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 March 31, 2003

OR

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

Commission File Number 1-9397

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

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 [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]

----------

As of May 1, 2003, the registrant has outstanding 336,645,783 shares of
Common Stock, $1 par value.

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 primarily in the
oilfield services industry. 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
participates in the continuous process industry where it manufactures and
markets a broad range of continuous and batch centrifuges and specialty filters.

BASIS OF PRESENTATION

The unaudited consolidated condensed financial statements of Baker Hughes
Incorporated 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, 2002. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the full year.

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. DISCONTINUED OPERATIONS

In November 2002, the Company sold EIMCO Process Equipment ("EIMCO"), a
division of the Process segment, and received total proceeds of $48.9 million,
of which $4.9 million was held in escrow pending completion of final adjustments
of the purchase price. Subsequent to the end of the first quarter of 2003, all
purchase price adjustments were completed resulting in the release of the escrow
balance, of which $2.9 million was returned to the buyer and $2.0 million was
received by the Company. The Company also recorded an additional loss on sale
due to purchase price adjustments of $2.5 million, net of tax of $1.3 million.
In addition, in December 2002, the Company entered into exclusive negotiations
for the sale of the Company's interest in its oil producing operations in West
Africa and received $10.0 million as a deposit. This transaction was effective
as of January 1, 2003, and resulted in a gain of $4.1 million, net of a tax
benefit of $0.2 million. The Company received the remaining $22.0 million in
proceeds upon closing, which occurred in April 2003. In accordance with
generally accepted accounting principles, the Company has reclassified the
consolidated financial statements for all prior periods to present both of these
operations as discontinued.

5

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

Summarized financial information from discontinued operations is as follows:

NOTE 3. ACQUISITIONS

In the first quarter of 2002, the Company made three small acquisitions
within its Oilfield segment having an aggregate purchase price of $51.7 million,
of which $30.6 million was paid in cash. As a result of these acquisitions, the
Company recorded approximately $34.9 million of goodwill in the first quarter of
2002. The purchase prices are allocated based on fair values of the
acquisitions. The purchase price allocation of one of the acquisitions may be
subject to change pending the final outcome of arbitration proceedings. 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.

NOTE 4. 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:

6

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

NOTE 5. STOCK-BASED COMPENSATION

As allowed for under Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, the Company has elected to
account for its stock-based compensation using the intrinsic value method of
accounting in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Under this method, no compensation
expense is recognized when the number of shares granted is known and the
exercise price of the stock option is equal to or greater than the market price
of the Company's common stock on the grant date. The Company has no stock-based
compensation expense associated with stock options reflected in its consolidated
statements of operations.

If the Company had recognized compensation expense as if the fair value
based method had been applied to all awards as provided for under SFAS No. 123,
the Company's pro forma net income, earnings per share ("EPS") and stock-based
compensation cost would have been as follows:

These pro forma calculations may not be indicative of future amounts since
the pro forma disclosure does not apply to options granted prior to 1996 and
additional awards in future years are anticipated.

NOTE 6. FINANCIAL INSTRUMENTS

At March 31, 2003, the Company had entered into several foreign currency
forward contracts with notional amounts aggregating $90.5 million to hedge
exposure to currency fluctuations in various foreign currencies, including the
British Pound Sterling , the Euro and the Norwegian Krone. These contracts are
designated as fair value hedges. Based on quoted market prices as of March 31,
2003 for contracts with similar terms and maturity dates, the Company recorded a
loss of $0.6 million which is reported in selling, general and administrative
expense in the consolidated condensed statement of operations.

NOTE 7. EARNINGS PER SHARE

A reconciliation of the number of shares used for the basic and diluted EPS
calculation is as follows:

Due to their antidilutive effect, 5.9 million and 5.0 million stock options
were excluded from the computation of diluted EPS for the three months ended
March 31, 2003 and 2002, respectively.

7

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

NOTE 8. INVENTORIES

Inventories are comprised of the following:

NOTE 9. GOODWILL AND INTANGIBLE ASSETS

On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. The adoption of SFAS No. 142 required the Company to cease
amortizing goodwill and 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 in
both the EIMCO and BIRD Machine operating divisions 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 transitional impairment losses of $42.5 million, net of tax of $20.4
million. The transitional impairment losses were recorded in the first quarter
of 2002 as the cumulative effect of accounting change in the consolidated
condensed statement of operations.

The changes in the carrying amount of goodwill (net of accumulated
amortization) for the three months ended March 31, 2003 relate to the Oilfield
segment and are as follows:

Balance as of December 31, 2002 $ 1,226.6
Foreign currency translation adjustments and other 1.9
------------
Balance as of March 31, 2003 $ 1,228.5
============

The Company has intangible assets which continue to be amortized and are
comprised of the following:

Amortization expense for intangible assets for the three months ended March
31, 2003 was $3.3 million and is estimated to be $12.1 million for 2003.
Estimated amortization expense for each of the subsequent five fiscal years is
expected to be within the range of $10.0 million to $12.0 million.

8

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

NOTE 10. SEGMENT AND RELATED INFORMATION

The Company currently has seven 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 Oil Tools, Baker Petrolite, Centrilift, Hughes Christensen and INTEQ. 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.
They also 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, South 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 investment in WesternGeco, a seismic venture between the
Company and Schlumberger Limited ("Schlumberger"), and other similar businesses.
The Company and Schlumberger own 30% and 70%, respectively, of WesternGeco.

The Process segment consists of one operating division, BIRD Machine, and
the Company's investment in the Petreco venture, a venture between the Company
and Sequel Holdings, Inc. BIRD Machine manufactures and sells a broad range of
continuous and batch centrifuges and specialty filters for separating,
dewatering or classifying process and waste streams. The principal markets for
this segment include all regions of the world where there are significant
industrial, municipal and chemical wastewater applications. Customers include
municipalities, contractors, pharmaceuticals and industrial companies.

The Company evaluates the performance of its Oilfield and Process segments
based on income from continuing operations 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 "Other" column also includes assets of
discontinued operations.

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

9

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

NOTE 11. GUARANTEES

In the normal course of business with customers, vendors and others, the
Company is contingently liable for performance under letters of credit and other
bank issued guarantees totaling approximately $207.8 million at March 31, 2003.
In addition, at March 31, 2003, the Company has guaranteed debt and other
obligations of third parties totaling $133.1 million, which includes $91.6
million for a lease on a seismic vessel. This lease was transferred to
WesternGeco at the time of the formation of the venture and Schlumberger has
indemnified the Company for 70% of the total lease obligation.

The Company sells certain of its products to customers with a product
warranty that provides that customers can return a defective product during a
specified warranty period following the purchase in exchange for a replacement
product, repair at no cost to the customer or the issuance of a credit to the
customer. The Company accrues its estimated exposure to warranty claims based
upon both current and historical product sales data and warranty costs incurred.
The changes in the aggregate product warranty liabilities for the three months
ended March 31, 2003 are as follows:

Balance as of December 31, 2002 $ 12.2
Claims paid (1.9)
Additional warranties issued 1.6
Revisions in estimates for previously issued warranties 0.2
Other 1.1
------------
Balance as of March 31, 2003 $ 13.2
============

NOTE 12. NEW ACCOUNTING STANDARDS

Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for
Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for legal obligations associated with the retirement of long-lived
assets. SFAS No. 143 requires that the fair value of a liability associated with
an asset retirement obligation ("ARO") be recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made. The liability
for the ARO is revised each subsequent period due to the passage of time and
changes in estimates. The associated retirement costs are capitalized as part of
the carrying amount of the long-lived asset and subsequently depreciated over
the estimated useful life of the asset.

The adoption of SFAS No. 143 in the first quarter of 2003 resulted in a
charge of $5.6 million, net of tax of $2.8 million, recorded as the cumulative
effect of accounting change in the consolidated condensed statement of
operations. In conjunction with the adoption, the Company recorded ARO
liabilities of $11.4 million primarily for anticipated costs of legal
obligations associated with the future disposal of power source units at
certain of its Oilfield divisions and refurbishment costs associated with
certain leased facilities in Europe and with a fleet of leased railcars and
tanks.

In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 elaborates on required disclosures by a guarantor in its
financial statements about obligations under certain guarantees that it has
issued and requires a guarantor to recognize, at the inception of certain
guarantees, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The adoption of the provisions of FIN 45 relating to the
initial recognition and measurement of guarantor liabilities, which were
effective for qualifying guarantees entered into or modified after December 31,
2002, did not have a material impact on the consolidated condensed financial
statements of the Company. The Company adopted the new disclosure requirements
in 2002.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. An entity is subject to the
consolidation rules of FIN 46 and is referred to as a variable interest entity
if the entity's equity investors lack the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its operations without additional financial support. FIN 46 applies
immediately to variable interest entities created or acquired after January 31,
2003. The Company has no such newly created or acquired entities. FIN 46 will
apply after July 1, 2003 for variable interest entities created or acquired
prior to February 1, 2003. The Company is reviewing the provisions of FIN 46 but
does not expect the adoption to have a material impact, if any, on the
consolidated condensed financial statements.

10

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

NOTE 13. SUBSEQUENT EVENTS

In April 2003, the Company completed the formation of the QuantX Wellbore
Instrumentation venture with Expro International Group ("Expro"). The venture
will be engaged in the permanent in-well monitoring market and was formed by
combining Expro's existing permanent monitoring business with one of the
Company's product lines. The Company also paid Expro $30.0 million and owns 50%
of the venture. This venture will be included in the Oilfield segment.

Also in April 2003, the Company entered into an interest rate swap agreement
for a notional amount of $325.0 million associated with the Company's 6.25%
Notes due January 2009. Under this agreement, the Company receives interest at a
fixed rate of 6.25% and pays interest at a floating rate of six-month LIBOR plus
a spread of 2.689%. This interest rate swap will settle semi-annually and
terminates in January 2009. The interest rate swap agreement has been designated
and qualified as a fair value hedging instrument. The interest rate swap
agreement will be fully effective, resulting in no gain or loss recorded in the
consolidated condensed statement of operations. In the unlikely event that the
counterparty fails to meet the terms of the interest rate swap agreement, the
Company's exposure is limited to the interest rate differential.

Subsequent to the end of the quarter through May 12, 2003, the Company
repurchased 2.0 million shares of its common stock at an average cost of $28.56
per share, for a total of $58.2 million. Upon repurchase, the shares were
retired. The Company has authorization remaining to repurchase up to $159.1
million in common stock.

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," "intend," "estimate," "project,"
"forecasts," "outlook," "will," "could," "may," "suggest" and similar
expressions, and the negative thereof, are intended to identify forward-looking
statements. Baker Hughes' expectations regarding 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 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; the Company's ability to retain or increase its market share; world
economic conditions; the price of, and the demand for, crude oil and natural
gas; drilling activity; weather conditions that affect the demand for energy and
severe weather conditions that affect exploration and production activities; the
legislative and regulatory environment in the U.S. and other countries in which
the Company operates; Organization of Petroleum Exporting Countries ("OPEC")
policy and the adherence by OPEC nations to their OPEC production quotas; war,
military action or extended period of international conflict, particularly
involving the U.S., Middle East or other major petroleum-producing or consuming
regions; any future acts of war, armed conflicts or terrorist activities; civil
unrest or in-country security concerns where the Company operates; the
development of technology by Baker Hughes or its competitors that lowers overall
finding and development costs; new laws and regulations that could have a
significant impact on the future operations and conduct of all businesses as a
result of the financial deterioration and bankruptcies of large U.S. entities;
labor-related actions, including strikes, slowdowns and facility occupations;
the condition of the capital and equity markets in general, including interest
rates; adverse foreign exchange fluctuations and adverse changes in the capital
markets in international locations where the Company operates; 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 of capital assets.

BUSINESS ENVIRONMENT

The Company currently has seven 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 Oil Tools, Baker Petrolite, Centrilift, Hughes Christensen and INTEQ -
that manufacture and sell products and provide services used in the oil and gas
exploration industry, including drilling, formation evaluation, completion and
production of oil and gas wells. The Oilfield segment also includes the
Company's investment in WesternGeco, a seismic venture between the Company and
Schlumberger Limited ("Schlumberger"), and other similar businesses. The Company
and Schlumberger own 30% and 70%, respectively, of WesternGeco.

The Process segment consists of one operating division, BIRD Machine, and
the Company's investment in the Petreco venture, a venture between the Company
and Sequel Holdings, Inc. BIRD Machine manufactures and sells a broad range of
continuous and batch centrifuges and specialty filters for separating,
dewatering or classifying process and waste streams.

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 ("E&P")
of oil and gas reserves. These

12

expenditures are influenced strongly by expectations about the supply and demand
for crude oil and natural gas products and by the energy price environment.

The Company does business in approximately 70 countries. According to
Transparency International's annual Corruption Perceptions Index ("CPI") survey,
a high degree of corruption is perceived to exist in many of these countries.
For example, the Company does business in about one-half of the 30 countries
having the worst scores in Transparency International's CPI survey for 2002. The
Company devotes significant resources to the development, maintenance and
enforcement of its Business Code of Conduct policy, its Foreign Corrupt
Practices Act (the "FCPA") policy, its internal control processes and
procedures, as well as other compliance related policies. Notwithstanding the
devotion of such resources, and in part as a consequence thereof, the Company,
from time to time, discovers or receives information alleging potential
violations of the FCPA and the Company's policies, processes and procedures. The
Company conducts internal investigations of these potential violations. The
Company anticipates that the devotion of significant resources to compliance
related issues, including the necessity for such internal investigations, will
continue to be an aspect of doing business in a number of the countries in which
oil and gas exploration, development and production take place and the Company
is requested to conduct operations.

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

o Production control - the degree to which individual OPEC nations and other
large oil and gas producing countries, including, but not limited to,
Mexico, Norway and Russia, are willing and able to control production and
exports of crude oil to decrease or increase supply and support their
targeted oil price while meeting their market share objectives. Key measures
of production control include actual production levels compared with target
or quota production levels, oil price compared with targeted oil price and
changes in each country's market share.

o Global economic growth - particularly the impact of the U.S. and Western
European economies and the 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 2003 will be the strength and timing of a U.S. economic recovery.
Key measures include U.S. and global economic activity, global energy demand
and forecasts of future demand by governments and private organizations.

o Oil and gas storage inventory levels - a measure of the balance between
supply and demand. A key measure of U.S. natural gas inventories is the
storage level reported weekly by the U.S. Department of Energy compared with
historic levels. Key measures for oil inventories include U.S. inventory
levels reported by the U.S. Department of Energy and American Petroleum
Institute and worldwide estimates reported by the International Energy
Agency, again compared with historic levels.

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 and
production from existing wells. Advanced technologies, such as horizontal
drilling, result in improved total recovery, but also result in 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 cost.
Also key are the overall levels of research and engineering spending and the
pace at which new technology is introduced commercially and accepted by
customers.

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

o Pace of new investment - access to capital and the reinvestment of available
cash flow into existing and emerging markets. Key measures of access to
capital include cash flow, interest rates, analysis of oil and gas company
leverage and equity offering activity. Access to capital is particularly
important for smaller independent oil and gas companies.

o Energy prices and price volatility - the impact of widely fluctuating
commodity prices on the stability of the market and subsequent impact on
customer spending. Sustained higher energy prices can be an impediment to
economic growth. While current energy prices are important contributors to
positive cash flow at E&P companies, expectations for future prices are more
important for determining future E&P spending.

o Access to prospects - which are economically attractive to individual oil
and gas companies based on their expectations of required returns,
forecasted energy prices and required investment. Access to prospects may be
limited because host governments do not allow access to the reserves or
because another oil and gas company owns the rights to develop the prospect.

13

o Possible supply disruptions - from key oil exporting countries, including,
but not limited to, Iraq, Saudi Arabia, Nigeria and other Middle Eastern
countries and Venezuela, due to political instability, civil unrest or
military activity. In addition, adverse weather such as hurricanes could
impact production facilities, causing supply disruptions.

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. A
key measure of the impact of weather on energy demand is population-weighted
heating and cooling degree days as reported by the U.S. Department of Energy
and forecasts of warmer than normal or cooler than normal temperatures.

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. West
Texas Intermediate ("WTI") 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.

WTI crude oil prices averaged $33.96/bbl in the first quarter of 2003,
rising from $30.56/bbl in early January to a high for the quarter of $37.83/bbl
in early March, before falling to a low for the quarter of $27.36/bbl in late
March. In January and February, oil prices rose due to the impact of the general
strike in Venezuela that began in December 2002. The strike resulted in
decreased oil production and exports from Venezuela and in lower inventories in
the U.S. Also in January and February, oil prices rose above what the historical
relationship between oil price and inventories would suggest was appropriate.
This "war premium" was driven by concerns of a possible supply disruption
resulting from military action in the Middle East. Prices fell throughout March
as military action in Iraq did not produce a significant disruption; as the
general strike in Venezuela subsided, allowing oil production and exports to
begin to recover; and as Saudi Arabia and other OPEC countries increased
production to compensate for the loss of Venezuelan and Iraqi crude.

During the first quarter of 2003, natural gas prices averaged $6.38/MMBtu.
Natural gas prices were volatile during the quarter, trading between a low of
$4.89/MMBtu and a high of $19.38/MMBtu, and averaged almost $10.00/MMBtu during
a period of colder weather in late February and early March. The rise in natural
gas prices was driven by tight supply, created by falling production, and
increased demand due to a winter that was colder than the prior year, but warmer
than normal. Prices rose to a level high enough to curtail enough demand to
allow the market to balance with less supply. The year over year natural gas
storage deficit grew throughout the quarter and storage levels reached record
lows in April 2003.

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 many of
the products and services provided 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 generally 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 its field service personnel worldwide
who obtain this information from various sources. 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. North American rigs are
counted as active if the well being drilled has been started and drilling has
not been completed on the day the count is taken. For an international rig to be
counted as active 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 certain countries, such as Russia and onshore 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 and gas demand, oil and gas prices and drilling activity.

Oil - The balance between oil supply and oil demand remained tight as the
second quarter of 2003 began. The supply disruptions caused by military action
in Iraq and the general strike in Venezuela tested, but did not exceed, OPEC's
ability to increase supply to stabilize the market. As a result, oil prices are
expected to trade between $23/bbl and $28/bbl for the balance of 2003. Prices
could move above this trading range if supply is disrupted in the Middle East,
Africa or Venezuela again. Prices could move below this trading range if OPEC
proves unwilling or unable to restrain production to match market demand or if
the U.S. and/or world economy slows.

North America Natural Gas - Prices are expected to trade between $4.00/MMBtu
and $6.00/MMBtu, as higher prices will be required to discourage some industrial
demand and increase the amount of gas that can be injected into storage before
the start of the 2003/2004 heating season. Prices could move to the top of this
trading range and spike above it if warmer than normal weather drives demand
higher or if supply is disrupted - e.g., by a Gulf of Mexico hurricane.

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

o North America - Spending in North America, primarily towards developing
natural gas supplies, is expected to increase approximately 10% to 15%
in 2003 compared with 2002.

o Outside North America - Customer spending, primarily directed at
developing oil supplies, is expected to be flat to up by 5% in 2003
compared with 2002.

o Total spending is expected to be up 4% to 6% in 2003 compared with 2002.

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 increase approximately 8% to
10% in 2003 compared with 2002. The U.S. rig count is expected to rise
throughout the year and end the year at approximately 950 to 1,100 rigs.

o Drilling activity outside of North America, excluding Venezuela, is
expected to remain steady in 2003 and is expected to increase as much as
3% to 5% compared with 2002.

15

COMPANY OUTLOOK

The Company expects that 2003 will be stronger than 2002, with revenues
expected to increase by approximately 4% to 6% as compared with 2002, with
related improvements in operating results, primarily in the second half of the
year. Activity is expected to improve in the second half of 2003 as a result of
anticipated increased drilling activity in the U.S., primarily due to relatively
higher commodity prices. Activity outside of the U.S. is also expected to
increase as a result of the relatively high crude oil prices. The Company
expects the second quarter of 2003 activity to be up 2% to 4% compared with the
first quarter of 2003 due to a steady post-strike recovery in Venezuela, a
return to normal activity levels in Nigeria and the Middle East by the end of
the second quarter, steady improvement in U.S. land gas-directed drilling and
the beginnings of an increase in U.S. offshore gas-directed drilling. These
improvements will be partially offset by the seasonal decline in Canadian
drilling.

Nigeria held national elections in April 2003. Civil unrest related to
electoral issues in Nigeria resulted in a number of operators curtailing
operations in Nigeria in March 2003 and the delay of several export-direct
customer orders for Nigerian customers. Activity is expected to return to normal
in the second quarter.

The military action in Iraq impacted the Company's operations in the Middle
East in the first quarter and resulted in delays affecting several export-direct
customer orders. The military action in Iraq is entering a new phase and the
Company expects most orders delayed in the first quarter to be shipped during
the second quarter.

Activity in the North Sea, particularly in the U.K. sector, is expected to
be depressed for the next 12 to 18 months. Although activity is expected to
increase seasonally, a meaningful increase in activity levels is probably
dependent upon a large number of assets being sold by the major oil and gas
companies and independents. As a result, the Company is taking steps to reduce
its cost structure in the North Sea.

NEW ACCOUNTING STANDARDS

Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for legal
obligations associated with the retirement of long-lived assets. SFAS No. 143
requires that the fair value of a liability associated with an asset retirement
obligation ("ARO") be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The liability for the ARO is
revised each subsequent period due to the passage of time and changes in
estimates. The associated retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently depreciated over the
estimated useful life of the asset.

The adoption of SFAS No. 143 in the first quarter of 2003 resulted in a
charge of $5.6 million, net of tax of $2.8 million, recorded as the cumulative
effect of accounting change in the consolidated condensed statement of
operations. In conjunction with the adoption, the Company recorded ARO
liabilities of $11.4 million primarily for anticipated costs of legal
obligations associated with the future disposal of power source units at certain
of its Oilfield divisions and refurbishment costs associated with certain leased
facilities in Europe and with a fleet of leased railcars and tanks.

In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 elaborates on required disclosures by a guarantor in its
financial statements about obligations under certain guarantees that it has
issued and requires a guarantor to recognize, at the inception of certain
guarantees, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The adoption of the provisions of FIN 45 relating to the
initial recognition and measurement of guarantor liabilities, which were
effective for qualifying guarantees entered into or modified after December 31,
2002, did not have a material impact on the consolidated condensed financial
statements of the Company. The Company adopted the new disclosure requirements
in 2002.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. An entity is subject to the
consolidation rules of FIN 46 and is referred to as a variable interest entity
if the entity's equity investors lack the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its operations without additional financial support. FIN 46 applies
immediately to variable interest entities created or acquired after January 31,
2003. The Company has no such newly created or acquired entities. FIN 46 will
apply after July 1, 2003 for variable interest entities created or acquired
prior to February 1, 2003. The Company is reviewing the provisions of FIN 46 but
does not expect the adoption to have a material impact, if any, on the
consolidated condensed financial statements.

16

DISCONTINUED OPERATIONS

In November 2002, the Company sold EIMCO Process Equipment ("EIMCO"), a
division of the Process segment, and received total proceeds of $48.9 million,
of which $4.9 million was held in escrow pending completion of final adjustments
of the purchase price. Subsequent to the end of the first quarter of 2003, all
purchase price adjustments were completed resulting in the release of the escrow
balance, of which $2.9 million was returned to the buyer and $2.0 million was
received by the Company. The Company also recorded an additional loss on sale
due to purchase price adjustments of $2.5 million, net of tax of $1.3 million.
In addition, in December 2002, the Company entered into exclusive negotiations
for the sale of the Company's interest in its oil producing operations in West
Africa and received $10.0 million as a deposit. This transaction was effective
as of January 1, 2003, and resulted in a gain on sale of $4.1 million, net of a
tax benefit of $0.2 million. The Company received the remaining $22.0 million in
proceeds upon closing, which occurred in April 2003. In accordance with
generally accepted accounting principles, the Company has reclassified the
consolidated financial statements for all prior periods to present both of these
operations as discontinued.

Summarized financial information from discontinued operations is as follows:

RESULTS OF OPERATIONS

The Company is primarily engaged in the oilfield service industry, which
accounted for 97.8% of total revenues for the three months ended March 31, 2003
and 2002. As a result, the discussion regarding the consolidated results of
operations is primarily focused on the Company's Oilfield segment.

REVENUES

Revenues for the three months ended March 31, 2003 were $1,226.5 million, an
increase of 2.0% compared with the three months ended March 31, 2002. Oilfield
revenues were $1,200.1 million, an increase of 2.0% compared with the three
months ended March 31, 2002. Oilfield revenues in North America, which account
for 43.9% of total Oilfield revenues, increased 9.0% for the three months ended
March 31, 2003 compared with the three months ended March 31, 2002. This
increase reflects increased activity in U.S. land operations, as evidenced by a
13.7% increase in the U.S. land rig count, partially offset by decreased
performances in the deepwater Gulf of Mexico. Outside North America, Oilfield
revenues decreased 2.8% for the three months ended March 31, 2003 compared with
the three months ended March 31, 2002. This decrease reflects a slower than
expected recovery in Venezuela, civil unrest in Nigeria, weakening North Sea
markets and associated price erosion, as well as product shipment delays to
Russia and the Middle East.

17

COST OF REVENUES

Cost of revenues for the three months ended March 31, 2003 was $923.3
million, an increase of 5.5% compared with the three months ended March 31,
2002. Cost of revenues as a percentage of consolidated revenues for the three
months ended March 31, 2003 and 2002 was 75.3% and 72.8%, respectively. The
increase is primarily the result of pricing pressures and a change in the
geographic and product mix from the sale of the Company's products and services.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative ("SG&A") expenses for the three months
ended March 31, 2003 were $201.8 million, a decrease of 1.6% compared with the
three months ended March 31, 2002. SG&A expenses as a percentage of consolidated
revenues for the three months ended March 31, 2003 and 2002 were 16.5% and
17.0%, respectively. This reflects the impact of the Company's cost control
measures and a more stable SG&A cost structure.

EQUITY IN INCOME (LOSS) OF AFFILIATES

Equity in income (loss) of affiliates relates to the Company's share of the
income (loss) of affiliates accounted for using the equity method of accounting.
Equity in income (loss) of affiliates for the three months ended March 31, 2003
decreased $13.5 million compared with the three months ended March 31, 2002. The
Company's most significant equity method investment is its 30% interest in
WesternGeco. The operating results of WesternGeco were adversely affected by the
continuing weakness in the seismic industry.

INTEREST EXPENSE AND INTEREST INCOME

Interest expense for the three months ended March 31, 2003 was unchanged
compared with the three months ended March 31, 2002. Interest expense was
impacted by lower total debt levels resulting from cash flow from operations and
the repayment of $100.0 million of long-term debt coupled with lower average
interest rates on the Company's short-term debt. The approximate average
interest rate on short-term debt was 1.3% for the three months ended March 31,
2003 compared with 1.8% for the three months ended March 31, 2002. Interest
expense was also impacted by the final settlement of outstanding obligations
with a related party.

Interest income for the three months ended March 31, 2003 compared with the
three months ended March 31, 2002, increased $1.5 million primarily due to the
final settlement of outstanding obligations due to the Company from a related
party.

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 higher
taxes within the WesternGeco venture that 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 profits 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 realization.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. The adoption of SFAS No. 142 required the Company to cease
amortizing goodwill and 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 in
both the EIMCO and BIRD Machine operating divisions 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 transitional impairment losses of $42.5 million, net of tax of $20.4
million. The transitional impairment losses were recorded in the first quarter
of 2002 as the cumulative effect of accounting change in the consolidated
condensed statement of operations.

On January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for legal obligations associated with the retirement of long-lived
assets. SFAS No. 143 requires that the fair value of a liability associated with
an asset retirement obligation ("ARO") be recognized in the period in which it
is

18

incurred if a reasonable estimate of fair value can be made. The liability for
the ARO is revised each subsequent period due to the passage of time and changes
in estimates. The associated retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently depreciated over the
estimated useful life of the asset.

The adoption of SFAS No. 143 in the first quarter of 2003 resulted in a
charge of $5.6 million, net of tax of $2.8 million, recorded as the cumulative
effect of accounting change in the consolidated condensed statement of
operations. In conjunction with the adoption, the Company recorded ARO
liabilities of $11.4 million primarily for anticipated costs of legal
obligations associated with the future disposal of power source units at certain
of its Oilfield divisions and refurbishment costs associated with certain leased
facilities in Europe and with a fleet of leased railcars and tanks.

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 three months ended March 31, 2003, net cash inflows from operating
activities of continuing operations totaled $20.1 million, an increase of $22.8
million compared with the three months ended March 31, 2002. This increase was
primarily due to a decrease in working capital, partially offset by lower income
from continuing operations.

Expenditures for capital assets totaled $76.2 million and $62.1 million for
the three months ended March 31, 2003 and 2002, respectively. The majority of
these expenditures were for machinery and equipment and rental tools. During the
three months ended March 31, 2003 and 2002, the Company received proceeds of
$12.4 million and $17.4 million, respectively, from the disposal of assets.

During 2002, the Company's Board of Director's authorized the Company to
repurchase up to $275.0 million of its common stock. During the three months
ended March 31, 2003, the Company repurchased 0.3 million shares at an average
cost of $28.69 per share, for a total of $8.6 million. Subsequent to the end of
the quarter through May 12, 2003, the Company repurchased 2.0 million shares at
an average cost of $28.56 per share, for a total of $58.2 million. Upon
repurchase, the shares were retired. The Company has authorization remaining to
repurchase up to $159.1 million in common stock.

Total debt outstanding at March 31, 2003 was $1,517.2 million, a decrease of
$30.6 million compared with December 31, 2002. The Company repaid $100.0 million
of its 5.8% Notes due February 2003. The repayment was funded through cash flow
from operations and the issuance of commercial paper. The debt to equity ratio
was 0.44 at March 31, 2003 compared with 0.46 at December 31, 2002. The
Company's long-term objective is to maintain a debt to equity ratio between 0.40
and 0.60.

At March 31, 2003, the Company had $977.5 million of credit facilities with
commercial banks, of which $594.0 million was committed. The committed
facilities expire in September 2003 ($56 million) and October 2003 ($538
million). There were no direct borrowings under these facilities during the
three months ended March 31, 2003; however, to the extent the Company has
outstanding commercial paper, available borrowings under the committed credit
facilities are reduced. At March 31, 2003, the Company had $50.0 million in
commercial paper outstanding. At December 31, 2002, the Company had no
outstanding commercial paper.

Cash flows from continuing operations are expected to be the principal
sources of liquidity in 2003. The Company believes that cash flows from
continuing 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 2003 capital expenditures to be between $310.0 million
and $330.0 million, excluding acquisitions. The expenditures are expected to be
used primarily for normal, recurring items necessary to support the growth of
the Company.

If the Company incurred a reduction in its debt ratings or stock price,
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. 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.

In the normal course of business with customers, vendors and others, the
Company is contingently liable for performance under letters of credit and other
bank issued guarantees totaling approximately $207.8 million at March 31, 2003.
In addition, at March 31, 2003, the Company has guaranteed debt and other
obligations of third parties totaling $133.1 million, which includes $91.6

19

million for a lease on a seismic vessel. This lease was transferred to
WesternGeco at the time of the formation of the venture and Schlumberger has
indemnified the Company for 70% of the total lease obligation.

The words "believes," "will," "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.

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 change due to changes in foreign currency
exchange rates when transactions are denominated in currencies other than the
Company's functional currencies. To minimize the need for foreign currency
contracts, the Company's objective 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 March 31, 2003, the Company had entered into several foreign currency
forward contracts with notional amounts aggregating $90.5 million to hedge
exposure to currency fluctuations in various foreign currencies, including the
British Pound Sterling , the Euro and the Norwegian Krone. These contracts are
designated as fair value hedges. Based on quoted market prices as of March 31,
2003 for contracts with similar terms and maturity dates, the Company recorded a
loss of $0.6 million.

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.

In April 2003, the Company entered into an interest rate swap agreement for
a notional amount of $325.0 million associated with the Company's 6.25% Notes
due January 2009. Under this agreement, the Company receives interest at a fixed
rate of 6.25% and pays interest at a floating rate of six-month LIBOR plus a
spread of 2.689%. This interest rate swap will settle semi-annually and
terminates in January 2009. The interest rate swap agreement has been designated
and qualified as a fair value hedging instrument. The interest rate swap
agreement will be fully effective, resulting in no gain or loss recorded in the
consolidated condensed statement of operations. In the unlikely event that the
counterparty fails to meet the terms of the interest rate swap agreement, the
Company's exposure is limited to the interest rate differential.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the filing of this Quarterly Report on Form
10-Q, the Company has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). This evaluation was
carried out under the supervision and with the participation of the Company's
management, including its principal executive officer and principal financial
officer. Based on this evaluation, these officers have concluded that the design
and operation of the Company's disclosure controls and procedures are effective.
There were no significant changes to the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation. No significant deficiencies or material weaknesses in the
internal controls were identified during the evaluation and, as a consequence,
no corrective action is required to be taken.

Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that the Company files or submits under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that the Company files under the Exchange Act is
accumulated and communicated to the Company's management, including its
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.

20

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 back pay 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. The state court case has been stayed pending the
outcome of the federal suit. Discovery in the federal suit is in the preliminary
stages.

On March 29, 2002, the Company announced that it had been advised that the
Securities and Exchange Commission ("SEC") and the Department of Justice ("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 Foreign Corrupt
Practices Act ("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 former employee's 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.

The Company's ongoing internal investigation has identified apparent
deficiencies with respect to certain operations in Nigeria in its books and
records and internal controls, and potential liabilities to governmental
authorities in Nigeria. The investigation was substantially completed during the
first quarter of 2003. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

The Company's Annual Meeting of Stockholders was held on April 23, 2003 (1)
to elect four Class III members of the Board of Directors to serve for
three-year terms, (2) to approve the amendment of the Baker Hughes Incorporated
Employee Stock Purchase Plan, (3) to consider a stockholder proposal regarding
poison pills, (4) to consider a stockholder proposal regarding classified
boards, (5) to consider a stockholder proposal regarding prohibition of stock
option grants to senior executives and (6) to consider a stockholder proposal on
implementation of the MacBride Principles in Northern Ireland. Following are the
final results of the Annual Meeting, which supersede the preliminary results
reported under Item 5 of the Current Report on Form 8-K filed with the SEC on
April 25, 2003.

The four Class III directors who were so elected are Claire W. Gargalli,
James A. Lash, James F. McCall and Michael E. Wiley. The directors whose term of
office continued after the Annual Meeting are Clarence P. Cazalot, Jr., Edward
P. Djerejian, Anthony G. Fernandes, Richard D. Kinder, J. Larry Nichols, H. John
Riley, Jr. and Charles L. Watson. The number of affirmative votes and the number
of votes withheld for the directors so elected were:

21

The number of affirmative votes, the number of negative votes, the number of
abstentions and the number of broker non-votes with respect to the amendment of
the Baker Hughes Incorporated Employee Stock Purchase Plan were as follows:

The number of affirmative votes, the number of negative votes, the number of
abstentions and the number of broker non-votes with respect to the approval of
the stockholder proposals were as follows:

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.1 Baker Hughes Incorporated Employee Stock Purchase Plan, as
amended and restated effective as of March 5, 2003.

10.2 Interest Rate Swap Confirmation, dated April 8, 2003, and
Schedule to the Master Agreement (Multicurrency-Cross Border),
dated as of March 6, 2000.

99.1 Statement of Michael E. Wiley, Chief Executive Officer, and G.
Stephen Finley, Chief Financial Officer, dated May 13, 2003
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 SEC on April 15, 2003,
to furnish under "Item 9. Regulation FD Disclosure" pursuant to "Item
12. Results of Operations and Financial Condition" (in accordance with
SEC Release No. 33-8216) the Company's updated outlook for the three
months ended March 31, 2003.

A Current Report on Form 8-K was filed with the SEC on April 25, 2003,
(a) to report under "Item 5. Other Events and Required FD Disclosure"
the preliminary results of the Company's Annual Meeting of Stockholders
and the election of certain members of the Board of Directors and
stockholder proposals and (b) to furnish under "Item 9. Regulation FD
Disclosure" pursuant to "Item 12. Results of Operations and Financial
Condition" (in accordance with SEC Release No. 33-8216) the Company's
announcement of financial results for the first quarter of 2003.

22

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: May 13, 2003 By: /s/G. STEPHEN FINLEY
------------------------------------------
G. Stephen Finley
Sr. Vice President - Finance and
Administration and Chief Financial Officer

Date: May 13, 2003 By: /s/ALAN J. KEIFER
------------------------------------------
Alan J. Keifer
Vice President and Controller

23

CERTIFICATIONS

I, Michael E. Wiley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Baker Hughes
Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003 By: /s/MICHAEL E. WILEY
------------------------------------
Michael E. Wiley
Chairman of the Board, President and
Chief Executive Officer

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I, G. Stephen Finley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Baker Hughes
Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003 By: /s/G. STEPHEN FINLEY
------------------------------------------
G. Stephen Finley
Sr. Vice President - Finance and
Administration and Chief Financial Officer

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