not interested but any North American leveredbusiness I think will get easier to buy if it's something we want to buy, aslong as, there's this cloud of uncertainty going on in terms of activity.

Okay. And I'll try to put Bradley on the spot a little bit.Do you guys have a first cut for next year on the magnitude of increase indepreciation and any idea where CapEx might shake out versus this year?

The depreciation for next year should trend upward, I thinkwe're going to exit the fourth quarter with a run rate of about $80 million ofD&A, that's a good place to start. The CapEx for next year will be drivenprimarily by the opportunities in the oil sands. If you'll recall we'll spendabout $130 million or $140 million in the oil sands this year. Some of that will spill over into next year and right now weare thinking about $75 million for accommodations next year in terms of CapEx,which in a flat USenvironment. I think we would put us probably around $125 million to $140million worth of CapEx next year in total.

Those are obviously very preliminary an we're going througha lot of detailed analysis of budgeting process with our divisions but the keyvariable for us is going to be growth opportunities in the oil sands from anorganic investment standpoint, similar to what we've seen the last couple ofyears.

Okay. Thank you.

And our next question is a follow-up from the line of KartikShrinivasan with Giovine Capital. Please proceed.

Hi. I had a follow-up question on the Offshore Productsbusiness given that you are capacity constrained. I'm just curious as to theanalysis that you're taking in terms of growing that business organicallyversus potentially acquiring a competitor to boost your capacity in that area?

I had a little tough time hearing that but I think are yousaying maybe just repeat it?

Sure. I'm sorry about that, can you hear me better now?

Yes.

Okay. I had a question on the Offshore Products businessjust in terms of understanding the analysis we're going through in terms ofexpanding organically versus acquiring a competitor and in particular what thelead time would be to expand your capacity in that area organically?

Well, that is a very good question. We've commented on quitea lot of past calls what we've done over the course of the last year toprobably 18 months is doing exactly that in terms of machining upgrades,facility layouts just a little bit low hanging fruit where you've gotbottlenecks and delays trying to de bottleneck those throughout the variousfacilities. We have multiple facilities in place. We have good demand asan example now in our drilling rig equipment operations both in home andHouston and we have sufficient demand for some of our sub-sea BOP stack upintegration work that we're adding a second high base which will allow us towork on two stacks at a time as opposed to one, and further expanding ourHouston operations. We've also entered out-sourcing arrangements both in the United States and overseas to further allowincreased input although that does obviously create reliance on added thirdparties in doing so. We do look for acquisitions and we are trying our best tofind them. That the sheer fact of the matter is our competitors land stake isvery significant with F&C and Cameron and others being very sizableobviously in this marketplace so there are fewer opportunities but there aresome that are out there that we're trying to pursue, if that's helpful.

No. That's helpful. I also had a follow-up question justtouch us on stock buyback, just given what appears to be a very attractiveevaluation, I am sorry, evaluation year. How often does the board meet to makea decision on whether or not to increase the authorization and expand thebuyback program?

We meet routinely with our board and obviously, if we getclose to eating through that buyback we will re-discuss that and likelyincrease it.

Thank you.

At this time, there are no other questions. I'll turn itback to the presenters for closing remarks.

Thank you all for dialing in today. I appreciate your timeand forbearance with us. Again, we continue to be very optimistic about a lotof our markets. We're not prepared to give any guidance on 2008, but we dothink we've got great opportunities continuing in the oil sands and I thinkthat will settle out and over time, we will get incremental benefits from thetwo acquisitions that we've made which will really augment our rental tooloperations and will evaluate our organic expansion plans, obviously if we moveforward throughout the fourth quarter. And again thanks to all of you for your support and we lookforward to visiting with you again at the end of the fourth quarter.

Ladies and Gentlemen, this does conclude today'spresentation. You may now disconnect. Thank you very much.