Good morning. My name is Luanneand I will be your conference facilitator. At this time, I would like towelcome everyone to the Baker Hughes Third Quarter 2007 Earnings ConferenceCall. All lines have been placed on mute to prevent any background noise. Afterthe speaker's remarks there will be a question-and-answer period. (OperatorInstructions). Thank you. I'll now turn the conference over to Mr. GaryFlaharty, Director of Investor Relations. Sir, you may proceed.

All right. Thank you, Luanne andgood morning everyone. Welcome to the Baker Hughes third quarter 2007 earningsconference call. Here with me this morning are Chad Deaton, Baker Hughes' ChiefExecutive Officer and Chairman; Rod Clark, Baker Hughes' President and ChiefOperating Officer and Peter Ragauss, Baker Hughes' Senior Vice President andChief Financial Officer. Following management's comments we'll open the linefor your questions. Reconciliation of operatingprofits and non-GAAP measures to GAAP results for historic periods can be foundon our website at www.bakerhughes.com in the investor relations section underfinancial information. Last, I caution you that anycompany outlooks discussed this morning are subject to various risk factors.We'll try to highlight these risk factors as we make these forward-lookingstatements, however, the format of the call does prevent a more thoroughdiscussion of these risk factors. So for a full discussion of these riskfactors, please refer to our annual report, 10-K, 10-Q, and in particular theforward-looking disclosure in this morning's news release. With that, I'll conclude ourdiscussion of the administrative details and turn the call over to Chad Deaton.Chad?

Thank you very much, Gary good morning,everyone. This morning we reported income from continuing operations for thethird quarter of 2007 of $389 million or $1.22 per share. This $1.22 per shareis up $0.13 or 12% from the $1.09 we reported in the second quarter of '07, andthe third quarter of '06. Revenue is up $2.68 billion,which was $2.68 billion, which is up $368 million or 16% from the third quarterof '06 and it was up $140 million or 6% sequentially. Outside of North America, revenue was up 22% compared to a year agoand was up 5% sequentially. Continued expansion in the internationalmarkets with seasonal recovery in Canada,a stable recount in US landand the increases in Gulf of Mexico revenueall contributed to the sequential improvement. Overall, it was a better quarteras both our Drilling and Evaluation segment and our Completion and Productionsegment delivered solid revenue growth and improved profitability in the thirdquarter compared to the second quarter. The Drilling and Evaluationprofits recovered in Canada, as activity improved seasonally and our Completionand Production businesses, which are more geared to production volumes anddrilling activity continue to deliver very solid results. Internationally, we showed goodgrowth in both segments. In the D&E segment the investments we have made atBaker Atlas in people and technology were evident in the improved performancefor the quarter. If we walk around the aroundworld, and look at our regions, North America revenue was up 8% year-on-yearand was up 7% sequentially. Looking at US its revenue increased 10% year-on-yearcompared to a rig count that was up 4%. The land revenue was up 13%year-on-year with strongest growth coming for our D&E group coming out of INTEQand Hughes Christensen and our C&Ps land revenue was up with strongincreases at Centrilift and Baker Oil Tools. US land revenue was up 4%sequentially, compared to a rig…

Thanks Chad, and good morning. As Chadsaid, third quarter revenue was $2.68 billion up $368 million or 16% comparedto the same quarter last year, and up $140 million or 6% sequentially. Revenuefor the Drilling and Evaluation segment was up 13% year-on-year and up 6%sequentially. D&E's operating margin in thethird quarter was 26.5% up 80 basis points from the second quarter andessentially flat for the year-ago quarter. Within D&E, Hughes Christensencontinues to have the highest operating margin. Hughes Christensen's operatingmargin decreased slightly from the third quarter of '06, but increasedsequentially as Canadian activity and profitability recovered from Q2 lows. INTEQ's operating margindecreased compared to both third quarter of '06 and the second quarter of '07due to delay of high margin work in the UKand lower activity in Nigeria. INTEQ continues to have thesecond highest operating margin in the company. Baker Atlas operating marginimproved both sequentially and year-on-year due to activity increases andstrong incrementals from international markets. Baker Hughes Drilling Fluidsoperating margin rebounded sequentially due principally to improve product mixresulting from increased deepwater rig activity in the Gulf of Mexico. The division operated on seven deepwater rigs in Q3 upfrom two rigs in the second quarter. Incremental margins for theD&E segment increased on both the year-on-year and sequential basis withyear-on-year incrementals of 25% and sequentially incremental margins of 40%. Baker Atlas is throwing off nicereturns on recent investments with incrementals both sequentially andyear-on-year in excess of 50%. Turning now to our Completion andProduction segment, revenue for the segment was up 20% year-on-year and up 5% fromthe second quarter. C&P's operating profit was up 20% year-on-year and 8%sequentially. Baker Oil Tools operating profitmargin improved sequentially and year-on-year. A recent third-party survey bySpears & Associates recognized Baker Oil Tools recent market share gains,which are reflected in their 20% year-on-year growth. Centrilift saw sequential marginimprovement in the third quarter driven by revenue growth and goodprofitability in Canada, Latin America and Asia Pacific. Although, marginsimproved on a sequential basis, year-on-year margin erosion reflects continuedcommodity price pressure. Baker Petrolite's performanceremains steady with operating margins in the mid to high teens. C&P'syear-over-year incremental margin was 22% and the sequential incremental marginwas 35%. I'll now turn it over to PeterRagauss. Peter?

Thanks, Rod. On a fully dilutedbasis, our operating earnings per share from continuing operations were $1.22for the quarter. There are a number of factors that had an impact on our thirdquarter results. The following should help clarifythe difference between this quarter and the prior quarter and the same quarterlast year. Bridging sequentially from lastquarter is $1.09 at $0.50 with the impact of share repurchases netted againstreduced interest income at about $0.03 for the impact of a lower comparativeeffective tax rate in this quarter. We tracked about $1.50 forincreased compliance-related corporate spending. Finally at $0.11 fromoperations, we posted 38% incremental profit on a revenue increase of $140 million.This kept us to $1.22 per share we recorded for Q3. The year-over-year from$1.09 we reported in Q3 of 2006 add about $0.01 for the impact of sharerepurchases netted against reduced interest income reflect about $0.03 for theimpact of a higher comparative effective tax rate in this quarter, reflectabout $3.50 for increased compliance-related corporate spending. Finally, at $0.185 fromoperations, we posted 23% incremental profit on revenue increase of $368million. This improvement was driven by higher revenue in the US and international markets, partially offsetby weaker activity in Canadaand includes about $0.04 of price improvement, net of raw material and laborinflation. This kept us to $1.22 per share we reported for Q3. Our balance sheet just getsstronger. At quarter end, we had cash in short-term investments of $908million. In comparison, our outstanding debt was just under $1.1 billion. Ourlong-term debt-to-cap ratio at the end of the third quarter was 15%. Our primary use of capitalcontinues to be growth in our business through investment in rental tools,manufacturing equipments and global infrastructure. Our intent is to return cash inexcess of our needs to our shareholders. As we disclosed last quarter, ourBoard authorized a $1 billion addition to…

All right. Thank you, Peter. Andclosing our comments on our outlook. Our industry is going to continue to bechallenged to meet projections for worldwide oil and natural gas demand withoutsome kind of increase in spending and order supports the higher exploration anddevelopment activity. We're going to continue to investin growth in our international markets, to provide our customers with the besttechnology and of course the execution for their projects that they haveoutlined. The near-term outlook for North America activity is less clear. The rig count in Canadahas recovered from low levels in the second quarter, however, there is no clearcatalyst in sight to accelerate activity and the Canadian producers continue tobe hindered by less favorable economics for natural gas. While USland activity has been sustained at a high level, growth in US land rig count is effectivelystalled due to concerns over the continued build in natural gas inventories.And we've seen weaker activity in rig counts in the US offshore markets. With natural gas inventoriesapproaching historically higher levels, the near-term direction for NorthAmerican natural gas activity will be determined by a number of in-relatedvariables, which includes demand, weather patterns, US and Canadian productionvolumes, LNG imports, depletion rates, natural gas prices, and of course ourclients or the producers are going to respond to all of these changingvariables. As a company, we remain committedto improving our margins and profitability. We have several key initiativesthat we've introduced that are intended to enhance profitability. And perhapsthe most important of these initiatives is proper investment and deployment ofnew technology. Last week I kicked-off our annualBaker Hughes Technology Conference. And once a year, we gather approximately1250 of our scientists and engineers from our global R&D centers in orderto bring them together to exchange ideas, to share technical papers and toidentify cost, divisional solutions and opportunities to satisfy…

Thanks Chad.

So, with that Gary, let's open it up for question.

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

Your first question comes fromJim Crandell with Lehman Brothers.

Good morning.

Good morning, everyone and Rodcongratulations on your retirement. You have done a great job over the years.

Thank you, Jim.

Well, my question is about therevenue side, first on the product line basis and then on a country basis. On aproduct line basis what I consider to be your three fastest growth divisionsshowed the lowest quarter-to-quarter growth this past quarter and I think Iheard some explanations why that was true with INTEQ. But I was wondering ifthose three divisions, could you expand on a little bit more? Is it a functionof geography, capacity constraints and what if anything should we read into it?

Well, you mentioned INTEQ. Iassume you are probably talking of Baker Oil Tools for another one and HughesChristensen or Atlas?

Yes, Atlas, your three lowestgrowth ones this quarter on the revenue side I would have thought, at least Ithink speculate they should be your three fastest ones.

Yeah. Well, INTEQ had to do someshift in the UK.I mean, there are just some project delays and other things. And also Nigeria, obviously some issues going on in Nigeria.Logistics issues, getting tools in and other things which all has been takenplace there in the news over the last while. Elsewhere, INTEQ was up verysolidly in Latin America, that Brazilcontinues to ramp up. I think we're 48% share there now and over 50 years wewould continue to ramp. So, I don't see any issue in INTEQ that has been anyconcerned on quarter-to-quarter. Atlas, North America we mentionedin the last second quarter we had lost some share in North America and Atlas inthe third quarter did very nicely, the Gulf of Mexico got back quite a bit. Infact, it was up significantly in the US sector. If you look at Atlas year-on-yearoutside North America it's growing in excessof 30% year-on-year. So, as Rod said in his comments, we've paid a lot ofattention to Atlas over these last year, year and a half. We've put in somesignificant investments and we're quite pleased with where Atlas is going inthat area. And Baker Oil Tools, again,year-on-year is up over 20%, which globally you look at that was our biggestgrowth area. Outside North America,year-on-year it was up 30%. So, this is sequential 2%. Again, we get a bigshipment of $40 million and it makes the next quarter look great. And actually if you go back overthe last three years, Jim, this is the first third quarter that showedsequential gain out of four years. In the previous three years Baker Oil Toolsalways had a third quarter that showed a drop in the second quarter. So, Ithink and as Rod said, BOT just recently speared the show that they are gainingmarket share. So, we've kind of turned the corner and showing it going up. So, weare happy with the results we are getting out of all three of those.

Okay. Thank you, and my follow upis though a geographical question. Chad,with both Russiaand Saudi now surging into the $500 million to $600 million revenue range foryou, what kind of growth here from these levels, you expect out of thosecountries in '08 and maybe '09.

I don't see anything stopping Russia and itsreally Russian/CIS, (inaudible) group that. But, I don't see anything stopping Russia.We're this quarter 109% in Russiaover a year ago and we continue to see good success with our Russian clients.They are really taking to technology. Saudi, obviously, is reaching its130 rigs and Manifa has not been awarded yet, Manifa will have some effect onHughes data, obviously, but there is still going to be a lot of activity inSaudi. I don't think we're going to see -- nobody will see the growth thatthey've seen in '05 and early '06 in Saudi's as they went from 35 rigs to 130rigs. But, Saudi is going to be a good, steady revenue generator. Saudi willprobably in time look more like a UK,Norway, little better interms of growth, but not like Russia.

Got you. Okay, thank you verymuch.

You bet.

Your next question comes Bill Herbertwith Simmons & Company Bill Herbert - Simmons & Company: Thanks, good morning Guys.

Hi, Bill.

Hi, Bill. Bill Herbert - Simmons & Company: Chad, continuing with the internationalrefrain. In 2008, and again, I have recognized that you haven't completed yourbudgeting process what have your. But, conceptually sort of paint a roadmap forus with respect to which international markets, not for the industry, but forBaker Hughes look to demonstrate the greatest rate of change?

Our '08 over '07? Bill Herbert - Simmons & Company: Yes, sir.

Well, I think. Bill Herbert - Simmons & Company: And that would be positive way ofchange.

I think there is some interestingthings in Venezuela juststarting Latin America, could be some potential there depending on what happensin Venezuela.Mexicois going to show some real activity. We are not strong in Mexico as you all know, but we'vebeen spending a lot of time and discussing and they clearly want us in thereright now. Brazilis going to be strong again in '08. We should, we're seeing in Brazil,which is really encouraging as that, it was an INTEQ driver that won thatcontract. But we are seeing nice gains in our sister companies on the pullthrough. Bill Herbert - Simmons & Company: And when you say strong again,that means demonstrating the same rate of year-over-year rev?

Well, I don't how much. We're up62% in Brazil,year-on-year. Bill Herbert - Simmons & Company: Okay.

It's going to be 62% probably not[above] it. Bill Herbert - Simmons & Company: Sure.

I think Libya, we are up 45%, Libya year-on-year. Libyais starting to get a little full on some competition but we did have a bigmarket share there and the clients are accepting us there with some open arms.So, I think we have an opportunity in Libya. Bill Herbert - Simmons & Company: Right.

I think Algeria will do well. Russia, we talked about, I don't see anythingstopping Russia.I think that will probably be still one of our strongest growth areas. And thegood thing is there, it is a very big area, lot of potential there. I think Egyptwe will show that it's going to have potential for next year. Kuwait is getting better. I think Malaysia is still going to be strong, but againwe are up 83%, Malaysiayear-on-year. So, it's going to be little hard to match that. I think we'llprobably see some countries that are just starting to pop up, that could begood that we need to watch. We did not have necessarily a good year in Indonesiaand usually these things sometimes swing back and forth. So, we could be betterin Indonesianext year. Bill Herbert - Simmons & Company: So, it sounds like a combinationof continued strong rates of growth in some countries where you have been bothperforming well and a couple of notable examples such as Mexico, which could be big wondersas well for you.

Yeah. And then India is another one that I failed to mentionbut Indiahas got some good potential too. Bill Herbert - Simmons & Company: Okay. And then secondly, and thenI am done the comment on the incrementals approaching 25% near-term, definenear-term? And then secondly, on that front in an environment, I mean, none ofus know what's going to happen in North America but in an environment ofstagnating drilling activity, as a potential scenario for 2008 and perhaps, theleading pricing in that environment, is it realistic to expect overall incrementalsto expand in that environment?

Well, first, 25% is near-term is,next quarter. Bill Herbert - Simmons & Company: Good.

And in terms of expandingincrementals, I think it's going to be difficult for North America to do that. Bill Herbert - Simmons & Company: Right.

And I think what we have to dois, like we said in the prepared remarks, I think what we have to do in NorthAmerica it's still a very good market to stabilize at a high level. We justhave to watch our costs.

And then internationally, we gotto, there we have the opportunity to continue to work on incrementals andcontinue to improve those blended and that's why we are saying 25%. Bill Herbert - Simmons & Company: Okay, great. Thank you very much.

All right.

Your next question comes from KenSill with Credit Suisse.

Yeah, good morning guys.

Good morning, Ken.

I do believe my congratulationstowards Rod also. On those incrementals just looking at it, the 21% growthinternationally is kind of in line with what we were expecting kind of anotable lack of guidance on North America inthis short run. Could you kind of walk through how that's going to play outsequentially anyway in the Gulf of Mexico andon shore where, on shore seems stable? Gulf, you had some evacuations but youguys were surprisingly strong there, how are you thinking North America is placed at Q3, Q4?

Land, well North America let's split it. So Canada, we show Canada to be a littlebetter in Q4 than Q3, but clearly not as -- not where it was a year ago Q4 andCanada we don't see as we said any real catalyst there again things come back,I don't see it and well into 2008, what's going on up there. US land I think it seems kind ofstabilized where the rig count level is today. It's holding in there I thinkthat will continue, through the quarter. We are starting to see a few rigscomeback in active into the fourth quarter in the Gulf. And you know thesethings, they finish drilling and switch over and sometimes it's your rig andsometimes it's not. We did well in the third quarter in the Gulf. We are veryhappy with our results there considering whatever was going on there and wethink we should do okay again in the fourth quarter in the Gulf, but its notgoing jump back up to the same rig count that was on the second quarter.

Okay, and then following up onthe incremental margins, 25% blended for this quarter with a little bit of topline growth looks like the [street] might be a bit high where they are onestimates but I guess the key here is this international build out andinternational infrastructure going in should eventually start leading to muchhigher international incrementals as the revenues flow through. I don't want to kind of get aheadof the game, but could you give us kind of your expectation for how incrementalmargins play out as we move through '08?

Yeah. Like I said, we see that wehave room to improve our international incrementals in the other three regionsas we go thorough '08. So, we know that's going to be the push to get those upto offset flat growth in a very big market like North America. You made the comment aboutrevenue and revenue growth versus others and where we are. It's all over themap, when you start talking about what revenue growth is going to be for nextyear and it's anywhere from -- I heard one competitor say, mid to upper teens,and I heard another one say 40%. And so, we have to just look at where we thinkwe are going to grow in which countries. I mean, you take Denmark, UKand Norway and we do more inthose three countries in a year, when one of our competitors does in the entireEurope, West African CIS countries. So, obviously, UK, Norwayand Denmark,it's not going to grow 30% or 40%. They grew this year at about 16% to 17%. Andthat does blend obviously with the countries that I talked about where we grow80% or 90%, in Russiaand et cetera. So, you blend all that. You look at it globally and that's where23% growth on a quarter and we break it down by country and look at it. We arepretty comfortable with what we see in response from our people.

And I understand that it's easierto grow from a smaller base and that seems to clearly be happening with some ofthe companies not named Schlumberger. But should we expect in our models to beseeing any kind of dramatic expansion and incremental margins as you movethrough '08 and some of this infrastructure in CapEx starts translating intoearnings. Where do you think it's going to be more of a steady progression onincremental margin improvement internationally?

I think it's going to be a steadyprogression, Jim, because we are not done investing. We continue to see, like Isaid, we are chasing $10.5 billion worth of contracts and opportunities aroundthe world, and where we have made our choices to move in like Brazil, likeIndia, like Saudi, these areas over the last couple or three years. We are veryhappy with what we see in our market share that we are getting there. And westill think we have other opportunities to do the same thing. So, we want tojust have a continued improvement in incremental margins around the world andjust keep margins grow over there.

Okay. And then I just wanted toconfirm what Jim had said that, what is Russian there on an annual run-rate forBaker, price wise?

Russia itself is $400 million.

$400, like what you would callthe CIS?

No, we exclude Sakhalinbecause we will manage that out of our Asia Pacific region for logisticreasons.

Okay. All right. Thank you.

Your next question comes from DanPickering with Tudor Pickering.

Good morning, guys.

Hey, Dan.

Chad, you mentioned the $10.5billion in backlog and I just was hoping for some perspective where that wouldhave been six months ago. I mean, is that number increasing and I assume Manifawill be in those numbers?

Manifa would have been in bothnumbers. And you are right, it is increasing. Dan, I don't know the number. Butwe just had a review from our integrated group the other day and that's thehighest number we've seen from the previous quarter. I can't remember what thenumber was. I think $8 billion or something like that. But, yeah, it'sincreasing. I think one of the things that weare seeing out there clearly is that there are some very big packages thatthree years ago, these things weren't happening. So, the international clientswere tending to go to big packages for longer term duration. And it's like Brazil last year, and what we are just saying inManifa, and what's going on in Norway,Statoil heat drill the Angolaproject. Those are in Mexico.And so, you just start adding those up around the world and it gives you somepretty good visibility what's out there.

Chad, are those projects kind ofan integrated projected management type of opportunities, where the customer isasking for basically a big company to come in and provide almost a turnkeyresult? Or are these product line-specific opportunities? TudorPickering: Chad, are those projects kind ofan integrated projected management type of opportunities, where the customer isasking for basically a big company to come in and provide almost a turnkeyresult? Or are these product line-specific opportunities?

There are a couple of placeswhere it's a turnkey. But for the most part, it's more of an integrated, we don'tlike to use the word bundling, but a group of your service is coming togetherand providing that. That's most of it. In Mexico, as obviously you areinvolved in trying to build locations and roads. But that's really theexception. Most other places, you are seeing and where they want you to do morelogistics and bring more of your services in, like Manifa. I mean, I think Manifa is aperfect example. It's not truly a project management, where you are buildingroads and managing rig and doing everything else. You're responsible for yourside of the logistics.

Okay. My follow up would be, Imean, we're getting close to '08. Now clearly, you are going through yourbudgeting process. As you look at your spending in '07, it's probably going tobe about $1.1 billion. Lots of big international projects out the there, howare you thinking about '08 capital spending? TudorPickering: Okay. My follow up would be, Imean, we're getting close to '08. Now clearly, you are going through yourbudgeting process. As you look at your spending in '07, it's probably going tobe about $1.1 billion. Lots of big international projects out the there, howare you thinking about '08 capital spending?

Well, you're right, Dan. We are just goinginto the process. What I'll tell you, and we'll come back obviously when we getit pen down, when we hear from the divisions and regions around the world. Butyou can expect that we will spend $200 million to $250 million again next yearon infrastructure spend. So, these are the things we are going to becouple of hundred million this year and a lot of this overlaps and keeps going.And then, we are probably going to be similar to where we werethis year and give-or-take some depending on what we see as we roll all thisup. It's hard to say because Angola itself, is over $1 billion project and ifyou win that, you obviously going to need more tools and et cetera, so it's thedifference from what I think it was two to three years ago, where you just kindof looked at individual jobs and put your CapEx together and now you could wina big job, it's $1 billion and that changes things.

Okay, thank you. And Rod,congrats enjoy your retirement.

Thank a lot Dan.

He is already in shorts and he'sgot his golf club ready.

I like it.

I still want strokes from youthough.

No way.

Next question comes from OleSlorer with Morgan Stanley.

Thank you very much. I wonderwhether you could walk us through some of the improvements that you have doneat Baker Oil Tools in terms of the bottlenecking the manufacturing over thepast 12 months, and sort of where you stand right now in context of having theavailable capacity for the next two years for the deep water expansion?

Yeah, Rod you want to take thatone?

Yeah. We are really happy withwhat's happened here since we hit the headwinds of our capacity constraintsbeginning in Q4 last year. We've increased capacity about 20% over last year atthis time, Ole. We have mentioned before in conference calls thatde-bottlenecking the machine tools here in Houston,the East Kilbride expansion, screen plantgoing into the meet region. But the affect of this is to couple of things oneour lead times are being drawn down as we hit into the backlog and decompressthe load on our manufacturing infrastructure. And secondly, to free up a littlebit of flexibility. But we are right now at 90% capacity utilization whichgives you enough flexibility to start capturing some high margin short-term,one-off type opportunities that we see in the market. So, we are at that stagenow, where we are able to have a little bit more maneuvering room, which wedidn't have three quarters ago.

Good. Is there more capacity tocome on? If you are looking at 90% utilization right now and the borderexpansion of 70, 80, 90 rigs, and top of that 166 you are running with rightnow. Do you have the capacity to?

We are not adding capacity thatwill significantly move that needle. But the margin, yes or especially needsnew products, some high-tech areas that we need some special machining,de-bottlenecking but no big material capacity adds underway.

Okay.

We will be opening the new manufacturingfacility in Dubai, probably first quarter of next year and also we are addingcapacity in Saudi, which will relieve some of the screen capacity problems inthe US and Europe. So, that's quite a bit of square footage coming on in '08.

But that's not speculative. Wehave very sound visibility on the sand control needs of the customer base.

And if you were to walk throughthe same story on INTEQ and Baker Atlas, two other divisions that had somecapacity utilization type issues. Where do you stand on those two now? In termsof the reengineering of the INTEQ tools that you've mentioned in the previousconference call, as well as next generation logging tool for Baker Atlas andtraining?

INTEQ providing building tools,we are not getting a crunch on INTEQ for tools. We said last call that insecond quarter we had $10 million maintenance thing, that worked its waythrough or exactly where we said we would be, so that's not an issue for us.Continuing to build new tools because there's quite a demand for some of thehigh-end inventory tools, so we will continue that will be something you'll seewell into next year, continuing to build those tools. I think probably where we are alittle tight right now and its good news it is in the Atlas area. Atlas as Isaid we're very happy with the way Atlas is growing internationally and thegood news is we probably going to have to build some more tools for them,because they are like I said year-on-year roughly over 30%. So, you'll see thatin our 2008 CapEx.

Okay, well. Thank you very much.

Your next question comes fromMichael LaMotte with JP Morgan

Thanks guys. I wanted to justfollow up on this incremental margin guidance for second and historically Iguess you've always targeted low 30s percent, now we are talking 25%. I amwondering is that still a function of the build out on the international side,or is that sort of building in some conservatism for potential price weaknessin North America going forward?

I think it's more of the former.We still feel pretty good about price generally, we're still on an up tick onprice. It's not quite as accelerating, quite as fast as it was. As Chad mentioned earlier, it's pretty flat in North America but internationally we are still pickingover contracts that are two and three years old and renewing those generallyspeaking. So there's still positive price momentum globally and when we arestill doing the build out internationally in $200 million to $215 million,those are pretty big numbers for Baker Hughes those are numbers you have neverseen before.

Yeah.

So, it's more the build outreally and obviously we are not getting the same price increases we did a yearago, which contributed to 30% and 40% incrementals. So, that plays into factorthat, but it's more than build out I'd say.

In Centrilift, specifically, onthe margins, I am kind of curious this is the fastest top-line growth that wehave seen in that business in three years. If you look at '07 year-to-date andyet margins are still under pressure, what's the challenge there in terms ofgetting the inflation put through in price increase in that business.

You just hit it right on thehead, Michael, we got to push, we got to get the price up. Lead is up 38%sequentially. We've had issues with copper, that's up very high in nickel. Wehave not been able to, whereas in INTEQ and some of the others, we have beenable to push through the price better and though we haven't had the samesuccess at Centrilift. Encouragingly, we actually see onthe C&P side, Baker Petrolite and Centrilift actually seeing some of ourbetter price improvement that we saw in this last quarter. They haven't pushedas hard as the D&E side, obviously on price, over the last year, year and ahalf and the clients were little more receptive. So, hopefully we'll be ableclaw some of this back as we go though the next couple three quartets.

Is there a backlog lag effect? Imean in terms of sort of a new order price today versus what's flown to theP&L in Q3? So, is deltas there that are potentially meaningful?

The lead time through ourmanufacturing facilities at Centrilift are not significant enough really toomake that a meaningful consideration in your model.

Okay.

That is to some extent, but itsnot huge.

Okay, great. And then lastly, Chadappetite for M&A at this point?

Well, its getting better. We've,obviously as Peter said, we have a very strong balance sheet. We do havemonitor in place now, that's been here three or four months. That actuallyhelps us in terms of getting comfort in terms of what we can do as we lookforward to make some acquisition. So, yeah, I think it's getting better for us.We don't have any big on horizon. But, I think we are in much better shape thanwe were a year ago and that we would be able to look.

Still thinking reservoir andinternational as the priorities?

Yes, in technology.

Thank you.

Your next question comes from BenDell with Bernstein.

Hi, guys.

Hi, Ben.

Morning, Ben.

I had a couple of questions,first was around Canada,obviously, the changes announced last night. I was wondering if you had anyinitial thoughts. It looks as though from my perspective the gas changes aren'tas bad as people are expecting.

I think they are not as bad,whether they are sort of 2 billion and dropped it to 1.4 billion or whateverelse, it's still bad. We've been talking to a few of our clients, senior level,and we haven't talked to them obviously since this slight reduction the 2billion to 1.4 billion. But, basically, what we heard is any type of changesnot going to go down favorably with them with the conditions in Canada.So, I don't think that's going to help Canada. I think even that's goingto still make Canadapretty week for the next several quarters.

Okay. And your comments on SouthAmerica, you didn't mention Argentina.Obviously, there is the elections going on there and there has been a gradualincrease in the gas price. Are you seeing any pickup in activity as that sortof coming through?

No. In fact, Argentina, there was a strike downthere this last quarter which affected us. Argentina was actually down for usfor the quarter. I think some of the other competitors had several issues thatthey have reported. I think one of the issues with Argentina is, they are not actuallyable to sell their gas or their oil with the price that is on the market. Andplus the labor costs are gone out of sight, not only for our people, but theservice companies which provide the service to the clients as well. So, its kind of both sides crashingtowards the middle. And I think until they get some of that worked out, Argentinais going to be a little slow. I think it's got great potential. That you wouldgo down and you talk to the clients they are very excited about doingsomething. They know that the country knows they need the gas and the oil, butI think politically right now it's not going to move until something changes oroperation is not going to move until something changes politically.

Okay. And then just lastly onyour CapEx levels in '08, can you give us some indication of what the numberwill be in terms of the infrastructure spend in '08?

You can use between $200 millionand $250 million.

Okay, great. Thank you very much.

Your next question comes fromRobin Shoemaker with Bear Stearns.

Yes, thank you. Chad, I wanted to ask aboutsomething you have discussed previously, if you could update us. You havetalked about the cost of hiring and training new employees in all divisions andthe time lag between that and the revenue generation that comes from thateventually. And these all relates to the kind of incremental margin questionsyou keep getting asked. Can you describe how that works, again, and where yourgreatest successes and greatest challenges are on the hiring and training frontkind of by geography?

Okay. Well again it's dependingon product line, it's much different. In Drilling Fluids you can hire anengineer or a new person and have him out on the rig -- basic rig in fourmonths. On Atlas and INTEQ, you are really looking at 18 months by the time youget him out and then it's a very basic rig. We use Brazil for example 10deepwater rigs, we're getting better but we still have a lot of overlap at yearend of the contract and we probably still have some overlap till the next fewmonths, but we'll rotate those the [expats] with the experiences we brought on,these 200 and some Brazilians and that will help bring our costs in line, whichtherefore helps improve our margins. Doing things like drilling the Maceiobase, now we can repair all those tools, level three down in Brazil and notbring them back to Louisiana for repair, so that works on it. In terms of geographically wherewe haven't success hiring, really we don't have a problem anywhere being ableto find engineers and people a little harder in the US and Europe because thenI think lot of it this the Oil industry as not as exciting as you find in theMiddle East or in Russia and other places, so its easy to attract engineers andpeople enter this industry in China and various other places. We don't havetrouble, in summary I guess, I'd say we don't have trouble finding and hiringgood people. It just it takes sometime to make sure you get him up to speed andget him out of the door so that you can continue to perform and execute on theclients well. Lastly, as you guys well know, you've heard us say, we net -- wehired 8,000 people netted 5,500 people and lot of those have been rolling outand going out on the jobs and [grow] it. This year, year-to-date we areabout 1,350 or 1,400 people we hired, so we have a little less overhead costs,training as we go through the next couple of quarters, but if we win a coupleof these big contracts, we going to be right back into going out and hiringsome additional people.

Okay, good also I may haveanother question, could you update us on cash again in Caspian projects?

No [either], I mean it's, it'sbeen a little flat I mean obviously they are trying to work through all otherissues over there and we hear some favorable things recently that appears thatthey may have come to some agreement but it's been basically flat for us overthere.

Okay. Thank you.

Okay. Thanks Robin. Luanne atthis point do we take one final question please?

Certainly, sir your last questioncomes from Geoff Kieburtz with Citi. Geoff Kieburtz – Citi: Thanks for letting me on.

Good morning Geoff. Geoff Kieburtz – Citi: Good morning. And I am going tobe really boring and go back to incremental margin questions again. Just so Iam understanding this right now near-term target 25% incremental margins wehave segment margins of already 24.2% in the most recent quarter so we are notreally looking right now for a big bump up in overall operating margin. Is thatcorrect?

Well, we said near-term we wantedto get to 25%. We define near-term as -- last quarter. Geoff Kieburtz – Citi: Okay.

In long-term we said that we wantto continue to push. We haven't given up on our 30% incrementals but as acompany but with North America in flat it'sbeen flat for quite some time now. And there's a little bit of pressure in North America on pricing and other things then this isgoing to be a 30. We obviously have to carry thatin the other three regions and we think that there's potential to continue toimprove margins in those three regions and it's going to be hard to hold decentincrementals in North America. So we haven't given up on that asa number, Geoff. We just said in the near-term, we went from 17% in Q2 to 23%in Q3 and we are saying we wanted to get at least 25% in Q4 and then continueto improve again.

That's helpful I wasn't intendingto be critical. I'm just sort of trying to understand whether you're pushingtoward 30% incremental goal is kind of a 12 month horizon or is more like a 36month kind of your target that you're looking at, given that I think we're allpretty much on the same page, North America is going to be a drag one way orthe other. It's going to flat or maybe even be a negative contributor?

With out a doubt in fact you lookaround there were quite a few decrementals in North America. I mean we were lucky thistime and it swings from quarter-to-quarter, but we have very strongincrementals in North America. But North America is going to be a drag there is no doubt tothe whole industry. The good in this is to drag it to very high levels still avery, very good business.

I guess but can you make progressfrom the 25% level you hope to get to in the fourth quarter towards that 30%level long-term, given what you kind of looks like the'08 outlook is, for rightnow? And what I'm thinking about is you have different incrementals indifferent lines of business you got the initiatives underway in terms of yourcost efficiency and so on so forth. And I think Peter said that youare still getting some net price gains internationally. Are we beingunrealistic to think that you can move those incrementals up in thatenvironment in '08?

I would rather let us get throughour budgeting process over this next month and a half. Right now what we'redoing is trying to hear what our clients are going to do around the world. Andthen we also have to factor in, there has been some significant changes takingplace over the last few months in the world. You have heard people talk aboutlogistics et cetera, some of these projects are probably -- could possibly bedelayed. Getting tools and equipment into some of these countries now, thatcould slow something down. Right now, we just need to roll these numbers up, Geoff.Look at it outside, try to factor-in, in which projects that we think we'regoing to win. Take some bets on that, and then I think we can come back with abetter answer for you.

Okay. And just related to that, hasthe logistics become the bottleneck at distributing capacity. Because a yearago, I would have thought that there was a supply chain itself that was gettingthe equipment, seemed to be you happen to make capital commitments 12 plusmonths ahead of time. That seems to have been a constraint that's relaxed. Butnow logistics sounds like, it has maybe become the bigger bottleneck in termsof expanding capacity. Is that correct?

I think in logistics we aretalking about customs clearance and some other things that are talking placeout there.

Right. That's what I meant.

Yeah.

Rather than getting the equipmentmanufactured.

Yeah. It's not going to be ashortage of equipment I think for the service sector or for us. We are notgetting that manufactured. I think it's more of it. I think what's happeningis, this industry is changing significantly. We've been through, as you allknow, quite a bit over these last few years, and now it's popping up in a lotof places. And I mean, one good thing, we have lived through it. And like Isaid, we got a team in place, we have got our controls in place and we've beenable to try to work through some of these issues. So, I just think that the wholeindustry now is being facing some of these challenges and it's going to slowsome things down in certain countries and that's why I think everybody wastrying to get a hand on it now.

Great. Thank you and since on thequestion, Rod, I would also like to say congratulations and good luck.

Thanks, Geoff. Let's do anotherball game. Okay.

All right. Thank you, Geoff andthank you, Chad,Rod and Peter. We'll take this opportunity to thank everyone, all of ourparticipants this morning for your time and your thoughtful questions.Following the conclusion of today's call, both Gene and I will be available toanswer any additional questions you may have. So, once again, thank you foryour participation.

Thank you for participating intoday's Baker Hughes Incorporated conference call. This call will be availablefor replay beginning at 11:30 am Eastern, 10:30 Central and will availablethrough 6 'O clock pm Eastern Time on Friday, November 9th, 2007. Theconference ID number for the replay is 15866175. Again, the conference IDnumber for the replay is 15866175. The number to dial for the replay is800-642-1687 in the USor 706-645-9291 International. That's 800-642-1687 in the US or 706-645-9291 International. Thank you. You may nowdisconnect.