Good morning ladies and gentlemen, and welcome to the SmithInternational Third Quarter 2007 Investor Conference Call. At this time, allparticipants are in a listen-only mode. Later we will conduct aquestion-and-answer session. Please note that this conference is beingrecorded. I will now turn the call over to Mr. Doug Rock. Mr. Rock,you may begin.

Thank you, Tatiana. Good morning, and welcome to the SmithInternational Third Quarter 2007 Investor Conference Call. I am Doug Rock,Chairman and CEO of Smith; and speaking today are Don McKenzie, who isPresident and CEO of M-I SWACO, and Margaret Dorman, our Senior Vice Presidentand Chief Financial Officer. This morning, Margaret, Don and I will talk forabout 30 minutes and then we'll have another half hour to answer yourquestions. So that everyone has a chance to ask questions, please ask no morethan two questions at one time. If time permits, you can re-queue and ask morequestions later in the call. Now let's talk about Smith's third quarter 2007. Overall,Smith third quarter 2007 revenues increased 17.3% year-on-year, and 6.2%sequential quarters. But once again the story is all about growth in the Eastern Hemisphere and Latin American markets.Year-on-year, our oil field segment revenues grew 19.3%, but Eastern Hemisphereand Latin American combined revenues grew 30% with a corresponding rig countgrowth of 8.4%. Our products and services are more suited to complex anddeep drilling, and completions along with high-temperature, high-pressureoperations. That's why our revenues expand much faster on a smaller rig countgains in the Eastern Hemisphere and Latin America.Most North American drilling rigs are land based, and drill on average, shallowless cost of the wells. Year-on-year for the quarter, the North American rig countwas down 3.4% and revenues were up 7.8%. That's not bad considering theCanadian rig count was down about 30% year-on-year for the quarter. Margins held steady force in North America, as our product mix has not been affected by theoversupply of products or services with high capital cost content. We did see some softness in the deep U.S. Gulf market duringthe quarter, but one should see recovery in that market over the next twoquarters as five deepwater rigs are added, bringing the…

Thank you Doug, good morning. I am going to discuss M-ISWACO. First, I will make some overall comments, then address the deepwatermarket, new technologies and individual business segments. Third quarter revenuesfor M-I SWACO were $1.115 billion, approximately 2% higher than the secondquarter of 2007, and 18% higher than the third quarter of 2006. This is ourthird billion-dollar quarter, and revenues have now increased in 20 consecutivequarters. Rig activity as measured by the M-I SWACO global rig countincreased 9% for the second quarter to average 4398 rigs. The worldwide rigcount increased 6% in Q3 as compared to the third quarter of 2006. Eastern Hemisphere grew2.8% sequentially and now accounts for 56.9% of total M-I SWACO revenue. LatinAmerican revenues grew 19.8% sequentially, and accounts for 14% of total M-ISWACO revenues. North American revenue fell by 5.5% in the quarter and NorthAmerican revenue now accounts for 29.2%. Total offshore revenue for M-I SWACO was $534.8 million inthe third quarter. This is a decline of 10.1% from the prior quarter. This$60.4 million decline is comprised of 13 days of revenue losses due toprecautionary shutdowns in the Gulf of Mexico because of storms, as well as, alower active deepwater rig count due to repairs in rig move and delays tointernational contract starts where we are the incumbent. The offshore rigreduction was offset by $84.4 million in land-based revenue increase. Now, let's look at the deepwater market. The average numberof rigs operating in the deepwater market declined 10% in the third quarter.The rig count engaged in drilling and completion of operations averaged 33.8units. The reduction of 3.3 rigs from the second quarter was primarily due torig repairs and the impact of weather in the quarter. Of the 33.8 rigs, 27.9were engaged in drilling operations, while 5.9 were engaged in workover andcompletion operations. M-I SWACO's service averaged…

Great Don, thank you. Good morning everyone. Just to quicklyrecap this morning's release, third quarter earnings totaled a $167 million or$0.83 per share. This represents a 9% profitability improvement over the Junequarter and year-on-year earnings growth of 26%. One of the largest factors that impacted the quarter was thedecline in offshore revenues. As Don mentioned M-I offshore operations reportedrevenues, which were $60 million or 10% below the levels experienced in the secondquarter. The softness in the offshore market, however was more than offset bythe Canadian drilling recovery that started several recent onshore fluidcontracts in Mexico, astrong quarter for premium tubular products and drill pipe in the U.S. market,and an increased demand for environmental equipment and service in theEurope/Africa region. The profitability improvement over the June quarter wasdriven by several factors including seasonal pickup in Canada forSmith, which recovered roughly half of the Canadian earnings declineexperienced in the June quarter. Higher business volumes in the U.S. marketwhere margins held, even with the weakness in offshore business. And furtherexpansion of our operations and markets outside North America in areas such as Mexico, Continental Europe and the North Sea region. Consolidated revenues for the quarter totaled $2.25 billion,representing 19% year-over-year growth in our Oilfield segment operations, anda 12% gain in our distribution segment. On a sequential quarter basis, consolidated revenues grew6%, largely concentrated in the Western Hemispheremarkets. Our onshore business volumes in Mexico, which grew a 146% over theJune quarter as we began work on several of the new contracts awarded earlierin the year, combined with increased land-based business volumes in the US andCanada, contributed to the revenue growth over the June quarter. Revenues for the Middle East/Asia operations declined $13million or 4% on a sequential quarter basis. As Doug mentioned, second quartersales from Omani joint venture operations combined with the timing of…

(Operator Instructions) Our first question comes from KenSill from Credit Suisse, please go ahead.

Yeah. Good morning, guys. Nice results considering whathappened in the Gulf of Mexico.

Thank you.

One of your competitors yesterday mentioned that they werestarting to see a little bit of price erosion in commodity fluids in distant North America. They kind of indicated it wasn’t a bigdeal yet, but are you guys seeing any of that leaking in the North America after the supplies of the some of the other product linesfor other people?

Excuse me, in the third quarter our margins in the Rockiesand in USland were actually up. We haven’t seen a lot of pricing erosion. We are themarket leader; we're going to be the market leader in pricing. We have seenwhere some of the cost of some of our commodities like Ferrite have increased,but to a great extent we have been able to pass some of that increase on andso, we're pretty bullish on North American land, stay at reasonable levels asit is now. But if we take a look at, Doug said in his earlier commentsthat, we're not affected quite as much by high CapEx items like pressurepumping where there is an oversupply and then you get kind of a double factorthere with utilization and price. We’re basically, the resources and the assetsare in place such as liquid mud flaps and what not and so, we see US land as avery important market and we will continue to be. We are continuing to monitorexactly what's happening there. And like I said, we’re going to be the pricingleader in that market like we are elsewhere around the world. And like I said,we haven’t seen any erosion to date.

And also Ken, we are not on the high end of thetechnologies. I mean, we don't sell bits and certain basins in the U.S.and other locations. We don’t operate where there is very low cost commoditytype business, so that really helps insulators from that quite a bit.

And then just one follow- on, on that, how much of yourcontracts in North America internationally areup for renewal, I guess, in the fourth quarter year?

In the fourth quarter in the Eastern Hemisphere and South America there are very, very few contracts that areup for renewal. In North America, we have three or four that are up forrenewal, and we have a portion of basically every one of those contracts now,and that we are looking at what we are going to do from a pricing standpoint,and I hate to disclose what we are going to do because I am sure that some ofour competitors are listening.

But most of the big ones are really that have been passedoff, so they’ve really been continued in some cases without bidding duringabout and as early this year.

That's right.

Okay. Thank you.

Welcome. Thank you.

Thank you. Our next question comes from Rob Mackenzie fromSBR. Please go ahead.

Hello.

Yeah, hi Rob.

Hi, sorry I had my phone on mute. Pardon me for that. Iwanted to talk with you guys a little more about something, not one of theother companies said on their call and that's the ability to find people again,I know this has been a long-time topic but when Schlumberger just startstalking about having problems, staffing up and finding people to me that couldbe a material impediment to grow. Can you talk to us about how, how you are dealing with thatpeople and do you think that will be a meaningful bottleneck in 2008 and 2009?

I don't think people will be meaningful, but if I couldcontrast the kind of people we hire versus say Schlumberger, Halliburton andBaker, maybe it's Exxon and Weatherford. Our key technologies are in mechanics,they are in materials, they are in chemistry, they're in logistics, hydraulicsand we are not the people that really evaluate the reservoir. So thegeophysicist system, the geologist, the GMG guys, the petroleum engineers, thereservoir people particularly, we have those people, but those aren't our mainpeople. So when you hear about shortages, typically in those geologicallyrelated functions, but with the 600 that we've hired pretty much average perquarter for the last three years, mostly outside the U.S. there's been a very littleproblem at all.

And from an M-I SWACO standpoint, we will train about 500engineers, fluid engineers this year. And for example, when we had the downturnin the Canadian activity we were able to place a lot of the Canadian engineerselsewhere in the Eastern Hemisphere where weare actually growing and so we are able to move some of the people arounddepending on what is happening in the geographic area. But we are continuing tomonitor, North America. And if there is anyactivity, a change or whatsoever we will take those people and move themelsewhere around the world.

Okay Don, my follow-up was actually for you as well. Justtrying to get a feel for how much of the reduction in Gulf of Mexico, deepwater activity from storms you've gotten back and if there is any otherinfluences there, rigs moving into market, out of market that would be movingfactors in Q4?

Well, what happened in Q3, it was kind of a double whammy ifyou will. First was the disruption because of the hurricanes and that was 13days and then a couple of other rigs actually went into a repair mode and so weexpect, like we've said in the call five additional rigs to come into the Gulfof Mexico in the fourth quarter and in our share that is going to be fairly significant.

Great, thank you very much.

Thank you. Our next question comes from Scott Gill from Simmons& Company. Please go ahead.

Yes. Good morning.

Good morning.

Don and Margaret I heard you talk a lot about the Mexico contributions here in the third quarterand the Latin America revenue growth 49%, veryimpressive. I am wondering as we look into 2008, if you could kind of give ussome sort of guidance as to what that Latin Americagrowth number could look like? I know you still ramping Mexico. So I would expected it tobe pretty big, but if you could just provide some color that would be great?

I am not going to give you a number, but I will give yousome color, I mean, Brazil'sgot another 8 or 9 offshore rigs. It will becoming in over the next 18 months,so we see significant growth there. We actually see significant growth in Venezuela coming along, and we've been surprisedsomewhat about the pickup that we've seen in Columbia. So, you'll see a very stronggrowth, we think at the level that we see in the eastern hemisphere and clearlywe've been running in the upper 20% to 30% range that actually on an average isa little over 30% for the last couple of years. But we think the Latin America area would be similar to eastern hemispheregrowth, at least for 2008.

Okay, and as a follow-up Doug you highlighted the revenueper rig numbers that you've seen in the eastern hemisphere. Clearly, we aregoing to get very similar type of numbers of out of Latin America. At what point does that revenue per rigorous start tonormalize in other words, are they kind of grows more with the rig count, howfar are we away from that?

Well, I think, that there if you look at the 130 or 140offshore rigs that are coming in, I guess they are booking them now and thetail end of 2010. We'd certainly be looking at accelerated revenue per rig asthese come in over 2008, 2009 at least the first half of 2010 has a lot offloaters not as many jack-ups in that period, and then I think the schedulesshowing out through the end of 2010. So we are looking at that to continue forthe next two to three years at least.

We believe that in 2008, we are going to see 14 deepwaterrigs come back -- comes into the around the world, in 2009, 21 and 2010, 14. Sothere is a total of 50 rigs that are coming into deepwater and from a M-I SWACOstandpoint deepwater rigs, we are 10 land rigs, so that kind of multiple.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Dan Pickering from TudorPickering. Please go ahead.

Good morning, guys.

Good morning, Dan.

I would like to follow-up a little bit on the comment aroundthe deepwater rig additions and, bare with me, I want to check some numbers.Don, I think you said that the Gulf of Mexico deepwater was down about 30million or so sequentially in revenue, and I think I heard you say, you wereworking on about 17.7 rigs versus 21.9 rigs last quarter, is that right?

That is correct.

Okay, and so guess what I am grappling with here is, is yourreported revenue is about $3 million a rig there, and the delta was about $7million a rig. And so, I am trying to understand that the rigs that went downwere sort of a ultra high end, you were getting a lot of revenues there and aswe step forward the rigs that are being added, do they look more like theaverage Gulf of Mexico rig or the incremental?

I think the missing piece is Doug was the that we lostacross a number of rigs with the delta that turned as a result of the twohurricanes that were coming in. You’ve got to put that in and that reduces the7 million numbers significantly.

Okay. So the delta was really the hurricane impact? Okay.And, I guess, my other question then would be, as we look at Canada Doug, Iknow there are a lot of uncertainties, do we think at this point kind of bestchance is Canada has a seasonal recovery, but still down the lineyear-over-year do we run a risk that Canada doesn’t do anything from here andkind of pulls to 2001 when it was pretty flattish Q3 to Q4, how do you see thatmarket playing out?

For planning purposes we’ve really planned on pretty much aflat North America going into 2008. I thinkthe question is if Canadareduces significantly and if they go with the full royalty proposal of theroyalty panel it could reduce, but then I think the deliveries to the US will -- natural gas will go down quickly andwe’ll actually see a short move up in the US. So it’s a tough one to figure,but for planning purposes we are looking at reasonably flat, but we are goingto be looking real carefully over the next couple of weeks with what happenswith the royalty proposal as an indicator of how 2008 will look in Canada.

Okay. And just remind us your biggest business in Canadais best of services at this point, on a percentage basis?

On a percentage basis, yeah.

Yeah, on a percentage basis it’s more bets then, but MI hasgot a very sizeable business as their services and as those in CE Franklin.

Great. Thank you

Yeah.

You are welcome.

Thank you. Our next question comes from Robin Shoemaker fromBear Stearns. Please go ahead.

Yes. Thank you. I just wanted to follow-up on this deepwaterfleet, our rig additions to the fleet just for background purposes,approximately how far in advance of a start up of a new deepwater rig is thedrilling fluid contract negotiated in, what is sort of the timing of that andhow much incremental business do you expect from new rig deliveries in '08. Imean we can see what the delivery schedule is, but are those contract alreadyawarded or in process?

Well, typically what will happen is that if a deeper rigcomes in and we have a contract for that particular operator, then we will getit. So, it's not a rig by rig basis, its more in line with where is thedistribution going to, what operator, and in some cases you may bid it out, butprobably in 70% of the cases, its going to go into the blanket agreement thatyou already have in place.

But when we give you the numbers looking forward like thefive rigs, we know month-by-month actually by a week, which rigs are going tobe drilling and which aren't. So, these are specific rigs, specific timeframesthat tie down to really within a week or two of starting up. So, we'reconfident about these numbers.

And for that like in 2008, we know there is five rigs cominginto the U.S.gulf and another nine will be delivered internationally. And we know kind ofwhere those are going because they were committed in the shipyard and we have apretty good idea as to, if that revenue stream is going to [flow transferred]to somebody else.

And the further you are out 2009, 2010, where they operatorscontract may or may not turn over, that we don't know, because its going to dependon who the operator is or whether we have contract with that operator.

Got it, okay. So, just on that same subject, your marketshare I believe you given this in the past, the domestic and international ondeep water rigs. Do you have that kind of broken out domestic, internationallyyour market share?

Well, what we typically have done is told you the numbers ofrigs that we're on, not necessarily the value of the market share and if youtake a look at in the third quarter we were on 17.7 or 33.8 of rigs and if wecompare that to the previous one its 21.9 and I now think Margaret's got somemore data for you.

That’s the U.S.number?

That's the U.S.number.

Yeah.

Okay.

Is there a comparable international number or…?

We don't typically give that out…

Okay.

For obvious reasons and what we said is our international sharesare similar and world wide it's over 50%.

That's right.

Okay. All right, thank you.

And thank you.

Great. Thank you.

Thank you. Your next question comes from Kurt Hallead fromRBC Capital Markets. Please go ahead.

Hey, good morning.

Good morning, Kurt.

Good morning, Kurt.

Just, I want to circle back around Doug you referenced theback that the Eastern hemisphere growth of North 30% in the last couple ofyears. Any reason to think if that adds at all in 2008 or do you think it'smaybe that a constant or accelerate. Can you give some color on that?

Right now, I mean it seems to be going near we have beenrunning in that 27%, 29% range over the last couple of quarters I don't seethat slowing down with the number of rigs that are coming in right now. But asDon mentioned there is some contracts we may do better, we may do worse say,but I don't see anything substantially changing, particularly with all the newrigs coming in and the opening up of some additional areas in the former SovietUnion and also with the rig activity going in to West Africa plus I thinkBrazil, acceleration in Saudi Arabia and a couple of other areas.

Okay and then Schlumberger referenced to prospects for someproject delays they mentioned in Nigeria, the Caspian and a coupleof regions and have a kind follow on impact or flow through impact on yourprospects?

That's part of our business project delays. We've alwayssaid if all the countries in West Africadrilled simultaneously, we might not have enough capability to service themall. There are always delays. So we haven't seen a delays that are abnormal oroutside of what we've seen in the past neither in a higher percentage ofprojects. You know, some projects we've got ready drilling had to waittwo years, and this is just the nature of the funding, particularly ournational oil companies where the funding has to come from the political side.So, we don't see it to be an abnormal slowdown as a result of delays at thispoint.

Okay. And then you referenced specifically in Latin America,Venezuela, despite I guess a lot of the headline, noise and the impact it mayhave on oil company ownership issues, can you give us some color as to whythings are looking so positive…?

Our relationships with Petrobras and the other companies in Venezuelahave been very solid. There are some of the -- they pay us on time, they liveup to their contracts. So, Don, you might want to comment, you have a majorityof business there?

Well, Venezuela,of course, it's difficult to say what you'll have there slightly tomorrow, but Petrobrasis stepping in to fill in the void of some of the IOCs that were in there andso there is opportunity in Venezuela.I think it's what we are talking about here, Kurt.

And then, just kind of to give your perspective on what's --how would you handicap the prospects for the Canadian tax issue?

How will I handicap? I believe there will be some form ofcompromise, but Premier Stelmach, he replaced Ralph Klein and hasn't go throughan election. He has got election next year and the polls, some place between78% and 88% of the people want to see higher taxes. So something is going tohappen. It's a question, is it going to be in line, you know, if you kick theRoyalty rates on the Oil Sands up 17% which is the proposal, and then 5% eachon gas and oil with no grandfathering, which again is the panel’s proposal,that’s pretty draconian, but still the take for the Canadian is not excessivecompared to the percent take of, of other countries in the world, if you lookat that information. So my guesses will be some form of compromise, and wherethat compromise winds up or whether that satisfies the EnCanas, the Talismansand Petrocas, I am not sure, but I think there will be a compromise.

And the bulkier stuff in Canada, if I understand correctly,it's still natural gas, right?

A lot of that drilling is natural gas, correct, but if yougo to offshore, Eastern Canadawhich is -- and the oil stock, it’s still about 30% of rigs drilling for oil.

Got it. Thanks.

You’re welcome.

Thank you. Our next question comes from Jim Crandell from LehmanBrothers. Please go ahead.

Good morning.

Good morning, Jim.

Good morning.

Doug, you and I've talked about this before, but more and moreof the drilling that takes place is horizontal, more of it uses rotarysteerable and two of the three large providers of rotary steerable do on theirown big companies, and they seem to be doing everything humanly possible tomake sure that their bits are used with their own rotary steerables, andapparently meeting with increased success. I realized that Schlumberger,Weatherford don't have big companies, and you strive to be the premium supplierof drill bits and, but it just seems you are up against a very powerful sort offorce here. Could you talk about this issue?

Yeah, sure if you read, I am sure you did, the Richard'sprevious report on market shares recently you find out that we are doing verywell for several years, and obviously with our relationship with Schlumbergerwho has gained significant share in the in the directional, in the drilling andmeasurement business. That's a very helpful to us. So, I'd say with thecombination of new products, with our both sequential and year-over-yearrevenue growth for the last couple years, all I can say is that Smith has beena successful one in those areas. So we are very pleased with where we aregoing.

What do you think the Company's drill bit share and I am notlooking for any specific number here, but just a sense is, with Schlumberger integratedproject management contract?

That's so hard when I, I mean….

I mean is it very high?

I don’t know the answer to that. I haven't asked in thatnumber.

Okay. My second question here for both Doug and Don here is,do you see at all some of your competitors namely Halliburton, and Baker tryingto package fluid that's with a number of their other items for "a loweroverall cost to the customer", and that because they offer the broaderproduct line than you were, that provides -- that's competitive issue for youand them there in the field.

Yes, we don’t see Baker doing as much. We do see Halliburtonoffering a package and this comes around from time-to-time. We saw it in theearly 90s and then the operators turned out with a package, maybe they weren'tgetting all the leading technology. So their efficiency wasn't as good. But ithasn't been a large trend, though of course with our relationships with Schlumberger,where they are doing integrated their project management, we are involved inmost, if not all of those project. But that tends to be in more remote areas.Not areas were operators can get a hold of variety of technologies andservices. If I answer your question I have seen Halliburton do more and reallyBaker very little.

Okay. Thank you Doug

You are welcome.

Thank you. Your next question comes from Alan Laws from MerrillLynch. Please go ahead.

Good morning.

Good morning Alan

See what I have here. I have many questions here. You'vecontinually been pretty successful of completing and you're adding earningsvalue, via tuck-in acquisitions and the recent At Balance like acquisition atoe hold I guess, it looks pretty interesting. How do the M&A pipelinelook? I know we ask you this question pretty much every quarter but I just wantto know the expectation gaps are really wide out there it. Is there a lot moreopportunities there?

We are review that very frequently and there we have a longlist of companies we are interested in, we are talking to. That's not for us topredict how many we close, but mostly in the Eastern Hemisphere and Latin America the areas where we are growing, Don you'vegot the numbers those we are looking at?

I can answer you, but our list is about -- on average withwhat we've done in the last or what we've looked at in the last three or fouryears. I think we are probably, notprobably, we are looking at seven to-date. Whether they are closed or not is, Idon't know but we are actively looking at ways that we grow our business ortake a niche technology and use our infrastructure around the world anddistribute it around the world. So we are continuing. Certainly the multiplesmay be a little bit higher today, but if you can find the right thing and useyour footprint around the world to improve the overall revenues and earnings ofthat particularly company then it’s something we are looking at.

All right. Just as a regional comment. Canada being so weak and so deepdown, is there anything in that market that has looked attractive to you?

Well, essentially as Don mentioned, we're looking more fortechnologies. I am not saying that if we had a good value asset play, where wecould buy something at discount. Assets, we wouldn’t do it, but at this pointthere is maybe Canadian company or two there. But nothing has come up as aresult of this downturn because they are primarily looking for new technologyplayers.

Okay. So, your second question have us on SmithTechnologies, I know this is kind of coming up in the next few months. I waswondering if you had any internal or western surround, you had a margin impactor earnings sensitivity from the six-cutter royalties you begin to play in January.

Actually there will be, it’s not January but our deal with GrantPrideco is that we prepaid royalties for six quarters, and actually when we hitthe second quarter of next year, because of the percentage use of the beds, itwill actually go down.

Okay.

So, there will no margin, and there will be no marginreduction and potentially a margin increase.

Okay. Thank you.

You are welcome.

Thank you. Our next question comes from Geoff Kieburtz fromCitigroup, please go ahead.

Good morning.

Good morning, Geoff.

Good morning, Geoff.

The oil field margins were flat sequentially, is that a faircharacterization for each of the three pieces of oil field?

I think what I've said Geoff is that, certainly theonshore/offshore mix in your mind, you would expect replacing onshore revenuesto with offshore reductions. You would expect that to have an adverse impact onthe EMI margins. What I had talked about is that, that really that was morethan compensated by the shift to the higher comparable margin quarters in SmithServices and Smith Technology. So, to answer your question, I don’t think thatwould be an accurate representation as each of the unit was flat.

Got you. We talked a little bit about the impact to the newrigs, and I think someone was trying to get a handle on it, let me make a stab,that you are getting something in the order of $4 to $5 million in a quarterfrom a deep water rig, is that a fair estimate?

Yeah, I mean I think what we’ve talked about, Geoff issomewhere a deepwater would be, you know, one to one and half a month, so $3million or $4 million a quarter.

3 to 4,okay.

Yeah, depending on the depth of that rig.

If we put it in downhole tools, and that's depending on therig, it could go up somewhat.

Okay. And as these new rigs come into the fleet, would youexpect them, I mean, obviously there is a variable, we don't know how many ofthose you will be contracted on, but is would -- should we expect that, thatrevenue run rate should be generated from the very beginning or will there besome kind of ramp up?

It's an oddity. Usually when they come to spud we providethem with some lower cost spud mud. So you see some higher revenues in the beginning,and usually lower margins. And then once they get into the deeper drilling andcertainly get into the reservoirs or the extended reach you’ll see the highermargin stuff being used. So, typically if they come in you might see a jump in volumewith lower margins and then you see the margins pick up once they are into theoperations.

Okay, but --

It’s the drilling multiple wells only from a single cord, sowe used to get a spud and then added 26 or 36 inch hole then only do themultiples coming up the bottom there, they extend in the region of a high valuework type and ultra deal fluid.

Got you. So it's really like a well -- really trying to getout as you probably heard Schlumberger’s comments about the efficiency of thesenew rigs as they come in to the fleet from the shipyard and their expectationthat they would not be generating service revenue at a seasoned rig, kind ofrate for, I think, they said as much as two years and I wondered how thatmight…

I didn't hear the comment.

Okay.

I didn't hear the comment neither, but if you look at itGeoff, without a doubt when it comes from the shipyard and goes to the seatrials and goes on its first well there is some bugs that have to be workedout. But typically I would think we took two years, but nonetheless, when theycome in we would start generating revenue once its spud.

And what's more important there is whether it's exploratoryor development drilling, development drilling generating much higher revenues.

And similar margins or higher margins as well?

For similar margins.

Similar, yeah.

Okay. And a question lastly for you Don, you called out thedollar amount of new technology revenue at M-I. I guess a two part question;one is, it seems like its running in just under 25% of M-I revenue now. Wheredo you see that going and the other part of the question is, is that heavily ordisproportionately in any one of the three segments of M-I that you've alsogiven us detail on?

Well, I would think that our new technology revenue willimprove overtime. We've invested a lot of money in research and development inour M-I new products system. We will also be looking at as we talked aboutearlier acquisitions that provide a component of new technologies. When you are talking about the segments, certainly the fluidsegment is important in the environmental process and solutions. That has ahigher component of new technologies and fluids by about 10% and so as thatgrows we would expect the margins to improve accordingly.

Okay. And just to clarify on the first part of your answer,do you expect new technology as a percentage of M-I revenue to go up?

Yes, we do.

Any kind of target?

Well, if you take a look at, this is a new technology wedefine as any technology that is less than five year old. So at the end ofevery year, our field operations are somewhat concerned because we drop thingsoff and as we drop off, so yes, it would improve, but even though you dropthings off, you wouldn’t necessarily expect the margin to erode just becauseyou dropped it off.

Got you.

If we take a look at for example, [sprinkler] technology andI don't know that actually dropped off. But it is a very interesting technology,it is, in terms of rig efficiency and what it can do for operators throughoutthe world, is an improvement over any other method, and so, consequentlymargins for that would stay.

Great, thank you.

Thank you.

Thank you. Your next question comes from Brad Handler fromWachovia Capital, please go ahead.

Thanks, good morning.

Good morning, Brad.

Hi, Brad.

I guess I just have one question last, overtime, you guyshave spoken to the idea of getting 200 to 300 basis points of margin throughthe course of an extended cycle. I never mean to suggest that was necessarily atarget, but it does seem, that was your representation on how it worked. Itlooks as though, if we're looking at your guidance, 2007 is going to shape upthat way. And I guess I was curious for whether or not if composition of yourbusiness has changed a little. For example, a bit more kind of an internationalland as you penetrate there. If there was something that changes about the[tenure] of your ability to move margins over the next couple of years?

Yeah, I think, you are exactly right, that's what we saidwith average-over-cycle, in fact, in this cycle that’s what we are averaging,but we've also the cycles who have periods where there are a little bit flatter,and really it's been a deceleration of North American growth that has -- therest of the world is growing at a rate much higher than I would have thoughtcouple of years ago, because I didn'tthink that oil prices would be this high, and were 85% or so of US drilling is gas;85% of rest of the world's drilling outside of Canada is oil. So, moving there, but again with a flat North American, thatwas the piece that was creating the other 100 basis point to get us up about200. That said deceleration. North American gas drilling will accelerate, Ijust can't tell you whether it's going to be 2008 or 2009 or 2010, but deliverabilityis going to be down. Consumption is not coming off and they still not kicks in,I think, you'll see rates above that range.

Okay. So, just to clarify at the -- your sense of theopportunities again in whether it’s international land or just broadlyinternational new different from a year-on-year opportunity to raise margin?

No, and particularly I think with the this quarter wasmainly, throughout the world, we actually saw a little bit less offshore indeep growing, and I think that was just a factor of the third quarter which werig by rig would see most of that or much of it coming back in the fourthquarter.

Sure. Makes sense. Okay, that’s helpful. Thanks.

Yeah, you are welcome.

We have no further questions at this time.

Well, thank you for joining us for our third quarter call,and we look forward to speaking with you and answering your questions in thefourth quarter. Good bye.

Thank you, ladies and gentlemen. This concludes today's teleconference.Thank you for participating, you may now disconnect.