BAKER HUGHES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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Commission File Number 1-9397

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BAKER HUGHES INCORPORATED
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 76-0207995
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)

3900 ESSEX LANE, SUITE 1200, HOUSTON, TEXAS
(Address of Principal Executive Offices)

77027
(Zip Code)

Registrant's Telephone Number, Including Area Code: (713) 439-8600

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]

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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

Class Outstanding at August 2, 2002
----- -----------------------------
Common Stock, $1.00 par value per share 337,417,312, shares

INDEX

1

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)

See accompanying notes to consolidated condensed financial statements.

2

BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)

See accompanying notes to consolidated condensed financial statements.

3

BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

See accompanying notes to consolidated condensed financial statements.

4

BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1. GENERAL

Nature of Operations

Baker Hughes Incorporated ("Baker Hughes") is engaged in the oilfield
services and continuous process industries. Baker Hughes is a major supplier of
wellbore related products, technology services and systems to the oil and gas
industry on a worldwide basis and provides products and services for drilling,
formation evaluation, completion and production of oil and gas wells. Baker
Hughes also manufactures, markets and services process equipment for separating
solids from liquids and liquids from liquids through filtration, sedimentation,
centrifugation and flotation processes to a wide range of markets.

Basis of Presentation

The unaudited consolidated condensed financial statements of Baker Hughes
and its subsidiaries (the "Company") included herein have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the presentations and
disclosures herein are adequate to make the information not misleading. The
unaudited consolidated condensed financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the interim periods. These unaudited consolidated condensed financial
statements should be read in conjunction with the Company's audited consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended December 31, 2001. The results of operations for the interim periods are
not necessarily indicative of the results of operations to be expected for the
full year.

Certain reclassifications have been made to the prior periods' consolidated
condensed financial statements to conform with the current period presentation,
including reclassification of unusual charges to restructuring charges or
gain/loss on disposal of assets.

In the notes to the unaudited consolidated condensed financial statements,
all dollar and share amounts in tabulations are in millions of dollars and
shares, respectively, unless otherwise indicated.

NOTE 2. ACQUISITIONS AND INVESTMENT IN AFFILIATE

In the first quarter of 2002, the Company acquired three businesses within
its Oilfield segment having an aggregate purchase price of $50.8 million, net of
cash acquired. As a result of these acquisitions, the Company recorded
approximately $30.5 million of goodwill. The purchase prices were allocated
based on estimated fair values at the date of acquisition and may be subject to
change based on the final determination of the purchase price allocations. Pro
forma results of operations have not been presented because the effects of these
acquisitions were not material to the Company's consolidated financial
statements on either an individual or aggregate basis.

5

BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes all changes in equity during a period
except those resulting from investments by and distributions to owners. The
components of the Company's comprehensive income (loss), net of related tax, are
as follows:

Total accumulated other comprehensive loss consisted of the following:

NOTE 4. FINANCIAL INSTRUMENTS

At June 30, 2002, the Company had two interest rate swap agreements that
have been designated and have qualified as fair value hedging instruments. They
were fully effective, resulting in no net gain or loss recorded in the
consolidated condensed statements of operations. The fair value of the swaps at
June 30, 2002 was a $7.8 million asset recognized in the consolidated condensed
balance sheet.

At June 30, 2002, the Company had entered into foreign currency forward
contracts with notional amounts of $15.0 million and $0.3 million to hedge
exposure to currency fluctuations in the British Pound Sterling and the Japanese
Yen, respectively. These contracts are cash flow hedges. Based on quoted market
prices as of June 30, 2002 for contracts with similar terms and maturity dates,
the fair value of the contracts was a $0.6 million asset recognized in the
consolidated condensed balance sheet.

NOTE 5. RESTRUCTURING CHARGE

In 2001, the Company initiated a restructuring of its German operations of
BIRD Machine, a division of the Process segment. The restructuring consisted of
downsizing its German operations from a full manufacturing facility to an
assembly and repair facility. As a result, the Company recorded a charge of $6.0
million relating to severance for approximately 100 employees. The employee
groups that were to be terminated were comprised of engineering, field service
and support personnel. The amount accrued for severance was based upon the
positions eliminated and the Company's specific or statutory severance plans in
place for these operations and did not include any portion of the employees'
salary through their severance dates. The Company has terminated 67 employees
and paid $4.1 million of accrued severance through June 30, 2002. Additionally,
the remaining accrual of $1.9 million was reversed during the second quarter of
2002 due to unanticipated voluntary terminations and more favorable separation
payments than had been originally estimated.

6

BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. EXTRAORDINARY LOSS

On May 28, 2001, the Company redeemed its outstanding Liquid Yield Options
Notes ("LYONS") at a redemption price of $786.13 per $1,000 principal amount,
for a total of $301.8 million. The redemption was funded through the issuance of
commercial paper. In connection with the early extinguishment of debt, the
Company recorded an extraordinary loss of $2.3 million ($1.5 million after tax)
which represents the write-off of the remaining debt issuance costs.

NOTE 7. EARNINGS PER SHARE

A reconciliation of the number of shares used for the basic and diluted
earnings per share ("EPS") calculation is as follows:

NOTE 8. INVENTORIES

Inventories are comprised of the following:

NOTE 9. GOODWILL AND INTANGIBLE ASSETS

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
in a business combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 provides that intangible
assets with finite useful lives be amortized and tested for potential impairment
whenever events or circumstances indicate that the carrying amounts may not be
recoverable. Goodwill, including goodwill associated with equity method
investments, and intangible assets with indefinite lives are not to be
amortized. Goodwill and intangible assets with indefinite lives will be tested
for impairment annually or more frequently if circumstances indicate that
impairment may exist.

The adoption of SFAS No. 142 required the Company to perform a transitional
impairment test of goodwill in each of its reporting units as of January 1,
2002. The Company's reporting units were based on its organizational and
reporting

7

BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

structure. Corporate and other assets and liabilities were allocated to the
reporting units to the extent that they related to the operations of those
reporting units. Valuations of the reporting units were performed by an
independent third party. The goodwill of the Company's Process segment was
determined to be impaired using a combination of a market value and discounted
cash flows approach to estimate fair value. Accordingly, the Company recognized
a transitional impairment loss of $42.5 million, net of income taxes of $20.4
million, recorded in the first quarter of 2002 as the cumulative effect of
accounting change in the consolidated condensed statements of operations.

The changes in the carrying amount of goodwill (net of accumulated
amortization) for the six months ended June 30, 2002 are as follows:

Intangible assets, which continue to be amortized, are comprised of the
following:

The adoption of SFAS No. 142 also required the Company to re-evaluate the
remaining useful lives of its intangible assets to determine whether the
remaining useful lives were appropriate. The Company also re-evaluated the
amortization methods of its intangible assets to determine whether the
amortization reflects the pattern in which the economic benefits of the
intangible assets are consumed. In performing these evaluations, the Company
reduced the remaining life of one of its marketing-related intangibles and
changed the method of amortization of one of its technology-based intangibles.

Amortization expense for intangible assets for the three months and six
months ended June 30, 2002 was $2.3 million and $4.8 million, respectively, and
is estimated to be $11.1 million for 2002. Estimated amortization expense for
each of the subsequent four fiscal years is expected to be approximately $11.7
million to $12.9 million.

8

BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill and goodwill associated with equity method investments effective
January 1, 2002. The unaudited pro forma results of operations of the Company,
giving effect to SFAS No. 142 as if it were adopted on January 1, 2001, are as
follows:

NOTE 10. SEGMENT AND RELATED INFORMATION

The Company currently has eight operating divisions that have separate
management teams and are engaged in the oilfield services and continuous process
industries. The divisions have been aggregated into two reportable segments,
"Oilfield" and "Process". The consolidated results for these segments are
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.

The Oilfield segment consists of six operating divisions -- Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes
Christensen. They have been aggregated into one reportable segment because they
have similar economic characteristics and because the long-term financial
performance of these divisions is affected by similar economic conditions. These
six operating divisions manufacture and sell products and provide services used
in the oil and gas exploration industry, including drilling, completion,
production and maintenance of oil and gas wells, and in reservoir measurement
and evaluation, and operate in the same markets and have substantially the same
customers. The principal markets for this segment include all major oil and gas
producing regions of the world, including North America, Latin America, Europe,
Africa, the Middle East and the Far East. Customers include major
multi-national, independent and national or state-owned oil companies. The
Oilfield segment also includes the Company's interest in an oil and gas property
in Nigeria and its investment in WesternGeco.

9

BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

The Process segment consists of two operating divisions - BIRD Machine and
EIMCO Process Equipment - that manufacture and sell process equipment for
separating solids from liquids and liquids from liquids through filtration,
sedimentation, centrifugation and flotation processes. The principal markets for
this segment include all regions of the world where there are significant
industrial and municipal wastewater applications and base metals activity.
Customers include municipalities, contractors, mineral producers and
engineering, pulp and paper, and industrial companies.

The Company evaluates the performance of its segments based on income before
income taxes, accounting changes, restructuring charges and interest income and
expense. Intersegment sales and transfers are not significant.

Summarized financial information is shown in the following table. The
"Other" column includes corporate-related items, results of insignificant
operations and, as it relates to segment profit (loss), income and expense not
allocated to reportable segments.

The following table presents the details of "Other" segment loss:

10

BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11. NEW ACCOUNTING STANDARDS

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets. SFAS No. 144 provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets and modifies the accounting and reporting of
discontinued operations. The adoption of SFAS No. 144 by the Company did not
have an impact on the consolidated financial statements of the Company.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of long-lived assets and the associated asset retirement costs. SFAS
No. 143 requires that the fair value of a liability associated with an asset
retirement be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated retirement costs are
capitalized as part of the carrying amount of the long-lived asset and
subsequently depreciated over the life of the asset. The Company has not
completed its analysis of the impact, if any, of the adoption of SFAS No. 143 on
its consolidated financial statements. The Company will adopt SFAS No. 143 for
its fiscal year beginning January 1, 2003.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Company will
adopt SFAS No. 146 for all exit or disposal activities initiated after
December 31, 2002.

NOTE 12. SUBSEQUENT EVENT

The Company signed a letter of intent in July 2002 for the sale of EIMCO
Process Equipment ("EIMCO"), a division of the Process segment. Any transaction
is subject to the negotiation and execution of a definitive sale agreement, as
well as various conditions, including satisfactory due diligence review of
EIMCO's business, regulatory approvals, purchaser's financing, and approval by
both parties' boards of directors. The transaction is expected to close in the
fourth quarter of 2002. Revenues for EIMCO totaled $88.1 million for the six
months ended June 30, 2002, and $181.1 million for the twelve months ended
December 31, 2001. There can be no assurance that the transaction will be
consummated.

11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the Company's
consolidated condensed financial statements and the related notes thereto.

FORWARD-LOOKING STATEMENTS

MD&A and certain statements in the Notes to Consolidated Condensed Financial
Statements include forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, (each a "Forward-Looking Statement"). The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "forecasts," "will," "could," "may," "suggest," "likely" and similar
expressions, and the negative thereof, are intended to identify forward-looking
statements. Baker Hughes' expectations about its business outlook, customer
spending, oil and gas prices and the business environment for the Company and
the industry in general are only its forecasts regarding these matters. These
forecasts may be substantially different from actual results, which are affected
by the following risk factors: the effect of competition; the level of petroleum
industry exploration and production expenditures; drilling rig and oil and gas
industry manpower and equipment availability; the Company's ability to implement
and effect price increases for its products and services; the Company's ability
to control its costs; the availability of sufficient manufacturing capacity and
subcontracting capacity at forecasted costs to meet the Company's revenue goals;
the ability of the Company to introduce new technology on its forecasted
schedule and at its forecasted cost; the ability of the Company's competitors to
capture market share; world economic conditions; price of, and the demand for,
crude oil and natural gas; drilling activity; weather; the legislative and
regulatory environment in the United States and other countries in which the
Company operates; Organization of Petroleum Exporting Countries ("OPEC") policy;
war or extended period of conflict involving the United States, the Middle East
and other major petroleum-producing or consuming regions; acts of war or
terrorism; the development of technology that lowers overall finding and
development costs; the condition of the capital and equity markets; new laws and
regulations, some of which are still being formulated, that could have a
significant impact on the future operations and conduct of all businesses as a
result of the bankruptcies of large U.S. entities; labor-related actions,
including strikes, slowdowns and facility occupations; and the timing of any of
the foregoing. See "Business Environment" for a more detailed discussion of
certain of these risk factors.

Baker Hughes' expectations regarding its level of capital expenditures
described in "Liquidity and Capital Resources " below are only its forecasts
regarding these matters. In addition to the factors described in the previous
paragraph and in "Business Environment," these forecasts may be substantially
different from actual results, which are affected by the following factors: the
accuracy of the Company's estimates regarding its spending requirements;
regulatory, legal and contractual impediments to spending reduction measures;
the occurrence of any unanticipated acquisition or research and development
opportunities; changes in the Company's strategic direction; and the need to
replace any unanticipated losses in capital assets.

BUSINESS ENVIRONMENT

The Company currently has eight operating divisions each with separate
management teams that are engaged in the oilfield services and continuous
process industries. The divisions have been aggregated into two reportable
segments - "Oilfield" and "Process".

The Oilfield segment consists of six operating divisions - Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes
Christensen - that manufacture and sell products and provide services used in
the oil and gas exploration industry, including drilling, completion, production
and maintenance of oil and gas wells, and in reservoir measurement and
evaluation. The Oilfield segment also includes the Company's interest in an oil
and gas property in Nigeria and its investment in WesternGeco.

12

The Process segment consists of two operating divisions - EIMCO Process
Equipment and BIRD Machine - that manufacture and sell process equipment for
separating solids from liquids and liquids from liquids through filtration,
sedimentation, centrifugation and flotation processes.

The business environment for the Company's Oilfield segment and its
corresponding operating results can be significantly affected by the level of
energy industry capital expenditures for the exploration and production of oil
and gas reserves. These expenditures are influenced strongly by oil company
expectations about the supply and demand for crude oil and natural gas products
and by the energy price environment that results from supply and demand
imbalances.

Key risk factors currently influencing the worldwide crude oil and gas
markets are:

o Production control - the degree to which OPEC nations and other large
producing countries, including, but not limited to, Mexico, Norway, and
Russia, are willing and able to control production and exports of crude oil
to reduce supply and support their targeted oil price while meeting their
market share objectives.

o Global economic growth - particularly the impact of the U.S. and Western
European economies and economic activity in Japan, China, South Korea and
the developing areas of Asia where the correlation between energy demand
and economic growth is strong. An important factor in the global economic
growth in 2002 and 2003 will be the strength and timing of the U.S.
economic recovery. In addition, the International Energy Agency forecasted
in August 2002 worldwide oil demand growth for 2003 compared with 2002 of
approximately 1.5%, compared with the 2.0% averaged for the 10 years
ending December 2000.

o Oil and gas storage inventories - relative to historic levels. Inventory
levels offer a measure of the balance between supply and demand. The
natural gas inventory levels in North America at the beginning of the
summer 2002 injection season were significantly above normal levels. While
the year over year surplus declined significantly during the 2002 summer
injection season, a significant surplus remained as of the end of July 2002
because total natural gas demand, especially in the industrial sector, has
been less than expected. The ongoing surplus suggests that the summer
demand for natural gas to be injected into storage will be less than normal
for the balance of the summer and that storage targets for the beginning of
the 2002 winter will be met.

o Ability to produce natural gas - The amount of natural gas that can be
produced is a function of the number of new wells drilled, completed and
connected to pipelines as well as the rate of reservoir depletion. Advanced
technologies, such as horizontal drilling, result in improved total
recovery but also a more rapid production decline.

o Technological progress - in the design and application of new products that
allow oil and gas companies to drill fewer wells and to drill, complete and
produce wells faster, recover more hydrocarbons and to do so at lower
costs.

o Maturity of the resource base - of known hydrocarbon reserves in the North
Sea, U.S., Canada and Latin America.

o The pace of new investment - access to capital and the reinvestment of
available cash flow into existing and emerging markets.

o Price volatility - the impact of widely fluctuating commodity prices on the
stability of the market and subsequent impact on customer spending.

o Possible supply disruptions - from key oil exporting countries, including,
but not limited to, Iraq, Saudi Arabia and other Middle Eastern countries
and Venezuela, due to political instability or military activity.

o Weather - the impact of variations in temperatures as compared with normal
weather patterns and the related effect on demand for oil and natural gas.

13

OIL AND GAS PRICES

Generally, customers' expectations about their prospects from oil and gas
sales and customers' expenditures to explore for or produce oil and gas rise or
fall with corresponding changes in the prices of oil or gas. Accordingly,
changes in these expenditures will normally result in increased or decreased
demand for the Company's products and services in its Oilfield segment. Crude
oil and natural gas prices are summarized in the table below as averages of the
daily closing prices during each of the periods indicated.

Oil prices averaged $26.29/bbl for the three months ended June 30, 2002,
ranging from a low of $23.47/bbl to a high of $29.42/bbl. Slower economic growth
and higher OPEC production levels contributed to an increase in inventories and
a moderation in oil prices, in comparison with the same period one year ago. Oil
prices at the end of the quarter were similar to oil prices at the beginning of
the quarter. Variation during the quarter was primarily due to changing
perceptions about the potential for a significant supply disruption as a result
of the Israeli/Palestinian crisis, possible military action in Iraq, as well as
changes in perceptions of how quickly the U.S. and world economy will improve.

During the three months ended June 30, 2002, U.S. natural gas prices
averaged $3.39/MMBtu, down from the $4.35/MMBtu for the three months ended June
30, 2001. Prices ranged from a high of $3.80/MMbtu to a low of $3.04/MMBtu. The
decline in natural gas prices, when compared with the second quarter of 2001,
was driven by a decrease in demand for natural gas due to slower U.S. economic
growth and milder than normal weather, which was offset only partially by
increased demand from fuel switching from crude oil back to natural gas and a
modest increase in production of natural gas. Although storage levels remain
significantly above year earlier levels, expectations for normal weather,
recovering demand, particularly in the industrial sector, and lowering
production levels resulting from lower rig activity, fueled expectations that
the supply and demand balance would tighten significantly during the 2002/2003
winter.

RIG COUNTS

The Company is engaged in the oilfield service industry providing products
and services that are used in exploring for, developing and producing oil and
gas reservoirs. When drilling or workover rigs are active, they consume the
products and services produced by the oilfield service industry. The rig counts
act as a leading indicator of consumption of products and services used in
drilling, completing, producing and processing hydrocarbons.

Rig count trends are governed by the exploration and development spending by
oil and gas companies, which in turn is influenced by current and future price
expectations for oil and natural gas. Rig counts therefore reflect the relative
strength and stability of energy prices. The Company has been providing rig
counts to the public since 1944. The Company gathers all relevant data through
their field service personnel worldwide who routinely visit the various rigs
operating in their areas. This data is then compiled and distributed to various
wire services and trade associations and is published on the Company's website.
Rig counts are compiled weekly for the U.S. and Canada and monthly for all
international and workover rigs. For a rig to be counted internationally on a
monthly basis, drilling operations must comprise at least 15 days during the
month. Published international rig counts do not include rigs drilling in Russia
or China because this information is extremely difficult to obtain. The
Company's rig counts are summarized in the table below as averages for each of
the periods indicated.

14

INDUSTRY OUTLOOK

Caution is advised that the factors described above in "Forward Looking
Statements" and "Business Environment" could negatively impact the Company's
expectations for oil demand, oil and gas prices and drilling activity.

Oil - Oil prices are expected to average between $23/bbl and $26/bbl for the
remainder of 2002. Sustained oil prices in the range of $20/bbl to $25/bbl and
an outlook that prices are likely to remain in this range or higher are expected
to support the Company's forecast of customer spending. Oil prices are
particularly susceptible to changes in oil supply as oil demand growth in 2002
compared with 2001 is expected to be the lowest year-to-year growth in a decade.

o Prices could average $20/bbl to $22/bbl or less if anticipated economic
growth fails to materialize or if OPEC, Russia or other non-OPEC
producers prove unwilling or unable to control their production.

o Prices could average $27/bbl to $30/bbl or more if OPEC fails to
increase quotas as required, if supply is disrupted or the market
perceives that a disruption of oil supply is likely.

North America Natural Gas - U.S. natural gas prices are expected to average
between $2.75/MMBtu and $3.50/MMBtu for the remainder of 2002.

o Prices are expected to move toward the top of this range in the second
half of the year if the combined impact of a growing U.S. economy,
particularly in the industrial sector, and production declines resulting
from lower customer spending in the second half of 2001 and the first
half of 2002 increase expectations for supply shortages in the winter of
2002/2003.

o Prices could move to the bottom of this range if the U.S. economic
recovery is delayed or weaker than expected, if weather is milder than
expected or if low drilling activity does not result in significantly
less gas production in 2002.

Customer Spending - Based upon the Company's discussions with its major
customers and its review of published industry surveys and reports and the
Company's outlook for oil and gas prices described above, the anticipated
customer spending trends are as follows:

15

o North America - Spending in North America, primarily towards developing
natural gas supplies, is expected to be down 15% to 20% in 2002 compared
with 2001.

o Outside North America - Customer spending, primarily directed at
developing oil supplies, is expected to be flat to up 5% in 2002
compared with 2001.

o Total spending is expected to be down 5% to 7% in 2002 compared with
2001.

Drilling Activity - Based upon the Company's outlooks for oil and natural
gas prices and customer spending described above the Company's outlook for
drilling activity, as measured by the Baker Hughes rig count, is as follows:

o The North American rig count is expected to decline between 15% to 20%
in 2002 compared with 2001.

o Drilling activity outside of North America is expected to increase 3% to
5% in 2002 compared with 2001.

COMPANY OUTLOOK

The trends as described above relating to declining rig counts, decreased
customer spending and low oil and gas prices began in late 2001 and have
continued to develop in 2002. As a result, the Company expects that 2002 will
not be as strong as 2001, with revenues expected to decline by approximately 3%
to 5% as compared with 2001, with related declines in operating results.

During the six months ended June 30, 2002, the Company recorded losses of
$7.9 million related to the weakening currency and the inability of the Company
to collect its outstanding receivables in Argentina. There could be additional
losses if there were to be additional currency devaluations or if the Company's
customers encounter additional financial difficulty, thereby impacting their
ability to pay amounts due to the Company. In addition, the uncertain economic
environment in Argentina will likely negatively impact the exploration and
production spending plans of the Company's customers in 2002 and beyond, thus
reducing the demand for the Company's products. The Company has responded to
this situation in a number of ways, including negotiating with its customers for
acceptable payment terms, increasing the use of U.S. Dollar based invoicing (or
U.S. Dollar equivalent pricing and invoicing), adjusting pricing and contracts
to reflect the changes in Argentina's currency, and shipping products to
Argentina directly from outside the country with payment made offshore in U.S.
Dollar or equivalent currency. At June 30, 2002 and December 31, 2001, net
property in Argentina totaled $9.7 million and $11.0 million, respectively.
Revenues for Argentina for the six months ended June 30, 2002 were $32.1
million; accordingly, the impact on the Company's total revenues in 2002 is not
expected to be significant.

Venezuela also continues to experience political and economic uncertainties,
including large fluctuations in exchange rates with the U.S. Dollar. This
creates additional uncertainties for the business environment and market for the
Company's products and services. The Company continues to closely monitor the
economic situation in Venezuela and is taking appropriate actions to minimize
its exposure to these risks, including increasing the use of U.S. Dollar based
transactions, monitoring foreign currency exchange, inflation and interest rates
and considering the use of foreign currency hedges. At June 30, 2002 and
December 31, 2001, net property in Venezuela totaled $30.9 million and $37.4
million, respectively, and revenues for Venezuela for the six months ended June
30, 2002 and 2001 totaled $79.6 million and $122.8 million, respectively.

The Company's most significant equity method investment is WesternGeco. The
operating results of WesternGeco have been adversely affected by the continuing
weakness in the seismic industry as crew counts remain at historic lows. This
trend is expected to continue through the remainder of 2002.

The Company signed a letter of intent in July 2002 for the sale of EIMCO
Process Equipment ("EIMCO"), a division of the Process segment. Any transaction
is subject to the negotiation and execution of a definitive sale agreement, as
well as various conditions, including satisfactory due diligence review of
EIMCO's business, regulatory approvals, purchaser's financing, and approval by
both parties' boards of directors. The transaction is expected to close in the
fourth quarter of

16

2002. Revenues for EIMCO totaled $88.1 million for the six months ended June 30,
2002, and $181.1 million for the twelve months ended December 31, 2001. There
can be no assurance that the transaction will be consummated.

NEW ACCOUNTING STANDARDS

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
in a business combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 provides that intangible
assets with finite useful lives be amortized and tested for potential impairment
whenever events or circumstances indicate that carrying amounts may not be
recoverable. Goodwill, including goodwill associated with equity method
investments, and intangible assets with indefinite lives are not to be
amortized. Goodwill and intangible assets with indefinite lives will be tested
for impairment annually or more frequently if circumstances indicate that
impairment may exist.

The adoption of SFAS No. 142 required the Company to perform a transitional
impairment test of goodwill in each of its reporting units as of January 1,
2002. The Company's reporting units were based on its organizational and
reporting structure. Corporate and other assets and liabilities were allocated
to the reporting units to the extent that they related to the operations of
those reporting units. Valuations of the reporting units were performed by an
independent third party. The goodwill of the Company's Process segment was
determined to be impaired using a combination of a market value and discounted
cash flows approach to estimate fair value. Accordingly, the Company recognized
a transitional impairment loss of $42.5 million, net of income taxes of $20.4
million, recorded as the cumulative effect of accounting change in the
consolidated condensed statement of operations.

The adoption of SFAS No. 142 required the Company to re-evaluate the
remaining useful lives of its intangible assets to determine whether the
remaining useful lives are appropriate. The Company also re-evaluated the
amortization methods of its intangible assets to determine whether the
amortization reflects the pattern in which the economic benefits of the
intangible assets are consumed. In performing these evaluations, the Company
reduced the remaining life of one of its marketing-related intangibles and
changed the method of amortization of one of its technology-based intangibles.

In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill and goodwill associated with equity method investments effective
January 1, 2002. Amortization of goodwill and goodwill associated with equity
method investments included in the Company's consolidated condensed statements
of operations for the three months ended June 30, 2001 was $10.8 million and
$2.0 million, respectively, and $21.6 million and $4.0 million, respectively,
for the six months ended June 30, 2001.

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets. SFAS No. 144 provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets and modifies the accounting and reporting of
discontinued operations. The adoption of SFAS No. 144 by the Company did not
have an impact on the consolidated financial statements of the Company.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
long-lived assets and the associated asset retirement costs. SFAS No. 143
requires that the fair value of a liability associated with an asset retirement
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated retirement costs are capitalized as part
of the carrying amount of the long-lived asset and subsequently depreciated over
the life of the asset. The Company has not completed its analysis of the impact,
if any, of the adoption of SFAS No. 143 on its consolidated financial
statements. The Company will adopt SFAS No. 143 for its fiscal year beginning
January 1, 2003.

17

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Company will
adopt SFAS No. 146 for all exit or disposal activities initiated after
December 31, 2002.

RESULTS OF OPERATIONS

REVENUES

Revenues for the three months ended June 30, 2002 were $1,301.8 million, a
decrease of 3.0% compared with the three months ended June 30, 2001. Oilfield
revenues were $1,225.3 million, a decrease of 2.6% compared with the three
months ended June 30, 2001. Oilfield revenues in North America, which account
for 38.7% of total Oilfield revenues, decreased 16.0% for the three months ended
June 30, 2002 compared with the three months ended June 30, 2001. This decrease
reflects lower activity in U.S. land operations and Canada, as evidenced by a
37.9% decrease in the North American rig count, partially offset by strong
performances in the deepwater Gulf of Mexico. Outside North America, Oilfield
revenues increased 8.3% for the three months ended June 30, 2002 compared with
the three months ended June 30, 2001. This increase reflects the improvement in
international drilling activity, particularly in the Middle East and Asia
Pacific, partially offset by weaker revenues in Latin America due to the
political and economic environments in Argentina and Venezuela.

Process revenues for the three months ended June 30, 2002 were $76.5
million, a 9.1% decrease compared with the three months ended June 30, 2001.
Excluding the effects of the Company's refining and production product line that
was contributed to a venture in October 2001, revenues increased 3.6% compared
with the three months ended June 30, 2001.

Revenues for the six months ended June 30, 2002 were $2,562.7 million, a
decrease of 0.3% compared with the six months ended June 30, 2001. Revenues were
impacted by the lower activity in North America and decreased revenues in Latin
America due to the political and economic environments in Argentina and
Venezuela, partially offset by the continuing improvement in activity in other
international locations.

GROSS MARGIN

Gross margin for the three months ended June 30, 2002 and 2001 was 27.6% and
28.3%, respectively. Gross margin for the six months ended June 30, 2002 and
2001 was 27.5% and 28.0%, respectively. The decreases in gross margin are the
result of the Company's strategy not to significantly reduce its work force to
match current activity levels, pricing pressures and under-absorbed
manufacturing costs.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative ("SG&A") expenses for the three months
ended June 30, 2002 were $230.5 million, an increase of 16.0% compared with the
three months ended June 30, 2001. SG&A expenses as a percentage of consolidated
revenues for the three months ended June 30, 2002 and 2001 were 17.7% and 14.8%,
respectively. SG&A expenses for the six months ended June 30, 2002 were $444.6
million, an increase of 10.6% compared with the six months ended June 30, 2001.
SG&A expense as a percentage of consolidated revenues for the six months ended
June 30, 2002 and 2001 were 17.4% and 15.6%, respectively. These increases in
SG&A expense as a percentage of consolidated revenues were primarily due to the
impact of the weakening U.S. dollar and the resulting foreign exchange losses;
increased depreciation of the costs associated with the now complete Project
Renaissance, the Company's multi-year initiative that began in 1997 to implement
SAP R/3, an enterprise-wide accounting and business application software system;
and the Company's strategy not to significantly reduce its work force to match
current activity levels.

18

RESTRUCTURING CHARGE

In 2001, the Company initiated a restructuring of its German operations of
BIRD Machine, a division of the Process segment. The restructuring consisted of
downsizing its German operations from a full manufacturing facility to an
assembly and repair facility. As a result, the Company recorded a charge of $6.0
million relating to severance for approximately 100 employees. The Company has
terminated 67 employees and paid $4.1 million of this accrued severance through
June 30, 2002. Additionally, the remaining accrual of $1.9 million was reversed
during the second quarter of 2002 due to unanticipated voluntary terminations
and more favorable separation payments than had been originally estimated.

INTEREST EXPENSE

Interest expense for the three and six months ended June 30, 2002 decreased
$4.9 million and $10.6 million, respectively, compared with the three and six
months ended June 30, 2001. These decreases were primarily due to lower total
debt levels resulting from cash flow from operations coupled with lower average
interest rates on the Company's short-term debt, commercial paper and interest
rate swaps. The approximate average interest rate on short-term debt and
commercial paper was 1.8% for the three and six months ended June 30, 2002
compared with 4.2% and 4.8% for the three and six months ended June 30, 2001,
respectively.

EQUITY IN INCOME OF AFFILIATES

The Company included amortization of goodwill associated with equity method
investments in "Equity in income of affiliates" in the consolidated condensed
statements of operations. In accordance with SFAS No. 142, the Company
discontinued this amortization effective January 1, 2002. Excluding the effects
of the $2.0 million and $4.0 million of amortization of goodwill associated with
equity method investments for the three and six months ended June 30, 2001,
respectively, equity in income of affiliates for the three months ended June 30,
2002 decreased $4.9 million and $4.4 million compared with the three and six
months ended June 30, 2001, respectively. The Company's most significant equity
method investment is WesternGeco. The operating results of WesternGeco were
negatively affected by the continuing weakness in the seismic industry as crew
counts remain at historic lows.

INCOME TAXES

The Company's effective tax rates differ from the statutory income tax rate
of 35% due to lower effective rates on international operations offset by
incremental taxes within WesternGeco. The additional taxes arose due to: (i) the
venture being taxed in certain foreign jurisdictions based on a deemed profit
basis, which is a percentage of revenues, rather than on income before income
taxes, and (ii) unbenefitted foreign losses of the venture, which are operating
losses in certain foreign jurisdictions where there was no current tax benefit
and where a deferred tax asset was not recorded due to the uncertainty of its
realization.

LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements have principally related to working
capital needs, payment of dividends and capital expenditures. These requirements
have been met through a combination of commercial paper borrowings and
internally generated funds.

In the six months ended June 30, 2002, net cash inflows from operating
activities totaled $226.7 million, a decrease of $18.3 million compared with the
six months ended June 30, 2001. This decrease was primarily due to the decrease
in net income and a slight increase in working capital.

Expenditures for capital assets totaled $136.2 million and $136.3 million
for the six months ended June 30, 2002 and 2001, respectively. The majority of
these expenditures were for rental tools. During the six months ended June 30,
2002 and 2001, the Company received proceeds of $37.1 million and $32.6 million,
respectively, from the disposal of assets.

19

During the six months ended June 30, 2002, the Company's Oilfield segment
acquired three businesses having an aggregate purchase price of $50.8 million,
net of cash acquired. As a result of these acquisitions, the Company recorded
approximately $30.5 million of goodwill. The purchase prices were allocated
based on estimated fair values at the date of acquisition and may be subject to
change based on the final determination of the purchase price allocations. In
addition, during the six months ended June 30, 2002, the Company invested $12.5
million in Luna Energy, L.L.C. ("Luna Energy"), a venture formed to develop,
manufacture, commercialize, sell, market and distribute downhole fiber optic and
other sensors for oil and gas exploration, production, transportation and
refining applications. The Company has a 40% ownership interest in Luna Energy.

Total debt outstanding at June 30, 2002 was $1,649.6 million, a decrease of
$45.0 million compared with December 31, 2001. Debt was repaid using cash flow
from operations, proceeds from the disposal of assets and proceeds from the
issuance of common stock. The debt to equity ratio was 0.48 at June 30, 2002
compared with 0.51 at December 31, 2001. The Company's long-term objective is to
maintain a debt to equity ratio between 0.40 and 0.60.

At June 30, 2002, the Company had $1,224.7 million of credit facilities with
commercial banks, of which $800.5 million was committed. After September 2002,
no draws may be made under the $262.5 million portion of the committed
facilities; however, any outstanding balance at September 30, 2002 will convert
to a one-year term facility due September 2003. The Company is considering
whether it will renew all or a portion of the $262.5 million facilities. The
remaining committed facilities of $538.0 million expire in October 2003. There
were no direct borrowings under these facilities during the six months ended
June 30, 2002; however, to the extent the Company has outstanding commercial
paper, available borrowings under the committed credit facilities are reduced.
At June 30, 2002 and December 31, 2001, the Company had $50.0 million and $95.0
million in commercial paper outstanding, respectively, with a weighted average
interest rate of 1.8% and 2.0%, respectively.

Cash flow from operations and borrowings from short-term debt and commercial
paper are expected to be the principal sources of liquidity in 2002. The Company
believes that cash flow from operations, combined with existing credit
facilities, will provide the Company with sufficient capital resources and
liquidity to manage its operations, meet debt obligations and fund projected
capital expenditures. The Company currently expects 2002 capital expenditures to
be between $300.0 million and $325.0 million, excluding acquisitions. The
expenditures are expected to be used primarily for normal, recurring items
necessary to support the growth and operations of the Company.

There are no provisions in the Company's debt or lease agreements that would
accelerate their repayment, require collateral or require material changes in
terms due to a reduction in the Company's debt ratings or stock price. Other
than normal operating leases, the Company does not have any off-balance sheet
financing arrangements such as securitization agreements, liquidity trust
vehicles or special purpose entities. As such, the Company is not materially
exposed to any financing, liquidity, market or credit risk that could arise if
the Company had engaged in such financing arrangements.

The words "believes," "will," "may," "expected" and "expects" are intended
to identify Forward-Looking Statements in "Liquidity and Capital Resources". See
"Forward-Looking Statements" and "Business Environment" above for a description
of risk factors related to these Forward-Looking Statements.

20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's operations are conducted around the world in a number of
different currencies. The majority of the Company's significant foreign
subsidiaries have designated the local currency as their functional currency. As
such, future earnings are subject to fluctuations due to changes in foreign
currency exchange rates when transactions are denominated in currencies other
than the subsidiary's respective functional currency. To minimize the need for
foreign currency contracts, the Company's goal is to manage its foreign currency
exposure by maintaining a minimal consolidated net asset or net liability
position in a currency other than the functional currency.

At June 30, 2002, the Company had entered into foreign currency forward
contracts with notional amounts of $15.0 million and $0.3 million to hedge
exposure to currency fluctuations in the British Pound Sterling and the Japanese
Yen, respectively. These contracts are cash flow hedges. Based on quoted market
prices as of June 30, 2002 for contracts with similar terms and maturity dates,
the fair value of the contracts was a $0.6 million asset recognized in the
consolidated condensed balance sheet.

The counterparties to the Company's forward contracts are major financial
institutions. The credit ratings and concentration of risk of these financial
institutions are monitored on a continuing basis. In the unlikely event that the
counterparties fail to meet the terms of a foreign currency contract, the
Company's exposure is limited to the foreign currency rate differential.

Certain borrowings of the Company are denominated in currencies other than
its functional currency. At June 30, 2002, these nonfunctional currency
borrowings totaled $13.0 million, with exposures between the U.S. Dollar and the
Euro, the Saudi Riyal, the Brazilian Real, the Thai Baht and the Singapore
Dollar. A 10% depreciation of the U.S. Dollar against any one of these foreign
currency borrowings would not have a material adverse effect on the future
earnings of the Company.

21

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company was named as a defendant in a number of shareholder class
action suits filed by purported shareholders shortly after the Company's
December 8, 1999 announcement regarding the accounting issues that the Company
discovered at its Baker Hughes INTEQ division. These suits, which sought
unspecified monetary damages, were consolidated in the federal district court
for the Southern District of Texas pursuant to the Private Securities Litigation
Reform Act of 1995. The Company filed Motions to Dismiss in both the shareholder
derivative suit and the class action. The federal district court granted the
Company's Motions on both actions. No appeal was filed in the shareholder
derivative suit, but the class action case was appealed to the U.S. Fifth
Circuit Court of Appeals, which upheld the lower court's dismissal in May 2002.

On September 12, 2001, the Company, without admitting or denying the
factual allegations contained in the Order, consented with the U.S. Securities
and Exchange Commission (the "SEC") to the entry of an Order making Findings and
Imposing a Cease-and-Desist Order (the "Order") for violations of Section
13(b)(2)(A) and Section 13(b)(2)(B) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Among the findings included in the Order were the
following. In 1999, the Company discovered that certain of its officers had
authorized an improper $75,000 payment to an Indonesian tax official, after
which the Company embarked on a corrective course of conduct, including
voluntarily and promptly disclosing the misconduct to the SEC and the Department
of Justice (the "DOJ"). In the course of the Company's investigation of the
Indonesia matter, the Company learned that it had made payments in the amount of
$15,000 and $10,000 in India and Brazil, respectively, to the Company's agents,
without taking adequate steps to ensure that none of the payments would be
passed on to foreign government officials. The Order found that the foregoing
payments violated Section 13(b)(2)(A). The Order also found the Company in
violation of Section 13(b)(2)(B) because it did not have a system of internal
controls to determine if payments violated the Foreign Corrupt Practices Act
("FCPA"). The FCPA makes it unlawful for U.S. issuers, including the Company, or
anyone acting on their behalf, to make improper payments to any foreign official
in order to obtain or retain business. In addition, the FCPA establishes
accounting control requirements for issuers subject to either the registration
or reporting provisions of the Exchange Act. The Company cooperated with the
SEC's investigation.

By the Order, dated September 12, 2001 (previously disclosed by the Company
and incorporated by reference in this Current Report as Exhibit 99.1), the
Company agreed to cease and desist from committing or causing any violation and
any future violation of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the
Exchange Act. Such Sections of the Exchange Act require issuers to (x) make and
keep books, records, and accounts, which, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the issuer and
(y) devise and maintain a system of internal accounting controls sufficient to
provide reasonable assurances that: (i) transactions are executed in accordance
with management's general or specific authorization; and (ii) transactions are
recorded as necessary: (I) to permit preparation of financial statements in
conformity with generally accepted accounting principles or any other criteria
applicable to such statements, and (II) to maintain accountability for assets.

On March 25, 2002, a former employee alleging improper activities relating
to Nigeria filed a civil complaint against the Company in the 281st District
Court in Harris County, Texas, seeking backpay and damages, including future
lost wages. On August 2, 2002, the same former employee filed substantially the
same complaint against the Company in the federal district court for the
Southern District of Texas. Discovery in the civil suits is in the preliminary
stages.

On March 29, 2002, the Company announced that it had been advised that the
SEC and the DOJ are conducting investigations into allegations of violations of
law relating to Nigeria and other related matters. The SEC has issued a formal
order of investigation into possible violations of provisions under the FCPA
regarding anti-bribery, books and records and internal controls, and the DOJ has
asked to interview current and former employees. Prior to the filing of the
complaint, the Company had independently initiated an investigation regarding
its operations in Nigeria, which is ongoing. The Company is providing documents
to and cooperating fully with the SEC and the DOJ.

22

The Company's ongoing internal investigation has identified apparent
deficiencies with respect to certain operations in Nigeria, including in its
books and records and internal controls, which may result in additional
liabilities to governmental authorities in Nigeria. While the investigation is
continuing, based upon current information, the Company does not expect that any
such potential liabilities will have a material adverse effect on the Company's
results of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The information concerning the matters submitted to a vote of the
stockholders and the voting results from the Company's Annual Meeting of
Stockholders held on April 24, 2002 was previously reported in response to Item
4 of Part II of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002.

ITEM 5. OTHER INFORMATION

On August 14, 2002, in connection with the filing of this Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2002, each of the Chief
Executive Officer, Michael E. Wiley, and the Chief Financial Officer, G. Stephen
Finley, submitted to the SEC written statements under oath pursuant to the SEC's
Order No. 4-460 and a joint written statement pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. A copy of each of these statements is attached
hereto as an Exhibit 99.2, 99.3 and 99.4.

In conjunction with the SEC's announced plans to review public disclosure
filings, the Company received and responded to comments from the SEC regarding
its Annual Report on Form 10-K for the year ended December 31, 2001 and its
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002. The
Company believes that neither of such Reports contains an untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading as of the end of the period covered by such Reports. These matters
are subject to interpretation and the SEC may have additional comments after
reviewing the Company's responses.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

3.1 - Restated Certificate of Incorporation of Baker Hughes Incorporated
filed on July 26, 2002.

3.2 - Bylaws (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2002).

4.1 - Restated Certificate of Incorporation of Baker Hughes Incorporated
filed on July 26, 2002 (filed as Exhibit 3.1 to the Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2002).

4.2 - Bylaws (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2002).

99.1 - Administrative Proceeding, File No. 3-10572, dated September 12,
2001, as issued by the Securities and Exchange Commission (filed as
Exhibit 99.1 to the Current Report on Form 8-K filed on September 12,
2001).

99.2 - Statement Under Oath of Michael E. Wiley, Chief Executive Officer,
dated August 14, 2002, pursuant to the Securities and Exchange
Commission Order No. 4-460.

99.3 - Statement Under Oath of G. Stephen Finley, Chief Financial Officer,
dated August 14, 2002, pursuant to the Securities and Exchange
Commission Order No. 4-460.

23

99.4 - Statement of Michael E. Wiley, Chief Executive Officer, and G.
Stephen Finley, Chief Financial Officer, dated August 14, 2002 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

A Current Report on Form 8-K was filed with the Commission on April 22,
2002, reporting the issuance of a press release whereby the Company announced
that the U.S. Securities and Exchange Commission and the Department of Justice
were conducting investigations into allegations of violations of law relating to
Nigeria and other related matters.

A Current Report on Form 8-K was filed with the Commission on April 26,
2002, reporting the results of the Company's Annual Meeting of Stockholders
election of certain members of the Board of Directors and stockholder proposals.

A Current Report on Form 8-K was filed with the Commission on April 30,
2002, for purposes of updating the description of the Company's capital stock
for the registration of such capital stock, including but not limited to
registrations of common stock for issuance pursuant to the Company's employee
benefit plans.

24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

BAKER HUGHES INCORPORATED
(REGISTRANT)

Date: August 14, 2002 By: /s/G. STEPHEN FINLEY
--------------------------------------------
Sr. Vice President - Finance and
Administration and Chief Financial Officer

Date: August 14, 2002 By: /s/ALAN J. KEIFER
--------------------------------------------
Vice President and Controller

25

EXHIBIT INDEX