BAKER HUGHES INC (Form: 10-Q, Received: 05/01/2007 06:03:27)

/s/ G. Stephen Finley

G. Stephen Finley
Sr. Vice President

/s/ Sandra E. Alford

Sandra E. Alford
Corporate Secretary

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007


o		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		(I.R.S. Employer Identification No.)
of incorporation or organization)


2929 Allen Parkway, Suite 2100, Houston, Texas		77019-2118
(Address of principal executive offices)		(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 þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of

“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

As of April 25, 2007, the registrant has outstanding 320,333,735 shares of common stock, $1 par value per share.

INDEX


		Page No .
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Condensed Statements of Operations (Unaudited) — Three months ended March 31, 2007 and 2006	2

	Consolidated Condensed Balance Sheets (Unaudited) — March 31, 2007 and December 31, 2006	3

	Consolidated Condensed Statements of Cash Flows (Unaudited) — Three months ended March 31, 2007 and 2006	4

	Notes to Unaudited Consolidated Condensed Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Submission of Matters to a Vote of Security Holders	27

Item 5.	Other Information	28

Item 6.	Exhibits	29

Signatures		31
Certificate of Amendment
Blyaws
Agreement of Resignation, Appointment and Acceptance
Deferred Prosecution Agreement
Plea Agreement
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Statement of Chief Executive Officer and Chief Financial Officer
Baker Hughes Incorporated Information Document
Baker Hughes Service International, Inc. Information Document
Sentencing Memorandum and Motion for Waiver
Baker Hughes Services International, Inc. Sentencing Letter
The Complaint by the SEC v. Baker Hughes Incorporated
News Release

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Baker Hughes Incorporated

Consolidated Condensed Statements of Operations
(In millions, except per share amounts)
(Unaudited)


	Three Months Ended
	March 31,
	2007			2006

Revenues:
Sales	$	1,200.9		$	1,036.5
Services and rentals		1,271.9			1,025.5

Total revenues		2,472.8			2,062.0


Costs and expenses:
Cost of sales		733.5			621.9
Cost of services and rentals		750.3			649.2
Research and engineering		91.6			78.4
Selling, general and administrative		337.2			272.1

Total costs and expenses		1,912.6			1,621.6


Operating income		560.2			440.4
Equity in income of affiliates		0.2			48.2
Interest expense		(16.8	)		(16.5	)
Interest and dividend income		11.5			7.3


Income from continuing operations before income taxes		555.1			479.4
Income taxes		(180.4	)		(160.6	)


Income from continuing operations		374.7			318.8
Income from discontinued operations, net of tax		—			20.4

Net income	$	374.7		$	339.2


Basic earnings per share:
Income from continuing operations	$	1.17		$	0.93
Income from discontinued operations		—			0.06

Net income	$	1.17		$	0.99


Diluted earnings per share:
Income from continuing operations	$	1.17		$	0.93
Income from discontinued operations		—			0.06

Net income	$	1.17		$	0.99


Cash dividends per share	$	0.13		$	0.13

See accompanying notes to unaudited consolidated condensed financial statements.

Baker Hughes Incorporated

Consolidated Condensed Balance Sheets
(In millions)


	March 31,			December 31,
	2007			2006
	(Unaudited)			(Audited)

ASSETS
Current Assets:
Cash and cash equivalents	$	718.7		$	750.0
Short-term investments		197.3			353.7
Accounts receivable, net		2,241.1			2,055.1
Inventories		1,662.2			1,528.8
Deferred income taxes		167.8			167.8
Other current assets		111.8			112.4

Total current assets		5,098.9			4,967.8

Property, net		1,924.1			1,800.5
Goodwill		1,347.6			1,347.0
Intangible assets, net		185.9			190.4
Other assets		410.2			400.0

Total assets	$	8,966.7		$	8,705.7


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	643.0		$	648.8
Short-term borrowings and current portion of long-term debt		8.6			1.3
Accrued employee compensation		326.6			484.2
Income taxes payable		301.2			150.0
Other accrued liabilities		256.2			337.6

Total current liabilities		1,535.6			1,621.9

Long-term debt		1,072.7			1,073.8
Deferred income taxes and other tax liabilities		350.8			300.2
Liabilities for pensions and other postretirement benefits		344.0			339.3
Other liabilities		102.8			127.6

Stockholders’ Equity:
Common stock		320.3			319.9
Capital in excess of par value		1,617.9			1,600.6
Retained earnings		3,803.8			3,509.6
Accumulated other comprehensive loss		(181.2	)		(187.2	)

Total stockholders’ equity		5,560.8			5,242.9

Total liabilities and stockholders’ equity	$	8,966.7		$	8,705.7

See accompanying notes to unaudited consolidated condensed financial statements.

Baker Hughes Incorporated

Consolidated Condensed Statements of Cash Flows
(In millions)
(Unaudited)


	Three Months Ended
	March 31,
	2007			2006

Cash flows from operating activities:
Income from continuing operations	$	374.7		$	318.8
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Depreciation and amortization		119.8			100.0
Amortization of net deferred gains on derivatives		(1.3	)		(1.3	)
Stock-based compensation costs		12.6			11.8
Acquired in-process research and development		—			2.6
(Benefit) provision for deferred income taxes		(28.7	)		33.0
Gain on disposal of assets		(24.4	)		(11.8	)
Equity in income of affiliates		(0.2	)		(48.2	)
Changes in operating assets and liabilities:
Accounts receivable		(201.3	)		(77.1	)
Inventories		(126.6	)		(79.9	)
Accounts payable		(15.9	)		15.9
Accrued employee compensation and other accrued liabilities		(228.3	)		(195.6	)
Income taxes payable		161.3			44.5
Other		14.0			(3.4	)

Net cash flows from continuing operations		55.7			109.3
Net cash flows from discontinued operations		—			0.4

Net cash flows from operating activities		55.7			109.7


Cash flows from investing activities:
Expenditures for capital assets		(262.0	)		(159.1	)
Acquisition of businesses, net of cash acquired		—			(55.4	)
Purchases of short-term investments		(864.3	)		(78.1	)
Proceeds from maturities of short-term investments		1,020.6			71.2
Proceeds from disposal of assets		49.7			28.7
Proceeds from sale of businesses		—			46.3

Net cash flows from investing activities		(56.0	)		(146.4	)


Cash flows from financing activities:
Net (repayments) borrowings of commercial paper and other short-term debt		7.4			(3.0	)
Proceeds from issuance of common stock		4.0			29.4
Repurchases of common stock		—			(90.7	)
Dividends		(41.5	)		(44.4	)
Excess tax benefits from stock-based compensation		—			6.2

Net cash flows from financing activities		(30.1	)		(102.5	)


Effect of foreign exchange rate changes on cash		(0.9	)		0.4

Decrease in cash and cash equivalents		(31.3	)		(138.8	)
Cash and cash equivalents, beginning of period		750.0			697.0

Cash and cash equivalents, end of period	$	718.7		$	558.2


Income taxes paid (net of refunds)	$	44.9		$	80.6
Interest paid	$	30.0		$	30.0

See accompanying notes to unaudited consolidated condensed financial statements.

Baker Hughes Incorporated

Notes to Unaudited Consolidated Condensed Financial Statements

NOTE 1. GENERAL

Nature of Operations

Baker Hughes Incorporated (“we,” “our” or “us”) is engaged in the oilfield services industry. We are a major supplier of wellbore related products and technology services and systems to the worldwide oil and natural gas industry and provide products and services for drilling, formation evaluation, completion and production of oil and natural gas wells.

Basis of Presentation

Our unaudited consolidated condensed financial statements 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. We believe 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 our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. 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.

New Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”). We adopted FIN 48 on January 1, 2007 and recorded a reduction to beginning retained earnings of $64.2 million. See Note 6 for further information.

In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1 (“FSP AUG AIR-1”), which addresses the accounting for planned major maintenance activities. FSP AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. We adopted FSP AUG AIR-1 on January 1, 2007 to change our method of accounting for repairs and maintenance activities on certain rental tools from the accrue-in-advance method to the direct expense method. The adoption resulted in the reversal of a $34.2 million accrued liability for future repairs and maintenance (“R&M”) costs and the recording of an income tax liability of $9.0 million. The net impact of $25.2 million has been recorded as an increase to beginning retained earnings as of January 1, 2007. We did not restate any prior periods as the impact was not material to our financial statements.

The table below reflects the impact of the adoption of FIN 48 and FSP AUG AIR-1 on beginning retained earnings, the current quarter activity and the ending balance of retained earnings as reflected on the condensed consolidated balance sheet as of March 31, 2007.


	Retained Earnings

As reported ending balance as of December 31, 2006	$	3,509.6
Adjustments for the adoption of new accounting standards:
FIN 48 – Accounting for Uncertainty in Income Taxes		(64.2	)
FSP AUG AIR-1 – Accounting for R&M activities		25.2

Adjusted beginning balance as of January 1, 2007		3,470.6
Net income		374.7
Cash dividends		(41.5	)

Ending balance as of March 31, 2007	$	3,803.8

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to measure eligible assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS 159 on January 1, 2008, and have not yet determined the impact, if any, on our consolidated condensed financial statements.

NOTE 2. STOCK-BASED COMPENSATION

We grant various forms of equity based awards to directors, officers and other key employees. These equity based awards consist primarily of stock options, restricted stock awards and restricted stock units. We also have an Employee Stock Purchase Plan available for eligible employees to purchase shares of our common stock at a 15% discount. We recorded $12.6 million and $11.8 million of total stock-based compensation expense for the three months ended March 31, 2007 and 2006, respectively.

Stock Options

Our stock option plans provide for the issuance of incentive and non-qualified stock options to directors, officers and other key employees at an exercise price equal to the fair market value of the stock at the date of grant.

The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions used in the option pricing model for the three months ended March 31, 2007 and 2006.


	2007			2006

Expected life (years)		5.1			5.0
Risk-free interest rate		4.8	%		4.5	%
Volatility		29.6	%		29.4	%
Dividend yield		0.8	%		0.7	%
Weighted-average fair value per share at grant date	$	22.31		$	23.78

We granted 348,733 options during the three months ended March 31, 2007 at a weighted-average exercise price per option of $68.27.

Restricted Stock Awards and Units

In addition to stock options, officers, directors and key employees may be granted restricted stock awards (“RSA”), which is an award of common stock with no exercise price, or restricted stock units (“RSU”), where each unit represents the right to receive at the end of a stipulated period one unrestricted share of stock with no exercise price. We determine the fair value of restricted stock awards and restricted stock units based on the market price of our common stock on the date of grant.

We granted 332,371 RSAs and 93,295 RSUs during the three months ended March 31, 2007 at a weighted-average price per award or unit of $68.37 and $68.54, respectively.

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of our stock at a 15% discount of the fair market value on the first or last day, whichever is lower, of the calendar year. We determined the fair value of our ESPP shares using the Black-Scholes option pricing model with the following assumptions.


	2007			2006

Expected life (years)		1.0			1.0
Risk-free interest rate		4.9	%		4.4	%
Volatility		30.5	%		28.0	%
Dividend Yield		0.7	%		0.9	%
Weighted-average fair value per share at grant date	$	10.39		$	7.68

Based on contributions as currently elected by eligible employees and our stock price on January 1, 2007, we estimate we will issue approximately 536,000 shares under the ESPP on or around January 1, 2008.

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

NOTE 3. SALE OF INTEREST IN AFFILIATE

We have investments in affiliates that are accounted for using the equity method of accounting. The most significant of these affiliates was our 30% interest in WesternGeco, a seismic venture jointly owned with Schlumberger. On April 28, 2006, we sold our 30% interest in WesternGeco to Schlumberger for $2.4 billion in cash. We recorded a pre-tax gain of $1,743.5 million ($1,035.2 million, net of tax).

NOTE 4. DISCONTINUED OPERATIONS

In the fourth quarter of 2005, our management initiated and our Board of Directors approved a plan to sell the Baker Supply Products Division (“Baker SPD”), a product line group within the Completion and Production segment, which distributes basic supplies, products and small tools to the drilling industry. In March 2006, we completed the sale of Baker SPD and received cash proceeds of $42.5 million. We recorded a gain on the sale of $19.2 million, net of tax of $11.0 million, which consisted of an after-tax gain on the disposal of $16.9 million and $2.3 million related to the recognition of the cumulative foreign currency translation adjustments. We have reclassified our consolidated condensed financial statements for all prior periods presented to reflect Baker SPD as a discontinued operation.

Summarized financial information for Baker SPD is as follows:


	Three Months Ended
	March 31,
	2007		2006

Revenues	$	—	$	6.7


Income before income taxes	$	—	$	1.8
Income taxes		—		(0.6	)

Income before gain on sale		—		1.2
Gain on sale, net of tax		—		19.2

Income from discontinued operations	$	—	$	20.4

NOTE 5. ACQUISITION

In January 2006, we acquired Nova Technology Corporation (“Nova”) for $55.4 million, net of cash acquired of $3.0 million, plus assumed debt. Nova is a supplier of permanent monitoring, chemical injection systems, and multi-line services for deepwater and subsea oil and gas well applications. As a result of the acquisition, we recorded $29.7 million of goodwill, $24.3 million of intangible assets and assigned $2.6 million to in-process research and development. Under the terms of the purchase agreement, the former owners of Nova are entitled to additional purchase price consideration of up to $3.0 million based on certain post-closing events to the extent that those events occur no later than January 31, 2016, of which $0.9 million was paid through March 31, 2007.

NOTE 6. INCOME TAXES

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 . FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the tax benefit from an uncertain tax position is to be recognized when it is more likely than not, based on the technical merits of the position, that the position will be sustained on examination by the taxing authorities. Additionally, the amount of the tax benefit to be recognized is the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and financial statement disclosures.

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

We adopted FIN 48 on January 1, 2007, pursuant to which we recognized a $78.5 million increase in the gross liability for unrecognized tax benefits, which included $17.3 million of interest and penalties. As a result of the implementation of FIN 48, we recognized the following adjustments to our accounts.


	Increase
	(Decrease)

Beginning retained earnings	$	(64.2	)
Deferred tax assets		(0.6	)
Non-current tax receivables		14.9
Tax liabilities		78.5

As of January 1, 2007, we had $422.8 million of total gross unrecognized tax benefits, which includes liabilities for interest and penalties of $50.4 million and $18.1 million, respectively, related to unrecognized tax benefits. Of this total, $339.2 million (net of associated and recognized tax benefits) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate.

As of March 31, 2007, we had $427.5 million of total gross unrecognized tax benefits, which includes liabilities for interest and penalties of $55.4 million and $18.2 million, respectively, related to unrecognized tax benefits. Of this total, $343.7 million (net of associated and recognized tax benefits) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate.

We have elected under FIN 48 to continue with our prior policy to classify interest and penalties related to unrecognized tax benefits as income taxes in our financial statements. For the period ending March 31, 2007, we recognized $5.0 million of interest expense related to unrecognized tax benefits.

It is expected that the amount of unrecognized tax benefits will change in the next twelve months due to expiring statutes and audit activity, including expected tax payments; however, we do not anticipate the change to have a significant impact on the results of operations or our financial position.

We operate in more than 90 countries and are subject to income taxes in most taxing jurisdictions in which we operate. The following table summarizes the earliest tax years that remain subject to examination by the major taxing jurisdictions in which we operate. These jurisdictions are those we project to have the highest tax liability for the current year.


	Earliest Open			Earliest Open
Jurisdiction	Tax Period		Jurisdiction	Tax Period

Angola		2002	Norway		2001
Argentina		1999	Russia		2004
Brazil		2001	Saudi Arabia		1995
Canada		1998	United Kingdom		1999
Equatorial Guinea		2003	United States		2002
Germany		1998	Venezuela		1998

NOTE 7. EARNINGS PER SHARE

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


	Three Months Ended
	March 31,
	2007		2006

Weighted average common shares outstanding for basic EPS		319.1		341.2
Effect of dilutive securities – stock plans		1.9		1.5

Adjusted weighted average common shares outstanding for diluted EPS		321.0		342.7


Future potentially dilutive shares excluded from diluted EPS:
Options with an exercise price greater than average market price for the period		1.0		0.3

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

NOTE 8. INVENTORIES

Inventories are comprised of the following:


	March 31,		December 31,
	2007		2006

Finished goods	$	1,343.3	$	1,239.5
Work in process		212.6		188.0
Raw materials		106.3		101.3

Total	$	1,662.2	$	1,528.8

NOTE 9. PROPERTY

Property is comprised of the following:


	March 31,			December 31,
	2007			2006

Land	$	46.6		$	46.1
Buildings and improvements		679.3			661.0
Machinery and equipment		2,488.7			2,387.6
Rental tools and equipment		1,499.2			1,419.2

Total property		4,713.8			4,513.9
Accumulated depreciation		(2,789.7	)		(2,713.4	)

Property, net	$	1,924.1		$	1,800.5

NOTE 10. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill are detailed below by segment:


	Drilling		Completion
	and		and
	Evaluation		Production		Total

Balance as of December 31, 2006	$	909.2	$	437.8	$	1,347.0
Translation adjustments and other		0.4		0.2		0.6

Balance as of March 31, 2007	$	909.6	$	438.0	$	1,347.6

Intangible assets are comprised of the following:


	March 31, 2007							December 31, 2006
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Amount		Amortization			Net		Amount		Amortization			Net

Technology based	$	237.3	$	(91.6	)	$	145.7	$	236.7	$	(87.2	)	$	149.5
Contract based		13.8		(7.1	)		6.7		13.8		(6.6	)		7.2
Marketing related		5.7		(5.7	)		—		5.7		(5.7	)		—
Customer based		13.7		(2.7	)		11.0		13.7		(2.4	)		11.3
Other		0.8		(0.4	)		0.4		0.7		(0.4	)		0.3

Total amortizable intangible assets		271.3		(107.5	)		163.8		270.6		(102.3	)		168.3
Marketing related intangible assets with indefinite useful lives		22.1		—			22.1		22.1		—			22.1

Total	$	293.4	$	(107.5	)	$	185.9	$	292.7	$	(102.3	)	$	190.4

Intangible assets are amortized either on a straight-line basis with estimated useful lives ranging from 1 to 20 years, or on a basis that reflects the pattern in which the economic benefits of the intangible assets are consumed, which range from 15 to 30 years.

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

Amortization expense for intangible assets included in net income for the three months ended March 31, 2007 was $5.4 million and is estimated to be $20.4 million for 2007. Estimated amortization expense for each of the subsequent five fiscal years is expected to be within the range of $13.8 million to $19.1 million.

NOTE 11. FINANCIAL INSTRUMENTS

Foreign Currency Forward Contracts

At March 31, 2007, we had entered into several foreign currency forward contracts with notional amounts aggregating $115.0 million to hedge exposure to currency fluctuations in various foreign currencies, including British Pound Sterling, Euro, Norwegian Krone, Brazilian Real and Indonesian Rupiah. These contracts are designated and qualify as fair value hedging instruments. Based on quoted market prices as of March 31, 2007 for contracts with similar terms and maturity dates, we recorded a loss of $0.4 million to adjust these foreign currency forward contracts to their fair market value. This loss offsets designated foreign exchange gains resulting from the underlying exposures and is included in selling, general and administrative expense in our consolidated condensed statement of operations.

NOTE 12. SEGMENT AND RELATED INFORMATION

We are a provider of drilling, formation evaluation, completion and production products and services to the worldwide oil and natural gas industry. We report results for our product-line focused divisions under two segments: the Drilling and Evaluation segment and the Completion and Production segment. We have aggregated the divisions within each segment because they have similar economic characteristics and because the long-term financial performance of these divisions is affected by similar economic conditions. They also operate in the same markets, which includes all of the major oil and natural gas producing regions of the world. The results of each segment are evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. The WesternGeco segment consisted of our 30% interest in WesternGeco which we sold in April 2006.

	•		The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids (drilling fluids), Hughes Christensen (oilfield drill bits), INTEQ (drilling, measurement-while-drilling and logging-while-drilling) and Baker Atlas (wireline formation evaluation and wireline completion services) divisions. The Drilling and Evaluation segment provides products and services used to drill and evaluate oil and natural gas wells.

	•		The Completion and Production segment consists of the Baker Oil Tools (workover, fishing and completion equipment), Baker Petrolite (oilfield specialty chemicals) and Centrilift (electrical submersible pumps and progressing cavity pumps) divisions and the ProductionQuest business unit. The Completion and Production segment provides equipment and services used from the completion phase through the productive life of oil and natural gas wells.

The performance of our segments is evaluated based on segment profit (loss), which is defined as income from continuing operations before income taxes, interest expense and interest and dividend income. Summarized financial information is shown in the following table. The “Corporate and Other” column includes corporate-related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to the segments.


	Drilling		Completion				Total		Corporate
	and Evaluation		and Production		WesternGeco		Oilfield		and Other			Total

*Revenues*
Three months ended March 31, 2007	$	1,288.5	$	1,184.2	$	—	$	2,472.7	$	0.1		$	2,472.8
Three months ended March 31, 2006		1,084.5		977.5		—		2,062.0		—			2,062.0

*Segment profit (loss)*
Three months ended March 31, 2007	$	366.6	$	246.4	$	—	$	613.0	$	(57.9	)	$	555.1
Three months ended March 31, 2006		280.3		207.7		47.9		535.9		(56.5	)		479.4

*Total assets*
As of March 31, 2007	$	4,214.1	$	3,768.0	$	—	$	7,982.1	$	984.6		$	8,966.7
As of December 31, 2006		3,988.8		3,595.7		—		7,584.5		1,121.2			8,705.7

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

The following table presents the details of “Corporate and Other” segment loss:


	Three Months Ended
	March 31,
	2007			2006

Corporate and other expenses	$	(52.6	)	$	(47.3	)
Interest expense		(16.8	)		(16.5	)
Interest and dividend income		11.5			7.3

Total	$	(57.9	)	$	(56.5	)

NOTE 13. EMPLOYEE BENEFIT PLANS

We have noncontributory defined benefit pension plans (“Pension Benefits”) covering employees primarily in the U.S., the U.K. and Germany. In the U.S., we merged two defined benefit pension plans effective January 1, 2007, resulting in one tax-qualified U.S. pension plan, the Baker Hughes Incorporated Pension Plan (“BHIPP”). We also provide certain postretirement health care and life insurance benefits (“other postretirement benefits”), through an unfunded plan, to substantially all U.S. employees who retire and have met certain age and service requirements.

The components of net periodic benefit cost are as follows:


													Other Postretirement
	U.S. Pension Benefits						Non-U.S. Pension Benefits						Benefits
	Three Months Ended						Three Months Ended						Three Months Ended
	March 31,						March 31,						March 31,
	2007			2006			2007			2006			2007		2006

Service cost	$	7.9		$	6.6		$	0.7		$	0.8		$	1.9	$	1.9
Interest cost		3.9			3.2			4.4			3.5			2.2		2.4
Expected return on plan assets		(8.6	)		(7.9	)		(4.8	)		(3.7	)		—		—
Amortization of prior service cost		0.2			—			—			—			0.3		0.2
Amortization of net loss		0.1			0.2			0.7			0.6			—		0.5

Net periodic benefit cost	$	3.5		$	2.1		$	1.0		$	1.2		$	4.4	$	5.0

NOTE 14. GUARANTEES

We sell certain products 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. We accrue amounts for estimated warranty claims based upon current and historical product sales data, warranty costs incurred and any other related information known to us.

The changes in the aggregate product warranty liabilities for the three months ended March 31, 2007 are as follows:


Balance as of December 31, 2006	$	22.6
Claims paid		(6.6	)
Additional warranties issued		2.4
Revisions in estimates of previously issued warranties		(1.0	)

Balance as of March 31, 2007	$	17.4

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

NOTE 15. 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 our comprehensive income (loss), net of related tax, are as follows:


	Three Months Ended
	March 31,
	2007			2006

Net income	$	374.7		$	339.2
Other comprehensive income (loss):
Foreign currency translation adjustments:
Translation adjustments during the period		6.3			1.9
Reclassifications included in net income due to sale of Baker SPD		—			(2.3	)
Pension and other postretirement benefits		(0.3	)		—

Total comprehensive income	$	380.7		$	338.8

Total accumulated other comprehensive loss consisted of the following:


	March 31,			December 31,
	2007			2006

Foreign currency translation adjustments	$	(54.0	)	$	(60.3	)
Pension and other postretirement benefits		(127.2	)		(126.9	)

Total accumulated other comprehensive loss	$	(181.2	)	$	(187.2	)

NOTE 16. SUBSEQUENT EVENT

On April 26, 2007, the United States District Court, Southern District of Texas, Houston Division (the “Court”) unsealed a three-count criminal information that had been filed against the Company as part of the execution of a Deferred Prosecution Agreement (the “DPA”) between us and the Department of Justice (“DOJ”). The three counts arise out of payments made to an agent in connection with a project in Kazakhstan and include conspiracy to violate the Foreign Corrupt Practices Act (“FCPA”), a substantive violation of the antibribery provisions of the FCPA, and a violation of the FCPA’s books-and-records provisions. All three counts relate to the Company’s operations in Kazakhstan during the period from 2000 to 2003. Although the Company did not plead guilty to that information, it faces prosecution under that information, and possibly under other charges as well, if it fails to comply with the terms of the DPA. Those terms include, for the two-year term of the DPA, full cooperation with the government; compliance with all federal criminal law, including but not limited to the FCPA; and adoption of a Compliance Code containing specific provisions intended to prevent violations of the FCPA. The DPA also requires the Company to retain an independent monitor for a term of three years to assess and make recommendations about our compliance policies and procedures and our implementation of those procedures. Provided that the Company complies with the DPA, the DOJ has agreed not to prosecute the Company for violations of the FCPA based on information that the Company has disclosed to the DOJ regarding its operations in Nigeria, Angola, Kazakhstan, Indonesia, Russia, Uzbekistan, Turkmenistan, and Azerbaijan, among other countries.

On the same date, the Court also accepted a plea of guilty by our subsidiary Baker Hughes Services International, Inc. (“BHSII”) pursuant to a plea agreement between BHSII and the DOJ (the “Plea Agreement”) based on similar charges relating to the same conduct. Pursuant to the Plea Agreement we have agreed to pay an $11 million penalty and a three-year term of organizational probation. The Plea Agreement contains provisions requiring BHSII to cooperate with the government, to comply with all federal criminal law, and to adopt a Compliance Code similar to the one that the DPA requires of the Company. Also on April 26, 2007, the Securities and Exchange Commission (“SEC”) filed a Complaint (the “SEC Complaint”) and a proposed order (the “SEC Order”) against the Company in the Court. The SEC Complaint and the SEC Order were filed as part of a settled civil enforcement action by the SEC, to resolve the civil portion of the government’s investigation of the Company. As part of its agreement with the SEC, the Company consented to the filing of the SEC Complaint without admitting or denying the allegations in the Complaint, and also consented to the entry of the SEC Order. The SEC Complaint alleges civil violations of the FCPA’s antibribery provisions related to the Company’s operations in Kazakhstan, the FCPA’s books-and-records and internal-controls provisions related to the Company’s operations in Nigeria, Angola, Kazakhstan, Indonesia, Russia, and Uzbekistan, and the SEC’s cease and desist order of September 12, 2001, which has been previously disclosed in our Annual Reports on Form 10-K. The SEC Order does not take effect until it is confirmed by the Court. If approved, it will permanently enjoin the Company from violating the FCPA’s antibribery, books-and-records, and internal-controls provisions. As in the DPA, it requires that the Company retain the independent monitor to assess its FCPA compliance policies and procedures for the three-year period.

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

Under the terms of the settlements with the SEC and the DOJ, the Company and BHSII agreed to pay $44.1 million ($11 million in criminal penalties, $10 million in civil penalties, $19.9 million in disgorgement of profits and $3.2 million in pre-judgment interest) to settle these investigations. In the fourth quarter of 2006, we recorded a financial charge for the potential settlement. The $44.1 million settlement will be paid in the second quarter of 2007.

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 our consolidated condensed financial statements and the related notes thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 2006.

EXECUTIVE SUMMARY

Organization

We are a leading provider of drilling, formation evaluation, completion and production products and services to the worldwide oil and natural gas industry. We report our results under two segments – Drilling and Evaluation and Completion and Production – which are aligned by product line based upon the types of products and services provided to our customers and upon the business characteristics of the divisions during business cycles.

	•		The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids (drilling fluids), Hughes Christensen (oilfield drill bits), INTEQ (drilling, measurement-while-drilling and logging-while-drilling) and Baker Atlas (wireline formation evaluation and wireline completion services) divisions. The Drilling and Evaluation segment provides products and services used to drill and evaluate oil and natural gas wells.

	•		The Completion and Production segment consists of the Baker Oil Tools (workover, fishing and completion equipment), Baker Petrolite (oilfield specialty chemicals) and Centrilift (electric submersible pumps and progressing cavity pumps) divisions. The Completion and Production segment also includes our ProductionQuest business unit. The Completion and Production segment provides equipment and services used from the completion phase through the productive life of oil and natural gas wells.

The WesternGeco segment consisted of our 30% interest in WesternGeco, a seismic venture jointly owned with Schlumberger Limited (“Schlumberger”). On April 28, 2006, we sold our 30% interest in WesternGeco to Schlumberger for $2.4 billion. We recorded a pre-tax gain of $1,743.5 million ($1,035.2 million, net of tax).

The business operations of our divisions are organized around four primary geographic regions: North America; Latin America; Middle East and Asia Pacific; and Europe, Africa, Russia and the Caspian. Each region has a council comprised of regional vice presidents from each division as well as representatives from various functions such as human resources, legal, marketing, finance and treasury, and health, safety and environmental. The regional vice presidents report directly to each division president. Through this structure, we have placed our management close to our customers, improving our customer relationships and allowing us to react more quickly to local market conditions and needs.

Our corporate headquarters are in Houston, Texas, and we have significant manufacturing operations in various countries, including, but not limited to, the United States (Texas, Oklahoma and Louisiana), the U.K. (Aberdeen, East Kilbride and Belfast), Germany (Celle), and Venezuela (Maracaibo). We operate in over 90 countries around the world and employ approximately 35,600 employees – of which approximately 55% work outside the U.S.

Results of Operations

In the first quarter of 2007, the Baker Hughes worldwide rig count continued to increase, as oil and natural gas companies around the world recognized the need to build productive capacity to meet the growing demand for hydrocarbons and to offset depletion of existing developed reserves. We reported revenues of $2,472.8 million for the first quarter of 2007, a 19.9% increase compared with the first quarter of 2006 outpacing the 5.1% increase in the worldwide average rig count. In addition to the growth in our revenues from increased activity, our revenues and net income were also impacted by pricing improvements and changes in market share in certain product lines and geographic areas. Income from continuing operations for the first quarter of 2007 was $374.7 million compared with $318.8 million in the first quarter of 2006.

	•		North America revenues increased 14.0% in the first quarter of 2007 compared with the first quarter of 2006, while the rig count increased 3.3% for the first quarter of 2007 compared with the first quarter of 2006.

	•		Latin America revenues increased 25.3% in the first quarter of 2007 compared with the first quarter of 2006, while the Latin America rig count was up 12.8%.

	•		Europe, Africa, Russia and the Caspian revenues increased 26.5% in the first quarter of 2007 compared with the first quarter of 2006, while the rig count decreased 8.5% in Europe and increased 29.4% in Africa. We do not count rigs in Russia or the Caspian.

	•		Middle East and Asia Pacific revenues were up 22.4% in the first quarter of 2007 compared with the first quarter of 2006. Revenue from the Middle East was up 29.5% while the rig count increased 20.6% and Asia Pacific revenue was up 15.6% while the rig count decreased 2.5%. We do not count rigs for onshore China.

BUSINESS ENVIRONMENT

Our business environment and its corresponding operating results are significantly affected by the level of energy industry spending for the exploration, development, and production of oil and natural gas reserves. Spending by oil and natural gas exploration and production companies is dependent upon their forecasts regarding the expected future supply and future demand for oil and natural gas products and their estimates of risk-adjusted costs to find, develop, and produce reserves. Changes in oil and natural gas exploration and production spending will normally result in increased or decreased demand for our products and services, which will be reflected in the rig count and other measures.

Oil and Natural Gas Prices

Oil (Bloomberg West Texas Intermediate (WTI) Cushing Crude Oil Spot Price) and natural gas (Bloomberg Henry Hub Natural Gas Spot Price) prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.


	Three Months Ended
	March 31,
	2007		2006

Oil prices ($/Bbl)	$	58.09	$	63.34
Natural gas prices ($/mmBtu)		7.19		7.66

Oil prices averaged $58.09/Bbl in the first quarter of 2007. Prices increased from a low of $50.30/Bbl in early January to a quarter high of $66.55/Bbl in late March. Oil prices continue to reflect strong worldwide demand, led by China, developing Asia and the U.S., as well as concerns about supply disruption which could result from geo-political events such as continued civil unrest in Nigeria, tensions in the Middle East and Iran’s nuclear program. Increased tensions regarding certain geo-political events and decreases in commercial inventories (resulting from the Organization of Petroleum Exporting Countries’ (“OPEC”) production cuts and rising demand) were the primary reasons that oil prices increased during the quarter. The International Energy Agency (“IEA”) estimated in its April 2007 Oil Market Report that worldwide excess productive capacity was 3.98 million barrels per day (“mbd”). The IEA also said that “a more realistic measure of effective spare capacity, excluding producers facing short-term challenges in boosting supply, was 3.01 mbd.” Spare capacity increased primarily as a result of OPEC’s production cuts. OPEC production was down 1.7 mbd in April 2007 compared to July 2006.

During the first quarter of 2007, natural gas prices averaged $7.19/mmBtu. Prices increased from $5.40/mmBtu at the beginning of the quarter to $9.07/mmBtu in early February before moderating to trade between approximately $6.75/mmBtu and $7.50/mmBtu during March. Following a warmer than normal start to the winter of 2006/2007, prices strengthened as colder than normal weather during the second half of January and February resulted in a significant storage withdrawal. The amount of storage at the end of the withdrawal season on March 23, 2007 was 1,511 Bcf, 21% ahead of the 5-year historic average but 11% below last year’s record high storage level.

Rig Counts

We have been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors or other outside sources. This data is then compiled and distributed to various wire services and trade associations and is published on our website. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international and U.S. workover rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian and onshore China, because this information cannot be readily obtained.

Rigs in the U.S. are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth, which may change from time to time and may vary from region to region, to be a potential consumer of our drill bits. Rigs in Canada are counted as active if data obtained by the Canadian Association

of Oilwell Drillers and Contractors indicates that drilling operations have occurred during the week and we are able to verify this information. In most international areas, rigs are counted as active if drilling operations have taken place for at least 15 days during the month. In some active international areas where better data is available, a weekly or daily average of active rigs is taken. In those international areas where there is poor availability of data, the rig counts are estimated from third party data. The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities, including production testing, completion and workover, or not significant consumers of drill bits.

Our rig counts are summarized in the table below as averages for each of the periods indicated.


	Three Months Ended
	March 31,
	2007		2006

U.S. – land and inland waters		1,651		1,441
U.S. – offshore		83		81
Canada		521		661

North America		2,255		2,183

Latin America		353		313
North Sea		47		53
Other Europe		28		29
Africa		66		51
Middle East		258		214
Asia Pacific		230		236

Outside North America		982		896

Worldwide		3,237		3,079


U.S. Workover Rigs		1,485		1,527

The U.S. – land and inland waters rig count increased 14.6% in the first quarter of 2007 compared with the first quarter of 2006 due to the increase in drilling for oil and natural gas. The U.S. – offshore rig count increased 2.5% in the first quarter of 2007 compared with the first quarter of 2006. The Canadian rig count was down 21.2% in the first quarter of 2007 compared with the first quarter of 2006 due to the negative impact of the repeal of certain drilling related tax credits in Canada and the impact of the spring break up which occurred approximately 2 weeks earlier than last year.

Outside North America, the rig count increased 9.6% in the first quarter of 2007 compared with the first quarter of 2006. The rig count in Latin America increased 12.8% in the first quarter of 2007 compared with the first quarter of 2006, with activity increases in Colombia, Brazil and Argentina. The North Sea rig count decreased 11.3% in the first quarter of 2007 compared with the first quarter of 2006 with the most significant declines in the U.K. and Norway. The rig count in Africa increased 29.4% in the first quarter of 2007 compared with the first quarter of 2006 driven by activity increases in Northern Africa (Algeria and Libya). Activity in the Middle East continued to rise steadily, with a 20.6% increase in the rig count in the first quarter of 2007 compared with the first quarter of 2006 driven primarily by activity increases in Saudi Arabia, Egypt and Oman. The rig count in the Asia Pacific region was down 2.5% in the first quarter of 2007 compared with the first quarter of 2006.

Worldwide Oil and Natural Gas Industry Outlook

This section should be read in conjunction with the factors described in “Part II, Item 1A. Risk Factors” and in the “Forward-Looking Statements” section in this Part I, Item 2, both contained herein. These factors could impact, either positively or negatively, our expectation for oil and natural gas demand, oil and natural gas prices and drilling activity.

Our outlook is based upon our expectations for customer spending. Our expectations for customer spending are in turn driven by our perception of industry expectations for energy prices and their likely impact on customer capital and operating budgets. Our forecasts are based on information provided by our customers as well as market research and analyst reports including the Short Term Energy Outlook (“STEO”) published by the Energy Information Administration of the U.S. Department of Energy (“DOE”), the Oil Market Report published by the IEA and the Monthly Oil Market Report published by OPEC.

Oil – In its April 2007 STEO, the DOE forecasted oil prices to average $64/Bbl in 2007. The DOE has forecasted a high case of approximately $75/Bbl and a low case of approximately $55/Bbl. The DOE expects oil prices to be within this case 95% of the time. While both inventories and spare productive capacity have increased recently, spare productive capacity, which buffers the market from supply disruptions, remains relatively low and is an indicator that supply and demand remain relatively tightly balanced. The

increase in spare productive capacity has been and will likely be driven by planned cuts in OPEC production which are aimed at supporting near-term oil prices while allowing for non-OPEC production increases.

We believe that the DOE’s forecasts are similar to the forecasts our customers are using to plan their current spending levels and, with prices averaging between $55/Bbl and $75/Bbl, our customers will continue to execute their capital budgets as planned. Our customers are more likely to reduce their capital budgets if the oil price were expected to trade below $55/Bbl for an extended period of time. The risks to oil prices falling significantly below $55/Bbl include (i) a significant economic recession in either the US and/or China; (ii) increases in Russian oil exports or non-OPEC production; (iii) any significant disruption to worldwide demand; (iv) reduced geo-political tensions; (v) poor OPEC Quota discipline; or (vi) other factors that result in spare productive capacity and higher oil inventory levels or decreased demand. If prices were to rise significantly above $75/Bbl there is a risk that the high energy price environment could destroy demand and significantly slow economic growth. If economic growth were to slow, our customers would likely decrease their capital spending from current levels. The primary risk of oil prices exceeding $75/Bbl is a supply disruption in a major oil exporting country including Iran, Saudi Arabia, Iraq, Venezuela, Nigeria or Norway.

Natural Gas – In its April 2007 STEO, the DOE forecasted that natural gas prices are expected to average $7.83/mmBtu in 2007 with monthly averages varying between $7.00/mmBtu and $9.00/mmBtu depending on seasonality. The DOE also publishes a high and low case and expects gas to trade between these two cases 95% of the time. The low case varies between $4.00/mmBtu and $6.00/mmBtu, depending on seasonality, and the high case varies between $10.00/mmBtu and $15.00/mmBtu, depending on seasonality. Prices are expected to remain volatile through 2007 with weather-driven demand and storage levels playing significant roles in determining prices.

If weather-dependent demand is strong enough to bring storage in-line with historical norms, we expect natural gas to trade in the upper half of the DOE’s forecast range. If weather-related demand is insufficient to bring storage in-line with historic norms, we believe that natural gas prices could approach the bottom of the DOE’s forecast range. Based on industry data regarding decline rates, we believe that a significant reduction in drilling activity would result in decreased production within one or two quarters helping to rebalance supply and demand quickly and prices would move from the bottom of the DOE’s range to the middle or top of the range. We believe that our customers’ forecasts are similar to the DOE’s and that they recognize that the long-term positive fundamentals for natural gas remain intact.

Customer Spending – Based upon our discussions with major customers, review of published industry reports and our outlook for oil and natural gas prices described above, anticipated customer spending trends are as follows:

	•		Outside North America – Customer spending, primarily directed at developing oil supplies, is expected to increase approximately 19% to 21% in 2007 compared with 2006.

	•		Assuming U.S. drilling activity for the remainder of 2007 remains flat with the first quarter of 2007, U.S. customer spending is expected to be up 7% compared to the year 2006.

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

	•		Drilling activity outside of North America is expected to increase approximately 9% to 11% in 2007 compared with 2006.

	•		Drilling activity in the U.S. is expected to increase approximately 4% in 2007 compared with 2006 assuming U.S. drilling activity for the remainder of 2007 remains flat with the first quarter of 2007.

	•		Drilling activity in Canada is expected to be down in 2007 compared with 2006.

For additional risk factors and cautions regarding forward-looking statements, see “Part II, Item 1A. Risk Factors” and the “Forward-Looking Statements” section in this Part I, Item 2, both contained herein. This list of risk factors is not intended to be all inclusive.

BUSINESS OUTLOOK

In our outlook for 2007, we took into account the factors described herein.

In 2006, 2005 and 2004, revenues outside North America were 55.7%, 57.6% and 58.5% of total revenues, respectively. In 2007, we expect revenues outside North America to increase approximately 19% to 21% compared with 2006, continuing the multi-year trend of growth in customer spending. Spending on large projects by National Oil Companies (“NOCs”) is expected to reflect established seasonality trends, resulting in softer revenues in the first half of the year and stronger revenues in the second half. In addition, customer spending could be affected by weather-related reductions. The Middle East, Africa and Latin America regions are expected to grow significantly in 2007 compared with 2006. Our expectations for spending and revenue growth could decrease if there are disruptions in key oil and natural gas production markets. Our assumptions regarding overall growth in customer spending outside of North America assume strong economic growth in the United States, China and the balance of the world outside of North America, resulting in an average oil price exceeding $55/Bbl.

In 2006, 2005 and 2004, revenues in North America were 44.3%, 42.4%, and 41.5% of total revenues, respectively. Assuming U.S. drilling activity for the remainder of 2007 remains flat with the first quarter of 2007, U.S. revenue is expected to be up 7% compared to the year 2006. Canadian revenues are expected to be down in 2007 compared with 2006. Customer spending growth and therefore revenue growth in 2007 is highly uncertain given its dependence on the impact of weather-driven events and their impact on supply, demand and natural gas storage levels.

In 2006, WesternGeco contributed $58.7 million of equity in income of affiliates compared with $96.7 million of equity in income of affiliates in 2005. We sold our 30% interest in WesternGeco in April of 2006.

Other factors that could have a significant positive impact on profitability include: increasing prices for our products and services; lower than expected raw material and labor costs; and/or higher than planned activity. Conversely, less than expected price increases or price deterioration, higher than expected raw material and labor costs and/or lower than expected activity would have a negative impact on profitability. Our ability to improve pricing is dependent on demand for our products and services and our competitors’ strategies of managing capacity. While the commercial introduction of new technology is an important factor in realizing pricing improvement, without capital discipline throughout the industry as a whole, meaningful improvements in our prices are not likely to be realized.

We do business in approximately 90 countries including over one-half of the 30 countries having the lowest scores, which indicates high levels of corruption, in Transparency International’s Corruption Perception Index (“CPI”) survey for 2006. We devote significant resources to the development, maintenance and enforcement of our Business Code of Conduct policy, our Foreign Corrupt Practices Act (“FCPA”) policy, our internal control processes and procedures and other compliance related policies. Notwithstanding the devotion of such resources, and in part as a consequence thereof, from time to time we discover or receive information alleging potential violations of laws and regulations, including the FCPA and our policies, processes and procedures. We conduct internal investigations of these potential violations and take appropriate action depending upon the outcome of the investigation. In addition, in April 2007, we entered into agreements with the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) that require us to appoint an independent monitor for three years to assess whether our policies and procedures are reasonably designed to detect and prevent violations of the FCPA, all applicable U.S. commercial bribery laws, and all applicable foreign bribery laws, by reviewing the controls, policies and procedures of the Company and its affiliates and subsidiaries. We anticipate that the monitor will be appointed during the second quarter of 2007. See “Part II, Item 1. Legal Proceedings” contained herein for additional information.

We anticipate that the devotion of significant resources to compliance related issues, including the necessity for investigations, will continue to be an aspect of doing business in a number of the countries in which oil and natural gas exploration, development and production take place and in which we are requested to conduct operations. Compliance related issues and the activities of the independent monitor could limit our ability to do business in these countries. In order to provide products and services in some of these countries, we may in the future utilize ventures with third parties, sell products to distributors or otherwise modify our business approach in order to improve our ability to conduct our business in accordance with laws and regulations and our Business Code of Conduct.

DISCONTINUED OPERATIONS

RESULTS OF OPERATIONS

The discussions below relating to significant line items from our consolidated condensed statements of operations are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items. The discussions are based on our consolidated financial results, as individual segments do not contribute disproportionately to our revenues, profitability or cash requirements. In addition, the discussions below for revenues and cost of revenues are on a combined basis as the business drivers for the individual components of product sales and services and rentals are similar.

The table below details certain consolidated condensed statement of operations data and their percentage of revenues for the three months ended March 31, 2007 and 2006, respectively.


	Three Months Ended March 31,
	2007				2006

Revenues	$	2,472.8	100.0	%	$	2,062.0	100.0	%
Cost of revenues		1,483.8	60.0	%		1,271.1	61.6	%
Research and engineering		91.6	3.7	%		78.4	3.8	%
Selling, general and administrative		337.2	13.6	%		272.1	13.2	%

Revenues

Revenues for the three months ended March 31, 2007 increased 19.9% compared with the three months ended March 31, 2006, primarily due to increases in activity, as evidenced by a 5.1% increase in the worldwide rig count, pricing improvements of between 5% and 6%, and changes in market share in selected product lines and geographic areas. Revenues in North America, which accounted for 43.4% of total revenues, increased 14.0% for the three months ended March 31, 2007 compared with the three months ended March 31, 2006. This increase is primarily due to (i) increased land-based drilling activity for natural gas in the U.S., as evidenced by the 14.6% increase in the U.S. – land and inland waters rig count for the first quarter of 2007 compared with the first quarter of 2006 offset partially by decreased drilling activity in Canada, and (ii) pricing improvements. Revenues outside North America, which accounted for 56.6% of total revenues, increased 24.9% for the three months ended March 31, 2007 compared with the three months ended March 31, 2006. This increase reflects the improvement in international drilling activity, as evidenced by the 9.6% increase in the rig count outside North America, particularly in Latin America, the Middle East and Africa, pricing improvements and increases in market share in certain product lines and within all three regions outside North America.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2007 increased 16.7% compared with the three months ended March 31, 2006. Cost of revenues as a percentage of consolidated revenues was 60.0% and 61.6% for the three months ended March 31, 2007 and 2006, respectively. The decrease in cost of revenues as a percentage of consolidated revenues was primarily the result of overall average price increases of between 5% and 6% and continued high utilization of our rental tool fleet and personnel. The increase was partially offset by higher raw material costs and employee compensation costs. Additionally, effective January 1, 2007, we increased the depreciable lives of certain assets of our Baker Atlas division resulting in a reduction to cost of services and rentals of approximately $6.0 million for the three months ended March 31, 2007.

Research and Engineering

Research and engineering expenses increased 16.8% for the three months ended March 31, 2007 compared with the three months ended March 31, 2006. The increase reflects our continued commitment to developing and commercializing new technologies as well as investing in our core product offerings.

Selling, General and Administrative

Selling, general and administrative expenses increased 23.9% for the three months ended March 31, 2007 compared with the three months ended March 31, 2006. The increase corresponds with increased activity and resulted primarily from higher employee related costs including compensation, training and benefits, as well as higher marketing expenses as a result of increased activity.

Equity in Income of Affiliates

Equity in income of affiliates decreased $48.0 million for the three months ended March 31, 2007 compared with the three months ended March 31, 2006 due to the sale of our 30% interest in WesternGeco in April 2006.

Interest and Dividend Income

Interest and dividend income increased $4.2 million for the three months ended March 31, 2007 compared with the three months ended March 31, 2006. The increase was primarily due to higher average cash balances as well as higher interest rates.

Income Taxes

Our effective tax rate is lower than the U.S. statutory income tax rate of 35% due to lower rates of tax on certain international operations offset by state income taxes.

Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. We believe we have substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. However, resolution of these matters involves uncertainties and there are no assurances that the outcomes will be favorable.

LIQUIDITY AND CAPITAL RESOURCES

Our objective in financing our business is to maintain adequate financial resources and access to additional liquidity. During the three months ended March 31, 2007, cash flows from operations were the principal sources of funding. We anticipate that cash flows from operations will be sufficient to fund our liquidity needs in 2007. We also have a $500.0 million committed revolving credit facility that provides back-up liquidity in the event an unanticipated and significant demand on cash flows could not be funded by operations.

Our capital planning process is focused on utilizing cash flows generated from operations in ways that enhance the value of our company. During the three months ended March 31, 2007, we used cash for a variety of activities including working capital needs, payment of dividends and capital expenditures.

Cash Flows

Cash flows provided (used) by continuing operations by type of activity were as follows for the three months ended March 31:


	2007			2006

Operating activities	$	55.7		$	109.3
Investing activities		(56.0	)		(146.4	)
Financing activities		(30.1	)		(102.5	)

Statements of cash flows for entities with international operations that are local currency functional exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are noncash charges. As a result, changes reflected in certain accounts on the consolidated condensed statements of cash flows may not reflect the changes in corresponding accounts on the consolidated condensed balance sheets.

Operating Activities

Cash flows from operating activities of continuing operations provided $55.7 million in the three months ended March 31, 2007 compared with $109.3 million in the three months ended March 31, 2006. This decrease in cash flows of $53.6 million is primarily due to an increase in income from continuing operations more than offset by a change in net operating assets and liabilities that used cash flows.

The underlying drivers of the changes in operating assets and liabilities are as follows:

	•		An increase in accounts receivable in the first quarter of 2007 used $201.3 million in cash compared with using $77.1 million in cash in the first quarter of 2006. This increase was primarily due to the increase in revenues and an increase in days sales outstanding (defined as the average number of days our net trade receivables are outstanding based on quarterly revenues) of approximately four days.

	•		A build up of inventory in anticipation of and related to increased activity used $126.6 million in cash in the first quarter of 2007 compared with using $79.9 million in cash in the first quarter of 2006.

	•		Accrued employee compensation and other accrued liabilities used $228.3 million in cash in the first quarter of 2007 compared with using $195.6 million in cash in the first quarter of 2006. The primary use of cash in each quarter is for the annual payment of employee bonuses that are made in March of each year.

	•		Income taxes payable provided $161.3 million in cash in the first quarter of 2007 compared to providing $44.5 million in cash in the first quarter of 2006. The increase was primarily due to an income tax refund in the U.S. of $78.0 million received in the first quarter of 2007.

Investing Activities

Our principal recurring investing activity is the funding of capital expenditures to ensure that we have the appropriate levels and types of rental tools in place to generate revenues from operations. Expenditures for capital assets totaled $262.0 million and $159.1 million for the three months ended March 31, 2007 and 2006, respectively. The majority of these expenditures were for rental tools and machinery and equipment, including wireline equipment.

During the three months ended March 31, 2007, we purchased $864.3 million of and received proceeds of $1,020.6 million from maturing auction rate securities, which are highly liquid, variable-rate debt securities. While the underlying security has a long-term maturity, the interest rate is reset through Dutch auctions that are typically held every 7, 28 or 35 days, creating short-term liquidity. These short-term investments are classified as available-for-sale securities and are recorded at cost, which approximates market value.

In the first quarter of 2006, we acquired Nova Technology Corporation (“Nova”) for $55.4 million, net of cash acquired of $3.0 million, plus assumed debt. As a result of the acquisition, we recorded $29.7 million of goodwill and $24.3 million of intangible assets. We also assigned $2.6 million to in-process research and development that was written off at the date of acquisition.

Proceeds from the disposal of assets were $49.7 million and $28.7 million for the three months ended March 31, 2007 and 2006, respectively. These disposals relate to rental tools that were lost-in-hole, as well as machinery, rental tools and equipment no longer used in operations that were sold throughout the period.

In March 2006, we completed the sale of Baker SPD and received $42.5 million in proceeds, and we received $3.8 million from the release of the remaining amount held in escrow related to our sale of Petreco International.

Financing Activities

We had net borrowings of short-term debt of $7.4 million and net repayments of $3.0 million in the three months ended March 31, 2007 and 2006, respectively. Total debt outstanding at March 31, 2007 was $1,081.3 million, an increase of $6.2 million

compared with December 31, 2006. The total debt to total capitalization (defined as total debt plus stockholders’ equity) ratios were 0.16 at March 31, 2007 and 0.17 at December 31, 2006.

We received proceeds of $4.0 million and $29.4 million in the three months ended March 31, 2007 and 2006, respectively, from the issuance of common stock from the exercise of stock options.

In April 2006, the Board of Directors authorized the repurchase of $1.8 billion of common stock which was in addition to the balance remaining from the Board of Directors’ previous authorizations. We did not repurchase any shares during the three months ended March 31, 2007. During the three months ended March 31, 2006, we repurchased 1.3 million shares of our common stock at an average price of $67.41 per share for a total of $90.7 million. At March 31, 2007, we had authorization remaining to repurchase up to a total of $345.5 million of our common stock.

We paid dividends of $41.5 million and $44.4 million in the three months ended March 31, 2007 and 2006, respectively.

Available Credit Facilities

At March 31, 2007, we had $993.3 million of credit facilities with commercial banks, of which $500.0 million is a committed revolving credit facility (the “facility”) which expires in July 2011. The facility provides for up to two one-year extensions, subject to the approval and acceptance by the lenders, among other conditions. In addition, the facility contains a provision to allow for an increase in the facility amount of an additional $500.0 million, subject to the approval and acceptance by the lenders, among other conditions. The facility contains certain covenants which, among other things, require the maintenance of a funded indebtedness to total capitalization ratio (a defined formula per the facility) of less than or equal to 0.60, restrict certain merger transactions or the sale of all or substantially all of the assets of the company or a significant subsidiary and limit the amount of subsidiary indebtedness. Upon the occurrence of certain events of default, our obligations under the facility may be accelerated. Such events of default include payment defaults to lenders under the facility, covenant defaults and other customary defaults. At March 31, 2007, we were in compliance with all of the facility covenants. There were no direct borrowings under the facility during the quarter ended March 31, 2007; however, to the extent we have outstanding commercial paper, our ability to borrow under the facility is reduced. At March 31, 2007, we had no outstanding commercial paper.

If market conditions were to change and revenues were to be significantly reduced or operating costs were to increase, our cash flows and liquidity could be reduced. Additionally, it could cause the rating agencies to lower our credit rating. We do not have any ratings triggers in the facility that would accelerate the maturity of any borrowings under the facility. However, a downgrade in our credit ratings could increase the cost of borrowings under the facility and could also limit or preclude our ability to issue commercial paper. Should this occur, we would seek alternative sources of funding, including borrowing under the facility.

We believe our credit ratings and relationships with major commercial and investment banks would allow us to obtain interim financing over and above our existing credit facilities for any currently unforeseen significant needs or growth opportunities. We also believe that such interim financings could be funded with subsequent issuances of long-term debt or equity, if necessary.

Cash Requirements

In 2007, we believe operating cash flows will provide us with sufficient capital resources and liquidity to manage our working capital needs, meet contractual obligations, fund capital expenditures, pay dividends, repurchase common stock and support the development of our short-term and long-term operating strategies.

In 2007, we expect capital expenditures to be between $1.0 billion and $1.2 billion, excluding acquisitions. The expenditures are expected to be used primarily for normal, recurring items necessary to support the growth of our business and operations.

In 2007, we expect to make interest payments of between $73.0 million and $75.0 million. This is based on our current expectations of debt levels during 2007.

We anticipate making income tax payments of between $875.0 million and $925.0 million in 2007.

As of March 31, 2007, we have authorization remaining to repurchase up to $345.5 million in common stock. We may repurchase our common stock depending on market conditions, applicable legal requirements, our liquidity and other considerations. We anticipate paying dividends of between $165.0 million and $170.0 million in 2007; however, the Board of Directors can change the dividend policy at anytime.

In the U.S., we merged two defined benefit pension plans effective January 1, 2007, resulting in one tax-qualified U.S. pension plan, the Baker Hughes Incorporated Pension Plan (“BHIPP”). As a result of the merger of these plans, BHIPP is overfunded; therefore, we are not required nor do we intend to make pension contributions to BHIPP in 2007, and we currently estimate that we will not be required to make contributions to BHIPP for five to eight years thereafter. In 2007, we estimate we will contribute between $28.0 million and $33.0 million to our other defined benefit pension plans and our postretirement welfare plans, and between $115.0 million and $125.0 million to our defined contribution plans.

Other than previously discussed, we do not believe there are any other material trends, demands, commitments, events or uncertainties that would have, or are reasonably likely to have, a material impact on our financial condition and liquidity. Other than previously discussed, we currently have no information that would create a reasonable likelihood that the reported levels of revenues and cash flows from operations for the three months ended March 31, 2007 are not indicative of what we can expect in the near term.

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as letters of credit and other bank issued guarantees, which totaled approximately $381.8 million at March 31, 2007. None of these off-balance sheet arrangements either has, or is likely to have, a material effect on our current or future financial condition, results of operations, liquidity or capital resources. Other than normal operating leases, we do not have any off-balance sheet financing arrangements such as securitization agreements, liquidity trust vehicles, synthetic leases or special purpose entities. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.

NEW ACCOUNTING STANDARDS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 . FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the tax benefit from an uncertain tax position is to be recognized when it is more likely than not, based on the technical merits of the position, that the position will be sustained on examination by the taxing authorities. Additionally, the amount of the tax benefit to be recognized is the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and financial statement disclosures. We adopted FIN 48 on January 1, 2007 and recorded a reduction to beginning retained earnings of $64.2 million and recognized a $78.5 million increase in the gross liability for unrecognized tax benefits, which included $17.3 million of interest and penalties. As a result of the implementation of FIN 48, we recognized the following adjustments to our accounts.


	Increase
	(Decrease)

Beginning retained earnings	$	(64.2	)
Deferred tax assets		(0.6	)
Non-current tax receivables		14.9
Tax liabilities		78.5

In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1 (“FSP AUG AIR-1”), which addresses the accounting for planned major maintenance activities. FSP AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. We adopted FSP AUG AIR-1 on January 1, 2007 to change our method of accounting for repairs and maintenance activities on certain rental tools from the accrue-in-advance method to the direct expense method. The adoption resulted in the reversal of a $34.2 million accrued liability for future repairs and maintenance costs and the recording of an income tax liability of $9.0 million. The net impact of $25.2 million has been recorded as an increase to beginning retained earnings as of January 1, 2007. We did not restate any prior periods as the impact was not material to our financial statements.

entities to measure eligible assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS 159 on January 1, 2008, and have not yet determined the impact, if any, on our consolidated condensed financial statements.

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,” “ensure,” “expect,” “if,” “intend,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “would,” “may,” “likely” and similar expressions, and the negative thereof, are intended to identify forward-looking statements. Our forward-looking statements are based on assumptions that we believe to be reasonable but that may not prove to be accurate. The statements do not include the potential impact of future transactions, such as an acquisition, disposition, merger, joint venture or other transaction that could occur. We undertake no obligation to publicly update or revise any forward-looking statement. Our expectations regarding our business outlook, including changes in revenue, pricing, expenses, capital spending, backlogs, profitability, tax rates, strategies for our operations, impact of our common stock repurchases, oil and natural gas market conditions, market share and contract terms, costs and availability of resources, economic and regulatory conditions, and environmental matters are only our forecasts regarding these matters.

All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors identified in “Part II, Item 1A. Risk Factors” section contained herein, as well as the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, this filing and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”). These documents are available through our web site or through the SEC’s Electronic Data Gathering and Analysis Retrieval System (“EDGAR”) at http://www.sec.gov .

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We conduct operations around the world in a number of different currencies. The majority of our 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 our functional currencies. To minimize the need for foreign currency forward contracts to hedge this exposure, our objective is to manage foreign currency exposure by maintaining a minimal consolidated net asset or net liability position in a currency other than the functional currency.

Foreign Currency Forward Contracts

The counterparties to the 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, our exposure is limited to the foreign currency rate differential.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 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 our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that, as of March 31, 2007, our disclosure controls and procedures are effective at a reasonable assurance level in ensuring that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms. There has been no change in our internal controls

over financial reporting during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit 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 us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On March 29, 2002, we announced that we had been advised that the SEC and the DOJ were conducting investigations into allegations of violations of law relating to Nigeria and other related matters. The SEC issued a formal order of investigation into possible violations of provisions under the Foreign Corrupt Practices Act (“FCPA”) regarding antibribery, books and records and internal controls. In connection with the investigations, the SEC issued subpoenas seeking information about our operations in Angola (subpoena dated August 6, 2003) and Kazakhstan (subpoenas dated August 6, 2003 and April 22, 2005) as part of its ongoing investigation. We have provided documents to and cooperated fully with the SEC and DOJ. In addition, we have conducted internal investigations into these matters. Our internal investigations identified issues regarding the propriety of certain payments and apparent deficiencies in our books and records and internal controls with respect to certain operations in Angola, Kazakhstan and Nigeria, as well as potential liabilities to government authorities in Nigeria. Evidence obtained during the course of the investigations has been provided to the SEC and DOJ.

On April 26, 2007, the United States District Court, Southern District of Texas, Houston Division (the “Court”) unsealed a three-count criminal information that had been filed against the Company as part of the execution of a Deferred Prosecution Agreement (the “DPA”) between us and the DOJ. The three counts arise out of payments made to an agent in connection with a project in Kazakhstan and include conspiracy to violate the FCPA, a substantive violation of the antibribery provisions of the FCPA, and a violation of the FCPA’s books-and-records provisions. All three counts relate to the Company’s operations in Kazakhstan during the period from 2000 to 2003. Although the Company did not plead guilty to that information, it faces prosecution under that information, and possibly under other charges as well, if it fails to comply with the terms of the DPA. Those terms include, for the two-year term of the DPA, full cooperation with the government; compliance with all federal criminal law, including but not limited to the FCPA; and adoption of a Compliance Code containing specific provisions intended to prevent violations of the FCPA. The DPA also requires the Company to retain an independent monitor for a term of three years to assess and make recommendations about the Company’s compliance policies and procedures and our implementation of those procedures. Provided that the Company complies with the DPA, the DOJ has agreed not to prosecute the Company for violations of the FCPA based on information that the Company has disclosed to the DOJ regarding its operations in Nigeria, Angola, Kazakhstan, Indonesia, Russia, Uzbekistan, Turkmenistan, and Azerbaijan, among other countries.

Also on April 26, 2007, the SEC filed a Complaint (the “SEC Complaint”) and a proposed order (the “SEC Order”) against the Company in the Court. The SEC Complaint and the SEC Order were filed as part of a settled civil enforcement action by the SEC, to resolve the civil portion of the government’s investigation of the Company. As part of its agreement with the SEC, the Company consented to the filing of the SEC Complaint without admitting or denying the allegations in the Complaint, and also consented to the entry of the SEC Order. The SEC Complaint alleges civil violations of the FCPA’s antibribery provisions related to the Company’s operations in Kazakhstan, the FCPA’s books-and-records and internal-controls provisions related to the Company’s operations in Nigeria, Angola, Kazakhstan, Indonesia, Russia, and Uzbekistan, and the SEC’s cease and desist order of September 12, 2001, which has been previously disclosed in our Annual Reports on Form 10-K. The SEC Order does not take effect until it is confirmed by the Court. If approved, it will permanently enjoin the Company from violating the FCPA’s antibribery, books-and-records, and internal-controls provisions. As in the DPA, it requires that the Company retain the independent monitor to assess its FCPA compliance policies and procedures for the three-year period.

For additional information see, “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Outlook” and “Item 5 - Other Information” of this Form 10-Q. Reference is also made to Item 3 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Annual Report”) for additional discussion of legal proceedings.

ITEM 1A. RISK FACTORS

As of the date of this filing, there have been no changes from the risk factors previously disclosed in our “Risk Factors” in the 2006 Annual Report except as set forth below:

The terms and the impact of the settlement with the DOJ and SEC may negatively impact our ongoing operations .

Under the settlements with the DOJ and SEC we are subject to ongoing review and regulation of our business operations, including the review of our operations and compliance program by a government approved independent monitor. The activities of the independent monitor will have a cost to us and may cause a change in our processes and operations, the outcome of which we are unable to predict. In addition, the settlements may impact our operations or result in legal actions against us in the countries that are the subject of the settlements. Also, the collateral impact of settlement in the United States and other countries outside the United States where we do business that may claim jurisdiction over any of the matters related to the DOJ and SEC investigations could be material. These settlements could also result in third-party claims against us, which may include claims for special, indirect, derivative or consequential damages.

Our failure to comply with the terms of our agreements with the DOJ and SEC will have a negative impact on our ongoing operations.

Under the settlements with the DOJ and SEC, we are subject to a two-year deferred prosecution agreement and enjoined by the federal district court against any further violations of the FCPA. Accordingly, the settlements reached with the DOJ and SEC could be substantially nullified and we could be subject to severe sanctions and civil and criminal prosecution as well as fines and penalties in the event of a subsequent violation by us or any of our employees or our failure to meet all of the conditions contained in the settlements. Our ability to comply with the terms of the settlements is dependent on the success of our ongoing compliance program, including our ability to continue to manage our agents and business partners and supervise, train and retain competent employees and the efforts of our employees to comply with applicable law and the Baker Hughes Business Code of Conduct.

An investment in our common stock involves various risks. When considering an investment in our company, you should consider carefully all of the risk factors described in our 2006 Annual Report and subsequent filings with the SEC as well as the risk factors described in this Form 10-Q. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in our Company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table contains information about our purchases of equity securities during the three months ended March 31, 2007.

Issuer Purchases of Equity Securities


					Total						Maximum
					Number of						Number (or
					Shares				Total		Approximate
					Purchased				Number of		Dollar Value) of
					as Part of a				Shares		Shares that May
			Average		Publicly		Average		Purchased		Yet Be
	Total Mumber of		Price Paid		Announced		Price Paid		in the		Purchased Under
Period	Shares Purchased ⁽¹⁾		Per Share ⁽¹⁾		Program		Per Share		Aggregate		the Program ⁽²⁾

January 1-31, 2007		74,058	$	68.78		—	$	—		74,058	$	—
February 1-28, 2007		2,516		64.57		—		—		2,516		—
March 1-31, 2007		—		—		—		—		—		—

Total		76,574	$	68.64		—	$	—		76,574	$	345,500,000


⁽¹⁾		Represents shares purchased from employees to pay the option exercise price related to stock-for-stock exchanges in option exercises or to satisfy the tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock units.

⁽²⁾		In April 2006, the Board of Directors authorized the repurchase of an additional $1.8 billion of common stock, which was in addition to the balance remaining from the Board of Directors’ previous authorization. At March 31, 2007, we had authorization remaining to repurchase up to a total of $345.5 million of our common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

Our Annual Meeting of Stockholders was held on April 26, 2007 (i) to elect twelve members of the Board of Directors to serve for one-year terms, (ii) to ratify Deloitte & Touche LLP as our Independent Auditor for 2007 and (iii) to approve an amendment to the Company’s Restated Certificate of Incorporation to adopt simple majority voting provisions. Following are the final results of the Annual Meeting.

The directors who were elected are Larry D. Brady, Clarence P. Cazalot, Jr., Chad C. Deaton, Edward P. Djerejian, Anthony G. Fernandes, Claire W. Gargalli, Pierre H. Jungels, James A. Lash, James F. McCall, J. Larry Nichols, H. John Riley, Jr., and Charles L. Watson.


	Number of		Number of
	Affirmative		Votes
Names	Votes		Withheld

Larry D. Brady		283,498,387		5,054,057
Clarence P. Cazalot, Jr.		284,934,750		3,617,694
Chad C. Deaton		281,571,283		6,981,161
Edward P. Djerejian		284,865,147		3,687,297
Anthony G. Fernandes		284,886,921		3,665,523
Claire W. Gargalli		284,638,171		3,914,273
Pierre H. Jungels		280,891,864		7,660,580
James A. Lash		284,922,578		3,629,866
James F. McCall		282,456,424		6,096,020
J. Larry Nichols		284,883,653		3,668,791
H. John Riley, Jr.		284,938,782		3,613,662
Charles L. Watson		281,653,922		6,898,522

The number of affirmative votes, the number of negative votes and the number of abstentions with respect to the ratification of Deloitte & Touche LLP as Independent Auditor for 2007 was as follows:


Number of	Number of
Affirmative	Negative
Votes	Votes		Abstentions
283,892,970		2,929,692		1,729,480

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 to the Company’s Restated Certificate of Incorporation adopting simple majority voting was as follows:

Number of

Affirmative

Negative

Broker

Votes

Abstentions

Non-Votes

282,396,136

440,708

1,932,221

35,481,823

ITEM 5. OTHER INFORMATION

The following events occurred subsequent to the quarterly period covered by this Form 10-Q and are reportable under Form 8-K:

Item 1.01 Entry into a Material Definitive Agreement.

On April 26, 2007 the Company entered into an Agreement of Resignation, Appointment and Acceptance by and among Citibank, N.A. and The Bank of New York Trust Company, N.A (“BNYTC”) effective as of May 1, 2007 (the “Agreement”). Pursuant to the terms of the Agreement, BNYTC will replace Citibank, N.A. as trustee under the Company’s Indenture dated May 15, 1991. A copy of the Agreement is attached hereto as Exhibit 10.1.

On April 26, 2007, the United States District Court, Southern District of Texas, Houston Division (the “Court”) unsealed a three-count criminal information that had been filed against the Company as part of the execution of a Deferred Prosecution Agreement (the “DPA”) between us and the DOJ. The three counts include conspiracy to violate the FCPA, a substantive violation of the antibribery provisions of the FCPA, and a violation of the FCPA’s books-and-records provisions. All three counts relate to the Company’s operations in Kazakhstan during the period from 2000 to 2003. On the same day, the Court also accepted a plea of guilty by our subsidiary BHSII pursuant to a plea agreement between BHSII and the DOJ (the “Plea Agreement”) based on similar charges relating to the same conduct. Also on April 26, 2007, the SEC filed a Complaint (the “SEC Complaint”) and a proposed order (the “SEC Order”) against the Company in the Court. The SEC Complaint and the SEC Order were filed as part of a settled civil enforcement action by the SEC, to resolve the civil portion of the government’s investigation of the Company. As part of its agreement with the SEC, the Company consented to the filing of the SEC Complaint without admitting or denying the allegations in the Complaint, and also consented to the entry of the SEC Order. For further information regarding the settlements, including a description of the material terms and conditions, see “Item 1. Legal Proceedings” in this report on Form 10-Q.

A copy of the: (i) Deferred Prosecution Agreement entered into between the Company and the DOJ is attached hereto as Exhibit 10.4; (ii) Baker Hughes Incorporated Information document is attached hereto as Exhibit 99.1; (iii) Plea Agreement entered into between Baker Hughes Services International, Inc. and the DOJ is attached hereto as Exhibit 10.5; (iv) Baker Hughes Services International, Inc. Information document is attached hereto as Exhibit 99.2; (v) Sentencing Memorandum and Motion for Waiver of Pre-Sentence Investigation of Baker Hughes Services International, Inc. is attached hereto as Exhibit 99.3; (vi) Baker Hughes Services International, Inc. Sentencing Letter is attached hereto as Exhibit 99.4; and (vii) the SEC Complaint is attached hereto as Exhibit 99.5. A copy of the news release dated April 26, 2007 by the Company regarding the settlement of the FCPA investigation is attached hereto as Exhibit 99.6. Exhibits 10.4 and 10.5 and 99.1 through 99.6 are each incorporated herein by reference.

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

On April 26, 2007, the Company filed in Delaware a Certificate of Amendment to its Restated Certificate of Incorporation adopting simple majority vote provisions. A copy of the Certificate of Amendment and the Restated Certificate of Incorporation are attached hereto as Exhibit 3.1.

On April 26, 2007, the Board of Directors of the Company amended and restated the Company’s Bylaws to eliminate all supermajority voting provisions. A copy of the Restated Bylaws is attached hereto as Exhibit 3.2.

Item 8.01 Other Events.

	a.		Following our Annual Meeting of Stockholders held on April 26, 2007, our Board of Directors held a meeting at which it appointed the members and chairmen for the Board’s five standing committees. The composition of each committee is as follows:

			Executive Committee — Messrs. Deaton (Chairman), Cazalot, Riley and Watson.

			Audit/Ethics Committee — Messrs. McCall (Chairman), Brady, Cazalot, Fernandes, Lash and Nichols.

			Governance Committee — Messrs. Cazalot (Chairman), Djerejian, McCall, Riley and Watson.

			Finance Committee — Messrs. Fernandes (Chairman), Brady, Jungels, Lash, Watson and Ms. Gargalli.

			Compensation Committee — Messrs. Riley (Chairman), Djerejian, Jungels, Nichols and Ms. Gargalli.

ITEM 6. EXHIBITS

	3.1		Certificate of Amendment dated April 26, 2007 and the Restated Certificate of Incorporation.

	3.2		Bylaws of Baker Hughes Incorporated restated as of April 26, 2007.

	10.1		Agreement of Resignation, Appointment and Acceptance by and among Baker Hughes Incorporated, Citibank, N.A. and The Bank of New York Trust Company, N.A. dated as of April 26, 2007, effective as of May 1, 2007.

	10.2		Form of Indemnification Agreement between Baker Hughes Incorporated and Stephen K. Ellison dated as of May 1, 2007 (filed as Exhibit 10.4 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2003).

	10.3		Form of Change in Control Severance Agreement between Baker Hughes Incorporated and Stephen K. Ellison dated as of May 1, 2007 (filed as Exhibit 10.8 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended September 30, 2004).

	10.4		Deferred Prosecution Agreement between Baker Hughes Incorporated and the United States Department of Justice filed on April 26, 2007 with the United States District Court of Texas, Houston Division.

	10.5		Plea Agreement between Baker Hughes Services International, Inc. and the United States Department of Justice filed on April 26, 2007 with the United States District Court of Texas, Houston Division.

	31.1		Certification of Chad C. Deaton, Chief Executive Officer, dated May 1, 2007, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

	31.2		Certification of Peter A. Ragauss, Chief Financial Officer, dated May 1, 2007, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

	32		Statement of Chad C. Deaton, Chief Executive Officer, and Peter A. Ragauss, dated May 1, 2007, furnished pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

	99.1		Baker Hughes Incorporated Information document filed on April 26, 2007 by the United States Attorney’s Office for the Southern District of Texas and the United States Department of Justice.


	99.2		Baker Hughes Services International, Inc. Information document filed on April 26, 2007 by the United States Attorney’s Office for the Southern District of Texas and the United States Department of Justice.

	99.3		Sentencing Memorandum and Motion for Waiver of Pre-Sentence Investigation of Baker Hughes Services International, Inc.

	99.4		Baker Hughes Services International, Inc. Sentencing Letter from the United States Department of Justice dated April 24, 2007.

	99.5		The Complaint by the Securities and Exchange Commission v. Baker Hughes Incorporated filed on April 26, 2007 with the United States District Court of Texas, Houston Division.

	99.6		News Release dated April 26, 2007 regarding the settlement of the FCPA investigation.

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 1, 2007		By: /s/ PETER A. RAGAUSS

		Peter A. Ragauss Senior Vice President and Chief Financial Officer

Date: May 1, 2007		By: /s/ ALAN J. KEIFER

		Alan J. Keifer
		Vice President and Controller

EXHIBIT INDEX


EXHIBITS		DESCRIPTION OF EXHIBITS

3.1		Certificate of Amendment dated April 26, 2007 and the Restated Certificate of Incorporation.

3.2		Bylaws of Baker Hughes Incorporated restated as of April 26, 2007.

10.1		Agreement of Resignation, Appointment and Acceptance by and among Baker Hughes Incorporated, Citibank, N.A. and The Bank of New York Trust Company, N.A. dated as of April 26, 2007, effective as of May 1, 2007.

10.2		Form of Indemnification Agreement between Baker Hughes Incorporated and Stephen K. Ellison dated as of May 1, 2007 (filed as Exhibit 10.4 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2003).

10.3		Form of Change in Control Severance Agreement between Baker Hughes Incorporated and Stephen K. Ellison dated as of May 1, 2007 (filed as Exhibit 10.8 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended September 30, 2004).

10.4		Deferred Prosecution Agreement between Baker Hughes Incorporated and the United States Department of Justice filed on April 26, 2007 with the United States District Court of Texas, Houston Division.

10.5		Plea Agreement between Baker Hughes Services International, Inc. and the United States Department of Justice filed on April 26, 2007 with the United States District Court of Texas, Houston Division.

31.1		Certification of Chad C. Deaton, Chief Executive Officer, dated May 1, 2007, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of Peter A. Ragauss, Chief Financial Officer, dated May 1, 2007, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32		Statement of Chad C. Deaton, Chief Executive Officer, and Peter A. Ragauss, dated May 1, 2007, furnished pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

99.1		Baker Hughes Incorporated Information document filed on April 26, 2007 by the United States Attorney’s Office for the Southern District of Texas and the United States Department of Justice.

99.2		Baker Hughes Services International, Inc. Information document filed on April 26, 2007 by the United States Attorney’s Office for the Southern District of Texas and the United States Department of Justice.

99.3		Sentencing Memorandum and Motion for Waiver of Pre-Sentence Investigation of Baker Hughes Services International, Inc.

99.4		Baker Hughes Services International, Inc. Sentencing Letter from the United States Department of Justice dated April 24, 2007.

99.5		The Complaint by the Securities and Exchange Commission v. Baker Hughes Incorporated filed on April 26, 2007 with the United States District Court of Texas, Houston Division.

99.6		News Release dated April 26, 2007 regarding the settlement of the FCPA investigation.

Exhibit 3.1

CERTIFICATE OF AMENDMENT

RESTATED CERTIFICATE OF INCORPORATION

BAKER HUGHES INCORPORATED

Baker Hughes Incorporated (the “Corporation”), a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the “DGCL”), does hereby certify that:

FIRST: Article SEVENTH of the Restated Certificate is amended to read in its entirety as follows:

“SEVENTH: The bylaws of the Corporation shall not be made, repealed, altered, amended or rescinded by the stockholders of the Corporation except by the vote of the holders of not less than a majority of the stock issued and outstanding and entitled to vote in the election of directors, considered for purposes of this Article SEVENTH as one class.”

SECOND: The first paragraph of Article TWELFTH of the Restated Certificate is hereby amended to read in its entirety as follows:

“TWELFTH: The vote of the holders of not less than a majority of the issued and outstanding shares of “Voting Stock” (as hereinafter defined) of the Corporation shall be required for the approval or authorization of any “Business Combination” (as hereinafter defined) of the Corporation with any “Related Person” (as hereinafter defined); provided, however, that such voting requirement shall not be applicable if:”

THIRD: Article THIRTEENTH of the Restated Certificate is amended by deleting the text thereof in its entirety.

FOURTH: Article FOURTEENTH of the Restated Certificate is amended to read in its entirety as follows:

“THIRTEENTH: The Corporation reserves the right to amend, alter, change or repeal any provisions contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.”

Exhibit 3.1

FIFTH: The foregoing amendments to the Corporation’s Restated Certificate were unanimously adopted by the Corporation’s Board of Directors at a meeting duly called and held on January 25, 2007 and by the holders of the Corporation’s capital stock at a meeting duly called and held on April 26, 2007, all in accordance with the provisions of Section 242 of the DGCL and the Corporation’s Restated Certificate.

IN WITNESS WHEREOF, the undersigned has caused this Certificate to be executed in its name and on its behalf by its duly authorized officer on this 26 ^th day of April, 2007.


	BAKER HUGHES INCORPORATED
	By:	/s/ Sandra E. Alford
		Sandra E. Alford
		Corporate Secretary

Exhibit 3.1

CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
BAKER HUGHES INCORPORATED

Baker Hughes Incorporated (the “Corporation”), a corporation duly organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that:

FIRST: Article ELEVENTH of the Corporation’s Restated Certificate of Incorporation is amended to read in its entirety as follows:

“The directors of the Corporation shall serve for a term of one year ending on the date of the annual meeting of stockholders following the annual meeting at which the director was elected.

The number of directors shall be fixed from time to time by the bylaws of the Corporation or an amendment thereof duly adopted by the Board of Directors or by the stockholders acting in accordance with Article SEVENTH herein.

Notwithstanding any of the foregoing provisions of this Article, each director shall serve until his or her successor is elected and qualified or until his or her death, retirement, resignation or removal.”

SECOND: Article THIRTEENTH of the Corporation’s Restated Certificate of Incorporation is amended to read in its entirety as follows:

“THIRTEENTH: The provisions set forth in this Article THIRTEENTH and in Articles SEVENTH (dealing with the alteration of bylaws by stockholders), EIGHTH (dealing with the prohibition against stockholder action without meetings), TENTH (dealing with liability of directors), ELEVENTH (dealing with the term and number of directors) and TWELFTH (dealing with the 75% vote of stockholders required for certain Business Combinations) herein may not be repealed or amended in any respect, and no Article imposing cumulative voting in the election of directors may be added, unless such action is approved by the affirmative vote of not less than 75% of the total voting power of all shares of stock of the Corporation entitled to vote in the election of directors, considered for purposes of this Article THIRTEENTH

as one class. Amendment to the provisions set forth in this Article THIRTEENTH and in Article TWELFTH shall also require the affirmative vote of 66-2/3% of such total voting power excluding the vote of shares owned by a “Related Person” (as defined in Article THIRTEENTH). The voting requirements contained in Article SEVENTH, Article TWELFTH and this Article THIRTEENTH herein shall be in addition to the voting requirements imposed by law, other provisions of this Certificate of Incorporation or any Certificate of Designation of Preferences in favor of certain classes or series of classes of shares of the Corporation.”

THIRD: The foregoing amendment to the Corporation’s Restated Certificate of Incorporation was duly adopted by the Corporation’s Board of Directors at a meeting duly called and held on January 27, 2005 and by the holders of the Corporation’s capital stock at a meeting duly called and held on April 28, 2005, all in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

     IN WITNESS WHEREOF, the undersigned has caused this Certificate to be executed in its name and on its behalf by its duly authorized officer on this 28 ^th day of April, 2005.

BAKER HUGHES INCORPORATED

By:   /s/ Sandra E. Alford

      Sandra E. Alford

      Corporate Secretary

RESTATED CERTIFICATE OF INCORPORATION
OF
BAKER HUGHES INCORPORATED

PURSUANT TO SECTIONS 245 AND 242 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

BAKER HUGHES INCORPORATED (the “Corporation”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, hereby adopts the following Restated Certificate of Incorporation pursuant to Sections 245 and 242 of said General Corporation Law and certifies as follows:

	1.		The name of this corporation is:

			BAKER HUGHES INCORPORATED

	2.		The Certificate of Incorporation of the Corporation was originally filed with the Secretary of State of the State of Delaware on November 3, 1986.

	3.		The 1987 Restated Certificate of Incorporation was duly adopted by unanimous written consent of the Board of Directors of the Corporation dated December 17, 1986, and by unanimous vote of all the stockholders on December 18, 1986 in accordance with the provisions of Section 245 and 242 of the General Corporation Law of the State of Delaware.

	4.		The Certificate of Amendment was duly adopted by the Board of Directors of the Corporation on March 3, 1999 and by the holders of a majority of the outstanding shares of the Corporation’s capital stock on April 28, 1999, in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

	5.		This Restated Certificate of Incorporation was duly adopted by the Board of Directors of the Corporation on July 24, 2002 in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware.

	6.		This Restated Certificate of Incorporation supersedes the original Certificate of Incorporation.

	7.		The Certificate of Incorporation is hereby restated in its entirety to read as follows:

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FIRST: The name of this Corporation is:

BAKER HUGHES INCORPORATED

			SECOND: The address of its registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.

			THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

			FOURTH: The total number of shares of stock which the Corporation shall have the authority to issue is 765,000,000 shares of capital stock consisting of 15,000,000 shares of preferred stock, par value $1.00 per share (the “Preferred Stock”), and 750,000,000 shares of common stock, par value $1.00 per share (the “Common Stock”).

			The designations, powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the Preferred Stock shall be established by resolution of the Board of Directors pursuant to Section 151 of the General Corporation Law of the State of Delaware.

			FIFTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the bylaws of the Corporation.

			SIXTH: Election of directors need not be by written ballot unless the bylaws of the Corporation shall so provide.

			SEVENTH: The bylaws of the Corporation shall not be made, repealed, altered, amended or rescinded by the stockholders of the Corporation except by the vote of the holders of not less than 75% of the total voting power of all shares of stock of the Corporation entitled to vote in the election of directors, considered for purposes of this Article SEVENTH as one class.

			EIGHTH: No action shall be taken by the stockholders except at an annual or special meeting of stockholders and stockholders may not act by written consent.

			NINTH: Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by the Board of Directors, or by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in the bylaws of the Corporation, include the power to call

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			such meetings. Special meetings of stockholders of the Corporation may not be called by any other person or persons.

			TENTH: No director of this Corporation shall be personally liable to the Corporation nor its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit.

			If the General Corporation Law of the State of Delaware is hereafter amended to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of the director to the Corporation shall be limited or eliminated to the full extent permitted by the General Corporation Law of the State of Delaware, as so amended from time to time. Any repeal or modification of this Article shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification.

			ELEVENTH: The initial directors of the Corporation shall serve for a term ending on the date of the first annual meeting of stockholders next following September 30, 1987. Thereafter, the Board of Directors shall be divided into three classes, Class I, Class II, and Class III. The number of directors in each class shall be the whole number contained in the quotient arrived at by dividing the authorized number of directors by three, and if a fraction is also contained in such quotient then if such fraction is one-third (1/3) the extra director shall be a member of Class III and if the fraction is two-thirds (2/3) one of the extra directors shall be a member of Class III and the other shall be a member of Class II. After division of the Board of Directors into classes, each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, however, that the initial directors appointed to Class I shall serve for a term ending on the date of the first annual meeting next following September 30, 1988, the initial directors appointed to Class II shall serve for a term ending on the date of the second annual meeting next following September 30, 1988, and the initial directors appointed to Class III shall serve for a term ending on the date of the third annual meeting next following September 30, 1988.

			The number of directors shall be fixed from time to time by the bylaws of the Corporation or an amendment thereof duly adopted by the Board of Directors or by the stockholders acting in accordance with Article SEVENTH herein. In the event of any increase or decrease in the authorized number of directors; (a) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his prior death, retirement, resignation or removal; and (b) the newly created or eliminated

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			directorships resulting from such increase or decrease shall be apportioned by the Board of Directors to such class or classes as shall, so far as possible, bring the number of directors in the respective classes into conformity with the formula in this Article, as applied to the new authorized number of directors.

			Notwithstanding any of the foregoing provisions of this Article, each director shall serve until his successor is elected and qualified or until his death, retirement, resignation or removal. No director may be removed during his term except for cause.

			TWELFTH: The affirmative vote of the holders of not less than 75% of the outstanding shares of “Voting Stock” (as hereinafter defined) of the Corporation, including the affirmative vote of the holders of not less than 66 2/3% of the outstanding shares of Voting Stock not owned, directly or indirectly, by any “Related Person” (as hereinafter defined), shall be required for the approval or authorization of any “Business Combination” (as hereinafter defined) of the Corporation with any Related Person; provided, however, that the 66 2/3% voting requirement referred to above shall not be applicable if the Business Combination is approved by the affirmative vote of the holders of not less than 90% of the outstanding shares of Voting Stock; and further provided that the 75% voting requirement shall not be applicable if:

(1) The Board of Directors of the Corporation by a vote of not less than 75% of the directors then holding office (a) have expressly approved in advance the acquisition of outstanding shares of Voting Stock of the Corporation that caused the Related Person to become a Related Person or (b) have approved the Business Combination prior to the Related Person involved in the Business Combination having become a Related Person;

(2) The Business Combination is solely between the Corporation and another corporation, 100% of the Voting Stock of which is owned directly or indirectly by the Corporation; or

(3) All of the following conditions have been met: (a) the Business Combination is a merger or consolidation, the consummation of which is proposed to take place within one year of the date of the transaction pursuant to which such person became a Related Person and the cash or fair market value of the property, securities or other consideration to be received per share by holders of Common Stock of the Corporation in the Business Combination is not less than the highest per share price (with appropriate adjustments for recapitalizations and for stock splits, reverse stock splits and stock dividends) paid by the Related Person in acquiring any of its holdings of the Corporation’s Common Stock; (b) the consideration to be received by such holders is either cash or, if the Related Person shall have acquired the majority of its holdings of the Corporation’s Common Stock for a form of consideration other than cash, in the same form of consideration as the Related Person acquired such majority; (c) after such Related

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			Person has become a Related Person and prior to the consummation of such Business Combination: (i) except as approved by a majority of the “Continuing Directors” (as hereinafter defined), there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Shares of Preferred Stock of the Corporation; (ii) there shall have been no reduction in the annual rate of dividends paid per share on the Corporation’s Common Stock (adjusted as appropriate for recapitalizations and for stock splits, reverse stock splits and stock dividends) except as approved by a majority of the Continuing Directors; (iii) such Related Person shall not have become the “Beneficial Owner” (as hereinafter defined) of any additional shares of Voting Stock of the Corporation except as part of the transaction which resulted in such Related Person becoming a Related Person; and (iv) such Related Person shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and (d) a proxy statement, responsive to the requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and the rules and regulations thereunder (or any subsequent provisions replacing the Exchange Act, rules or regulations), shall be mailed to all stockholders of record at least 30 days prior to the consummation of the Business Combination for the purpose of soliciting stockholder approval of the Business Combination and shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may choose to state and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or unfairness) of the terms of such Business Combination from the point of view of the remaining stockholders of the Corporation (such investment banking firm to be selected by a majority of the Continuing Directors and to be paid a reasonable fee for its services by the Corporation upon receipt of such opinion).

			For the purposes of this Article:

(i) The term “Business Combination” shall mean (a) any merger or consolidation of the Corporation or a subsidiary with or into a Related Person; (b) any sale, lease exchange, transfer or other disposition, including without limitation a mortgage or any other security device, of all or any “Substantial Part” (as hereinafter defined) of the assets either of the Corporation (including, without limitation, any voting securities of a subsidiary) or of a subsidiary to a Related Person (other than a distribution by the Corporation or a subsidiary to the Related Person of assets in connection with a pro rata distribution by the Corporation to all stockholders); (c) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation; (d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the

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Corporation or a subsidiary of the Corporation; (e) the issuance of any securities (other than by way of pro rata distribution to all stockholders) of the Corporation or a subsidiary of the Corporation to a Related Person; (f) the acquisition by the Corporation or a subsidiary of the Corporation of any securities of a Related Person; g) any recapitalization that would have the effect of increasing the voting power of a Related Person; (h) any series or combination of transactions having the same effect, directly or indirectly, as any of the foregoing and (i) any agreement, contract or arrangement providing for any of the transactions described in this definition of Business Combination.

(ii) The term “Continuing Director” shall mean any member of the Board of Directors of the Corporation who is not affiliated with a Related Person and who was a member of the Board of Directors immediately prior to the time that the Related Person became a Related Person, and any successor to a Continuing Director who is not affiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors then serving as members of the Board of Directors of the Corporation.

(iii) The term “Related Person” shall mean and include any individual, corporation, partnership or other person or entity which, together with its “Affiliates” and “Associates” (as defined on October 1, 1986 in Rule 12b-2 under the Exchange Act), is the “Beneficial Owner” (as defined on October 1, 1986 in Rule 13d-3 under the Exchange Act) in the aggregate of 10% or more of the outstanding Voting Stock of the Corporation, and any Affiliate or Associate of any such individual, corporation, partnership or other person or entity.

(iv) The term “Substantial Part” shall mean more than 10% of the book value of the total assets of the Corporation in question as of the end of its most recent fiscal year ending prior to the time the determination is being made.

(v) Without limitation, any shares of Common Stock of the Corporation that any person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by such person.

(vi) For the purposes of subparagraph (3) of this Article, the term “other consideration to be received” shall include, without limitation, Common Stock of the Corporation retained by its existing public stockholders in the event of a Business Combination in which the Corporation is the surviving corporation.

(vii) The term “Voting Stock” shall mean all outstanding shares of capital stock of the Corporation or another corporation entitled to vote generally in the election of directors and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares.

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			THIRTEENTH: The provisions set forth in this Article THIRTEENTH and in Articles SEVENTH (dealing with the alteration of bylaws by stockholders), EIGHTH (dealing with the prohibition against stockholder action without meetings), TENTH (dealing with liability of directors), ELEVENTH (dealing with the classification and number of directors) and TWELFTH (dealing with the 75% vote of stockholders required for certain Business Combinations) herein may not be repealed or amended in any respect, and no Article imposing cumulative voting in the election of directors may be added, unless such action is approved by the affirmative vote of not less than 75% of the total voting power of all shares of stock of the Corporation entitled to vote in the election of directors, considered for purposes of this Article THIRTEENTH as one class. Amendment to the provisions set forth in this Article THIRTEENTH and in Article TWELFTH shall also require the affirmative vote of 66 2/3% of such total voting power excluding the vote of shares owned by a “Related Person” (as defined in Article THIRTEENTH). The voting requirements contained in Article SEVENTH, Article TWELFTH and this Article THIRTEENTH herein shall be in addition to the voting requirements imposed by law, other provisions of this Certificate of Incorporation or any Certificate of Designation of Preferences in favor of certain classes or series of classes of shares of the Corporation.

			FOURTEENTH: The Corporation reserves the right to amend, alter, change or repeal any provisions contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provision set forth in Articles SEVENTH, EIGHTH, TENTH, ELEVENTH, TWELFTH, and THIRTEENTH may not be repealed or amended in any respect unless such repeal or amendment is approved as specified in Article THIRTEENTH herein.

IN WITNESS WHEREOF, BAKER HUGHES INCORPORATED has caused this Restated Certificate of Incorporation to be executed, signed and acknowledged by G. Stephen Finley, its Sr. Vice President, who states under penalty that the facts stated herein are true, and to be attested by Sandra E. Alford, its Corporate Secretary this 24th day of July, 2002.

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Exhibit 3.2

BYLAWS
OF
BAKER HUGHES INCORPORATED

Restated as of
April 26, 2007

Table of Contents


	Page No.
ARTICLE I — Offices		1

Section 1. Registered Office		1
Section 2. Other Offices		1

ARTICLE II — Meetings of Stockholders		1

Section 1. Place of Meetings		1
Section 2. Annual Meeting of Stockholders		1
Section 3. Quorum; Adjourned Meetings and Notice Thereof		1
Section 4. Proxies		2
Section 5. Special Meetings		2
Section 6. Notice of Stockholders’ Meetings		2
Section 7. Waiver of Notice		2
Section 8. Maintenance and Inspection of Stockholder List		2
Section 9. Stockholder Action by Written Consent Without a Meeting		3
Section 10. Inspectors of Election		3
Section 11. Procedure for Stockholders’ Meetings		3
Section 12. Order of Business		3
Section 13. Procedures for Bringing Business before an Annual Meeting		4
Section 14. Procedures for Nominating Directors		4

ARTICLE III — Directors		6

Section 1. Number and Qualification of Directors		6
Section 2. Election and Term of Office		6
Section 3. Resignation and Removal of Directors		6
Section 4. Vacancies		7
Section 5. Powers		7
Section 6. Place of Directors’ Meetings		7
Section 7. Regular Meetings		7
Section 8. Special Meetings		7
Section 9. Quorum		8
Section 10. Action Without Meeting		8
Section 11. Telephonic Meetings		8
Section 12. Meetings and Action of Committees		8
Section 13. Special Meetings of Committees		9
Section 14. Minutes of Committee Meetings		9
Section 15. Compensation of Directors		9
Section 16. Indemnification		9

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ARTICLE IV — Officers			12

Section 1. Officers			12
Section 2. Election of Officers			12
Section 3. Subordinate Officers			12
Section 4. Removal and Resignation of Officers			12
Section 5. Vacancies in Offices			13
Section 6. Chairman of the Board			13
Section 7. Chief Executive Officer			13
Section 8. President			13
Section 9. Chief Operating Officer			13
Section 10. Vice Presidents			14
Section 11. Secretary			14
Section 12. Chief Financial Officer			14
Section 13. Treasurer and Controller			15
Section 14. Delegation of Authority			15

ARTICLE V — Certificate of Stock			15

Section 1. Certificates			15
Section 2. Signatures on Certificates			15
Section 3. Statement of Stock Rights, Preferences, Privileges			15
Section 4. Lost, Stolen or Destroyed Certificates			15
Section 5. Transfers of Stock			16
Section 6. Fixing Record Date			16
Section 7. Registered Stockholders			16

ARTICLE VI — General Provisions			16

Section 1. Dividends			16
Section 2. Payment of Dividends			16
Section 3. Checks			17
Section 4. Corporate Contracts and Instruments			17
Section 5. Fiscal Year			17
Section 6. Manner of Giving Notice			17
Section 7. Waiver of Notice			17

ARTICLE VII — Amendments			18

Section 1. Amendment by Directors			18
Section 2. Amendment by Stockholders			18

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BYLAWS
OF
BAKER HUGHES INCORPORATED

ARTICLE I

Offices

Section 1. Registered Office . The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

Section 2. Other Offices . The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE II

Meetings of Stockholders

Section 1. Place of Meetings . All meetings of the stockholders shall be held at such place, if any, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.

Section 2. Annual Meetings of Stockholders . An annual meeting of stockholders shall be held at such date and time as may be determined from time to time by resolution adopted by the Board of Directors, for the purpose of electing the directors of the Corporation, and transacting such other business as may properly be brought before the meeting.

Section 3. Quorum; Adjourned Meetings and Notice Thereof . A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, without regard to class or series, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws. If a separate vote by a class or classes or series is required, a majority of the outstanding shares of such class or classes or series present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than 30 days, or if after the

adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat.

Section 4. Proxies . At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy authorized by an instrument in writing or by a transmission, including by telephone and electronic transmission, permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the Corporation on the record date set by the Board of Directors as provided in Article V, Section 6 hereof.

Section 5. Special Meetings . Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called at any time by the Board of Directors or by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in these Bylaws, include the power to call such meetings. Special meetings of stockholders of the Corporation may not be called by any other person or persons. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

Section 6. Notice of Stockholders’ Meetings . If mailed, notice to stockholders shall be deemed given when deposited in the mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in, and subject to the provisions of, Section 232 of the Delaware General Corporation Law, as amended.

Section 7. Waiver of Notice . Attendance of a person at a meeting shall constitute a waiver of notice to such person of such meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.

Section 8. Maintenance and Inspection of Stockholder List . The officer or agent who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, in the manner provided by law. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger of

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the Corporation shall be the only evidence as to who are the stockholders entitled to examine such list or to vote at any meetings of stockholders.

Section 9. Stockholder Action by Written Consent Without a Meeting . No action shall be taken by stockholders except at an annual or special meeting of stockholders, and stockholders may not act by written consent.

Section 10. Inspectors of Election . Before any meeting of stockholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder’s proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one or three. If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one or three inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any stockholder or a stockholder’s proxy shall, appoint a person to fill such vacancy.

The duties of these inspectors shall be as follows:

(a) To ascertain the number of shares outstanding and the voting power of each;

(b) To determine the shares represented at a meeting and the validity of proxies and ballots;

(d) To determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and

(e) To certify their determination of the number of shares represented at the meeting and their count of all votes and ballots.

Section 11. Procedure for Stockholders’ Meetings . Meetings of the stockholders shall be presided over by the Chairman of the Board of Directors, or in his absence, by the Chief Executive Officer, the President or by any Vice President, or, in the absence of any of such officers, by a chairman to be chosen by a majority of the stockholders entitled to vote at the meeting who are present in person or by proxy. The Secretary, or, in his absence, any person appointed by the chairman, shall act as secretary of all meetings of the stockholders.

Section 12. Order of Business . The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. The chairman shall also determine the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The chairman of the meeting shall have the power to adjourn the meeting to another place, if any, date and time. The date and time of

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the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting.

Section 13. Procedures for Bringing Business before an Annual Meeting . Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting of the stockholders except in accordance with the procedures set forth in this Section 13; provided, however, that nothing in this Section 13 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with such procedures.

At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (2) otherwise properly brought before the meeting by or at the direction of the Board, or (3) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days in advance of the first annual anniversary of the date of the Corporation’s proxy statement released to stockholders in connection with the previous year’s annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year’s proxy statement, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. Any adjournment(s) or postponement(s) of the original meeting whereby the meeting will convene or reconvene within 30 days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting and no business may be brought before any such meeting unless timely notice of such business was given to the Secretary of the Corporation for the meeting as originally scheduled. A stockholder’s notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and their reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholders, and (iv) any material interest of the stockholder in such business.

The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 14, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

Section 14. Procedures for Nominating Directors . Notwithstanding anything in these Bylaws to the contrary, only persons who are nominated in accordance with the procedures hereinafter set forth in this Section 14 shall be eligible for election as directors of the Corporation.

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Nominations of persons for election to the Board of Directors of the Corporation may be made at the annual meeting of stockholders only (1) by or at the direction of the Board of Directors or (2) by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 14. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days, nor more than 150 days, in advance of the first annual anniversary of the date of the Corporation’s proxy statement released to stockholders in connection with the previous year’s annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year’s proxy statement, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. Any adjournment(s) or postponement(s) of the original meeting whereby the meeting will convene or reconvene within 30 days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting and no nominations by a stockholder of persons to be elected directors of the Corporation may be made at any such meeting other than pursuant to a notice that was timely for the meeting on the date originally scheduled. Such stockholder’s notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any successor regulation thereto (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving notice (A) the name and address, as they appear on the Corporation’s books, of such stockholder, and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder’s notice of nomination that pertains to the nominee.

Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of record of the Corporation who is a stockholder of record at the time of giving of notice provided for in this paragraph, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 14 of this Article II. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder’s notice required by the second paragraph of Section 14 of this Article II shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public disclosure is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting.

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The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 15, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

ARTICLE III

Directors

Section 1. Number and Qualification of Directors . The Board of Directors shall consist of 12 directors. No officer of the Corporation may serve on a board of directors of any company having a present or retired employee on the Corporation’s Board of Directors. No person associated with an organization whose services are contracted by the Corporation shall serve on the Corporation’s Board of Directors; provided, however, that a majority of the members of the whole Board may waive this prohibition if the Board in its judgment determines that such waiver would be in the best interest of the Corporation. The term “Whole Board”, where used in these Bylaws, refers to the 12 directors constituting the Board of Directors.

Section 2. Election and Term of Office . Each Director shall be elected for a term of one year and shall hold office until such director’s successor is elected and qualified or until his earlier death, retirement, resignation or removal.

Section 3. Resignation and Removal of Directors . No person who is concurrently a director and an employee of the Corporation shall be qualified to serve as a director of the Corporation from and after the time of any diminution in such person’s duties or responsibilities as an officer, the time they leave the employ of the Corporation for any reason or their 72nd birthday; provided, however, that if any such person resigns from the Board of Directors upon such event, such person shall thereafter be deemed qualified to serve as a director of the Corporation for so long as such person is otherwise qualified to so serve pursuant to the following sentence. No person shall be qualified to serve as a director of the corporation on or after the date of the annual meeting of stockholders following: (i) his 72nd birthday or (ii) any fiscal year in which he has failed to attend at least 66% of the meetings of the Board of Directors and any committees of the Board of Directors on which such director serves, provided that such a person shall be deemed to be qualified to serve as a director if so determined by a majority of the members of the Whole Board (excluding the director whose resignation would otherwise be required) if the Board in its judgment determines that such waiver would be in the best interest of the Corporation. Any director may be removed with or without cause by the holders of a majority of the shares of the Corporation entitled to vote in the election of directors. The Board of Directors may not remove any director with or without cause, and no recommendation by the Board of Directors that a director be removed with or without cause may be made to the stockholders except by the affirmative vote of not less than 75% of the members of the Whole Board.

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Section 4. Vacancies . Except as otherwise provided by statute or the Certificate of Incorporation, (i) in the case of any increase in the number of directors, such additional director or directors shall be elected by a majority vote of the directors then in office, although less than a quorum, or by a sole remaining director, or (ii) in the case of any vacancy in the Board of Directors, however created, the vacancy or vacancies shall be filled by a majority vote of the directors then in office, although less than a quorum, or by a sole remaining director. Notwithstanding the preceding sentence of this Article III, Section 4, if, by the affirmative vote of a majority of the directors then in office the Board determines that a newly created directorship or vacancy should be filled by the stockholders, the stockholders shall elect a nominee to fill such newly created directorship or vacancy. In the event one or more directors shall resign, effective at a future date, such vacancy or vacancies shall be filled as provided herein. Directors so chosen or elected shall hold office until the annual meeting next following his election or until his successor is elected and qualified or until his earlier death, retirement, resignation or removal.

In the event of any decrease in the authorized number of directors, each director then serving as such shall nevertheless continue as a director until the expiration of his current term, or his prior death, retirement, resignation or removal.

Section 5. Powers . The property and business of the Corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

Section 6. Place of Directors’ Meetings . The directors may hold their meetings and have one or more offices, and keep the books of the Corporation outside the State of Delaware.

Section 7. Regular Meetings . Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Except as otherwise provided by statute, any business may be transacted at any regular meeting of the Board of Directors.

Section 8. Special Meetings . Special meetings of the Board of Directors may be called by the Chairman of the Board or the Chief Executive Officer on at least 24 hours’ notice, or such shorter period as the person calling deems appropriate, to each director. Special meetings shall be called by the Chairman of the Board, the Chief Executive Officer or the Secretary in like manner and on like notice on the written request of a majority of the total number of directors.

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Section 9. Quorum . At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action is approved by at least a majority of the required quorum for such meeting.

Section 10. Action Without Meeting . Unless otherwise restricted by statute, the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 11. Telephonic Meetings . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in a meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.

Section 12. Meetings and Action of Committees . The Board of Directors may from time to time designate committees of the Board of Directors, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board of Directors and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The Board of Directors shall, by resolution passed by a majority of the Whole Board, designate one member of each committee as chairman of such committee. Each such chairman shall hold such office for a period not in excess of five years, and shall upon surrender of such chairmanship resign from membership on such committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following

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matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law (other than the election of directors) to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation.

Section 13. Special Meetings of Committees . Special meetings of committees may be called by the Chairman of such committee, the Chairman of the Board or the Chief Executive Officer, on at least 24 hours’ notice, or such shorter period as the person calling deems appropriate, to each member. Alternate members shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules of the government of any committee not inconsistent with the provisions of these Bylaws. If a committee is comprised of an odd number of members, a quorum shall consist of a majority of that number. If the committee is comprised of an even number of members, a quorum shall consist of 1/2 of that number. If a committee is comprised of two members, a quorum shall consist of both members; all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all the members thereof consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be electronic form if the minutes are maintained in electronic form.

Section 14. Minutes of Committee Meetings . Each Committee shall keep regular minutes of its meetings and report the same to the Board of Directors when requested.

Section 15. Compensation of Directors . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

Section 16. Indemnification . (a) The Corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director, officer or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries or, while a director, officer or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries, is or was serving at the request of the Corporation or any of its direct or indirect wholly owned subsidiaries, as a director, officer or employee, of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law; provided that the Corporation shall not be obligated to indemnify any such person against any such action, suit or proceeding which is brought by such person

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against the Corporation or any of its direct or indirect wholly owned subsidiaries or the directors of the Corporation or any of its direct or indirect wholly owned subsidiaries, other than an action brought by such person to enforce his rights to indemnification hereunder, unless a majority of the Board of Directors of the Corporation shall have previously approved the bringing of such action, suit or proceeding, and provided further that the Corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person.

(b) The Corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was licensed to practice law and an employee (including an employee who is or was an officer) of the Corporation or any of its direct or indirect wholly owned subsidiaries and, while acting in the course of such employment committed or is alleged to have committed any negligent acts, errors or omissions in rendering professional legal services at the request of the Corporation or pursuant to his employment (including, without limitation, rendering written or oral legal opinions to third parties) against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law; provided that the Corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person.

(c) The Corporation shall indemnify every person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, or employee of the Corporation, or any of its direct or indirect wholly owned subsidiaries or, while a director, officer, or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries, is or was serving at the request of the Corporation or any of its direct or indirect wholly owned subsidiaries, as a director, officer, or employee of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

(d) To the extent that a director, officer, or employee of the Corporation, or any of its direct or indirect wholly owned subsidiaries, has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a), (b) and (c) of this

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section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

(e) Any indemnification under subsections (a), (b) and (c) of this section (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a), (b) and (c) of this section. Such determination shall be made (1) by a majority vote of the directors who were not parties to such action, suit or proceeding, (2) by a committee or such directors designated by majority vote of such directors even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. If a claim under this Section 16 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section 16 or otherwise shall be on the Corporation.

(f) Expenses (including attorneys’ fees) incurred by an present or former officer or director of the Corporation or any of its direct or indirect wholly owned subsidiaries in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as

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authorized in this Section 16. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate.

(g) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 16 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any provision of law, the Corporation’s Certificate of Incorporation, the Certificate of Incorporation or Bylaws or other governing documents of any direct or indirect wholly owned subsidiary of the Corporation, or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding any of the positions or having any of the relationships referred to in this Section 16.

(h) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 16 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person.

ARTICLE IV

Officers

Section 1. Officers . The officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, a Vice President, a Secretary, a Treasurer and a Controller. The Corporation may also have, at the discretion of the Board of Directors, a Chief Operating Officer, one or more additional Vice Presidents, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. Any two (2) or more offices may be held by the same person.

Section 2. Election of Officers . The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of any officer under any contract of employment.

Section 3. Subordinate Officers . The Board of Directors may appoint, and may empower the Chief Executive Officer to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine.

Section 4. Removal and Resignation of Officers . Any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors, provided that such removal shall not prejudice the remedy of such officer for breach of any contract of employment.

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Any officer may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect on receipt of such notice or at any later time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party.

Section 5. Vacancies in Offices . A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office.

Section 6. Chairman of the Board . The Chairman of the Board shall, if present, preside at all meetings of the Board of Directors and of the stockholders, and shall exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws.

Section 7. Chief Executive Officer . The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers, other than the Chairman of the Board of the Corporation with all such powers as may be reasonably incident to such responsibilities. He shall perform all other duties normally incident to the office of Chief Executive Officer, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws.

Section 8. President . The President shall be the Chief Operating Officer of the Corporation and shall, subject to the control of the Chief Executive Officer and the Board of Directors, have general supervision, direction and control of the business and the officers, other than the Chairman of the Board, of the Corporation. In the absence of the Chairman of the Board, the Chief Executive Officer, the President shall preside at all meetings of the stockholders and the Board of Directors. He shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Chief Executive Officer, the Board of Directors or the Bylaws.

Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation.

Section 9. Chief Operating Officer . The Chief Operating Officer of the Corporation shall have general management of the business unit operations of the Corporation, subject to the direction and control of the Chief Executive Officer and the Board of Directors. The Chief Operating Officer shall sign all papers and documents to which such officer’s signature may be necessary or appropriate in connection with the operations of the Corporation, make reports to the Board of Directors or the Chief Executive Officer and have such further powers and duties as may, from time to time, be prescribed by the Board of Directors or the Chief Executive Officer.

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Section 10. Vice Presidents . If there be more than one Vice President, the Board of Directors may designate one or more of them as Executive Vice President or Senior Vice President among the Vice Presidents and may also grant to such officers and other Vice Presidents such titles as shall be descriptive of their respective functions or indicative of their relative seniority. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the President, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws or the President.

Section 11. Secretary . The Secretary shall keep or cause to be kept, at the principal office or such other place as the Board of Directors may order, a book of minutes of all meetings and actions of directors, committees of directors and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors’ and committee meetings, the number of shares present or represented at stockholders’ meetings, and the proceedings thereof.

The Secretary shall keep, or cause to be kept, at the principal office or at the office of the Corporation’s transfer agent or registrar, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by these Bylaws or by law to be given, and he shall keep the seal of the Corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws.

Section 12. Chief Financial Officer . The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall be open at all times to inspection by any director.

The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the Chief Executive Officer, President and Directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws.

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Section 13. Treasurer and Controller . The Treasurer and the Controller shall each have such powers and perform such duties as from time to time may be prescribed for him by the Board of Directors, the President or these Bylaws.

Section 14. D elegation of Authority . The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.

ARTICLE V

Certificate of Stock

Section 1. Certificates . Shares of the stock of the Corporation may be represented by certificates or uncertificated. Owners of shares of the stock of the Corporation shall be recorded in the share register of the Corporation, and ownership of such shares shall be evidenced by a certificate or book-entry notation in the share register of the Corporation. Any certificates representing such shares shall be signed by, or in the name of the Corporation by, the Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or any Assistant Secretary, if one be appointed, or the Treasurer or an Assistant Treasurer of the Corporation, certifying the number of shares represented by the certificate owned by such stockholder in the Corporation.

Section 2. Signature on Certificates . Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

Section 3. Statement of Stock Rights, Preferences, Privileges . If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided by statute, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

Section 4. Lost, Stolen or Destroyed Certificates . The Board of Directors, the Secretary and the Treasurer each may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the owner of such certificate,

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or his legal representative. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to furnish the Corporation a bond in such form and substance and with such surety as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

Section 5. Transfers of Stock . Upon surrender to the Corporation, or the transfer agent of the Corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate or other evidence of such new shares to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Uncertificated shares shall be transferred in the share register of the Corporation upon the written instruction originated by the appropriate person to transfer the shares.

Section 6. Fixing Record Date . In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

Section 7. Registered Stockholders . The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware.

ARTICLE VI

General Provisions

Section 1. Dividends . Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the Corporation’s capital stock, subject to the provisions of the Certificate of Incorporation.

Section 2. Payment of Dividends . Before declaration of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as

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the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation, and the Board of Directors may thereafter abolish any such reserve in its absolute discretion.

Section 3. Checks . All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation shall be signed by such officer or officers as the Board of Directors or the President or any Vice President, acting jointly, may from time to time designate.

Section 4. Corporate Contracts and Instruments . The Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer may enter into contracts and execute instruments on behalf of the Corporation. The Board of Directors, the President or any Vice President may authorize any officer or officers, and any employee or employees or agent or agents of the Corporation or any of its subsidiaries, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.

Section 5. Fiscal Year . The fiscal year of the Corporation shall be January 1 through December 31, unless otherwise fixed by resolution of the Board of Directors.

Section 6. Manner of Giving Notice . Whenever, under the provisions of the statutes, the Certificate of Incorporation or these Bylaws, notice is required to be given to any director, it shall not be construed to require personal notice, but such notice may be given in writing, by mail, addressed to such director, at his address as it appears on the records of the Corporation (unless prior to mailing of such notice he shall have filed with the Secretary a written request that notices intended for him be mailed to some other address, in which case such notice shall be mailed to the address designated in the request) with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail; provided, however, that, in the case of notice of a special meeting of the Board of Directors, if such meeting is to be held within seven calendar days after the date of such notice, notice shall be deemed given as of the date such notice shall be accepted for delivery by a courier service that provides “opening of business next day” delivery, so long as at least one attempt shall have been made, on or before the date such notice is accepted for delivery by such courier service, to provide notice by telephone to each director at his principal place of business and at his principal residence. Notice to directors may also be given by telegram, by personal delivery, by telephone, by facsimile or by other electronic transmission.

Section 7. Waiver of Notice . Whenever any notice is required to be given under the provisions of the statutes, the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent thereto.

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ARTICLE VII

Amendments

Section 1. Amendment by Directors . Except any amendment to this Article VII and to Article II, Section 5, Article II, Section 9, Article III, Section 1 (as it relates to changes in the number of directors), Article III, Section 2, the last sentence of Article III, Section 3 (as it relates to removal of directors), Article III, Section 4, Article III, Section 16 and Article VI, Section 6 of these Bylaws, or any of such provisions, which shall require approval by the affirmative vote of directors representing at least 75% of the number of directors provided for in accordance with Article III, Section 1, the directors, by the affirmative vote of a majority of the Whole Board and without the assent or vote of the stockholders, may at any meeting, make, repeal, alter, amend or rescind any of these Bylaws, provided the substance of the proposed amendment or other action shall have been stated in a notice of the meeting.

Section 2. Amendment by Stockholders . These Bylaws shall not be made, repealed, altered, amended or rescinded by the stockholders of the Corporation except by the vote of the holders of not less than a majority of the stock issued and outstanding and entitled to vote in the election of directors, considered for such purpose as one class.

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Exhibit 10.1

AGREEMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE

This Agreement of Resignation, Appointment and Acceptance is made as of April 26, 2007 and effective as of May 1, 2007 by and among that issuer or other person who is identified in Exhibit A attached hereto (the “Exhibit”) as the Issuer (the “Issuer”), Citibank, N.A., a national banking association, duly organized and existing under the laws of the United States and having its principal corporate trust office in New York, New York (the “Bank”) and The Bank of New York Trust Company, N.A. (“BNYTC”), a national banking association, duly organized and existing under the laws of the United States and having its principal office in Los Angeles, California.

RECITALS:

WHEREAS , the Issuer and the Bank entered into one or more trust indentures, paying agency agreements, registrar agreements, or other relevant agreements as such are more particularly described in the Exhibit under the section entitled “Agreements” (individually and collectively referred to herein as the “Agreements”) under which the Bank was appointed in the capacity or capacities identified in the Exhibit (individually and collectively the “Capacities”);

WHEREAS , the Issuer desires to appoint BNYTC as the successor to the Bank in its Capacities under the Agreements; and

WHEREAS , BNYTC is willing to accept such appointment as the successor to the Bank in its Capacities under the Agreements.

NOW, THEREFORE , the Issuer, the Bank and BNYTC, for and in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby consent and agree as follows:

ARTICLE I

THE BANK

SECTION 1.01. The Bank hereby resigns from its Capacities under the Agreements.

SECTION 1.02. The Bank hereby assigns, transfers, delivers and confirms to BNYTC all right, title and interest of the Bank in its Capacity(s) relating to the Agreements; provided, however that the Bank shall continue to be entitled to the compensation, expense reimbursement and indemnity provisions thereunder with respect to the period prior to the effective date hereof. The Bank shall at the expense of BNYTC execute and deliver such further instruments and shall do such other things as BNYTC may reasonably require so as to more fully and certainly vest and confirm in BNYTC all the rights, powers and trust hereby assigned, transferred, delivered and confirmed to BNYTC as Trustee, Paying Agent and Security Registrar.

ARTICLE II

THE ISSUER

SECTION 2.01. The Issuer hereby accepts the resignation of the Bank from its Capacities under the Agreements.

SECTION 2.02. All conditions relating to the appointment of BNYTC as the successor to the Bank in its Capacities under the Agreements have been met by the Issuer, and the Issuer hereby appoints BNYTC to its Capacities under the Agreements with like effect as if originally named to such Capacities under the Agreements.

ARTICLE III

BNYTC

SECTION 3.01. BNYTC hereby represents and warrants to the Bank and to the Issuer that BNYTC is not disqualified to act in the Capacities under the Agreements.

SECTION 3.02. BNYTC hereby accepts its appointment to the Capacities under the Agreements and accepts and assumes the rights, powers, duties and obligations of the Bank under the Agreements, upon the terms and conditions set forth therein, with like effect as if originally named to such Capacities under the Agreements.

ARTICLE IV

MISCELLANEOUS

SECTION 4.01. This Agreement and the resignation, appointment and acceptance effected hereby shall be effective as of the commencement of business on the Effective Date set forth in the Exhibit.

SECTION 4.02. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws principles thereof.

SECTION 4.03. This Agreement may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

SECTION 4.04. The persons signing this Agreement on behalf of the Issuer, BNYTC and the Bank are duly authorized to execute it on behalf of the each party, and each party warrants that it is authorized to execute this Agreement and to perform its duties hereunder.

SECTION 4.05. The Issuer represents that it is the type of entity as identified in the Exhibit and has been duly organized and is validly existing under the laws of the jurisdiction as identified in the Exhibit.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement of Resignation, Appointment and Acceptance to be duly executed all as of the day and year first above written.


	BAKER HUGHES INCORPORATED
	By:	/s/Andrew L. Puhala
	Name:	Andrew L. Puhala
	Title:	Assistant Treasurer


	CITIBANK, N.A., As Resigning Trustee
	By:	/s/Wafaa Orfy
	Name:	Wafaa Orfy
	Title:	Vice President


	THE BANK OF NEW YORK TRUST COMPANY, N.A., as Successor Trustee
	By:	/s/Marcella Burgess
	Name:	Marcella Burgess
	Title:	Assistant Vice President

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EXHIBIT A

Issuer: Baker Hughes Incorporated

Effective Date: May 1, 2007

Agreement(s):


Name/Description of transaction	Description of relevant	Capacities
	Agreement & Date

6-7/8% Notes due 2029	Indenture dated as of May 15, 1991	Trustee, Reg, P/A

6% Notes due 2009	Indenture dated as of May 15, 1991	Trustee, Reg, P/A

6-1/4% Notes due 2009	Indenture dated as of May 15, 1991	Trustee, Reg, P/A

Exhibit 10.4

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION


UNITED STATES OF AMERICA	:
	:
v.	:	No. H-07-130
	:
BAKER HUGHES INCORPORATED,	:	DEFERRED PROSECUTION
	:	AGREEMENT
Defendant	:
	:

Defendant BAKER HUGHES INCORPORATED (“Baker Hughes”), Delaware Corporation, by its undersigned attorneys, pursuant to authority granted by its Board of Directors, and the United States Department of Justice, Criminal Division, Fraud Section (“Department of Justice” or the “Department”) enter into this Deferred Prosecution Agreement (“Agreement”) which shall apply to Baker Hughes and all its affiliates and subsidiaries including Baker Hughes Services International, Inc. (“BHSI”). The terms and conditions of this Agreement are as follows:

1. Baker Hughes accepts and acknowledges that the United States will file a three-count criminal Information in the United States District Court for the Southern District of Texas charging Baker Hughes with conspiracy to violate the Foreign Corrupt Practices Act of 1977 (“FCPA”), as amended, 15 U.S.C. § 78dd-1, et. seq. , in violation of 18 U.S.C. § 371 (Count One); a substantive violation of the FCPA, 15 U.S.C. § 78dd-1(a) (Count Two); and falsification of books and records in violation of 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5) and 78ff(a) (Count Three). In so doing,

Baker Hughes knowingly waives its right to indictment on these charges, as well as all rights to a speedy trial pursuant to the Sixth Amendment to the United States Constitution, Title 18, United States Code Section 3161, Federal Rule of Criminal Procedure 48(b), and all applicable Local Rules of the United States District Court for the Southern District of Texas for the period during which this Agreement is in effect.

2. Baker Hughes accepts and acknowledges that it is responsible for the acts of its officers, employees and its wholly-owned subsidiary, BHSI, as set forth in the Statement of Facts annexed hereto as “Attachment A.” Should the Department initiate the prosecution that is deferred by this Agreement, Baker Hughes agrees that it, will neither contest the admissibility of, nor contradict, in any such proceeding, the facts contained in the Statement of Facts. Baker Hughes does not endorse, ratify or condone criminal conduct and, as set forth below, has taken and commits to continue to take significant steps to prevent such conduct from recurring.

3. This Agreement is agreed to by the Department based upon the fact that Baker Hughes has voluntarily disclosed the misconduct referenced in the Statement of Facts; conducted a thorough investigation of that misconduct and other possible misconduct; regularly reported all its findings to the Department; cooperated in the Department’s subsequent investigation of this matter; agreed to implement remedial measures to ensure that this conduct will not recur and to continue to cooperate with

the Department in its ongoing investigation of the conduct of Baker Hughes, BHSI, and the officers, directors, employees and agents thereof.

4. During the two (2) year term of this Agreement, Baker Hughes agrees to cooperate fully with the Department, and any other authority or agency, domestic or foreign, designated by the Department investigating Baker Hughes, BHSI, or any of its present and former directors, officers, employees, agents, consultants, contractors and subcontractors, or any other party, in any and all matters relating to corrupt payments in connection with its operations. Baker Hughes agrees that its cooperation shall include, but is not limited to, the following:

a. Baker Hughes shall continue to cooperate fully with the Department, and with all other authorities and agencies designated by the Department, and shall truthfully disclose all information with respect to the activities of Baker Hughes and its present and former subsidiaries and affiliates, and the directors, officers, employees, agents, consultants, contractors and subcontractors thereof, concerning all matters relating to corrupt payments in connection with their operations, related false books and records, and inadequate internal controls about which Baker Hughes has any knowledge or about which the Department shall inquire. This obligation of truthful disclosure includes the obligation of Baker Hughes to provide to the Department, upon request, any document, record, or other tangible

evidence relating to such corrupt payments, books and records, and internal controls about which the Department shall inquire of Baker Hughes.

i. The Department specifically reserves the right to request that Baker Hughes provide the Department with access to information, documents, records, facilities and/or employees that may be subject to a claim of attorney-client privilege and/or the attorney work-product doctrine.

ii. Upon written notice to the Department, Baker Hughes specifically reserves the right to withhold access to information, documents, records, facilities and/or employees based upon an assertion of a valid claim of attorney-client privilege or application of the attorney work-product doctrine. Such notice shall include a general description of the nature of the information, documents, records, facilities and/or employees that are being withheld, as well as the basis for the claim.

iii. In the event that Baker Hughes withholds access to the information, documents, records, facilities and/or employees of Baker Hughes, the Department may consider this fact in determining whether Baker Hughes has fully cooperated with the Department.

iv. Except as provided in this paragraph, Baker Hughes shall not withhold from the Department, any information, documents, records, facilities and/or employees on the basis of an attorney-client privilege or work product claim.

b. Upon request of the Department, with respect to any issue relevant to its investigation of corrupt payments in connection with the operations of Baker Hughes, or any of its former subsidiaries or affiliates, related books and records and inadequate internal controls, Baker Hughes shall designate knowledgeable employees, agents, or attorneys to provide to the Department the information and materials described in Paragraph 4(a) above, on behalf of Baker Hughes. It is further understood that Baker Hughes must at all times provide complete, truthful, and accurate information.

c. With respect to any issue relevant to the department’s investigation of corrupt payments in connection with the operations of Baker Hughes, or any of its present or former subsidiaries or affiliates, Baker Hughes shall use its best efforts to make available for interviews or testimony, as requested by the Department, present or former directors, officers, employees, agents and consultants of Baker Hughes, or any of its present or former subsidiaries or affiliates, as well as the directors, officers, employees, agents and consultants of contractors and sub-contractors. This includes, but is not limited to, sworn testimony before a federal grand jury or in federal trials, as well as interviews with federal law enforcement authorities. Cooperation under this Paragraph will include identification of witnesses who, to the knowledge of Baker Hughes, may have material information regarding the matters under investigation.

d. With respect to any information, testimony, document, record, or other tangible evidence provided to the Department pursuant to this Agreement, Baker Hughes consents to any and all disclosures to other government agencies, whether agencies of the United States or a foreign government, of such materials as the Department, in its sole discretion, shall deem appropriate.

5. In return for the full and truthful cooperation of Baker Hughes, and compliance with all the terms and conditions of this Agreement, the Department agrees not to use any information related to the conduct described in the attached Statement of Facts against Baker Hughes in any criminal or civil case, except in a prosecution for perjury or obstruction of justice; in a prosecution for making a false statement after the date of this Agreement; in a prosecution or other proceeding relating to any crime of violence; or in a prosecution or other proceeding relating to a violation of any provision of Title 26 of the United States Code. In addition, the Department agrees, except as provided herein, that it will not bring any criminal or civil case against Baker Hughes, or any subsidiary of Baker Hughes, related to the conduct of present and former employees as described in the attached Statement of Facts, or relating to information Baker Hughes disclosed to the Department prior to the date of this Agreement, concerning its business affairs in Kazakhstan, Angola, Nigeria, Indonesia, Russia, Uzbekistan, Turkmenistan and Azerbaijan, among other countries. This Paragraph does not provide any protection against prosecution for any

corrupt payments or false accounting, if any, made in the future by Baker Hughes, or any of its officers, directors, employees, agents or consultants, whether or not disclosed by Baker Hughes, pursuant to the terms of this Agreement. This paragraph also does not provide any protection against prosecution for any corrupt payments made in the past which are not described in the attached Statement of Facts or were not disclosed to the Department prior to the date of this Agreement. In addition, this Paragraph does not provide any protection against criminal prosecution of any present or former officer, employee, director, shareholder, agent or consultant of Baker Hughes for any violations committed by them.

6. Baker Hughes represents that it has implemented and will continue to implement a compliance and ethics program designed to detect and prevent violations of the FCPA, U.S. commercial bribery laws and foreign bribery laws throughout its operations, including those of its subsidiaries, affiliates, joint ventures, and those of its contractors and subcontractors, with responsibilities that include interactions with foreign officials. Implementation of these policies and procedures shall not be construed in any future enforcement proceeding as providing immunity or amnesty for any crimes not disclosed to the Department as of the date of the execution of this Agreement for which Baker Hughes would otherwise be responsible.

7. In particular, Baker Hughes represents that, at a minimum, it has undertaken, or agrees that it will undertake, the following steps:

a. Adopt a system of internal accounting controls and a system designed to ensure the making and keeping of accurate books, records, and accounts; and

b. Adopt a rigorous anti-corruption compliance code (“Compliance Code”), as described further below, that is designed to detect and deter violations of the FCPA, U.S. commercial bribery laws and foreign bribery laws. The anti-bribery Compliance Code of Baker Hughes will consist of the following elements, at a minimum:

i. A clearly articulated corporate policy against violations of the FCPA, U.S. commercial bribery laws and foreign bribery laws;

ii. Promulgation of compliance standards and procedures to be followed by all directors, officers, employees and, where appropriate, business partners, including, but not limited to, agents, consultants, representatives, teaming partners, joint venture partners and other parties acting on behalf of Baker Hughes in a foreign jurisdiction (respectively, “agents” and “business partners”), that are reasonably capable of reducing the prospect that the FCPA, U.S. commercial bribery laws, foreign bribery laws or the Compliance Code of Baker Hughes will be violated;

iii. The assignment to one or more senior corporate officials of Baker Hughes, who shall report directly to the Audit/Ethics Committee of the Board of Directors, of responsibility for the implementation and oversight of

compliance with policies, standards, and procedures established in accordance with the Compliance Code of Baker Hughes;

iv. The effective communication to all directors, officers, employees and, where appropriate, agents and business partners, of corporate and compliance policies, standards, and procedures regarding the FCPA, U.S. commercial bribery laws and foreign bribery laws. This shall include: (A) training concerning the requirements of the FCPA, U.S. commercial bribery laws and foreign bribery laws on a periodic basis to all directors, officers and employees; and (B) periodic certifications by all directors, officers, employees, including the head of each Baker Hughes business or division, and, where appropriate, agents and business partners, certifying compliance therewith;

v. A reporting system, including a “Helpline” for directors, officers, employees, agents and business partners to report suspected violations of the Compliance Code or suspected criminal conduct;

vi. Appropriate disciplinary procedures to address violations of the FCPA, U.S. commercial bribery laws, foreign bribery laws, or the Compliance Code;

vii. Extensive pre-retention due diligence requirements pertaining to, as well as post-retention oversight of, all agents and business partners, including the maintenance of complete due diligence records at Baker Hughes;

viii. Clearly articulated corporate procedures designed to ensure that Baker Hughes exercises due care to assure that substantial discretionary authority is not delegated to individuals whom Baker Hughes knows, or should know through the exercise of due diligence, have a propensity to engage in illegal or improper activities;

ix. A committee consisting of senior officials of Baker Hughes and each Baker Hughes business or division to review and to record, in writing, actions relating to: (A) the retention of any agent or subagents thereof; and (B) all contracts and payments related thereto;

x. The inclusion in all agreements, contracts, and renewals thereof with all agents and business partners provisions that are reasonably calculated to prevent violations of the FCPA, U.S. commercial bribery laws, foreign bribery laws and other relevant laws, which may, depending upon the circumstances, include: (A) setting forth anti-corruption representations and undertakings relating to compliance with the FCPA, U.S. commercial bribery laws, foreign bribery laws and other relevant laws; (B) allowing for internal and independent audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (C) providing for termination of the agent or business partner as a result of any breach of anti-corruption laws and regulations or representations and undertakings related thereto;

xi. Financial and accounting procedures designed to ensure that Baker Hughes maintains a system of internal accounting controls and makes and keeps accurate books, records, and accounts; and

xii. Independent audits by outside counsel and auditors, at no longer than three-year intervals beginning after the completion of the term of the Monitor, as discussed below, to ensure that the Compliance Code, including its anti-corruption provisions, are implemented in an effective manner.

8. Baker Hughes agrees to engage an independent monitor (“Monitor”) within sixty (60) calendar days of the signing of this Agreement, to monitor the Company’s compliance program with respect to the FCPA, U.S. commercial bribery laws, and foreign bribery laws for a period of three (3) years from the execution of this Agreement, subject to the provisions of paragraphs 9 through 15 below. For thirty (30) calendar days after the signing of this Agreement, the Company and the Department shall use mutual best efforts to identify a mutually acceptable person to serve as the Monitor. If, after that period, the parties have been unable to identify a mutually acceptable person then the Department in its sole discretion shall select a person to serve as the Monitor. The Monitor will review and evaluate the effectiveness of Baker Hughes’s internal controls, record-keeping, and financial reporting policies and procedures as they relate to Baker Hughes’s compliance with the books and records, internal accounting controls, and anti-bribery provisions of the

FCPA, U.S. commercial bribery laws, and foreign bribery laws. This review and evaluation shall include an assessment of those policies and procedures as actually implemented.

9. Baker Hughes shall cooperate fully with the Monitor and the Monitor shall have the authority to take such reasonable steps, in his or her view, as may be necessary to be fully informed about the operations of Baker Hughes within the scope of his or her responsibilities under this Agreement. To that end, Baker Hughes shall provide the Monitor with access to all information, documents, records, facilities and/or employees that fall within the scope of responsibilities of the Monitor under this Agreement. Any such disclosure to the Monitor retained by Baker Hughes concerning corrupt payments, related books and records and internal controls, shall not relieve Baker Hughes of its obligation to truthfully disclose such matters to the Department.

a. The parties agree that no attorney-client relationship shall be formed between Baker Hughes and the Monitor.

b. In the event that Baker Hughes seeks to withhold from the Monitor access to information, documents, records, facilities and/or employees of Baker Hughes which may be subject to a claim of attorney-client privilege or to the attorney work-product doctrine, Baker Hughes shall promptly provide written notice of this determination to the Monitor and the Department. Such notice shall include a

general description of the nature of the information, documents, records, facilities and/or employees that are being withheld, as well as the basis for the claim. The Department may then consider whether to make a further request for access to such information, documents, records, facilities and/or employees, as provided in Paragraph 4(a) of this Agreement.

c. Except as provided in this paragraph, Baker Hughes shall not withhold from the Monitor any information, documents, records, facilities and/or employees on the basis of an attorney client privilege or work product claim.

10. Baker Hughes agrees that the Monitor shall assess whether these entities’ policies and procedures are reasonably designed to detect and prevent violations of the FCPA, U.S. commercial bribery laws, and foreign bribery laws, and, during the three (3) year period, shall conduct an initial review and prepare an initial report, followed by two (2) follow-up reviews and follow-up reports as described below. With respect to each of the three (3) reviews, after initial consultations with Baker Hughes and the Department, the Monitor shall prepare a written work plan for each of the reviews, which shall be submitted in advance to Baker Hughes and the Department for comment. In order to conduct an effective initial review and to fully understand any existing deficiencies in controls, policies and procedures related to the FCPA, U.S. commercial bribery laws, and foreign bribery laws, the Monitor’s initial work plan shall include such steps as are necessary to develop an understanding of the

facts and circumstances surrounding any violation that may have occurred. Any disputes between Baker Hughes and the Monitor with respect to the work plan shall be decided by the Department in its sole discretion.

11. In connection with the initial review, the Monitor shall issue a written report within one hundred twenty (120) calendar days of his or her retention setting forth the Monitor’s assessment and making recommendations reasonably designed to improve the policies and procedures of Baker Hughes for ensuring compliance with the FCPA, U.S. commercial bribery laws, and foreign bribery laws. The Monitor shall provide the report to the Board of Directors of Baker Hughes and contemporaneously transmit copies to Mark F. Mendelsohn, (or his successor), Deputy Chief, Fraud Section, Criminal Division, U.S. Department of Justice, 10 ^th and Constitution Ave., N.W., Bond Building, Fourth Floor, Washington, D.C. 20530. The Monitor may extend the time period for issuance of the report with prior written approval of the Department.

12. Within sixty (60) calendar days after receiving the Monitor’s report, Baker Hughes shall adopt all recommendations in the report; provided, however, that within thirty (30) calendar days after receiving the report, Baker Hughes shall advise the Monitor and the Department in writing of any recommendations that Baker Hughes considers unduly burdensome, impractical, or costly. With respect to any recommendation that Baker Hughes considers unduly burdensome, impractical, or

costly, Baker Hughes need not adopt that recommendation within that time but shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose. As to any recommendation on which Baker Hughes and the Monitor do not agree, such parties shall attempt in good faith to reach an agreement within thirty (30) calendar days after Baker Hughes serves the written advice. In the event Baker Hughes and the Monitor are unable to agree on an alternative proposal, Baker Hughes shall abide by the determination of the Monitor. With respect to any recommendation that the Monitor determines cannot reasonably be implemented within sixty (60) calendar days after receiving the report, the Monitor may extend the time period for implementation with prior written approval of the Department.

13. The Monitor shall undertake two (2) follow-up reviews to further monitor and assess whether the policies and procedures of Baker Hughes are reasonably designed to detect and prevent violations of the FCPA, U.S. commercial bribery laws, and foreign bribery laws. Within sixty (60) calendar days of initiating each follow-up review, the Monitor shall: (a) complete the review; (b) certify whether the anti-bribery compliance program of Baker Hughes, including its policies and procedures, is appropriately designed and implemented to ensure compliance with the FCPA, U.S. commercial bribery laws, and foreign bribery laws; and (c) report on the Monitor’s findings in the same fashion as set forth in Paragraph 11 with respect to the

initial review. The first follow-up review shall commence one year after appointment of the Monitor under this Agreement. The second follow-up review shall commence at least one year after completion of the first review. The Monitor may extend the time period for these follow-up reviews with prior written approval of the Department.

14. In undertaking tale assessments and reviews described in Paragraphs 10 through 13 of this Agreement, the Monitor shall formulate conclusions based on, among other things: (a) inspection of documents, including all the policies and procedures relating to the anti-bribery compliance program of Baker Hughes and all its affiliates and subsidiaries; (b) onsite observation of the systems and procedures of Baker Hughes, including its internal controls and its recordkeeping and internal audit procedures; (c) meetings with and interviews of employees, officers, and directors of Baker Hughes and all its affiliates and subsidiaries, and any other relevant persons; and, (d) analyses, studies and testing of the anti-bribery compliance program of Baker Hughes and all its affiliates and subsidiaries.

15. The charge of the Monitor, as described above, is to review the controls, policies and procedures of Baker Hughes and all its affiliates and subsidiaries related to compliance with the FCPA, U.S. commercial bribery laws and foreign bribery laws. Should the Monitor during the course of his or her engagement discover that questionable or corrupt payments or questionable or corrupt transfers of

property or interests may have been offered, promised, paid, or authorized by any Baker Hughes entity or person, or any entity or person working directly or indirectly for Baker Hughes, or that related false books and records have been maintained, the Monitor shall promptly report such payments to Baker Hughes for further investigations, unless the Monitor believes, in the exercise of his or her discretion, that such disclosure should be made directly to the Department. If the Monitor refers the matter only to Baker Hughes, Baker Hughes shall promptly report the same to the Department. If Baker Hughes fails to make such disclosure within ten (10) calendar days of the report of such payments to Baker Hughes, the Monitor shall independently disclose his or her findings to the Department at the address listed above in Paragraph 11. Further, in the event that Baker Hughes, or any entity or person working directly or indirectly for Baker Hughes, refuses to provide information necessary for the performance of the Monitor’s responsibilities, the Monitor shall disclose that fact to the Department. Baker Hughes and its shareholders shall not take any action to retaliate against the Monitor for any such disclosures or for any other reason. The Monitor may report other criminal or regulatory violations discovered in the course of performing its duties, in the same manner as described above.

16. In consideration of the action of Baker Hughes in voluntarily disclosing and conducting an investigation by outside legal counsel regarding the matter set out in the attached Statement of Facts and other matters disclosed to the Department, and

the cooperation of Baker Hughes with the investigation conducted by the Department; and the willingness of Baker Hughes to: (a) acknowledge responsibility for its behavior and that of its subsidiaries and affiliates; (b) continue its cooperation with the Department; (c) adopt and maintain remedial measures and independently review and audit such measures; and (d) cause its subsidiary, BHSI, to enter into a plea agreement and plead guilty to the charges set forth in a separate criminal Information, the Department agrees that any prosecution of Baker Hughes for the conduct set forth in the attached Statement of Facts, and for the conduct relating to information Baker Hughes disclosed to the Department prior to the date of this Agreement concerning its business affairs in Kazakhstan, Angola, Nigeria, Indonesia, Russia, Uzbekistan, Turkmenistan and Azerbaijan, among other countries, be and hereby is deferred for a period of two (2) years from the date of this Agreement.

17. The Department further agrees that if Baker Hughes is in full compliance with all of its obligations under this Agreement, including its obligation to adopt the recommendations of the Monitor in accordance with the terms of Paragraph 12, the Department will not continue the criminal prosecution against Baker Hughes described in Paragraph 1 and, after two (2) years, this Agreement shall expire.

18. If the Department determines, in its sole discretion, that Baker Hughes at any time during the two-year term of this Agreement, has committed any federal

crimes subsequent to the date of this Agreement, has provided deliberately false, incomplete, or misleading information under this Agreement, or has otherwise breached the Agreement, Baker Hughes shall, in the Department’s sole discretion, thereafter be subject to prosecution for any federal criminal violation of which the Department has knowledge. Any such prosecutions may be premised on information provided by Baker Hughes. Moreover, Baker Hughes agrees that any such prosecution that is not time-barred by the applicable statute of limitations on the date of this Agreement may be commenced against Baker Hughes in accordance with this Agreement, notwithstanding the expiration of the statute of limitations between the signing of this Agreement and the termination of this Agreement. By this Agreement, Baker Hughes expressly intends to and does waive any rights in this respect.

19. It is further agreed that in the event that the Department determines that Baker Hughes has breached this Agreement: (a) all statements made by or on behalf of Baker Hughes to the Department or to the Court, including the attached Statement of Facts, and any testimony given by Baker Hughes before a grand jury or any tribunal, at any legislative hearings, or to the Securities and Exchange Commission (“SEC”), whether prior or subsequent to this Agreement, or any leads derived from such statements or testimony, shall be admissible in evidence in any and all criminal proceedings brought by the Department against Baker Hughes; and (b) Baker Hughes shall not assert any claim under the United States Constitution, Rule 11(f) of the

Federal Rules of Criminal Procedure, Rule 410 of the Federal Rules of Evidence, or any other federal rule, that statements made by or on behalf of Baker Hughes prior to or subsequent to this Agreement, or any leads developed therefrom, should be suppressed. The decision whether conduct or statements of any individual will be imputed to Baker Hughes for the purpose of determining whether Baker Hughes has violated any provision of this Agreement shall be in the sole discretion of the Department.

20. Baker Hughes acknowledges that the Department has made no representations, assurances, or promises concerning what sentence may be imposed by the Court if Baker Hughes breaches this Agreement and this matter proceeds to judgment. Baker Hughes further acknowledges that any such sentence is solely within the discretion of the Court and that nothing in this Agreement binds or restricts the Court in the exercise of such discretion.

21. Baker Hughes agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger, or transfer, they shall include in any contract for sale, merger or transfer a provision binding the purchaser or any successor in interest thereto to the obligations described in this Agreement.

22. Baker Hughes expressly agrees that it shall not, through present or future attorneys, Boards of Directors, officers, or any other person authorized to speak for Baker Hughes, make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by Baker Hughes set forth above or the factual statements set forth in the attached Statement of Facts. Any such contradictory statement shall, subject to cure rights below by Baker Hughes, constitute a breach of this Agreement and Baker Hughes thereafter shall be subject to prosecution as set forth in Paragraphs 18 and 19 of this Agreement. The decision, whether any public statement by any such person contradicting a fact contained in the Statement of Facts will be imputed to Baker Hughes for the purpose of determining whether they have breached this Agreement shall be at the sole discretion of the Department. If the Department determines that a public statement by any such person contradicts in whole or in part a statement contained in the Statement of Facts, the Department shall so notify Baker Hughes and Baker Hughes may avoid a breach of this Agreement by publicly repudiating such statement(s) within two (2) business days after notification. Consistent with the obligations of Baker Hughes as set forth above, Baker Hughes shall be permitted to raise defenses and to assert affirmative claims in civil and regulatory proceedings relating to the matters set forth in the Statement of Facts. This Paragraph is not intended to apply to any statement made by any employee of Baker

Hughes in the course of any criminal, regulatory, or civil case initiated against such individual, unless such individual is speaking on behalf of Baker Hughes.

23. In connection with this Agreement, Baker Hughes shall only issue a press release if it first determines that the text of the release is acceptable to the Department.

24. It is understood that this Agreement is binding on Baker Hughes and the Department but specifically does not bind any other federal agencies, or any state or local law enforcement or regulatory agencies, although the Department will bring the cooperation of Baker Hughes and its compliance with its other obligations under this Agreement to the attention of such agencies and authorities if requested to do so by Baker Hughes.

25. This Agreement sets forth all the terms of the Deferred Prosecution Agreement between Baker Hughes and the Department. No modifications or additions to this Agreement shall be valid unless they are in writing and signed by the Department, the attorneys for Baker Hughes, and a duly authorized representative of Baker Hughes.

26. Any notice to Baker Hughes under this Agreement shall be given by personal delivery, overnight delivery by a recognized delivery service or registered or certified mail, in each case addressed to the General Counsel, Baker Hughes

Incorporated, 2929 Allen Parkway, Suite 2100, Houston, Texas 77019. Notice shall be effective upon actual receipt by Baker Hughes.

AGREED:

FOR BAKER HUGHES INCORPORATED:


		/s/ Reid M. Figel REID M. FIGEL, ESQ.
		Kellogg, Huber, Hansen, Todd, Evans
		& Figel, P.L.L.C.
		Washington, D.C. 20036
		Counsel for Baker Hughes Incorporated

		/s/ Alan R. Crain, Jr. ALAN R. CRAIN, JR.
		Senior Vice-President and General Counsel
		Baker Hughes. Incorporated

FOR THE DEPARTMENT OF JUSTICE:


		STEVEN A. TYRRELL
		Chief, Fraud Section

		By:		/s/ Mark F. Mendelsohn
		MARK F. MENDELSOHN
		Deputy Chief, Fraud Section

		By:		/s/ John A. Michelich
		JOHN A. MICHELICH
		Senior Trial Attorney, Fraud Section
		United States Department of Justice
		Fraud Section, Criminal Division
		10 ^th & Constitution Avenue, NW
		Washington, D.C. 20530
		(202) 514-7023

Filed at Houston, Texas, on this 11 day of April, 2007.

ATTACHMENT A
STATEMENT OF FACTS

The following Statement of Facts is incorporated by this reference as part of the Deferred Prosecution Agreement (the “Agreement”) between the United States Department of Justice (the “Department”) and Baker Hughes Incorporated (“Baker Hughes”), and the parties hereby agree and stipulate that the following information is true and accurate. As set forth in Paragraph 2 of the Agreement, Baker Hughes accepts and acknowledges that it is responsible for the acts of its officers and employees, and those of its wholly-owned subsidiary, defendant Baker Hughes Services International, Inc. (“BHSI”), that are set forth below. Should the Department initiate the prosecution that is deferred by this Agreement, Baker Hughes agrees that it will neither contest the admissibility of, nor contradict, this Statement of Facts in any such proceeding. If this matter were to proceed to trial, the United States would prove beyond a reasonable doubt, by admissible evidence, the facts alleged in the Information. This evidence would establish the following:

Baker Hughes Incorporated

1. Baker Hughes, headquartered in Houston, Texas, was a corporation organized under the laws of the State of Delaware, with principal offices in Houston, Texas. Baker Hughes was a global provider of

comprehensive oil-field services and products which it provided through several subsidiaries and operating divisions, and operated in more than 80 countries.

2. Baker Hughes issued and maintained a class of securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 781) and was required to file periodic reports with the United States Securities and Exchange Commission under Section 13 of the Securities Exchange Act (15 U.S.C. § 78m). Accordingly, Baker Hughes was an “issuer” within the meaning of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1(a).

Baker Hughes Services International, Inc.

3. From in or about 1993 to the present, Baker Hughes maintained BHSI, a wholly owned subsidiary which was organized under the laws of the State of Delaware and which conducted business in the Republic of Kazakhstan, the Southern District of Texas and elsewhere. Accordingly, BHSI was a “domestic concern” within the meaning of the FCPA, (15 U.S.C. § 78dd-2). BHSI was engaged in the business of providing comprehensive oil-field services and products in the Republic of Kazakhstan and elsewhere and, during the relevant period, maintained an office in Almaty, Kazakhstan.

4. BHSI regularly sought approval for management decisions from superiors at Baker Hughes management offices in Houston, Texas. BHSI maintained a bank account at the Chase Bank of Texas, N.A., in Houston, Texas. For internal accounting purposes, BHSI regularly sent invoices to the various Baker Hughes operating divisions requesting them to remit funds directly to BHSI’s account at Chase Bank in Houston. Accordingly, BHSI operated within the territorial jurisdiction of the United States.

The Karachaganak Project in Kazakhstan

5. The government of the Republic of Kazakhstan managed its national petroleum exploration and production through Kazakhoil, its state-owned oil company. Kazakhoil is a government instrumentality and its employees are foreign government officials within the meaning of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1(f)(1)(A). From time to time, Kazakhoil would form consortiums, in which Kazakhoil would join with several different oil companies, in order to undertake collectively particular petroleum exploration and production projects.

Karachaganak Integrated Organization (“KIO”), for the development and operation of the oil production facilities in Karachaganak.

7. The four international oil companies formed the Karachaganak Petroleum Operating Company, B.V. (“KPO”), a company organized and registered under the laws of The Netherlands, which maintained its principal offices in the Republic of Kazakhstan. KPO was responsible for developing and operating the Karachaganak field on behalf of partners in the joint venture. KPO solicited bids from outside vendors for comprehensive oil-field drilling services and products including project management, oil drilling and engineering support. In December, 1999, Baker Hughes was invited to submit a bid to KPO for a contract to provide a wide range of oil-field drilling and production services for the Karachaganak project.

The Co-Conspirators

8. BHSI Employee A (hereinafter, “Employee A”), who is named in the Information as a co-conspirator but not as a defendant, was employed as Country Manager and Business Development Manager of BHSI. Employee A also served as a Business Development Manager and as the Team Leader for the Karachaganak tender. Employee A’s duties included, among other things, the coordination of the various Baker Hughes operating divisions relating to the Baker Hughes bid on the Karachaganak project. As such, Employee A

was an employee of a “domestic concern” within the meaning of the FCPA, 15 U.S.C. § 78dd-2.

9. Consulting Firm A, which is named in the Information as a co-conspirator but not as a defendant, was a consulting firm incorporated and registered as a private limited liability company in the Isle of Man, where it maintained its principal place of business. Consulting Firm A maintained a business office in London, United Kingdom, and also maintained a bank account in the name of Consulting Firm A at Barclay’s Bank in London, United Kingdom. Generally, Consulting Firm A provided unspecified administrative and consulting services and acted as an agent for companies doing business in the Republic of Kazakhstan and elsewhere.

10. Agent A, who is named in the Information as a co-conspirator but not as a defendant, was a director of Consulting Firm A, and acted as the representative of Consulting Firm A and as the agent for Baker Hughes regarding its bid for Karachaganak. Agent A informed Employee A that a Kazakhoil official demanded that BHSI pay a commission to Consulting Firm A in order for BHSI to obtain the Karachaganak contract. Agent A is a citizen of the United Kingdom.

The Baker Hughes Bid for Karachaganak

11. In or about February 2000, Baker Hughes, through BHSI, submitted a consolidated bid to KPO for various categories of work on the Karachaganak project. The bid was submitted for work to be performed by Baker Hughes operating divisions Baker Atlas, Baker Oil Tools and INTEQ, and was coordinated and submitted by Baker Hughes Enterprise Services & Technology Group (“BEST”). BEST was a team of Baker Hughes business development managers responsible for coordinating, structuring and marketing Baker Hughes oilfield services for significant contracts across its various operating divisions, and was not itself a business unit.

12. Although it was not a member of the KPO consortium, Kazakhoil wielded considerable influence as Kazakhstan’s national oil company and, in effect, the ultimate award of a contract by KPO to any particular bidder depended upon the approval of Kazakhoil officials. Kazakhoil was controlled by officials of the Government of Kazakhstan and, as such, was an “instrumentality” of a foreign government and its officers and employees were “foreign officials,” within the meaning of the FCPA, 15 U.S.C. § 78dd-1(f)(1)(A). Baker Hughes understood that KPO’s approval of their bid for the contract depended heavily on a favorable recommendation from Kazakhoil.

Kazakhoil Directs BHSI to Retain an Agent

13. In or about early September 2000, Baker Hughes managers and executives received unofficial notification that their bid was successful and that Baker Hughes would win the Karachaganak tender. Nevertheless, in or about mid-September 2000, a Kazakhoil official demanded that, in order for Baker Hughes to win the Karachaganak contract, BHSI should pay Consulting Firm A, an agent located on the Isle of Man, a commission equal to 3.0% of the revenue earned by Baker Hughes on the Karachaganak contract.

14. On September 17, 2000, Employee A sent an e-mail informing his supervisor that Kazakhoil officials were demanding that Baker Hughes retain an agent in order to receive approval for the Karachaganak project and stated, among other things, that “. . . Kazakhoil approached me through an agent in London stating that to get Kazakhoil approval a 3% commission is required. This as you know I refused and said that it is utterly outrageous to wait until a contractor is chosen and start demanding amounts that have been suggested.” Further, Employee A suggested that Baker Hughes should make a counter-offer to retain the agent only for future business which “. . . keeps us clear of any criticism (sic) for this KIO contract.” Further, Employee A stated, “. . . unless we do something we are not going to get the Kazakhoil support . . .”

and “. . . we are in the driving seat but if one our (sic) competitors comes in with a pot of gold, it is not going to be our contract.”

15. On September 19, 2000, Employee A sent an e-mail to Agent A, director of Consulting Firm A, in London, stating that Employee A had the “green light” from his corporate superiors to proceed with the agency agreement as proposed.

16. Although Consulting Firm A had performed no services to assist Baker Hughes or BHSI in preparing and submitting their bid for Karachaganak, BHSI sought and obtained approval from executives of operating divisions Baker Atlas, Baker Oil Tools, and INTEQ, to retain and pay a commission to Consulting Firm A of 2.0% of the revenue earned by each operating division in the Karachaganak project.

Karachaganak contract and 3.0% of revenue for all future services it would perform in Kazakhstan. In the e-mail, Employee A stated, “You will note the consideration has been greatly increased and trust this will receive the recognition it deserves in the necessary corners of Kazakhstan in confirming their support to Baker Hughes.” The side-letter, dated September 1, 2000, stated that Consulting Firm A had been retained by Baker Hughes “ . . . in recognition of said work and assistance given by [Consulting Firm A] towards Baker Hughes in pursuit of the Karachaganak contract. . .” and that Baker Hughes had decided to reward Consulting Firm A by payment of consideration equal to 2.0% of the contract revenues.

18. On September 25-26, 2000, Employee A and his supervisor began to canvass officers of operating divisions Baker Atlas, Baker Oil Tools and INTEQ requesting their agreement to pay their share of the agency commission. On September 26, 2000, Employee A received an e-mail from his supervisor directing Employee A not to sign any agency agreement until they had discussed several remaining issues. On September 27, 2000, Employee A received an e-mail from his supervisor informing him that the operating divisions had approved the plan to pay a 2.0% to 3.0% commission to Consulting Firm A for the Karachaganak contract.

Baker Hughes Wins the Karachaganak Contract

19. On September 27, 2000, Employee A signed a “Sales Representation Agreement” on behalf of BHSI with Consulting Firm A, which was backdated to September 1, 2000. In early October 2000, officials of KPO notified BHSI and Baker Hughes that the Baker Hughes tender was successful and the Karachaganak contract was awarded to Baker Hughes. The Integrated Services Contract between KPO and BHSI became effective on or about October 23, 2000. Thereafter, Baker Hughes and operating divisions Baker Atlas, Baker Oil Tools and INTEQ, through Baker Hughes’s subsidiary BHSI, performed services pursuant to the contract with KPO.

Baker Hughes Divisions and BHSI Pay Commissions

20. On approximately a monthly basis, beginning in May 2001, and continuing through at least November 2003, BHSI would notify the three Baker Hughes operating divisions of the amount of commission charges each division owed based upon calculating 2.0% of that division’s revenue for the month. BHSI sent an invoice to each operating division requesting it to send its commission payment to the BHSI bank account at Chase Bank in Houston, Texas.

21. Beginning in May 2001, and continuing through at least November 2003, BHSI and Baker Hughes made commission payments to

Consulting Firm A totaling $4,100,162.70, which represented 2.0% of the revenue earned by Baker Hughes and its sub-contractors on the Karachaganak project. Each commission payment was wire-transferred from the BHSI bank account at Chase Bank in Houston to an account in the name of Consulting Firm A at Barclay’s Bank in London, United Kingdom.

22. On the dates set forth below, the following payments were made via wire transfer from a BHSI bank account at Chase Bank in Houston, Texas, to a bank account maintained by Consulting Firm A at Barclay’s Bank, in London, United Kingdom:

Commission Payments to
Consulting Firm A


Date	Amount in USD
May 24, 2001	$	32,540.00
June 20, 2001	$	97,116.00
August 1, 2001	$	117,336.00
August 22, 2001	$	108,680.00
October 26, 2001	$	278,999.00
December 6, 2001	$	323,399.00
December 13, 2001	$	34,123.00
January 16, 2002	$	147,211.02
February 21, 2002	$	125,367.00


Date	Amount in USD
April 5, 2002	$	281,741.00
May 15, 2002	$	170,950.00
June 25, 2002	$	143,107.00
August 1, 2002	$	380,682.47
September 27, 2002	$	400,488.58
November 27, 2002	$	139,819.00
December 31, 2002	$	118,843.00
January 29, 2003	$	122,146.93
February 25, 2003	$	121,810.62
March 3, 2003	$	123,737.08
April 8, 2003	$	111,760.42
May 8, 2003	$	96,535.78
May 27, 2003	$	126,761.96
July 1, 2003	$	103,600.98
July 30, 2003	$	111,362.50
September 16, 2003	$	105,170.33
October 28, 2003	$	83,052.94
November 25, 2003	$	93,821.11
Total	$	4,100,162.70

23. Baker Hughes and BHSI failed to properly account for the purported commission payments to Consulting Firm A, and failed to describe accurately the transactions in its books and records. Instead, Baker Hughes and BHSI improperly characterized the payments made as legitimate payments for, among other things, “commissions,” “fees,” or “legal services.” However, Consulting Firm A had no office or presence in Kazakhstan and rendered no goods or ancillary agency services to Baker Hughes or BHSI in Kazakhstan or elsewhere. In fact, the so-called “commission” payments made to Consulting Firm A were bribes, paid and authorized by employees of BHSI, all or part of which BHSI understood and intended to be transferred to an undisclosed official or officials of Kazakhoil, in exchange for which Baker Hughes and BHSI would receive the contract to provide services in the Karachaganak oilfield project.

24. Net revenues realized by Baker Hughes on the Karachaganak project were $189.2 Million. After offsetting net revenues by the company’s expenses, Baker Hughes recognized a profit of approximately $19.9 million.

Conclusion

25. Based upon the facts as set forth above, Baker Hughes admits that it is an “issuer” within the meaning of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1, et seq ., and that its officers, employees and agents made

use of and caused the use of the mails and means and instrumentalities of interstate commerce corruptly in furtherance of a payment of money to Consulting Firm A, while knowing that all or a portion of such money would be given, directly or indirectly, to an official of Kazakhoil, an instrumentality of the government of Kazakhstan, for the purpose of influencing acts and decisions of a foreign official in his official capacity to secure an improper advantage for Baker Hughes and BHSI, and to assist Baker Hughes in obtaining and retaining business; and that Baker Hughes failed to accurately reflect in its books and records the payment of commissions to Consulting Firm A totaling $4,100,162.70.

AGREED:

FOR BAKER HUGHES INCORPORATED:


		/s/ Reid M. Figel REID M. FIGEL, ESQ.
		Kellogg, Huber, Hansen, Todd, Evans
		& Figel, P.L.L.C.
		Washington, D.C. 20036
		Counsel for Baker Hughes Incorporated

		/s/ Alan R. Crain, Jr. ALAN R. CRAIN, JR.
		Senior Vice-President and General Counsel
		Baker Hughes Incorporated

FOR THE DEPARTMENT OF JUSTICE:


		STEVEN A. TYRRELL
		Chief, Fraud Section

		By:		/s/ Mark F. Mendelsohn MARK F. MENDELSOHN
				Deputy Chief, Fraud Section

		By:		/s/ John A. Michelich JOHN A. MICHELICH
				Senior Trial Attorney, Fraud Section
				United States Department of Justice
				Fraud Section, Criminal Division
				10 ^th & Constitution Avenue, NW
				Washington, D.C. 20530
				(202) 514-7023

Filed at Houston, Texas, on this ___day of April, 2007.

Exhibit 10.5

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION


	:
UNITED STATES OF AMERICA
	:
v.	:	NO: H-07-129
	:
BAKER HUGHES SERVICES	:	PLEA AGREEMENT
INTERNATIONAL, INC.,	:
	:
Defendant	:
	:

The United States of America, by and through Mark F. Mendelsohn, Deputy Chief, and John A. Michelich, Senior Trial Attorney, United States Department of Justice, Criminal Division, Fraud Section (the “Department” or the “Fraud Section”), the defendant, BAKER HUGHES SERVICES INTERNATIONAL, INCORPORATED (“BHSI”), and the defendant’s counsel, Reid M. Figel, Esq., Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., pursuant to Rule 11(c)(1)(B) of the Federal Rules of Criminal Procedure, state that they have entered into an agreement, the terms and conditions of which are as follows:

The Defendant’s Agreement

1. Defendant BHSI agrees to waive indictment and plead guilty to a three-count criminal information filed in the Southern District of Texas charging BHSI with conspiracy to violate the Foreign Corrupt Practices Act of 1977 (“FCPA”), as amended, 15 U.S.C. §§ 78dd-1, et. seq ., in violation of 18 U.S.C. § 371 (Count One); a substantive violation of the FCPA, 15 U.S.C. § 78dd-2(a) (Count Two); and aiding and abetting the falsification of books and records in violation of 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5) and 78ff(a), and 18 U.S.C. § 2 (Count

Three). The defendant further agrees to persist in that plea through sentencing and, as set forth below, to fully cooperate with the United States.

2. This plea agreement is between the Department and the defendant BHSI, and does not bind any other division or section of the Department of Justice or any other federal, state, or local prosecuting, administrative, or regulatory authority. This agreement does not apply to any other charges other than those specifically mentioned herein. However, the Department will bring this Agreement and the cooperation of BHSI, its direct or indirect affiliates, subsidiaries, and parent corporations, to the attention of other prosecuting authorities or other agencies, if requested.

3. Defendant agrees that this Agreement will be executed by an authorized corporate representative. Defendant further agrees that a Resolution duly adopted by the Board of Directors of Baker Hughes, on behalf of its subsidiary BHSI, in the form attached to this Agreement as Exhibit 3, or in a substantially similar form, represents that the signature on this Agreement by BHSI and its counsel are authorized by the Board of Directors of Baker Hughes, on behalf of its subsidiary BHSI.

4. Defendant BHSI agrees that it has the full legal right, power and authority to enter into and perform all of its obligations under this Agreement and defendant agrees to abide by all terms and obligations of this Agreement as described herein.

5. Defendant agrees that any fine or restitution imposed by the Court will be due and payable within five (5) business days from the date of sentencing, and defendant will not attempt to avoid or delay payments. Defendant further agrees to pay the Clerk of the Court for the

United States District Court for the Southern District of Texas the mandatory special assessment within five (5) business days from the date of sentencing.

6. Defendant agrees that if the company or any of its direct or indirect affiliates, subsidiaries, or parent corporations issues a press release in connection with this Agreement, Defendant shall first consult the Department to determine whether the text of the release is acceptable, and shall only issue a press release that has been deemed acceptable to the Department.

7. Defendant BHSI agrees that in the event it sells, merges or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale(s) is/are structured as a stock or asset sale, merger, or transfer, BHSI shall include in any contract for sale, merger or transfer, a provision fully binding the purchaser(s) or any successor(s) in interest thereto to the obligations described in this Agreement.

The United States’ Agreement

8. In exchange for the corporate guilty plea of BHSI and the complete fulfillment of all of its obligations under this Agreement, the Department agrees not to file additional criminal charges against BHSI for any of the corrupt payments described in the Statement of Facts attached as Exhibit 1. This Agreement will not close or preclude the investigation or prosecution of any natural persons, including any officers, directors, employees, agents or consultants of BHSI, or of any other Baker Hughes entity, including all of its direct or indirect affiliates, subsidiaries, or parent corporations, who may have been involved in any of the matters set forth in the Information, Statement of Facts or in any other matters.

Factual Basis

9. Defendant BHSI is pleading guilty because it is guilty of the charges contained in the Information. Defendant BHSI agrees and stipulates that the factual allegations set forth in the Information are true and correct, that it is responsible for the acts of its officers and employees described in the Statement of Facts attached hereto and incorporated herein as Exhibit 1, and that the Statement of Facts accurately reflects its criminal conduct.

Defendant’s Obligations

10. Defendant BHSI agrees:

a. To plead guilty as set forth in this Agreement;

b. To abide by all sentencing stipulations contained in this Agreement;

c. To: (i) appear, through its duly appointed representatives, as ordered for all court appearances; and (ii) obey any other ongoing court order in this matter;

d. To commit no further crimes;

e. To be truthful at all times with the Court;

f. To pay the applicable fine and special assessment;

g. To create and implement a Compliance Code which, at a minimum, contains all of the obligations and provisions described in the Compliance Code attached as Exhibit 2 hereto and incorporated herein; and

h. To ensure that in the event BHSI sells, merges or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale(s) is/are structured as a stock or asset sale, merger or transfer, BHSI shall include in any contract for sale, merger, or transfer a provision fully binding the purchaser(s) or any

successor(s) in interest thereto to the obligations described in this Agreement, including the obligations described in Exhibit 2 with respect to a Compliance Code.

11. BHSI shall continue to cooperate fully with the Department, and with all other authorities and agencies designated by the Department, and shall truthfully disclose all information with respect to the activities of BHSI and its present and former directors, officers, employees, agents, consultants, contractors and subcontractors thereof, concerning all matters relating to corrupt payments in connection with their operations, related false books and records, and inadequate internal controls about which BHSI has any knowledge or about which the Department shall inquire. This obligation of truthful disclosure includes the obligation of BHSI to provide to the Department, upon request, any document, record, or other tangible evidence relating to such corrupt payments, books and records, and internal controls about which the Department shall inquire of BHSI.

a. The Department specifically reserves the right to request that BHSI provide the Department with access to information, documents, records, facilities and/or employees that may be subject to a claim of attorney-client privilege and/or the attorney work-product doctrine.

b. Upon written notice to the Department, BHSI specifically reserves the right to withhold access to information, documents, records, facilities and/or employees based upon an assertion of a valid claim of attorney-client privilege or application of the attorney work-product doctrine. Such notice shall include a general description of the nature of the information, documents, records, facilities and/or employees that are being withheld, as well as the basis for the claim.

c. In the event that BHSI withholds access to the information, documents, records, facilities and/or employees of BHSI, the Department may consider this fact in determining whether BHSI has fully cooperated with the Department.

d. Except as provided in this paragraph, BHSI shall not withhold from the Department, any information, documents, records, facilities and/or employees on the basis of an attorney-client privilege or work product claim.

Waiver of Constitutional Rights

12. BHSI knowingly, intelligently, and voluntarily waives its right to appeal the conviction in this case. BHSI similarly knowingly, intelligently, and voluntarily waives the right to appeal the sentence imposed by the court. In addition, BHSI knowingly, intelligently, and voluntarily waives the right to bring a collateral challenge pursuant to 28 U.S.C. § 2255, challenging either the conviction, or the sentence imposed in this case, except for a claim of ineffective assistance of counsel. BHSI waives all defenses based on the statute of limitations and venue with respect to any prosecution that is not time-barred on the date that this Agreement is signed in the event that: (a) the conviction is later vacated for any reason; (b) BHSI violates this Agreement; or (c) the plea is later withdrawn. The Department is free to take any position on appeal or any other post-judgment matter.

Penalty Range

13. The statutory maximum sentence that the Court can impose for a violation of Title 18, United States Code, Section 371 is a fine of $500,000 or twice the gross gain or gross loss resulting from the offense, whichever is greatest, 18 U.S.C. §§ 3571(c)(3) and (d); five years’ probation, 18 U.S.C. § 3561(c)(1); and a mandatory special assessment of $400, 18 U.S.C. §

3013(a)(2)(B). The statutory maximum sentence that the Court can impose for a violation of Title 15, United States Code, Section 78dd-2, et seq. , is a fine of $2,000,000 or twice the gross gain or gross loss resulting from the offense, whichever is greatest, 15 U.S.C. § 78dd-2(g)(1)(A), 18 U.S.C. § 3571(d), five years’ probation, 18 U.S.C. § 3561(c)(1), and a mandatory special assessment of $400, 18 U.S.C. § 3013(a)(2)(B). The statutory maximum sentence that the Court can impose for a violation of Title 15, United States Code, Section 78m(b)(2)(A) is a fine not exceeding $25,000,000, 15 U.S.C. § 78ff(a); five years’ probation, 18 U.S.C. § 3561(c)(1), and a mandatory special assessment of $400, 18 U.S.C. § 3013(a)(2)(B). The statutory maximum sentences for multiple counts can be aggregated and may run consecutively.

14. Calculation of Fine . The parties stipulate that the 2003 Guidelines Manual applies to this matter and to the factual predicates set forth below and that the following is the proper application of the sentencing guidelines to the offense alleged in the Information:


a. Calculation of Offense Level Base Offense Level (U.S.S.G. § 2C1.1(a)):			10

Benefit received or to be received of approximately $19 million (U.S.S.G. §§ 2C1.1(b)(2)(a), 2B 1.1(b)(1)(K)):			+20


TOTAL OFFENSE LEVEL:			30

b. Calculation of Culpability Score:

Base Score (U.S.S.G. § 8C2.5(a)):			5

Involvement in or tolerance of criminal activity in an organization of 200 or more employees and an individual within high level personnel of the organization participated in, condoned, or was willfully ignorant of the offense (U.S.S.G. § 8C2.5(b)(3)(A)):			+ 3


Prior history: Commission of the offense less than 5 years after a civil or administrative adjudication based on two or more separate instances of similar misconduct (U.S.S.G. § 8C2.5(c)(2)):		+ 2

Self-reporting, cooperation, acceptance of responsibility (U.S.S.G. § 8C2.5(g)(1)):		- 5


TOTAL CULPABILITY SCORE:		5

c. Calculation of Fine Range:

Base Fine: Greater of the amount from table in U.S.S.G. § 8C2.4(a)(1) & (d) corresponding to offense level of 30 ($10,500,000), or the pecuniary gain to the organization from the offense ($19,000,000) (U.S.S.G. § 8C2.4(a)(2)):	$	19,000,000

Multipliers, culpability score of 5 (U.S.S.G. § 8C2.6):		1.00 - 2.00

Fine Range (U.S.S.G. § 8C2.7):	$	*19,000,000 –$38,000,000*

d. The parties agree that the offenses of conviction should be grouped together for purposes of sentencing pursuant to U.S.S.G. § 3D1.2.

Sentencing Factors

15. The parties agree that pursuant to United States v. Booker , 543 U.S. 220 (2005), the Court must determine an advisory sentencing guideline range pursuant to the United States Sentencing Guidelines. The Court will then determine a reasonable sentence within the statutory range after considering the advisory sentencing guideline range and the factors listed in 18 U.S.C. § 3553(a). The parties’ agreement herein to any guideline sentencing factors constitutes proof of those factors sufficient to satisfy the applicable burden of proof.

Sentencing Recommendation

16. Fine . Assuming BHSI accepts responsibility as explained above, the parties will recommend the imposition of a fine in the amount of $11,000,000 payable to the Clerk of the

Court for the United States District Court for the Southern District of Texas. The parties further agree that this amount shall be paid as a lump sum within five (5) business days after imposition of sentence in this matter.

17. The parties have agreed that the fine of $11,000,000 for defendant BHSI is an appropriate disposition of the case based upon the following factors:

a. By entering and fulfilling the obligations under this Agreement, defendant BHSI has demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct;

b. The plea underlying this Agreement is a result of the voluntary disclosure made by BHSI and its parent corporation Baker Hughes Incorporated, through their counsel, to the Department beginning in May 2003, and the disclosure of evidence obtained as a result of the extensive investigation their attorneys subsequently conducted into the operations of BHSI, its parent, affiliates, and subsidiaries;

c. At the time of the initial disclosure, the conduct was unknown to the Department;

d. By entering into a deferred prosecution agreement with the Department, Baker Hughes, the defendant’s parent corporation has, among other things, agreed to: (i) implement and continue to implement a compliance and ethics program designed to detect and prevent violations of the FCPA, U.S. commercial bribery laws and foreign bribery laws throughout its operations, including those of Baker Hughes and its subsidiaries (including defendant BHSI), affiliates, and successors; and (ii) engage a monitor.

18. The parties agree not to seek any adjustments to, or departures from, the agreed upon payment of $11,000,000 as set forth herein.

19. Organizational Probation . The parties agree that organizational probation is appropriate in this case and shall include, as a condition of probation, the creation and implementation of a Compliance Code which, at a minimum, contains all of the obligations and provisions described in Exhibit 2. The parties recommend a three (3) year term of probation.

20. Community Service . The parties agree that community service need not be ordered in this case.

21. Forfeiture . The parties agree that forfeiture need not be ordered in this case.

22. Special Assessment . Defendant BHSI further agrees to pay the Clerk of the Court for the United States District Court for the Southern District of Texas within (5) business days of the time of sentencing the mandatory special assessment of $400 per count, for a total of $1,200.

23. Waiver of Pre-Sentence Report . The parties further agree, with the permission of the Court, to waive the requirement for a pre-sentence report pursuant to Federal Rule of Criminal Procedure 32(c)(1)(A), based on a finding by the Court that the record contains information sufficient to enable the Court to meaningfully exercise its sentencing power. However, the parties agree that in the event the Court orders the preparation of a pre-sentence report prior to sentencing, such order will not affect the agreement set forth herein.

24. Entry of Guilty Plea and Sentencing . The parties further agree to ask the Court’s permission to combine the entry of the plea and sentencing into one proceeding, and to conduct the plea and sentencing hearings of defendant BHSI in one proceeding. However, the parties

agree that in the event the Court orders that the entry of the guilty plea and sentencing hearing occur at separate proceedings, such an order will not affect the agreement set forth herein.

25. Court Not Bound . The Court is not bound by the recommendations of the parties or those made in any pre-sentence report. Because this Agreement is made under Rule 11(c)(1)(B) of the Federal Rules of Criminal Procedure, BHSI may not withdraw any guilty plea or rescind this Plea Agreement if the Court does not follow the agreements or recommendations herein.

26. Full Disclosure/Reservation of Rights . In the event the Court directs the preparation of a pre-sentence report, the Department will fully inform the preparer of the pre-sentence report and the Court of the facts and law related to BHSI’s case. Except as set forth in this Agreement, the parties reserve all other rights to make sentencing recommendations and to respond to motions and arguments by the opposition.

Breach of Agreement

27. If the Department determines, in its sole discretion, that BHSI has committed any federal crimes subsequent to the date of this Agreement, has provided deliberately false, incomplete, or misleading information under this Agreement, or has otherwise breached the Agreement, the Department is relieved of its obligations under this Agreement but BHSI may not withdraw any guilty plea.

28. In the event of a breach of this Agreement by BHSI, if the Department elects to pursue criminal charges, or any civil or administrative action that was not filed as a result of this Agreement, then:

a. BHSI agrees that any applicable statute of limitations is tolled between the date of BHSI’s signing of this Agreement and the discovery by the Department of any breach by the defendant; and

b. BHSI gives up all defenses based on the statute of limitations, any claim of pre-indictment delay, or any speedy trial claim with respect to any such prosecution or action, except to the extent that such defenses existed as of the date of the signing of this Agreement.

Complete Agreement

29. This document states the full extent of the agreement between the parties. There are no other promises or agreements, express or implied. Any modification of this Plea Agreement shall be valid only if set forth in writing in a supplemental or revised plea agreement signed by all parties.

AGREED:

FOR DEFENDANT BHSI:



	/s/ Reid M. Figel
	REID M. FIGEL, ESQ.
	Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C. Washington, D.C. 20036 Counsel for Defendant Baker Hughes Services, International, Inc. and Baker Hughes Incorporated

FOR BAKER HUGHES INCORPORATED:



	/s/ Alan R. Crain, Jr.
	ALAN R. CRAIN, JR.
	Senior Vice-President and General Counsel Baker Hughes Incorporated

FOR THE DEPARTMENT OF JUSTICE:


	STEVEN A. TYRRELL Chief, Fraud Section
	By:	/s/ Mark F. Mendelsohn
		MARK F. MENDELSOHN
		Deputy Chief, Fraud Section


	By:	/s/ John A. Michelich
		JOHN A. MICHELICH
		Senior Trial Attorney, Fraud Section United States Department of Justice Fraud Section, Criminal Division 10 ^th & Constitution Avenue, NW Washington, D.C. 20530 (202) 514-7023

Filed at Houston, Texas, on this 11 day of April, 2007.

EXHIBIT 1

STATEMENT OF FACTS

The following Statement of Facts is incorporated by this reference as part of the Plea Agreement (“Agreement”) between the United States Department of Justice (the “Department”) and Baker Hughes Services International, Inc. (“BHSI”), and the parties hereby agree and stipulate that the following information is true and accurate. As set forth in Paragraph 9 of the Agreement, BHSI accepts and acknowledges that it is responsible for the acts of its officers and employees as set forth below. If this matter were to proceed to trial, the United States would prove beyond a reasonable doubt, by admissible evidence, the facts alleged in the Information. This evidence would establish the following:

Baker Hughes Incorporated

1. Baker Hughes Incorporated (“Baker Hughes”), headquartered in Houston, Texas, was a corporation organized under the laws of the State of Delaware, with principal offices in Houston, Texas. Baker Hughes was a global provider of comprehensive oil-field services and products which it provided through several subsidiaries and operating divisions, and operated in more than 80 countries.

Baker Hughes Services International, Inc.

3. From in or about 1993 to the present, Baker Hughes maintained BHSI, a wholly owned subsidiary which was organized under the laws of the State of Delaware and which conducted business in the Republic of Kazakhstan, the Southern District of Texas and elsewhere. Accordingly, BHSI was a “domestic concern” within the meaning of the FCPA, (15 U.S.C. § 78dd-2). During the relevant period, BHSI was engaged in the business of providing comprehensive oil-field services and products in the Republic of Kazakhstan and elsewhere, and maintained an office in Almaty, Kazakhstan.

The Karachaganak Project in Kazakhstan

5. The government of the Republic of Kazakhstan managed its national petroleum exploration and production through Kazakhoil, its state-owned oil company. Kazakhoil is a government instrumentality and its employees are foreign government officials within the meaning of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-2(h)(2)(A). From time to time, Kazakhoil would form consortiums, in which Kazakhoil would join with several different oil companies, in order to undertake collectively particular petroleum exploration and production projects.

6. Karachaganak was a giant gas and oil field located in northwestern Kazakhstan. Beginning in or about 1997, the government of Kazakhstan and Kazakhoil entered into a Final Production Sharing Agreement with a consortium of four international oil companies known as the Karachaganak Integrated Organization (“KIO”), for the development and operation of the oil production facilities in Karachaganak.

7. The four international oil companies formed the Karachaganak Petroleum Operating Company, B.V. (“KPO”), a company organized and registered under the laws of The Netherlands, which maintained its principal offices in the Republic of Kazakhstan. KPO was responsible for developing and operating the Karachaganak field on behalf of all partners in the joint venture. KPO solicited bids from outside vendors for comprehensive oil-field drilling services and products including project management, oil drilling and engineering support. In December, 1999, Baker Hughes was invited to submit a bid to KPO for a contract to provide a wide range of oil-field drilling and production services for the Karachaganak project.

The Co-Conspirators

8. BHSI Employee A (hereinafter, “Employee A”), who is named in the Information as a co-conspirator but not as a defendant, was employed as Country Manager and Business Development Manager of BHSI. Employee A also served as a Business Development Manager and as the Team Leader for the Karachaganak tender. Employee A’s duties included, among other things, the coordination of the various Baker Hughes operating divisions with respect to the Baker Hughes bid on the Karachaganak project. As such, Employee A was an employee of a “domestic concern” within the meaning of the FCPA, 15 U.S.C. § 78dd-2.

The Baker Hughes Bid for Karachaganak

11. In or about February 2000, Baker Hughes, through BHSI, submitted a consolidated bid to KPO for various categories of work on the Karachaganak project. The bid was submitted for work to be performed by Baker Hughes operating divisions Baker Atlas, Baker Oil Tools and INTEQ, and was coordinated and submitted by Baker Hughes Enterprise Services & Technology Group (“BEST”). BEST was a team of Baker Hughes business development and enterprise account managers responsible for coordinating, structuring and marketing Baker Hughes oilfield services for significant contracts across its various operating divisions, and was not itself a business unit.

12. Although it was not a member of the KPO consortium, Kazakhoil wielded considerable influence as Kazakhstan’s national oil company and, in effect, the ultimate award of a contract by KPO to any particular bidder depended upon the approval of Kazakhoil officials. Kazakhoil was controlled by officials of the Government of Kazakhstan and, as such, was an “instrumentality” of a foreign government and its officers and employees were “foreign officials,” within the meaning of the FCPA, 15 U.S.C. § 78dd-2(h)(2)(A). Baker Hughes understood that KPO’s approval of their bid for the contract depended heavily on a favorable recommendation from Kazakhoil.

Kazakhoil Officials Direct BHSI to Retain an Agent

for future business which “. . . keeps us clear of any critcism (sic) for this KIO contract.” Further, Employee A stated, “. . . unless we do something we are not going to get the Kazakhoil support . . .” and “. . . we are in the driving seat but if one our (sic) competitors comes in with a pot of gold, it is not going to be our contract.”

15. On September 19, 2000, Employee A sent an e-mail to Agent A, a director of Consulting Firm A, in London, stating that Employee A had the “green light” from his corporate superiors to proceed with the agency agreement as proposed.

17. On or about September 24, 2000, Employee A sent an e-mail to his supervisor and others informing them that Kazakhoil had rejected the Baker Hughes counter-offer to hire an agent only for future business in Kazakhstan, and stated “unless we pay a commission relative to the KIO contract we can say goodbye to this and future business.” Also, Employee A sent an e-mail to Agent A of Consulting Firm A and attached a side-letter agreement retaining Consulting Firm A as an agent for BHSI and agreeing to pay a 2.0% commission based upon revenue earned by Baker Hughes on the Karachaganak contract and 3.0% of revenue for all future services it would perform in Kazakhstan. In the e-mail, Employee A stated, “You will note the consideration has been greatly increased and trust this will receive the recognition it deserves in the necessary corners of Kazakhstan in confirming their support to Baker Hughes.” The side-

letter, dated September 1, 2000, stated that Consulting Firm A had been retained by Baker Hughes “. . . in recognition of the said work and assistance given by [Consulting Firm A] towards Baker Hughes in pursuit of the Karachaganak contract . . .” and that Baker Hughes had decided to reward Consulting Firm A by payment of consideration equal to 2.0% of the contract revenues.

Baker Hughes Wins the Karachaganak Contract

Baker Hughes Divisions and BHSI Pay Commissions

21. Beginning in May 2001, and continuing through at least November 2003, BHSI and Baker Hughes made commission payments to Consulting Firm A totaling $4,100,162.70, which represented 2.0% of the revenue earned by Baker Hughes and its sub-contractors on the Karachaganak project. Each commission payment was wire- transferred from the BHSI bank account at Chase Bank in Houston to an account in the name of Consulting Firm A at Barclay’s Bank in London, United Kingdom.

Commission Payments to
Consulting Firm A


Date	Amount in USD
May 24, 2001	$	32,540.00
June 20, 2001	$	97,116.00
August 1, 2001	$	117,336.00
August 22, 2001	$	108,680.00
October 26, 2001	$	278,999.00
December 6, 2001	$	323,399.00
December 13, 2001	$	34,123.00


Date	Amount in USD
January 16, 2002	$	147,211.02
February 21, 2002	$	125,367.00
April 5, 2002	$	281,741.00
May 15, 2002	$	170,950.00
June 25, 2002	$	143,107.00
August 1, 2002	$	380,682.47
September 27, 2002	$	400,488.58
November 27, 2002	$	139,819.00
December 31, 2002	$	118,843.00
January 29, 2003	$	122,146.93
February 25, 2003	$	121,810.62
March 3, 2003	$	123,737.08
April 8, 2003	$	111,760.42
May 8, 2003	$	96,535.78
May 27, 2003	$	126,761.96
July 1, 2003	$	103,600.98
July 30, 2003	$	111,362.50
September 16, 2003	$	105,170.33
October 28, 2003	$	83,052.94
November 25, 2003	$	93,821.11
Total	$	4,100,162.70

23. Baker Hughes and BHSI failed to properly account for the purported commission payments to Consulting Firm A, and failed to describe accurately the transactions in their books and records. Instead, Baker Hughes and BHSI improperly characterized the payments made as legitimate payments for, among other things, “commissions,” “fees,” or “legal services.” However, Consulting Firm A had no office or presence in Kazakhstan and rendered no goods or ancillary agency services to Baker Hughes or BHSI in Kazakhstan or elsewhere. In fact, the so-

called “commission” payments made to Consulting Firm A were bribes, paid and authorized by employees of BHSI, all or part of which BHSI understood and intended to be transferred to an undisclosed official or officials of Kazakhoil, in exchange for which Baker Hughes and BHSI would receive the contract to provide services on the Karachaganak oilfield project.

Conclusion

25. Based upon the facts as set forth above, BHSI admits that it is a “domestic concern” within the meaning of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-2, et seq. ; that its officers, employees and agents made use of and caused the use of the mails and means and instrumentalities of interstate commerce corruptly in furtherance of a payment of money to Consulting Firm A, while knowing that all or a portion of the money would be given, directly or indirectly, to an official of Kazakhoil, an instrumentality of the government of Kazakhstan, for the purpose of influencing acts and decisions of a foreign official in his official capacity to secure an improper advantage for Baker Hughes and BHSI, and to assist Baker Hughes in obtaining and retaining business; and that BHSI aided, abetted and assisted Baker Hughes in failing to accurately reflect in its books and records the payment of commissions to Consulting Firm A totaling $4,100,162.70.

AGREED:

FOR DEFENDANT BHSI:



	/s/ Reid M. Figel
	REID M. FIGEL, ESQ.
	Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C. Washington, D.C. 20036 Counsel for Defendant Baker Hughes Services, International, Inc. and Baker Hughes Incorporated

FOR BAKER HUGHES INCORPORATED:



	/s/ Alan R. Crain, Jr.
	ALAN R. CRAIN, JR.
	Senior Vice-President and General Counsel Baker Hughes Incorporated

FOR THE DEPARTMENT OF JUSTICE:


	STEVEN A. TYRRELL Chief, Fraud Section
	By:
		MARK F. MENDELSOHN
		Deputy Chief, Fraud Section


	By:
		JOHN A. MICHELICH
		Senior Trial Attorney, Fraud Section United States Department of Justice Fraud Section, Criminal Division 10 ^th & Constitution Avenue, NW Washington, D.C. 20530 (202) 514-7023

Filed at Houston, Texas, on this _______ day of April, 2007.

EXHIBIT 2

COMPLIANCE CODE

Defendant BHSI represents and agrees, as a condition of organizational probation as set forth in Paragraph 19 of the Plea Agreement, that it will, at a minimum, undertake the following steps:

1. Adopt a system of internal accounting controls and a system designed to ensure the making and keeping of accurate books, records, and accounts; and

2. Adopt a rigorous anti-corruption compliance code (“Compliance Code”), as described further below, that is designed to detect and deter violations of the FCPA, U.S. commercial bribery laws and foreign bribery laws. The anti-bribery Compliance Code applicable to BHSI will consist of the following elements, at a minimum:

a. A clearly articulated corporate policy against violations of the FCPA, U.S. commercial bribery laws and foreign bribery laws;

b. Promulgation of compliance standards and procedures to be followed by all directors, officers, employees and, where appropriate, business partners, including, but not limited to, agents, consultants, representatives, teaming partners, joint venture partners and other parties acting on behalf of Baker Hughes in a foreign jurisdiction (respectively, “agents” and “business partners”), that are reasonably capable of reducing the prospect that the FCPA, U.S. commercial bribery laws, foreign bribery laws or the Compliance Code of Baker Hughes will be violated;

c. The assignment to one or more independent BHSI senior corporate officials who shall report directly to the Compliance Committee of the Board of Directors, the responsibility for the implementation and oversight of compliance with policies, standards, and

procedures established in accordance with the Compliance Code applicable to BHSI;

d. The effective communication to all directors, officers, employees and, where appropriate, agents and business partners, of corporate and compliance policies, standards, and procedures regarding the FCPA, U.S. commercial bribery laws and foreign bribery laws. This shall include: (A) training concerning the requirements of the FCPA, U.S. commercial bribery laws and foreign bribery laws on a periodic basis to all directors, officers and employees; and (B) periodic certifications by all directors, officers, employees, including the head of each Baker Hughes business or division, and, where appropriate, agents and business partners, certifying compliance therewith;

e. A reporting system, including a “Helpline” for directors, officers, employees, agents and business partners to report suspected violations of the Compliance Code or suspected criminal conduct;

f. Appropriate disciplinary procedures to address violations of the FCPA, U.S. commercial bribery laws, foreign bribery laws, or the Compliance Code;

g. Extensive pre-retention due diligence requirements pertaining to, as well as post-retention oversight of, all agents and business partners, including the maintenance of complete due diligence records at BHSI;

h. Clearly articulated corporate procedures designed to ensure that BHSI exercises due care to assure that substantial discretionary authority is not delegated to individuals who BHSI knows, or should know through the exercise of due diligence, have a propensity to engage in illegal or improper activities;

i. A committee consisting of senior BHSI officials to review and to record, in writing, actions relating to: (A) the retention of any agent or subagents thereof; and (B) all contracts and payments related thereto;

j. The inclusion in all agreements, contracts, and renewals thereof with all agents and business partners, written provisions that are reasonably calculated to prevent violations of the FCPA, U.S. commercial bribery laws, foreign bribery laws and other relevant laws, which may, depending upon the circumstances, include: (A) setting forth anti-corruption representations and undertakings relating to compliance with the FCPA, U.S. commercial bribery laws, foreign bribery laws and other relevant laws; (B) allowing for internal and independent audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (C) providing for termination of the agent or business partner as a result of any breach of anti-corruption laws and regulations or representations and undertakings related thereto;

k. Financial and accounting procedures designed to ensure that BHSI maintains a system of internal accounting controls and makes and keeps accurate books, records, and accounts; and

l. Independent audits by outside counsel and auditors, at no longer than three (3) year intervals beginning after the completion of the term of Organizational Probation, to ensure that the Compliance Code, including its anti-corruption provisions, are implemented in an effective manner.

Exhibit 31.1

CERTIFICATION

I, Chad C. Deaton, certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 1, 2007	By:	/s/ Chad C. Deaton
		Chad C. Deaton
		Chairman of the Board and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Peter A. Ragauss, certify that:

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

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 1, 2007	By:	/s/ Peter A. Ragauss
		Peter A. Ragauss
		Senior Vice President and Chief Financial Officer

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Baker Hughes Incorporated (the “Company”) on Form 10-Q for the period ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Chad C. Deaton, Chief Executive Officer of the Company, and Peter A. Ragauss, the Chief Financial Officer of the Company, each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	(i)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(ii)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

The certification is given to the knowledge of the undersigned.



	/s/ Chad C. Deaton
	Name:	Chad C. Deaton
	Title:	Chief Executive Officer
	Date:	May 1, 2007

	/s/ Peter A. Ragauss
	Name:	Peter A. Ragauss
	Title:	Chief Financial Officer
	Date:	May 1, 2007

Exhibit 99.1

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION


UNITED STATES OF AMERICA	:	Criminal No. H-07-130
	:
v.	:
	:
	:	18 U.S.C. § 371,
BAKER HUGHES INCORPORATED,	:	15 U.S.C. §§ 78dd-1 and 78m(b)
	:
Defendant	:
	:

INFORMATION

THE UNITED STATES ATTORNEY CHARGES:

COUNT ONE
(Conspiracy)

At all times relevant to this Information:

Introduction

The Foreign Corrupt Practices Act

1. The Foreign Corrupt Practices Act of 1977 (hereinafter, the “FCPA”), as amended, 15 U.S.C. §§ 78dd-1, et seq ., prohibited certain classes of persons and entities from making payments to foreign government officials to obtain or retain business. Specifically, the FCPA prohibited any issuer of publicly-traded securities from making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to a foreign official for the purpose of obtaining or retaining business for, or directing business to, any person or securing any improper advantage. 15 U.S.C . § 78dd-1(a)(3). Furthermore, the FCPA required certain corporations to make and keep books, records and accounts which accurately and fairly reflect transactions and dispositions of the company’s assets and prohibited the knowing falsification of such books, records or accounts. 15 U.S.C. §§ 78m(b)(2)(A) and (b)(5).

Baker Hughes Incorporated

2. Defendant Baker Hughes Incorporated (“Baker Hughes”), headquartered in Houston, Texas, was a corporation organized under the laws of the State of Delaware, with its principal offices in Houston, Texas. Baker Hughes was a global provider of comprehensive oil-field services and products which it provided through several subsidiaries and operating divisions.

3. Baker Hughes issued and maintained a class of publicly-traded

securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 781) and was required to file periodic reports with the United States Securities and Exchange Commission under Section 13 of the Securities Exchange Act (15 U.S.C. § 78m). Accordingly, Baker Hughes was an “issuer” within the meaning of the FCPA, 15 U.S.C. § 78dd-1(a). By virtue of its status as an issuer within the meaning of the FCPA, Baker Hughes was required to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected the transactions and disposition of assets of Baker Hughes. Baker Hughes also had an obligation to ensure that its wholly-owned subsidiary, BHSI, maintained accurate books and records.

Baker Hughes Services International, Inc.

4. From in or about 1993 to the present, Baker Hughes maintained a wholly-owned subsidiary under the name of Baker Hughes Services International, Inc. (“BHSI”), which was organized under the laws of the State of Delaware and which conducted business in the Republic of Kazakhstan, the Southern District of Texas and elsewhere. Accordingly, BHSI was a “domestic concern” within the meaning of the FCPA, 15 U.S.C . § 78dd-2(h)(1)(B). During the relevant period, BHSI was engaged in the business of providing comprehensive oil-field services and products in the Republic of Kazakhstan and elsewhere; and maintained an office in Almaty, Kazakhstan.

5. BHSI regularly sought approval for management decisions from Baker Hughes and its officers and personnel in management offices in Houston, Texas. BHSI maintained a bank account at Chase Bank of Texas, N.A., in

Houston, Texas. For internal accounting purposes, BHSI regularly sent invoices to various Baker Hughes operating divisions requesting them to remit funds directly to BHSI’s account at Chase Bank in Houston. In these and other ways, BHSI was a domestic concern and operated within the territorial jurisdiction of the United States.

The Karachaganak Project in Kazakhstan

6. Karachaganak was a giant gas and oil field located in northwestern Kazakhstan. Beginning in or about 1997, the Government of Kazakhstan and the national state-owned oil company, Kazakhoil, entered into a Final Production Sharing Agreement with a consortium of four international oil companies known as the Karachaganak Integrated Organization (“KIO”), for the development and operation of the oil production facilities in Karachaganak.

7. The four international oil companies formed the Karachaganak Petroleum Operating Company, B.V. (“KPO”), a company organized and registered under the laws of The Netherlands, which maintained its principal offices in the Republic of Kazakhstan. KPO was responsible for developing and operating the Karachaganak field on behalf of all partners in the KIO joint venture. KPO solicited bids from outside vendors for comprehensive oil-field drilling services and products, including project management, oil drilling and engineering support.

8. Although it was not a member of the consortium, Kazakhoil wielded considerable influence as Kazakhstan’s national oil company and, in effect, the ultimate award of a contract by KPO to any particular bidder depended upon the approval of Kazakhoil officials. Kazakhoil was controlled by officials of the Government of Kazakhstan and, as such, constituted an “instrumentality” of a foreign government, and its officers and employees were “foreign officials,” within the meaning of the FCPA, 15 U.S.C. § 78dd-1(f)(1)(A).

The Baker Hughes Bid for Karachaganak

9. In or about February 2000, Baker Hughes submitted a consolidated bid to KPO for various categories of work on the Karachaganak oil-field drilling project. The bid was submitted for work to be performed by Baker Hughes operating divisions Baker Atlas, Baker Oil Tools and INTEQ and was coordinated and submitted by Baker Hughes Enterprise Services & Technology Group (“BEST”). BEST was a team of Baker Hughes business development and enterprise account managers responsible for coordinating, structuring and marketing Baker Hughes oilfield services for significant contracts across its various operating divisions, and was not itself a business unit.

Kazakhoil Directs BHSI to Retain an Agent

10 . In or about early September 2000, Baker Hughes’s managers and executives received unofficial notification that their bid was successful and that Baker Hughes would win the Karachaganak tender. Nevertheless, in or about mid-September 2000, a Kazakhoil official demanded that, in order for Baker Hughes to win the Karachaganak contract, BHSI should pay Consulting Firm A, an agent located on the Isle of Man, a commission equal to 3.0% of the revenue earned by Baker Hughes on the Karachaganak contract.

11. Although Consulting Firm A had performed no services to assist Baker Hughes or BHSI in preparing and submitting their bid for Karachaganak, BHSI sought and obtained approval from executives of operating divisions Baker Atlas, Baker Oil Tools, and INTEQ, to retain and pay a commission to Consulting Firm A of 2.0% of the revenue earned by each operating division on the Karachaganak project.

12. On or about September 24, 2000, BHSI agreed, with the knowledge and approval of Baker Hughes, to retain Consulting Firm A and to pay it a 2.0% commission based upon revenue earned by Baker Hughes on the Karachaganak contract and 3.0% of revenue for all future services it would perform in Kazakhstan.

Baker Hughes Wins the Karachaganak Contract

13. In or about early October 2000, officials of KPO notified BHSI and Baker Hughes that the Baker Hughes tender was successful and the Karachaganak contract was awarded to Baker Hughes. The Integrated Services Contract between KPO and BHSI became effective on or about October 23, 2000. Thereafter, Baker Hughes and operating divisions Baker Atlas, Baker Oil Tools, and INTEQ, through Baker Hughes’s subsidiary BHSI, performed services pursuant to the contract with KPO.

Baker Hughes Divisions and BHSI Pay Commissions

14. On approximately a monthly basis, from in or about May 2001, and continuing through at least November 2003, BHSI notified the three Baker Hughes operating divisions of the amount of commission charges each division owed based upon calculating 2.0% of that division’s revenue for the month. BHSI sent an invoice to each operating division requesting it to send its commission payment to the BHSI bank account at Chase Bank in Houston, Texas.

15. From in or about May 2001, and continuing through at least November 2003, defendant Baker Hughes and BHSI made commission payments to Consulting Firm A totaling $4,100,162.70, which represented 2.0% of the revenue earned by Baker Hughes and its sub-contractors on the Karachaganak project. Each commission payment was wire-transferred from the BHSI bank account at Chase Bank in Houston to an account of Consulting Firm A at Barclay’s Bank in

London, United Kingdom.

The Co-Conspirators

16. BHSI, which is named as a co-conspirator but not as a defendant herein, was a wholly-owned subsidiary of Baker Hughes. BHSI was engaged in the business of providing comprehensive oil-field services and products in the Republic of Kazakhstan and was responsible for coordinating and managing the Baker Hughes bid for the Karachaganak project.

17. At all relevant times, BHSI Employee A (hereinafter, “Employee A”), who is named as a co-conspirator but not as a defendant herein, was employed as Country Manager and Business Development Manager of BHSI. Employee A also served as a Business Development Manager for BEST and as the Team Leader for the Karachaganak tender. Employee A’s duties included, among other things, the coordination of the various Baker Hughes operating divisions regarding the Baker Hughes bid on the Karachaganak project. As such, Employee A was an employee of a “domestic concern” within the meaning of the FCPA, 15 U.S.C . § 78dd-2(a).

business in the Republic of Kazakhstan and elsewhere. Understanding that Consulting Firm A was acting at the direction of Kazakhoil officials, BHSI retained Consulting Firm A to represent the interests of Baker Hughes regarding its Karachaganak bid.

19. Agent A, who is named as a co-conspirator but not as a defendant herein, was a director of Consulting Firm A, and acted as the representative of Consulting Firm A and as the agent for Baker Hughes and BHSI regarding Baker Hughes’s bid for Karachaganak. Agent A informed Employee A that a Kazakhoil official demanded that BHSI pay a commission to Consulting Firm A in order for BHSI to obtain the Karachaganak contract. Agent A is a citizen of the United Kingdom.

The Conspiracy and its Objects

20. From in or about September 2000, through in or about November 2003, in the Southern District of Texas, and elsewhere, defendant Baker Hughes did knowingly and willfully conspire and agree with BHSI, Employee A, Consulting Firm A, Agent A, and others, known and unknown, to commit the following offenses against the United States:

Object No. 1 - Foreign Corrupt Practices Act

official capacity; (ii) inducing such foreign officials to do and omit to do acts in violation of the lawful duty of such officials; (iii) securing an improper advantage; and (iv) inducing such foreign officials to use their influence with foreign governments and instrumentalities thereof to affect and influence any acts and decisions of such governments and instrumentalities in order to assist Baker Hughes and BHSI in obtaining and retaining business for and with, and directing business to, Baker Hughes and BHSI, contrary to Title 15 , United States Code, § 78dd-l(a); and

Object No. 2 — False Books and Records

(b) to knowingly falsify and cause to be falsified books, records, and accounts which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of the assets of Baker Hughes, an issuer within the meaning of the FCPA, contrary to Title 15 , United States Code, §§ 78m(b)(2)(A), 78m(b)(5) and 78ff(a).

Purpose of the Conspiracy

21. The primary purpose of the conspiracy was to make corrupt payments to Kazakh government officials for the purpose of influencing their official decisions and to secure an improper advantage for defendant Baker Hughes and BHSI in obtaining and retaining business from KPO in connection with the Karachaganak project and future business in Kazakhstan.

Manner and Means of the Conspiracy

22. The manner and means by which defendant Baker Hughes and its co-conspirators accomplished the objects of the conspiracy, included, but were not

limited to the following:

a. It was part of the conspiracy that from in or about May 2001, through in or about November 2003, defendant Baker Hughes and BHSI, through Employee A and others, authorized, made and caused to be made 27 commission payments to Consulting Firm A totaling $4,100,162.70, which represented 2.0% of the revenue earned by Baker Hughes and its sub-contractors on the Karachaganak project, to a bank account in the name of Consulting Firm A at Barclay’s Bank in London, United Kingdom.

b. It was a further part of the conspiracy that defendant Baker Hughes and its co-conspirators knew and intended that the commissions paid to
Consulting Firm A would be transferred in whole or in part to officials of Kazakhoil, who were foreign officials as defined in Paragraph 8 above, in order to secure an improper advantage for Baker Hughes by influencing their decision to award the Karachaganak contract to Baker Hughes.

c. It was a further part of the conspiracy that defendant Baker Hughes and BHSI failed to properly account for the purported commission payments to Consulting Firm A, and failed to describe accurately the transactions in their books and records. Instead, defendant Baker Hughes and BHSI improperly characterized the payments made as legitimate payments for, among other things, “commissions,” “fees,” or “legal services.”

d. It was a further part of the conspiracy that between in or about October 2000 and November 2003, defendant Baker Hughes realized profits of approximately $19.9 million from the Karachaganak project.

Overt Acts

23. In furtherance of the conspiracy and to accomplish its unlawful objects, the following overt acts, among others, were committed in the Southern District of Texas, and elsewhere:

a. On or about September 17, 2000, Employee A sent an e-mail informing his supervisor that Kazakhoil officials were demanding that Baker Hughes retain an agent in order to receive approval for the Karachaganak project and stated, among other things, that “. . . Kazakhoil approached me through an agent in London stating that to get Kazakhoil approval a 3% commission is required. This as you know I refused and said that it is utterly outrageous to wait until a contractor is chosen and start demanding amounts that have been suggested.” Further, Employee A suggested that Baker Hughes should make a counter-offer to retain the agent only for future business which “. . . keeps us clear of any critcism (sic) for this KIO contract.” Further, Employee A stated, “. . . unless we do something we are not going to get the Kazakhoil support . . .” and “. . . we are in the driving seat but if one our (sic) competitors comes in with a pot of gold, it is not, going to be our contract.”

b. On or about September 19, 2000, Employee A sent an e-mail to Agent A, a director of Consulting Firm A, in London, stating that Employee A had the “green light” from his corporate superiors to proceed with the agency agreement as proposed.

c. On or about September 24, 2000, Employee A sent an e-mail to his supervisor and others informing them that Kazakhoil had rejected the Baker

Hughes counter-offer to hire an agent only for future business in Kazakhstan, and stated “unless we pay a commission relative to the KIO contract we can say goodbye to this and future business.”

d. On or about September 24, 2000, Employee A sent an e-mail to Agent A of Consulting Firm A and attached a side-letter agreement retaining Consulting Firm A as an agent for BHSI. In the e-mail, Employee A stated, “You will note the consideration has been greatly increased and trust this will receive the recognition it deserves in the necessary corners of Kazakhstan in confirming their support to Baker Hughes.” The side-letter, dated September 1, 2000, stated that Consulting Firm A had been retained by Baker Hughes “. . . in recognition of the said work and assistance given by [Consulting Firm A] towards Baker Hughes in pursuit of the Karachaganak contract . . .” and that Baker Hughes had decided to reward Consulting Firm A by payment of consideration equal to 2.0% of the contract revenues.

e. On or about September 25 and September 26, 2000, Employee A and his supervisor began to canvass officers of Baker Hughes operating divisions Baker Atlas, Baker Oil Tools, and INTEQ, requesting their agreement for each of them to pay their share of the agency commission.

f. On or about September 26, 2000, Employee A received an e-mail from his supervisor directing Employee A not to sign any agency agreement until they had discussed several remaining issues.

g. On or about September 27, 2000, Employee A received an e-mail from his supervisor informing him that the operating divisions had approved the plan to pay a 2.0% to 3.0% commission to Consulting Firm A for the Karachaganak contract.

h. On or about September 27, 2000, Employee A signed a “Sales Representation Agreement” on behalf of BHSI with Consulting Firm A, which was backdated to September 1, 2000.

i. On approximately a monthly basis, from in or about May 2001, through in or about November 2003, BHSI notified the three Baker Hughes operating divisions of the amount of commission charges each division owed based upon calculating 2.0% of that division’s revenue for the month. BHSI sent an invoice to each operating division requesting it to send its commission payment to the BHSI bank account at Chase Bank in Houston, Texas .

j. On approximately a monthly basis, from in or about May 2001, through in or about November 2003, each of the three Baker Hughes operating divisions wire transferred its commission payment requested in the BHSI invoice to the BHSI bank account maintained at Chase Bank in Houston, Texas.

k. On or about the dates set forth below, the following payments were made via wire transfer from a BHSI bank account at Chase Bank in Houston, Texas, to a bank account maintained by Consulting Firm A at Barclay’s Bank, in London, United Kingdom:

Commission Payments to
Consulting Firm A


Date	Amount in USD
May 24, 2001	$	32,540.00
June 20, 2001	$	97,116.00
August 1, 2001	$	117,336.00
August 22, 2001	$	108,680.00
October 26, 2001	$	278,999.00
December 6, 2001	$	323,399.00
December 13, 2001	$	34,123.00
January 16, 2002	$	147,211.02
February 21, 2002	$	125,367.00
April 5, 2002	$	281,741.00
May 15, 2002	$	170,950.00
June 25, 2002	$	143,107.00
August 1, 2002	$	380,682.47
September 27, 2002	$	400,488.58
November 27, 2002	$	139,819.00
December 31, 2002	$	118,843.00
January 29, 2003	$	122,146.93
February 25, 2003	$	121,810.62
March 3, 2003	$	123,737.08
April 8, 2003	$	111,760.42
May 8, 2003	$	96,535.78
May 27, 2003	$	126,761.96
July 1, 2003	$	103,600.98
July 30, 2003	$	111,362.50
September 16, 2003	$	105,170.33
October 28, 2003	$	83,052.94
November 25, 2003	$	93,821.11
Total	$	4,100,162.70

All in violation of Title 18, United States Code, Section 371.

COUNT TWO
(Foreign Corrupt Practices Act)

24. Paragraphs 1 through 19 and 21 through 23 of Count One are realleged and incorporated as if fully set forth herein.

25. From in or about September 2000, through in or about November 2003, in the Southern District of Texas, and elsewhere, defendant Baker Hughes, an issuer within the meaning of the FCPA, 15 U.S.C. § 78dd-1, et seq. , used any means and instrumentalities of interstate commerce, corruptly in furtherance of an offer, payment, promise to pay and authorization of the payment of money, and an offer, gift, promise to give, and authorization of the giving of anything of value to a person, while knowing that all or a portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to foreign officials for purposes of: (i) influencing the acts and decisions of such foreign officials in their official capacity; (ii) inducing said foreign officials to do acts in violation of their lawful duty; (iii) securing an improper advantage; and (iv) inducing such foreign officials to use their influence with a foreign government and instrumentality thereof to affect or influence an act and decision of such government and instrumentality in order to assist defendant Baker Hughes in obtaining and retaining business for and with, and directing business to, any person; to wit , in order to secure the award of an oil-field services contract at the Karachaganak oil fields in the Republic of Kazakhstan, to secure an improper advantage for

defendant Baker Hughes and BHSI in connection with that contract, and to obtain future business in Kazakhstan, defendant Baker Hughes and BHSI made payments and caused payments to be made, totaling approximately $4.1 million, from BHSI’s bank account in Houston, Texas, to the bank account of Consulting Firm A in London, United Kingdom.

All in violation of Title 15, United States Code, Section 78dd-1(a)(3).

COUNT THREE
(Books and Records Violation)

26. Paragraphs 1 through 19 and 21 through 23 of Count One are realleged and incorporated as if fully set forth herein.

27. From in or about May 2001, through in or about November 2003, defendant Baker Hughes and BHSI failed to account properly for the commission payments to Consulting Firm A and failed to describe accurately the transactions in their books and records. Instead, the payments were improperly characterized on Baker Hughes’s books and records as legitimate payments for, among other things, “commissions,” “fees,” and “legal services.”

28. From in or about May 2001, through in or about November 2003, in the Southern District of Texas, and elsewhere, defendant Baker Hughes knowingly and willfully falsified books, records, and accounts which, in reasonable detail, accurately and fairly reflected the transactions and disposition of the assets of Baker Hughes, to wit : defendant Baker Hughes inaccurately reflected in its books and records the payments to Consulting Firm A totaling $4,100,162.70 as, among other things, “commissions,” “fees,” and “legal services,” when in fact these

payments were bribes, paid through an intermediary, all or part of which defendant Baker Hughes understood and believed would be transferred to Kazakh government officials.

All in violation of Title 15, United States Code, Sections 78m(b)(2)(A), 78m(b)(5) and 78ff(a).


				DONALD J. DeGABRIELLE, JR.
				United States Attorney

		By:		/s/ James R. Buchanan

				JAMES R. BUCHANAN
				Assistant United States Attorney
				United States Attorney’s Office
				Southern District of Texas
				P.O. Box 61129
				Houston, Texas 77208-1129

				STEVEN A. TYRRELL
				Chief, Fraud Section
				Criminal Division
				United States Department of Justice

		By:		/s/ Mark F. Mendelsohn

				MARK F. MENDELSOHN
				Deputy Chief, Fraud Section
				Criminal Division
				United States Department of Justice

		By:		/s/ John A. Michelich

				JOHN A. MICHELICH
				Senior Trial Attorney
				Fraud Section, Criminal Division
				United States Department of Justice

Exhibit 99.2

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION


UNITED STATES OF AMERICA		:
		:	Criminal No. H-07-129
	v.	:
		:	18 U.S.C. §§ 371 and 2,
BAKER HUGHES SERVICES		:	15 U.S.C. §§ 78dd-2 and 78m(b),
	INTERNATIONAL, INC.,	:
		:
	Defendant	:
		:

INFORMATION

THE UNITED STATES ATTORNEY CHARGES:

COUNT ONE
(Conspiracy)

At all times relevant to this Information:

Introduction

The Foreign Corrupt Practices Act

1. The Foreign Corrupt Practices Act of 1977 (hereinafter, the “FCPA”), as amended, 15 U.S.C. §§ 78dd-1, et seq., prohibited certain classes of persons and entities from making payments to foreign government officials to obtain or retain business. Specifically, the FCPA prohibited any domestic concern from making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to a

foreign government official for the purpose of obtaining or retaining business for, or directing business to, any person or securing any improper advantage. 15 U.S.C. § 78dd-2(a)(3). Furthermore, the FCPA required certain corporations to make and keep books, records and accounts which accurately and fairly reflect transactions and dispositions of the company’s assets and prohibited the knowing falsification of such books, records or accounts. 15 U.S.C. §§ 78m(b)(2)(A) and (b)(5).

Baker Hughes Incorporated

2. Baker Hughes Incorporated (“Baker Hughes”), headquartered in Houston, Texas, was a corporation organized under the laws of the State of Delaware, with its principal offices in Houston, Texas. Baker Hughes was a global provider of comprehensive oil-field services and products which it provided through several subsidiaries and operating divisions.

3. Baker Hughes issued and maintained a class of publicly-traded securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 781) and was required to file periodic reports with the United States Securities and Exchange Commission under Section 13 of the Securities Exchange Act (15 U.S.C. § 78m). Accordingly, Baker Hughes was an “issuer” within the meaning of the FCPA, 15 U.S.C. § 78dd-1(a). By virtue of its status as an issuer within the meaning of the FCPA, Baker Hughes was required to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected the transactions and disposition of assets of Baker Hughes. Baker Hughes

also had an obligation to ensure that its wholly-owned subsidiary, BHSI, maintained accurate books and records.

Baker Hughes Services International, Inc.

4. From in or about 1993 to the present, Baker Hughes maintained a wholly-owned subsidiary under the name of Baker Hughes Services International, Inc. (“BHSI”), which was organized under the laws of the State of Delaware and which conducted business in the Republic of Kazakhstan, the Southern District of Texas and elsewhere. Accordingly, BHSI was a “domestic concern” within the meaning of the FCPA, 15 U.S.C. § 78dd-2(h)(1)(B). During the relevant period, defendant BHSI was engaged in the business of providing comprehensive oil-field services and products in the Republic of Kazakhstan and elsewhere, maintained an office in Almaty, Kazakhstan.

5. Defendant BHSI regularly sought approval for management decisions from Baker Hughes and its officers and personnel in management offices in Houston, Texas. BHSI maintained a bank account at Chase Bank of Texas, N.A., in Houston, Texas. For internal accounting purposes, BHSI regularly sent invoices to various Baker Hughes operating divisions requesting them to remit funds directly to BHSI’s account at Chase Bank in Houston. In these and other ways, defendant BHSI operated within the territorial jurisdiction of the United States.

The Karachaganak Project in Kazakhstan

6. Karachaganak was a giant gas and oil field located in northwestern

Kazakhstan. Beginning in or about 1997, the Government of Kazakhstan and the national state-owned oil company, Kazakhoil, entered into a Final Production Sharing Agreement with a consortium of four international oil companies known as the Karachaganak Integrated Organization (“KIO”), for the development and operation of the oil production facilities in Karachaganak.

7. The four international oil companies formed the Karachaganak Petroleum Operating Company, B.V. (“KPO”), a company organized and registered under the laws of The Netherlands, which maintained its principal offices in the Republic of Kazakhstan. KPO was responsible for developing and operating the Karachaganak field on behalf of all partners in the KIO joint venture. KPO solicited bids from outside vendors for comprehensive oil-field drilling services and products, including project management, oil drilling and engineering support.

The Baker Hughes Bid for Karachaganak

9. In or about February 2000, Baker Hughes submitted a consolidated bid

to KPO for various categories of work on the Karachaganak oil-field drilling project. The bid was submitted for work to be performed by Baker Hughes operating divisions Baker Atlas, Baker Oil Tools and INTEQ, and was coordinated and submitted by Baker Hughes Enterprise Services & Technology Group (“BEST”). BEST was a team of Baker Hughes business development and enterprise account managers responsible for coordinating, structuring and marketing Baker Hughes oilfield services for significant contracts across its various operating divisions, and was not itself a business unit.

Kazakhoil Directs BHSI to Retain an Agent

10. In or about early September 2000, Baker Hughes managers and executives received unofficial notification that their bid was successful and that Baker Hughes would win the Karachaganak tender. Nevertheless, in or about mid-September 2000, a Kazakhoil official demanded that, in order for Baker Hughes to win the Karachaganak contract, BHSI should pay Consulting Firm A, an agent located on the Isle of Man, a commission equal to 3.0% of the revenue earned by Baker Hughes on the Karachaganak contract.

12. On or about September 24, 2000, BHSI agreed to retain Consulting Firm A and to pay it a 2.0% commission based upon revenue earned by Baker Hughes on the Karachaganak contract and 3.0% of revenue for all future services it would perform in Kazakhstan.

Baker Hughes Wins the Karachaganak Contract

Baker Hughes Divisions and BHSI Pay Commissions

15. From in or about May 2001, and continuing through at least November 2003, defendant BHSI and Baker Hughes made commission payments to Consulting Firm A totaling $4,100,162.70, which represented 2.0% of the revenue earned by Baker Hughes and its sub-contractors on the Karachaganak project. Each commission payment was wire- transferred from the BHSI bank account at Chase Bank in Houston to an account of Consulting Firm A at Barclay’s Bank in London, United

Kingdom.

The Co-Conspirators

16. Baker Hughes, which is named as a co-conspirator but not as a defendant herein, was the corporate parent of defendant BHSI, and maintained various operating divisions, including three known as Baker Atlas, Baker Oil Tools and INTEQ. Each of the three operating divisions performed certain oil-field services pursuant to the Karachaganak contract awarded to Baker Hughes by KPO.

17. At all relevant times, BHSI Employee A (hereinafter, “Employee A”), who is named as a co-conspirator but not as a defendant herein, was employed as Country Manager and Business Development Manager of defendant BHSI. Employee A also served as a Business Development Manager for BEST and as the Team Leader for the Karachaganak tender. Employee A’s duties included, among other things, the coordination of the various Baker Hughes operating divisions regarding the Baker Hughes bid on the Karachaganak project. As such, Employee A was an employee of a “domestic concern” within the meaning of the FCPA, 15 U.S.C. § 78dd-2(a).

18. Consulting Firm A, which is named as a co-conspirator but not as a defendant herein, was incorporated and registered as a private limited liability company in the Isle of Man where it maintained its principal place of business. Consulting Firm A maintained a business office in London, United Kingdom, and a bank account in the name of Consulting Firm A at Barclay’s Bank in London, United Kingdom. Generally, Consulting Firm A provided unspecified administrative and consulting services and acted as an agent for companies doing business in the Republic of Kazakhstan and elsewhere. Understanding that Consulting Firm A was acting at the direction of Kazakhoil officials, defendant BHSI retained Consulting Firm A to represent the interests of Baker Hughes regarding its Karachaganak bid.

The Conspiracy and its Objects

20. From in or about September 2000, through in or about November 2003, in the Southern District of Texas, and elsewhere, defendant BHSI did knowingly and willfully conspire and agree with Baker Hughes, Employee A, Consulting Firm A, Agent A, and others, known and unknown, to commit the following offenses against the United States:

Object No. 1 — Foreign Corrupt Practices Act

(a) to make use of the mails and any means and instrumentalities of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, and authorization of the payment of any money, and an offer, gift, promise to give, and authorization of the giving of anything of value to foreign officials for purposes of (i) influencing acts and decisions of such foreign officials in their official capacity; (ii) inducing such foreign officials to do and omit to do acts in violation of the lawful duty of such officials; (iii) securing an improper advantage; and (iv) inducing such foreign officials to use their influence with foreign governments and instrumentalities thereof to affect and influence any acts and decisions of such governments and instrumentalities in order to assist BHSI and Baker Hughes in obtaining and retaining business for and with, and directing business to, BHSI and Baker Hughes, contrary to Title 15, United States Code, § 78dd-2(a); and

Object No. 2 — False Books and Records

(b) to knowingly falsify and cause to be falsified books, records, and

accounts which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of the assets of Baker Hughes, an issuer within the meaning of the FCPA, contrary to Title 15, United States Code, §§ 78m(b)(2)(A), 78m(b)(5) and 78ff(a) .

Purpose of the Conspiracy

21. The primary purpose of the conspiracy was to make corrupt payments to Kazakh government officials for the purpose of influencing their official decisions and to secure an improper advantage for defendant BHSI and Baker Hughes in obtaining and retaining business from KPO in connection with the Karachaganak project and future business in Kazakhstan.

Manner and Means of the Conspiracy

22. The manner and means by which defendant BHSI and its co-conspirators accomplished the objects of the conspiracy, included, but were not limited to the following:

a. It was part of the conspiracy that from in or about May 2001, through in or about November 2003, defendant BHSI and Baker Hughes, through Employee A and others, authorized, made and caused to be made, 27 commission payments to Consulting Firm A totaling $4,100,162.70, representing 2.0% of the revenue earned by Baker Hughes and its sub-contractors on the Karachaganak project, to a bank account in the name of Consulting Firm A at Barclay’s Bank in London, United Kingdom.

b. It was a further part of the conspiracy that defendant BHSI and its co-conspirators knew and intended that the commissions paid to Consulting Firm A would be transferred in whole or in part to officials of Kazakhoil, who were foreign officials as defined in Paragraph 8 above, in order to secure an improper advantage for Baker Hughes by influencing their decision to award the Karachaganak contract to Baker Hughes.

c. It was a further part of the conspiracy that defendant BHSI and Baker Hughes failed to properly account for the purported commission payments to Consulting Firm A, and failed to describe accurately the transactions in their books and records. Instead, defendant BHSI and Baker Hughes improperly characterized the payments made as legitimate payments for, among other things, “commissions,” “fees,” or “legal services.”

d. It was a further part of the conspiracy that between in or about October 2000 and November 2003, Baker Hughes realized profits of approximately $19.9 million from the Karachaganak project.

Overt Acts

23. In furtherance of the conspiracy and to accomplish its unlawful objects, the following overt acts, among others, were committed in the Southern District of Texas, and elsewhere:

a. On or about September 17, 2000, Employee A sent an e-mail

informing his supervisor that Kazakhoil officials were demanding that Baker Hughes retain an agent in order to receive approval for the Karachaganak project and stated, among other things, that “. . . Kazakhoil approached me through an agent in London stating that to get Kazakhoil approval a 3% commission is required. This as you know I refused and said that it is utterly outrageous to wait until a contractor is chosen and start demanding amounts that have been suggested.” Further, Employee A suggested that Baker Hughes should make a counter-offer to retain the agent only for future business which “. . . keeps us clear of any critcism (sic) for this KIO contract.” Further, Employee A stated, “. . . unless we do something we are not going to get the Kazakhoil support . . .” and “. . .we are in the driving seat but if one our (sic) competitors comes in with a pot of gold, it is not going to be our contract.”

c. On or about September 24, 2000, Employee A sent an e-mail to his supervisor and others informing them that Kazakhoil had rejected the Baker Hughes counter-offer to hire an agent only for future business in Kazakhstan, and stated “unless we pay a commission relative to the KIO contract we can say goodbye to this and future business.”

d. On or about September 24, 2000, Employee A sent an e-mail to

Agent A of Consulting Firm A and attached a side-letter agreement retaining Consulting Firm A as an agent for BHSI. In the e-mail, Employee A stated, “You will note the consideration has been greatly increased and trust this will receive the recognition it deserves in the necessary corners of Kazakhstan in confirming their support to Baker Hughes.” The side-letter, dated September 1, 2000, stated that Consulting Firm A had been retained by Baker Hughes “... in recognition of the said work and assistance given by [Consulting Firm A] towards Baker Hughes in pursuit of the Karachaganak contract . . .” and that Baker Hughes had decided to reward Consulting Firm A by payment of consideration equal to 2.0% of the contract revenues.

e. On or about September 25 and September 26, 2000, Employee A and his supervisor began to canvass officers of Baker Hughes operating divisions Baker Atlas, Baker Oil Tools and INTEQ, requesting their agreement for each of them to pay their share of the agency commission.

f. On or about September 26, 2000, Employee A received an e-mail from his supervisor directing Employee A not to sign any agency agreement until they had discussed several remaining issues.

h. On or about September 27, 2000, Employee A signed a “Sales Representation Agreement” on behalf of BHSI with Consulting Firm A, which was backdated to September 1, 2000.

Commission Payments to
Consulting Firm A


Date	Amount in USD
May 24, 2001	$	32,540.00
June 20, 2001	$	97,116.00
August 1, 2001	$	117,336.00
August 22, 2001	$	108,680.00
October 26, 2001	$	278,999.00
December 6, 2001	$	323,399.00
December 13, 2001	$	34,123.00
January 16, 2002	$	147,211.02
February 21, 2002	$	125,367.00
April 5, 2002	$	281,741.00
May 15, 2002	$	170,950.00
June 25, 2002	$	143,107.00
August 1, 2002	$	380,682.47
September 27, 2002	$	400,488.58


November 27, 2002	$	139,819.00
December 31, 2002	$	118,843.00
January 29, 2003	$	122,146.93
February 25, 2003	$	121,810.62
March 3, 2003	$	123,737.08
April 8, 2003	$	111,760.42
May 8, 2003	$	96,535.78
May 27, 2003	$	126,761.96
July 1, 2003	$	103,600.98
July 30, 2003	$	111,362.50
September 16, 2003	$	105,170.33
October 28, 2003	$	83,052.94
November 25, 2003	$	93,821.11
Total	$	4,100,162.70

All in violation of Title 18, United States Code, Section 371.

COUNT TWO
(Foreign Corrupt Practices Act)

24. Paragraphs 1 through 19 and 21 through 23 of Count One are realleged and incorporated as if fully set forth herein.

25. From in or about September 2000, through in or about November 2003, in the Southern District of Texas, and elsewhere, defendant BHSI, a “domestic concern” within the meaning of the FCPA, 15 U.S.C. § 78dd-2(h)(1)(B), used any means and instrumentalities of interstate commerce, corruptly in furtherance of an offer, payment, promise to pay and authorization of the payment of any money, and an offer, gift, promise to give, and authorization of the giving of anything of value to a person, while knowing that all or a portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to foreign officials for purposes of: (i) influencing the acts and decisions of such foreign officials in their official capacity; (ii) inducing said foreign officials to do acts in violation of their lawful duty; (iii) securing an improper advantage; and (iv) inducing such foreign officials to use their influence with a foreign government and instrumentality thereof to affect or influence an act and decision of such government and instrumentality in order to assist defendant BHSI in obtaining and retaining business for and with, and directing business to, any person; to wit , in order to secure the award of an oil-field services contract at the Karachaganak oil fields in the Republic of Kazakhstan, to secure an improper advantage for defendant BHSI and Baker Hughes in connection with that

contract, and to obtain future business in Kazakhstan, defendant BHSI made payments and caused payments to be made, totaling approximately $4.1 million, from its bank account in Houston, Texas, to the bank account of Consulting Firm A in London, United Kingdom.

All in violation of Title 15, United States Code, Section 78dd-2(a)(3).

COUNT THREE
(Aiding and Abetting Books and Records Violation)

26. Paragraphs 1 through 19 and 21 through 23 of Count One are realleged and incorporated as if fully set forth herein.

27. From in or about May 2001, through in or about November 2003, defendant BHSI and Baker Hughes failed to account properly for the commission payments to Consulting Firm A and failed to describe accurately the transactions in their books and records. Instead, the payments were improperly characterized on Baker Hughes’s books and records as legitimate payments for, among other things, “commissions,” “fees,” and “legal services.”

28. From in or about May 2001, through in or about November 2003, in the Southern District of Texas, and elsewhere, defendant BHSI knowingly and willfully aided, abetted and assisted in the falsification of books, records, and accounts which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of the assets of Baker Hughes, to wit : defendant BHSI aided, abetted and assisted Baker Hughes in inaccurately reflecting in its books and records the payments to Consulting

Firm A totaling $4,100,162.70 as, among other things, “commissions,” “fees,” and “legal services,” when in fact these payments were bribes, paid through an intermediary, all or part of which defendant BHSI understood and intended would be transferred to Kazakh government officials.

All in violation of Title 15, United States Code, Sections 78m(b)(2)(A), 78m(b)(5) and 78ff(a), and Title 18, United States Code, Section 2.


	DONALD J. DeGABRIELLE, JR. United States Attorney
	By:	/s/ James R. Buchanan
		JAMES R. BUCHANAN
		Assistant United States Attorney United States Attorney’s Office Southern District of Texas P. O. Box 61129 Houston, Texas 77208-1129


	STEVEN A. TYRRELL Chief, Fraud Section Criminal Division United States Department of Justice
	By:	/s/ Mark F. Mendelsohn
		MARK F. MENDELSOHN
		Deputy Chief, Fraud Section


	By:	/s/ John A. Michelich
		JOHN A. MICHELICH
		Senior Trial Attorney Fraud Section, Criminal Division

Exhibit 99.3

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION


UNITED STATES OF AMERICA		)
		)	Case No. H-07-129
	v.	)
		)
BAKER HUGHES SERVICES		)
	INTERNATIONAL, INC.	)

SENTENCING MEMORANDUM
AND MOTION FOR WAIVER OF PRE-SENTENCE INVESTIGATION
OF BAKER HUGHES SERVICES INTERNATIONAL, INC.

In the accompanying Plea Agreement, Baker Hughes Services International, Inc. (“BHSI”) has agreed to plead guilty to a three-count criminal information charging that BHSI violated the Foreign Corrupt Practices Act (“FCPA”) by making improper payments to an agent of a Kazakhstan government official and failing properly to account for such payments in its books and records. This Memorandum is submitted in support of the joint recommendation of BHSI and the United States Department of Justice (“DOJ”), that this Court waive preparation of the Pre-Sentence Report and immediately impose certain specified sanctions, including a criminal fine of $11 million, as the appropriate sentence for BHSI’s violations.

The agreed-upon recommended sentence reflects the considered judgment of the parties in light of all the circumstances of this case, including DOJ’s public statement commending the extraordinary cooperation of BHSI’s corporate parent, Baker Hughes Incorporated (“BHI” or “the Company”), throughout a five-year parallel criminal and civil investigation into violations of the FCPA. In the course of that investigation, BHI conducted an extensive internal investigation; shared the results of that investigation with

law enforcement authorities; engaged in an unsparing internal review that led to sweeping remedial efforts and a commitment to further compliance enhancements; and provided extensive assistance to law enforcement authorities. BHI’s cooperation has resulted in an enormous savings of scarce prosecutorial resources. During its five-year investigation, BHI spent more than $50 million, engaging hundreds of lawyers, forensic accountants and support staff; reviewing material from approximately 300 computers (containing a volume of data that is roughly equivalent to 90 million pages of documents); and interviewing more than 245 witnesses. BHI voluntarily disclosed the facts obtained during its investigation to the government, providing the government with much of the evidence on which this prosecution is founded, and thus allowing the government to conserve its own scarce resources.

The Plea Agreement filed with this Court (the “Plea Agreement”) and the criminal fine jointly recommended by the parties are only part of the sanctions to be imposed on BHI based on the events discovered during the parallel investigations. Pursuant to a separate deferred prosecution agreement (“DPA”) with DOJ, BHSI’s parent, BHI, has agreed to the filing of a criminal information that was recently reassigned to this Court. It has also agreed with the Securities and Exchange Commission (“the SEC”) to the entry of a Consent Judgment that will be filed in the District Court for the Southern District of Texas the same day as BHSI enters its plea in this case. The DPA and the Consent Judgment impose a wide variety of additional sanctions on BHI, including the appointment of an independent Monitor, approved by DOJ and the SEC, to review BHI’s FCPA policies and procedures for three years. As part of the settlement with the SEC, moreover, BHI has agreed to an additional payment of more than $33 million

(comprising disgorgement, a civil penalty, and prejudgment interest) — making the combined criminal and civil monetary sanctions of more than $44 million the largest ever in an FCPA case. The parties agree that the joint sentencing recommendation is appropriate in these circumstances, and we urge the Court to adopt it.

It is appropriate to limit the criminal fine to $11 million in recognition of BHI’s outstanding cooperation and remedial efforts. Long before the negotiations that led to this parallel settlement, BHI had voluntarily adopted extensive remedial measures designed to ensure full compliance with the anti-bribery, books-and-records, and internal accounting control provisions of the FCPA. BHI terminated or forced the resignation of employees found by its investigation to have been insufficiently attentive to compliance requirements. The Company retained a “Blue Ribbon Panel” of leading securities-law practitioners to guide the Company, while devoting millions of dollars to an enhanced compliance program designed to root out existing FCPA compliance problems and prevent new ones. It also implemented aggressive compliance policies that go well beyond what the law requires, and radically changed its business model by reducing the number of third-party commercial agents and subjecting existing agents to rigorous oversight. It has retained experienced counsel to advise it on crafting these procedures and has involved its Board of Directors and the highest levels of its management as leaders of the process. As a result of these steps, BHI is a very different company today than it was in 2000, when the events at issue occurred.

BHI has also demonstrated the highest standards of responsible corporate citizenship by committing itself to strict adherence to federal law and to continued enhancements to its existing compliance procedures. In addition to the organizational

probation contemplated by the Plea Agreement for BHSI, BHI has agreed to subject itself to the provisions of the DPA (including oversight by an independent Monitor for three years) and to a federal injunction that imposes strict obligations to comply with federal law. Its agreements with DOJ and the SEC require BHI to continue to implement an advanced Compliance Code that will both cement the gains it has already made and build on them. BHI accepts and welcomes the additional accountability contemplated by the obligations imposed by the DPA and the Consent Judgment.

In sum, the $11 million fine, along with the other sentencing recommendations, reflects both the seriousness of BHSI’s failings and BHI’s dramatic response to the discovery of those offenses. The sentencing factors set forth in § 3553, and this Court’s obligation to impose a sentence that satisfies the need for specific and general deterrence, are fully satisfied by an $11 million criminal fine and the other provisions of the recommended sentence. This is particularly true in light of the Company’s five-year history of cooperation and remediation, the global settlement that has more than deprived the Company of any benefit from its misconduct, and the additional enforcement mechanisms of injunctive relief, a deferred prosecution agreement, and a three-year independent monitor.

Finally, BHI also requests that this Court waive pre-sentence investigation and proceed immediately to sentencing, pursuant to Rule 32(c)(1)(A)(ii) of the Federal Rules of Criminal Procedure. BHI makes this request for two important reasons. First, in light of the extensive factual development that has already taken place, a pre-sentence report is unlikely to uncover significant additional facts. Equally important, BHI is a New York Stock Exchange-traded company, and it is important to BHI’s shareholders to avoid any

uncertainty in the market that could result from the time necessary to prepare a pre-sentence report.

I. BACKGROUND

A. Nature and Stage of the Proceedings

The five-year parallel SEC and DOJ investigation began in 2002, when a former BHI employee filed a civil action in Texas state court alleging that he had been wrongfully terminated for refusing to participate in corrupt activities in Nigeria. ¹ See Plaintiff’s Original Petition ¶¶ 14-17, Ferguson v. Baker Hughes Inc. , No. 2002-14960 (Tex. Dist. Ct. filed Mar. 25, 2002). Although none of these allegations ultimately led to any criminal charges, BHI took the allegations seriously. It retained outside counsel, reporting jointly to the General Counsel and the Audit/Ethics Committee of BHI’s Board of Directors, to investigate the Company’s operations in Nigeria and to cooperate fully with the government’s combined investigation. In 2003, when the SEC and DOJ broadened the investigation to include BHI’s operations in Angola and Kazakhstan, BHI expanded the scope of its internal investigation as well, and thereafter identified and voluntarily disclosed the violation of the FCPA reflected in the criminal information. As part of its internal investigation, BHI identified, investigated, and made voluntary disclosures about other potential violations, not previously known to the government,


¹		In September 2001, before the investigation began, BHI settled an earlier administrative FCPA enforcement action with the SEC based on BHI’s voluntary disclosures of an improper payment to tax officials in Indonesia and of certain other payments in India and Brazil. See Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order, In re Baker Hughes Inc. , Securities Exchange Act of 1934 Release No. 44784 (Sept. 12, 2001) (attached hereto as Exhibit A).

arising from the Company’s operations in Angola, Nigeria, Indonesia, Russia, Uzbekistan, Turkmenistan, and Azerbaijan, among other countries.

BHI’s internal investigation and extensive cooperation have involved a significant expenditure of corporate resources and unflinching candor in sharing the results of its investigation with the SEC and DOJ. BHI retained an experienced former federal securities-fraud prosecutor to lead a comprehensive internal investigation that involved more than 330 lawyers, 82 support staff, 31 forensic accountants, and a private investigative firm to collect, review, analyze, and produce evidence relevant to the government’s investigation. BHI has collected documents and electronic media from 20 cities on four continents, reviewed data from approximately 300 computers, and conducted more than 245 witness interviews. BHI has reviewed (either page-by-page or using term searches) approximately 1.69 terabytes of electronic data, the approximate equivalent of 90 million pages, as well as hundreds of thousands of pages of hard-copy documents. BHI has examined this evidence for relevance and privilege, sorted and prioritized it for responsiveness, and organized and produced relevant material in the specific manner and format requested by the government. The total production to the government has amounted to more than 750,000 pages.

BHI has repeatedly met with the SEC and DOJ and has diligently shared relevant evidence uncovered as a result of its internal investigation. In dozens of meetings and telephone calls, BHI provided detailed facts of possible misconduct by current and former officers, employees, and agents, offering the government transparency into its operations in high-risk countries. BHI frequently informed the government of new evidence within days and even hours of the time it was discovered. To expedite the

investigation, BHI also retained a second law firm to investigate additional issues that arose during the course of the investigation, and that firm also met with the government on numerous occasions to present relevant evidence. BHI has further assisted the government’s investigation by making witnesses available, agreeing not to assert applicable privileges with respect to certain events, and conducting targeted supplemental investigations at the government’s request. ²

B. The Conduct at Issue

The conduct that relates to the recommended sentence is set forth in detail in the Statement of Facts (“Statement”), attached as Exhibit 1 to the Plea Agreement. In 2000, as part of an effort to win a tender for oilfield services for the Karachaganak oilfield in Kazakhstan, BHSI agreed to make payments to an agent it understood to be acting on behalf of a Kazakh government official. In September 2000, after receiving preliminary information that BHI would likely be awarded the Karachaganak contract, a BHSI manager (“Employee A”) negotiated with an individual (“Agent A”) who claimed to represent a senior officer of Kazakhoil, then the national oil company of Kazakhstan. See Statement ¶¶ 14-15. To obtain Kazakhoil’s support for BHI, Employee A agreed that BHSI would retain Agent A’s company (“Consulting Firm A”) as its agent and would pay, and would cause BHI’s subcontractors to pay, a commission of 2% of BHI’s revenues from Karachaganak. See id. ¶ 17.

Employee A understood and intended that the commission payments would be passed on in whole or in part to this Kazakhoil official. See id. ¶ 25. In addition,


²		Although BHI agreed not to assert privileges as to certain limited contemporaneous events, BHI continues to maintain the attorney-client and work-product privileges with respect to outside counsel’s investigation.

Employee A sought approval to make these payments from his superiors, and from other employees of BHI, after sending them e-mails informing them of the improper demand (quoted in Statement ¶¶ 14, 17). BHI ultimately won the Karachaganak contract, from which it earned approximately $189.2 million in net revenues and approximately $19.9 million in profits. See id. ¶ 24. BHSI thereafter made more than $4.1 million in payments to Consulting Firm A. See id. ¶ 22 tbl. The payments were halted in November 2003, after BHI’s internal investigation uncovered evidence that they may have been improper. BHI and BHSI improperly recorded these payments on their books and records as “commissions,” “fees,” or payments for “legal services.” Id. ¶ 23.

Both BHI and BHSI have accepted responsibility for Employee A’s acts and have admitted that these acts violated the FCPA’s anti-bribery provision. See id. , preamble & ¶ 25; DPA Attach. A, preamble &. ¶ 25. BHI and BHSI have also admitted that their failure to record these payments properly in their books and records violated the FCPA’s books-and-records provision. See Statement ¶ 25; DPA Attach. A, ¶ 25. As further acceptance of its responsibility, BHSI has also agreed to plead guilty to conspiracy to violate the FCPA, and BHI has consented to the filing of a conspiracy charge against it as well. See Plea Agreement ¶ 1; DPA ¶ 1.

C. Remedial Measures Undertaken by BHI

Before and after learning of these improper payments, BHI undertook extensive remedial and preventive measures to ensure that BHI employees throughout the world adhere to the highest standards of ethical conduct. First, BHI acted decisively in response to evidence of improper or problematic conduct by its employees. Since the beginning of the investigation, it has terminated 10 employees for cause and disciplined 19 others.

Numerous other employees left the Company after they were investigated but before they could be disciplined. Recognizing that foreign third-party sales or commercial agents — of the sort Consulting Firm A purported to be — pose particular risks related to FCPA compliance, BHI terminated seven such agents based on specific information developed in the investigation and embarked on a Company-wide review of its use of such agents. As a result of that review, it reduced the number of agents by 88%, from approximately 650 at the start of the process to 77 as of December 31, 2006. BHI expects to reduce this number still further.

Second, BHI took steps to ensure that its top management is committed to compliance and receives the highest-quality advice about best compliance practices. BHI hired a new Chairman and Chief Executive Officer in October 2004 with a mandate from the Board of Directors to focus on compliance issues. Indeed, none of BHI’s senior managers at the time of the violation are still with the Company. BHI also retained, early in the investigation, a Blue Ribbon Legal Advisory Panel (the “Blue Ribbon Panel”) comprising three of the nation’s foremost experts on securities law enforcement to help guide its internal investigation, cooperation, and remediation efforts. ³ The Blue Ribbon Panel meets periodically with BHI’s General Counsel and its Chief Compliance Officer; it also advises the Audit/Ethics Committee, the Board of Directors, and other members of senior management. Its task is to ensure that the Company’s FCPA compliance program remains state of the art.


³		The Blue Ribbon Panel included the late Alan B. Levenson (a partner at Fulbright & Jaworski and former Director of the SEC’s Division of Corporation Finance); it continues to include the Honorable Stanley Sporkin (formerly a partner at Weil, Gotshal & Manges, a United States District Judge, General Counsel of the Central Intelligence Agency, and Director of the SEC’s Division of Enforcement) and James R. Doty (a partner at Baker Botts L.L.P. and former General Counsel of the SEC).

Third, under the guidance of the Blue Ribbon Panel, BHI took concrete steps to reduce the risk of future FCPA noncompliance. It created and has repeatedly revised and fine-tuned a due-diligence and certification process designed to screen out unsuitable third-party representatives and joint-venture partners. That process has been further expanded to cover freight forwarders, customs-clearing agents, and other sources of potential FCPA compliance risk. In addition, BHI now employs a Chief Compliance Officer for each of its seven divisions and has devoted significant additional resources to compliance in each of its operating regions. For instance, the Company now employs a full-time compliance attorney in both Aberdeen, Scotland and Dubai, United Arab Emirates, as well as two full-time operations attorneys in Nigeria and one in Kazakhstan. The Company also now employs three full-time investigative counsel and two forensic accountants who are available to investigate potential compliance issues as soon as they arise.

The Company has also made a strong commitment to FCPA training and education: from January 2002 through March 26, 2007, the Company conducted mandatory FCPA training and testing for nearly 40,000 current and former employees. It has instituted a sweeping worldwide ban on “facilitating payments” — i.e. , payments to foreign officials “the purpose of which is to expedite or to secure the performance of a routine governmental action,” 15 U.S.C. § 78dd-1(b) — even though such payments are expressly permitted under the FCPA. ⁴ BHI has also undertaken an affirmative effort to identify and address potential problems by conducting periodic, comprehensive “legal


⁴		The Company’s ban on making such payments is subject to an exception if an imminent threat exists to the health, safety, or welfare of a BHI employee, family member, or co-worker. Even then, any payment made must be promptly and accurately recorded.

audits” of its foreign commercial agents. By June 2007, BHI expects to have completed comprehensive, on-site legal audits of every one of its commercial agents (working in 25 different countries) operating worldwide.

II. THE TERMS OF THE SETTLEMENT

A. The Plea Agreement

The Plea Agreement imposes a number of significant sanctions on BHSI, including the recommended $11 million fine. Under the Plea Agreement, BHSI: (1) accepts responsibility for its employees’ conduct related to the Karachaganak project; (2) gives DOJ an enforceable commitment that BHSI’s full cooperation with DOJ’s ongoing investigation of corrupt payments will continue; and (3) pledges to create and implement a comprehensive Compliance Code (set forth in Exhibit 2 to the Plea Agreement). The Plea Agreement also sets forth the basis for the $11 million fine that the parties have agreed to recommend to this Court, including both a Guidelines calculation and the reasons that this Court should impose a sentence below the Guidelines range.

The parties have agreed that the offenses of conviction should be grouped together for purposes of sentencing pursuant to U.S.S.G. § 3D1.2 and that the following calculations from the 2003 Guidelines Manual apply to this case:


1. Calculation of Offense Level:

Base Offense Level (U.S.S.G. § 2C1.1(a)):			10

Benefit received or to be received of approximately $19 million (U.S.S.G. §§ 2C1.1(b)(2)(A), 2B1.1(b)(1)(K)):			+ 20


TOTAL OFFENSE LEVEL:			30


2. Calculation of Culpability Score:

Base Score (U.S.S.G. § 8C2.5(a)):			5

Involvement in or tolerance of criminal activity in an organization of 200 or more employees and an individual within high level personnel of the organization participated in, condoned, or was willfully ignorant of the offense (U.S.S.G. § 8C2.5(b)(3)(A)):			+ 3

Prior history: Commission of the offense less than 5 years after a civil or administrative adjudication based on two or more separate instances of similar misconduct (U.S.S.G. § 8C2.5(c)(2)):			+ 2

Self-reporting, cooperation, acceptance of responsibility (U.S.S.G. § 8C2.5(g)(1)):			- 5


TOTAL CULPABILITY SCORE:			5

3. Calculation of Fine Range:

Base Fine: Greater of the amount from table in U.S.S.G. § 8C2.4(a)(1) & (d) corresponding to offense level of 30 ($10.5 million), or the pecuniary gain to the organization from the offense ($19 million) (U.S.S.G. § 8C2.4(a)(2)):			$19 mm

Multipliers, culpability score of 5 (U.S.S.G. § 8C2.6):			1.00 - 2.00

FINE RANGE (U.S.S.G. § 8C2.7):			$19 - $38mm

The parties’ joint recommendation that the Court impose an $11 million fine, to be paid within five days after imposition of sentence, is intended to reward BHI for its thoroughgoing cooperation and remediation. The parties have agreed that four factors support the proposed downward departure from the recommended Guidelines fine: (a) BHSI’s demonstrated recognition and affirmative acceptance of responsibility for its misconduct; (b) the extensive investigation by BHI and BHSI and their voluntary disclosure to DOJ of evidence obtained from that investigation; (c) BHSI’s disclosure of

misconduct that was unknown to DOJ at the time of the disclosure; and (d) BHI’s agreement (in the DPA) to implement a comprehensive compliance and ethics program and to engage a monitor to oversee the program. ⁵ A departure awarded in recognition of these significant factors will promote respect for the rule of law and will encourage other companies to engage in responsible corporate conduct in the future.

B. The Remainder of the Settlement

The Plea Agreement represents only one portion of the parties’ comprehensive settlement. BHI has also agreed with DOJ to enter a DPA, filed with this Court, to provide added assurance that BHI will honor its commitments. The DPA imposes obligations directly on BHI that mirror those that the Plea Agreement imposes on BHSI. BHI, like BHSI, must continue to cooperate fully with the government’s investigations, must create and implement a Compliance Code, and must avoid any violation of federal law for the two-year term of the DPA. Further, BHI must retain an independent Monitor who will serve for three years, paid entirely by BHI, to ensure that its Compliance Code and FCPA policies and procedures meet the highest standards. Should BHI fail to fulfill any of these obligations, it will be subject to broad and draconian sanctions.

In addition, BHI has agreed to the entry of a Consent Judgment, to be filed in this Court, settling an SEC civil enforcement action. The proposed Consent Judgment includes a monetary sanction of more than $33 million — consisting of approximately $19.9 million in disgorgement of BHI’s profits from the Karachaganak project, a $10 million civil penalty for violation of the SEC’s prior administrative order, and


⁵		In addition, the parties recommend that this Court impose a term of three years of organizational probation and require, as a condition of probation, that BHSI implement the Compliance Code set forth in Exhibit 2 to the Plea Agreement. See Plea Agreement ¶ 19.

approximately $3.1 million in prejudgment interest. This amount brings the combined monetary sanction to more than $44 million, the largest amount ever paid in an FCPA case. The proposed Consent Judgment also requires BHI to retain an independent consultant to review and improve its FCPA policies. ⁶ Moreover, the decree will enjoin BHI from committing further FCPA violations, adding contempt sanctions to the government’s collective arsenal of enforcement sanctions.

In short, an extensive series of negotiations have resulted in a global resolution of this investigation that imposes substantial sanctions on BHI for its conduct and provides the government with powerful weapons to ensure that BHI will continue to live up to the high standard of cooperation and remediation that it has demonstrated.

III. APPLICATION OF THE RELEVANT SENTENCING FACTORS

A. Standard of Review

After United States v. Booker , 543 U.S. 220, 233-34 (2005), the Sentencing Guidelines are no longer binding on this Court in criminal sentencing. Though a sentencing court still must calculate the Guidelines sentencing range, it may treat the sentencing range as merely “one of many factors” to be weighed under 18 U.S.C. § 3553(a). United States v. Armendariz , 451 F.3d 352, 357 (5th Cir. 2006); see United States v. Reinhart , 442 F.3d 857, 864 (5th Cir. 2006) (“the guidelines are merely one sentencing factor among many”); see also Booker , 543 U.S. at 259-60. The factors prescribed by § 3553(a) are:

(1) the nature and circumstances of the offense and the history and characteristics of the defendant;


⁶		To avoid duplication of effort and waste of resources, the parties expect that the same individual will serve both as the Monitor under the settlement with DOJ and the independent consultant under the settlement with the SEC.

(2) the need for the sentence imposed—

(A) to reflect the seriousness of the offense, to promote respect for the law, and
to provide just punishment for the offense;
(B) to afford adequate deterrence to criminal conduct;
(C) to protect the public from further crimes of the defendant; and
(D) to provide the defendant with needed educational or vocational training,
medical care, or other correctional treatment in the most effective manner;

(3) the kinds of sentences available;

(4) the kinds of sentence and the sentencing range established for—

(A) the applicable category of offense committed by the applicable category of
defendant as set forth in the [applicable Sentencing Guidelines] . . . ;

(5) any [applicable] pertinent policy statement [issued by the Sentencing Commission] . . . [;]

(6) the need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct; and

(7) the need to provide restitution to any victims of the offense. 18 U.S.C. § 3553(a). For the reasons set forth below, the $11 million fine recommended by the parties is reasonable and promotes the policy objectives encompassed in § 3553(a).

B. Application of the Sentencing Factors

First, and most important, BHI’s cooperation with the government has been exemplary. The willingness of BHSI’s parent to devote such substantial resources to its investigation, and the extensive voluntary disclosures of evidence uncovered by that investigation, shed light on the “characteristics of the defendant,” id. § 3553(a)(1), and on the “need for the sentence imposed . . . to promote respect for the law,” id. § 3553(a)(2)(A). BHI’s and BHSI’s shared commitment to the ideal of responsible corporate citizenship, manifested throughout the investigation by its diligence and

candor, is a significant mitigating characteristic and demonstrates that respect for the law is already ingrained in BHI’s corporate values and culture.

BHI and BHSI fully accept that the offenses at issue are extremely serious and justify strong corrective measures. ⁷ In a complex, multidimensional settlement such as this one, however, the relevant corrective measures are not limited to the criminal fine alone. They include the SEC’s civil monetary sanction; the prospective enforcement mechanisms afforded by organizational probation, the DPA, and the SEC’s consent decree; the appointment of an outside Monitor to oversee BHI’s FCPA policies and procedures; and, indeed, the costs of the investigation itself. The external monetary costs of BHI’s cooperation (more than $50 million) and the combined monetary sanction ($44 million) alone already far exceed the profits that BHI earned from the Karachaganak project ($19.9 million). Moreover, these figures do not include the internal costs of BHI’s cooperation or the prospective costs of retaining an independent Monitor. In these circumstances, an $11 million fine affords “adequate deterrence to criminal conduct,” 18 U.S.C. § 3553(a)(2)(B), including both specific deterrence against BHSI and general deterrence against other corporations observing this settlement. And the presence of the Monitor, combined with the dual enforcement mechanisms of the DPA and the SEC’s injunction, will effectively prevent future misconduct by BHI or BHSI.


⁷		Although BHSI retained Consulting Firm A before the SEC issued its September 2001 cease-and-desist order against BHI, see supra note 1, BHSI continued to make payments after September 2001. Also, both BHI and BHSI recorded those payments incorrectly in their books and records after September 2001. BHI and BHSI acknowledge and accept that BHI’s failure to obey the cease-and-desist order increases the seriousness of the offense, as the Guidelines range reflects. In addition, the SEC’s proposed monetary penalty — which is based not only on the conduct giving rise to the criminal charges, but on additional, uncharged conduct as well — would impose a significant sanction on the Company for violating the terms of the cease-and-desist order.

Similarly, in assessing the need for “adequate deterrence to criminal conduct” and the need to “protect the public from further crimes of the defendant,” id. § 3553(a)(2)(B), (C), this Court may properly take into account the appointment of the Monitor and the disciplinary measures already imposed by BHI and BHSI. The employees directly involved in the retention of Consulting Firm A — Employee A, his supervisors for three levels above him, and numerous others who approved or facilitated the agreement to pay Consulting Firm A — are no longer employees of BHI or BHSI. Some were directly terminated; others resigned before action could be taken and left their jobs under a cloud. Because BHI has already taken action to hold accountable the individuals who caused BHSI’s violations, the incremental benefits from a larger fine against the corporation would be slight. The oversight responsibilities entrusted to an independent monitor — approved by DOJ — provides substantial additional assurances that such violations will not recur.

The sweeping remedial efforts already undertaken by BHI and BHSI, and further efforts promised in the future, further underscore the reasonableness of the parties’ agreed-upon sentencing recommendation. BHI’s reduction in the number of its agents, its enhanced due-diligence program, and its rigorous system of legal audits, for example, are all critical elements in reducing the risk of future FCPA violations. These prospective compliance measures are all part of an ongoing process that began well before the government began its investigations.

Finally, the Court should weigh the government’s strong interest in providing adequate incentives for corporate cooperation with governmental investigations. Improper payments that take place in foreign countries are difficult for the government to

detect and, often, effectively investigate. Voluntary disclosures and internal investigations of the kind made by BHI are therefore key to an effective FCPA enforcement program. This Court should therefore give special weight to DOJ’s agreement that the $11 million recommended fine appropriately reflects BHI’s cooperation when considered against all the other facts of this case.

IV. CONCLUSION

For the reasons set forth above, BHSI respectfully requests that the Court impose the sentence recommended by the parties.


	Respectfully submitted, KELLOGG, HUBER, HANSEN, TODD, EVANS & FIGEL, P.L.L.C.
	By:	/s/ Reid M. Figel
		Reid M. Figel
		Kevin B. Huff Gregory G. Rapawy Michael J. Fischer 1615 M Street, N.W., Suite 400 Washington, D.C. 20036 Telephone: (202) 326-7900 Facsimile: (202) 326-7999 Counsel to BHI and BHSI

Exhibit 99.4

U.S. Department of Justice

Criminal Division


Mark F. Mendelsohn		Telephone: (202) 514-1721
Deputy Chief		Facsimile: (202) 514-7021
Fraud Section, Criminal Division

mark.mendelsohn@usdoj.gov

10th & Constitution Ave. NW (Bond 4402)
Washington, DC 20530-0001

April 24, 2007

BY FACSIMILE 713-250-5894

The Honorable Gray H. Miller
United States District Court
Southern District of Texas
United States Courthouse
515 Rusk Avenue, Room 9010C
Houston, Texas77002


Re:		United States v. Baker Hughes Services International, Inc.
		Criminal Case No. H-07-129

Your Honor,

The United States Department of Justice, Criminal Division, Fraud Section (“the Department”) and the defendant, Baker Hughes Services International, Inc. (“BHSI”), a Delaware corporation and wholly owned subsidiary of Baker Hughes Incorporated (“Baker Hughes”), a New York Stock Exchange listed company headquartered in Houston, Texas, have entered into a plea agreement previously submitted for the Court’s approval.

Introduction

The allegations set forth in the Information involve violations of the Foreign Corrupt Practices Act of 1977 (the “FCPA”), as amended, 15 U.S.C. §§ 78dd-1, et seq. The FCPA prohibits certain classes of persons and entities from making payments to foreign government officials to obtain or retain business. Specifically, the FCPA prohibits any issuer of publicly-traded securities, e.g. , Baker Hughes, or any domestic concern, e.g. , BHSI, from making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value would be offered, given, or promised, directly or

indirectly, to a foreign official for the purpose of obtaining or retaining business for, or directing business to, any person or securing any improper advantage. 15 U.S.C. § 78dd-1(a)(3) and § 78dd-2(a)(3). In addition, the FCPA requires certain corporations to make and keep books, records and accounts which accurately and fairly reflect transactions and dispositions of the company’s assets and prohibits the knowing falsification of such books, records or accounts. 15 U.S.C. §§ 78m(b)(2)(A) and (b)(5).

Pursuant to the plea agreement, defendant BHSI has agreed to waive indictment and plead guilty to a three-count criminal Information charging one count of Conspiracy to violate the FCPA (18 U.S.C. § 371; Count One), violating the FCPA (15 U.S.C. § 78dd(2); Count Two), and aiding and abetting the making of false entries in the books and records of its parent company, Baker Hughes (15 U.S.C. § 78m(b); Count Three).

Assuming defendant BHSI accepts responsibility and pleads guilty as anticipated, the Department will recommend the imposition of a fine in the amount of $11,000,000, and a term of organizational probation of three years. The Department further agrees, with the Court’s approval, to consent to a waiver of a pre-sentence investigation and report as required by Rule 32(c)(1)(A), F.R. Crim. P., and to a consolidation of the arraignment, plea hearing and sentencing hearing into one proceeding on Thursday, April 26, 2007.

In reaching this plea agreement with BHSI and a related deferred prosecution agreement with its parent corporation, Baker Hughes, the Department is guided by Department policy as set forth in the memoranda entitled “Principles of Federal Prosecution of Business Organizations,” commonly known as the “McNulty Memorandum.” This memorandum directs, among other things, that the Department disclose to the Court any negotiated departure from the Sentencing Guidelines. Because the proposed disposition in this case does represent a negotiated departure, the Department respectfully submits this letter to the Court in order to set forth the reasons for the Department’s exercise of its discretion in entering into this agreement, and for commending it to the Court for acceptance and approval.

Sentencing Guidelines Calculation

The parties stipulate that the 2003 Guidelines Manual applies to this matter and that the following is the proper application of the sentencing guidelines to the offense alleged in the Information:


A. Calculation of Offense Level :
Base Offense Level (U.S.S.G. § 2C1.1(a)):			10
Benefit received or to be received of approximately $19 million (U.S.S.G. §§ 2C1.1(b)(2)(a), 2B1.1(b)(l)(K)):			+20


TOTAL OFFENSE LEVEL:			30

B. Calculation of Culpability Score:


Base Score (U.S.S.G. § 8C2.5(a)):		5

Involvement in or tolerance of criminal activity in an organization of 200 or more employees and an individual within high level personnel of the organization participated in, condoned, or was willfully ignorant of the offense (U.S.S.G. § 8C2.5(b)(3)(A)):		+3

Prior history: Commission of the offense less than 5 years after a civil or administrative adjudication based on two or more separate instances of similar misconduct (U.S.S.G. § 8C2.5(c)(2)):		+ 2

Self-reporting, cooperation, acceptance of responsibility (U.S.S.G. § 8C2.5(g)(1)):		-5


TOTAL CULPABILITY SCORE:		5

C. Calculation of Fine Range:

Base Fine: Greater of the amount from table in U.S.S.G. § 8C2.4(a)(1) & (d) corresponding to offense level of 30 ($10,500,000), or the pecuniary gain to the organization from the offense ($19,000,000) (U.S.S.G. § 8C2.4(a)(2)):	$	19,000,000

Multipliers, culpability score of 5 (U.S.S.G. § 8C2.6):		1.00 - 2.00

Fine Range (U.S.S.G. § 8C2.7):	$	*19,000,000 –$38,000,000*

D. The parties agree that the offenses of conviction should be grouped together for purposes of sentencing pursuant to U.S.S.G. § 3D1.2.

Fine Recommendation and Rationale

Notwithstanding the above stipulated Sentencing Guidelines fine analysis, the Department submits that based on a reasoned consideration of the guidance and factors set forth in the McNulty Memorandum, the imposition of a fine of $11,000,000, in addition to the other terms of the plea agreement with BHSI, and the terms of the deferred prosecution agreement with Baker Hughes, is an appropriate monetary sanction against BHSI .

A. Timely Disclosure and Exceptional Cooperation

The McNulty Memorandum recommends scrutiny of the authenticity of a company’s cooperation. Here, there can be no question that the cooperation of Baker Hughes and BHSI was sincere and complete. Indeed, the cooperation provided by defendants in this matter was exceptional.

The conduct alleged in the Information and further described in the Statement of Facts was voluntarily disclosed to the Department within a reasonably prompt time after the defendant BHSI and Baker Hughes became aware of the offenses. At the time of the initial disclosure, the entire scope of the criminal conduct was unknown to the Department. Subsequently, defendant BHSI and Baker Hughes fully cooperated with the Department by devoting considerable resources, both financial and otherwise, to perform a thorough investigation and make full disclosure of the conduct at issue.

The Plea Agreement in this matter is a result, in part, of the voluntary disclosure of voluminous information made available by defendant BHSI and its parent corporation Baker Hughes, through their investigative counsel, to the Department beginning in March 2002, delivered during a series of lengthy meetings with government counsel in which evidence, in the form of documents, emails, correspondence and other information, in hard copy and electronic form, was produced and explained.

The voluminous information disclosed by Baker Hughes was collected by its investigative counsel during the course of an extensive and thorough investigation lasting almost four years, conducted by two different law firms, concerning the operations, policies and practices of Baker Hughes and its affiliates and subsidiaries, regarding numerous business ventures in more than a dozen countries throughout the world. The investigation involved, among other things, (1) an independent analysis of financial records, including invoices, bank drafts and wire transfers, with the assistance of forensic accountants; (2) the review by outside counsel of tens of millions of pages of electronic data, and hundreds of thousands of pages of hard copy records of current and former employees; and (3) hundreds of in-person and telephonic interviews of defendants’ employees and other witnesses located, literally, throughout the world. Moreover, Baker Hughes agreed to make, and has made to the extent possible, its employees, and those of its subsidiaries, available for interviews by the Department and encouraged employee cooperation in the investigation by agreeing to pay employee travel expenses in connection with those interviews. Baker Hughes encouraged certain employees to retain separate counsel and volunteered to pay their attorney’s fees to promote their continued cooperation with the company and the government. Counsel for Baker Hughes gave the Department regular real-time briefings and updates of the results of the investigation. Counsel also voluntarily provided the Department with the results of all of its interviews without interposing any obstacle to the production of factual information. Lastly, counsel for Baker Hughes provided the Department a full and lengthy report of all findings.

Proper investigation and determination of the extent of the unlawful conduct required extensive review of Baker Hughes’s books and records, both paper and electronic, from various Baker Hughes offices throughout the world. The Audit Committee authorized investigative counsel to retain a forensic accounting firm to conduct extensive forensic work and to conduct extensive revenue and profit analyses related to the criminal conduct, the results of which were provided to the Department.

In the course of the internal investigation by outside investigative counsel, and the related forensic accounting work, various other instances of potentially improper business activity and possible violations of company policy were identified. Investigative counsel

conducted a thorough investigation and made disclosures to the Department regarding each such issue.

With respect to the results of its internal investigation, including investigative counsel’s memoranda of witness interviews, the Audit Committee authorized investigative counsel voluntarily to provide to the Department work-product protected material, as well as certain attorney-client privileged material relevant to the investigation. While this step was not specifically requested by the Department, the production of such materials substantially assisted the Department in conducting its own assessment of the veracity and credibility of witnesses and in obtaining the fullest benefit from investigative counsel’s internal investigation.

C. Discipline of Wrongdoers

Upon learning that various officers, managers and employees of Baker Hughes and BHSI were involved in criminal conduct, the Board of Directors moved quickly to terminate those persons. This action sent a strong message throughout the company that unethical and illegal business practices would not be tolerated. The Department is satisfied that defendants moved swiftly to discharge all those employees who participated in the illegal conduct. Furthermore, additional personnel were disciplined short of termination based on their failure to act fully consistent with Baker Hughes policies and expectations.

D. Compliance Program and Other Remedial Action

Another set of important factors under the McNulty Memorandum to be considered in reaching an appropriate resolution of such matters, relates to the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one.

Defendant BHSI and Baker Hughes took significant remedial action to address the conduct at issue despite the fact that such remedial action resulted in considerable financial consequences to their business. Baker Hughes retained a “Blue Ribbon Panel” of securities law experts to assist the company in its remedial and compliance efforts and to counsel its Board of Directors, Audit/Ethics Committee, General Counsel, and other senior executives.

The compliance reforms that were adopted include a number of FCPA best practices. For example, defendant BHSI and Baker Hughes conducted extensive due diligence of all its potential agents, consultants and intermediaries retained in connection with foreign contracts, and drastically reduced the number of such third parties engaged in business development on behalf of Baker Hughes. Baker Hughes instituted a complete ban on facilitating payments (except for the case of imminent threat to the health, safety or welfare of Baker Hughes personnel or their families) throughout its global operations, though such payments are lawful under the FCPA. Baker Hughes implemented a program of periodic legal audits of its foreign agents, and has prohibited payments from Baker Hughes to its agents outside the country in which the agent is assisting the company.

Baker Hughes has devoted substantial additional resources to its compliance department by hiring chief compliance officers for each of its seven operating divisions, and has enhanced its internal legal and accounting resources available to investigate compliance issues.

Finally, defendant BHSI and Baker Hughes have agreed to the instant resolution of this matter with the Department, including a plea of guilty by defendant BHSI in this matter and a deferred prosecution agreement regarding Baker Hughes in the related matter. By entering and fulfilling the obligations under this Plea Agreement, defendant BHSI has demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct. Accordingly, the parties have agreed that the fine of $11 million for defendant BHSI is part of an appropriate disposition of the case based upon the factors discussed above.

D. Related Disposition

As noted earlier, the plea agreement with BHSI is part of a larger, overall proposed resolution of this criminal investigation with the Department. Another significant part of this resolution is the agreement by the parent corporation, Baker Hughes, to enter into a deferred prosecution agreement with the Department. The agreement is for a term of two years, after which, if Baker Hughes has complied with all its terms and conditions, no further criminal charges will be brought by the government based on this conduct. Under the terms of the deferred prosecution agreement, Baker Hughes has, among other things, agreed to: (I) implement and maintain a compliance and ethics program designed to detect and prevent violations of the FCPA, U.S. commercial bribery laws and foreign bribery laws throughout its operations, including those of Baker Hughes and its subsidiaries (including defendant BHSI), affiliates, and successors; and (ii) engage an independent monitor for a period of three years who will review the company’s compliance program and ongoing business activities and report his findings to the company and the Department.

In addition to resolving the criminal matters with the Department through the BHSI guilty plea and the Baker Hughes deferred prosecution agreement, Baker Hughes is expected to enter into a settlement with the Securities and Exchange Commission in which it has agreed to pay a civil penalty of $10 million; to disgorge all profit earned in connection with the Karachaganak contract of approximately $20 million; and to pre-judgment interest of approximately $3 million. Notably, if imposed, combined economic sanctions of more than $44 million would constitute the largest combined sanction ever imposed in an FCPA case.

E. Acceptance of Responsibility

In conducting an extensive internal investigation, disciplining wrongdoers irrespective of rank, replacing senior management, overhauling its compliance program and procedures, and by entering and fulfilling its obligations under the plea agreement and deferred prosecution agreement, Baker Hughes and its wholly owned subsidiary, BHSI,

have demonstrated recognition and affirmative acceptance of responsibility for the criminal conduct uncovered.

Conclusion

Baker Hughes and its wholly owned subsidiary, BHSI, have voluntarily disclosed serious criminal conduct in connection with the company’s business affairs in Kazakhstan and elsewhere. The internal investigation, conducted by outside investigative counsel, at the direction of the Board of Directors, has quickly and effectively exposed the complete scope of wrongdoing under investigation. Relevant information has been shared with the Department, and maximum assistance has been provided to the Department, often at great expense to and effort by the company. Moreover, corporate governance at the company has been significantly improved, in part through the adoption of a robust, remedial compliance program.

Therefore, based upon the foregoing discussion, the Department respectfully submits that a fine in the amount of $11,000,000 in connection with the guilty plea of BHSI as recommended in the plea agreement is an appropriate monetary sanction and that such a fine should be imposed by the Court.

Thank you for your consideration of this matter. We appreciate the Court’s accommodation of the parties in scheduling the hearings in this case.

Very truly yours,

/s/ Mark F. Mendelsohn
Mark F. Mendelsohn
Deputy Chief
Fraud Section, Criminal Division

cc: Reid M. Figel, Esq.

Exhibit 99.5

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION



SECURITIES AND EXCHANGE COMMISSION,	:
100 F Street, N.E.	:
Washington, D.C. 20549-4631,	:
	:
Plaintiff,	:
	:
v.	:
	:
BAKER HUGHES INCORPORATED and	:
ROY FEARNLEY,	:
	:	COMPLAINT
	:
Defendants.	:

Plaintiff, Securities and Exchange Commission (“Commission”), alleges that:

SUMMARY

1. From at least 1998 through 2003, Baker Hughes Incorporated (“Baker Hughes” or the “Company”), paid approximately $5.2 million to agents while knowing that some or all of the money was intended to bribe government officials in Kazakhstan. These commission payments were made to influence acts and decisions by foreign officials in Kazakhstan who were employed by the country’s state-owned oil companies to obtain or retain business for Baker Hughes. Baker Hughes lacked sufficient internal controls to prevent or detect such improper payments, and improperly recorded the payments in its books and records.

2. One agent was hired in late September 2000 near the very end of a long competitive tender process for a significant oil services contract for the Karachaganak oil field in Kazakhstan. Baker Hughes retained this agent on the understanding that Kazakhoil, Kazakhstan’s national oil company, had demanded that the agent be hired to influence senior-

level employees of Kazakhoil to approve the award of the closed tender to Baker Hughes. The agent was hired even though Baker Hughes did not need any legitimate services from an agent at this late juncture in the tender process as its bid had been submitted approximately seven months prior and it was just then awaiting for the business to be awarded; Baker Hughes already understood it was to be recommended the contract by the tendering group, a consortium of oil companies called Karachaganak Integrated Organization (“KIO”); agents were not legally required for such tenders in Kazakhstan; and Baker Hughes had conducted no due diligence as to the agent’s background, competence or track record. In fact, Baker Hughes failed to conduct any meaningful due diligence on the agent until more than two years after its retention, after approximately $2.5 million had already been paid to the agent.

3. Baker Hughes retained the agent principally at the urging of Roy Fearnley, a Baker Hughes business executive located in Kazakhstan, who also was Baker Hughes’ primary coordinator for its bid on the Karachaganak tender. Fearnley told his bosses that the “agent for Kazakhoil” told him that unless the agent was retained, Baker Hughes could “say goodbye to this and future business.” Recognizing the urgency of the situation, Fearnley sought and obtained the approvals from senior executives across several operating divisions of Baker Hughes to engage the agent.

4. Baker Hughes was awarded the Karachaganak contract in October 2000, and it generated $219.9 million in gross revenues from 2001 through 2006. From May 2001 to November 2003, Baker Hughes made twenty-seven commission payments to the agent’s London bank account totaling over $4.1 million. Of that amount, Baker Hughes paid approximately $2.3 million on its own behalf with the balance of $1.8 million paid by Baker Hughes on behalf of its subcontractors. Baker Hughes received no identifiable services from the agent in exchange for

such commission payments.

5. Baker Hughes retained a second agent in Kazakhstan in 1998, and made commission payments to the agent from July 1998 to April 1999. A senior official and a Country Manager of a Baker Hughes’ wholly-owned operating subsidiary authorized payments to this agent to influence acts and decisions by foreign officials in Kazakhstan for the benefit of Baker Hughes. The commission payments to the agent’s company were made at the direction of a high-ranking executive of KazTransOil, Kazakhstan’s national oil transportation company, who was therefore in a position to influence or determine the award of a chemical contract obtained by Baker Hughes. Baker Hughes paid agent commissions of nearly $1.1 million, reflecting a commission of approximately 30% on gross revenues on the contract of more than $3.2 million. Baker Hughes retained the agent without having conducted any due diligence at all as to its background, competence or track record.

6. Between 1998 and 2005, Baker Hughes also made payments in Kazakstan and other countries either to agents or to other individuals, including public officials, in circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes’ books and records. Examples include, but are not limited to, the following: (1) in Angola, from 1998 to 2003, Baker Hughes paid an agent more than $10.3 million in commissions under circumstances in which the company failed to adequately assure itself that such payments were not being passed on to employees of Sonangol, Angola’s state-owned oil company, to obtain or retain business in Angola; Baker Hughes also failed to conduct any meaningful due diligence into the background of this agent; (2) in Nigeria, a Baker Hughes operating subsidiary made a payment to a tax consultant in 2001 under circumstances in which it failed to make an adequate

inquiry to determine whether all or a part of such payment was to be funneled to a Nigerian government official (the payment was also inaccurately recorded in the company’s books and records); (3) in Indonesia, between 2000 and 2003, Baker Hughes paid certain freight forwarders to import equipment into Indonesia using a “door-to-door” process under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Indonesian customs officials; (4) Baker Hughes authorized payments to a company in Kazakhstan for an option to lease a parcel of land in connection with another oil services contract bid while knowing that a high-ranking executive of the Kazakhstan national oil company had a direct or indirect interest in the company; moreover, the payee company was controlled, directly or indirectly, by the principal of the same agent to which Baker Hughes improperly agreed to make payments back in 2000 for the Karachaganak project; (5) in Nigeria, between at least 2001 and 2005, Baker Hughes authorized payments to certain customs brokers to facilitate the resolution of alleged customs deficiencies under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Nigerian customs officials; and (6) from 1998 to 2004, Baker Hughes authorized commission payments of nearly $5.3 million to another agent (who worked in Kazakhstan, Russia and Uzbekistan) under circumstances in which the company failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA.

7. By making these payments, Baker Hughes violated the Foreign Corrupt Practices Act of 1977 (the “Foreign Corrupt Practices Act” or “FCPA”) as incorporated into the federal securities laws as Sections 30A, 13(b)(2)(A), 13(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”), and also violated Section 13(b)(5) of the Exchange Act.

8. In addition, by authorizing and directing these payments, Roy Fearnley violated the FCPA as incorporated into the federal securities laws as Sections 30A, and aided and abetted

Baker Hughes’ violations of Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and also violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder,

9. In addition to violating the federal securities laws, certain of this conduct violated a cease-and-desist order against Baker Hughes issued by the Commission on September 12, 2001. The Commission issued the cease-and-desist order after finding that Baker Hughes violated the FCPA’s books and records and internal controls provisions in connection with improper payments it made in Indonesia, Brazil and India.

10. Baker Hughes and Roy Fearnley may, unless restrained and enjoined, continue to engage in the acts and practices set forth in this complaint and in acts and practices of similar purport and object.

JURISDICTION AND VENUE

11. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78aa].

12. Venue in the Houston Division of the Southern District of Texas is proper pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa].

13. In connection with the conduct described herein, Baker Hughes and Roy Fearnley made use of the mails or the means or instrumentalities of interstate commerce.

DEFENDANTS

14. Baker Hughes is a Delaware corporation headquartered in Houston, Texas. Baker Hughes is a global provider of oilfield services and products both in the United States and, during the relevant period, through various operating subsidiaries outside the United States. Baker Hughes’ common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange.

15. Roy Fearnley is a British national residing in Kazakhstan. From 1999 to 2003, Fearnley was employed by Baker Hughes as a Business Development Manager in Kazakhstan and later in Russia. As of September 2005, Fearnley was employed as Vice President of Business Development for an oilfield service company based in Kazakhstan with offices in Kazakhstan and the United States.

FACTS

A. Payments with respect to Karachaganak Oil Field, Kazakhstan

Background to the
Karachaganak Oil Field Project

16. In November 1997, the Government of the Republic of Kazakhstan and Kazakhstan’s then national oil company, Kazakhoil, signed a 40-year Final Production Sharing Agreement with the partners of the Karachaganak Integrated Organization (“KIO”), consisting of Eni-AGIP S.p.A. of Italy, British Gas Exploration and Production Ltd. of the United Kingdom, ChevronTexaco Inc. of the United States and Lukoil Oil Co. of Russia, to develop and operate for world production the Karachaganak oil field near Aksai, Kazakhstan. To assist it in implementing this Production Sharing Agreement, the KIO consortium set out to tender a substantial oil drilling services contract for the Karachaganak oil field to outside vendors. The tender, which offered the potential for hundreds of millions of dollars of revenues to the winning bidder, would be for a variety of bundled services, including project management, oil drilling operations logistics and engineering support, among other services.

15. As Kazakhstan’s national oil company, Kazakhoil was responsible for overseeing various oil and gas activities in the country, including the Karachaganak oil field project. KIO sought Kazakhoil’s approval at various stages of the tender process, including its approval of KIO’s recommendation for the ultimate award. As a reflection of this influence, Baker Hughes

perceived that its fortunes with respect to the KIO tender relied, in large part, on Kazakhoil’s favorable recommendation.

18. Prior to the Karachaganak contract, Baker Hughes’ Kazakhstan-related revenue was modest, with only approximately $10 million in revenues from its Baker Atlas, INTEQ and Baker Oil Tools divisions in 1999. By late 1999, Baker Hughes expected revenue for the Karachaganak project alone was approximately $100 million over three years. By October 2000, when the Karachaganak tender was ultimately awarded to Baker Hughes, expected revenue from the contract was nearly $200 million. Given the amount of revenue Baker Hughes expected to receive in Kazakhstan at that time, an individual who later became Baker Hughes’ Vice President of Marketing and Technology (the “VP of Marketing”) stated in November 1999 that winning the Karachaganak project was “crucial for the future health of [Baker Hughes] in Kazakhstan.”

The KIO Tender Process

19. In October 1998, Baker Hughes learned about the specifics of KIO’s impending tender for the Karachaganak oil drilling services contract, and began coordinating its preparation for the bid. Among other items, Baker Hughes learned that the KIO tender required a company to submit a single integrated bid for all of the requested bundled services. Integrated bids were comparatively rare at Baker Hughes – frequently the Baker Hughes operating divisions prepared their own separate bids for a given contract; in fact, culturally and operationally the divisions frequently acted like stand-alone companies. An early internal Baker Hughes estimate suggested that 85% of the potential revenues and costs of the Karachaganak contract would be shared by three of Baker Hughes’ operating divisions — Baker Atlas, Baker Oil Tools and INTEQ. A single integrated bid also had the added complication of requiring Baker Hughes to coordinate

with third-party subcontractors to provide those “gap” services that Baker Hughes could not provide itself.

20. In December 1998, Roy Fearnley, then Baker Hughes’ Business Development Manager for Kazakhstan, was designated “Team Leader” to coordinate Baker Hughes’ Karachaganak tender submission. Fearnley’s strategy from the outset was to garner support from Kazakhoil and its senior-level employees. As part of this strategy, Fearnley and the VP of Marketing met with senior-level employees of Kazakhoil. Later, Fearnley reported to his supervisor that he had made contact with a particular high-ranking executive of Kazakhoil and had discussed a strategy for Baker Hughes’ pre-qualification and tender submission. Baker Hughes and Fearnley understood that this individual, in particular, wielded significant responsibility and decision-making authority over the Karachaganak tender.

21. The KIO consortium’s tendering process began in earnest in late 1999, when Baker Hughes was informed that its pre-qualification was successful, and it received the official tender documents (along with other competing bidders). Baker Hughes then sent a tender team consisting of Fearnley and representatives from the various operating divisions to Holland to concentrate on putting together the draft tender submission.

22. On or around February of 2000, the tender team presented the draft tender at a meeting in London that was attended by hemisphere vice presidents of three of Baker Hughes’ operating divisions. Among the topics discussed was the fact that Baker Hughes’ draft bid had very thin expected profit margins — around 5-6% — relative to the double digit margins typically expected of such projects. By the end of February 2000, more than a year after it began coordinating the effort, Baker Hughes submitted its integrated bid to the KIO for the Karachaganak oil field drilling services contract. Baker Hughes’ bid, when submitted, did not

contain a provision for the retention of an agent and an agent was not foreseen as necessary to obtain the work.

23. Because it was a “closed” tender, meaning the competing parties submitted blind bids for the tender, after Baker Hughes submitted its bid to the KIO consortium pricing negotiations on the submitted bids generally came to a halt. By late August 2000, other than providing “clarifications” to the KIO about its tender bid, or technical or legal responses to the terms of its bid, and discussions of whether to extend the terms of its bid for three additional years, Baker Hughes essentially had finished substantive negotiating with the KIO over its bid to win the Karachaganak contract. On September 12, 2000, Fearnley told his senior supervisor residing in Houston, Texas, the VP of Marketing, that though they had no “official” news, he had heard unofficially that Baker Hughes had won the Karachaganak tender and that they should know definitively within the week.

Baker Hughes Approached by “Kazakhoil . . . [T]hrough an [A]gent”

The Request for a Commission

24. By September 14, 2000, the VP of Marketing had received a phone call from a senior level employee of Baker Hughes’ Western Geophysical division who informed him that Kazakhoil requested that Baker Hughes hire an agent in connection with the Karachaganak tender. On September 14, 2000, the VP of Marketing e-mailed Fearnley about his call from the Western Geophysical employee, stating that “I have heard rumours (from [Western] Geo[physical]) that the Kazakhs are looking for an agency agreement. I hope not at this late stage.” Fearnley confirmed the rumor in a reply e-mail that day, later telling the VP of Marketing and Baker Hughes’ Vice President of Sales (“VP of Sales”) in a follow-up e-mail that “[a]s you know from W[estern]G[eophysical] Kazakhoil approached me through an agent in London stating that to get Kazakhoil approval a 3% commission is required.” Fearnley went on

to explain that the commission had been demanded despite his understanding that the KIO tender representatives already had recommended that Baker Hughes win the tender and were awaiting approval from their respective companies and Kazakhoil. Fearnley then added, “if one our (sic) competitors comes in with a pot of gold, it is not going to be our contract.”

25. Fearnley, with approval from the VP of Marketing, determined that the best course of action was to respond by refusing the demand to hire the agent on the Karachaganak project, but offering to retain the same agent for future work in the region. This approach was consistent with the fact that the agent had performed no identifiable services for Baker Hughes with respect to Karachaganak to deserve a commission, and also, as Fearnley stated by e-mail, would “keep[] [Baker Hughes] clear of any critcism (sic) for this KIO contract.” After soliciting and receiving support from the eastern hemisphere vice presidents for the three divisions involved in the tender — Baker Atlas, Baker Oil Tools and INTEQ — Fearnley met with the agent to discuss the counteroffer.

26. By Sunday, September 24, 2000, the agent had not only rejected Baker Hughes’ counterproposal for commissions based only on future business acquired, but had increased the pressure on Baker Hughes to pay a commission for Karachaganak. Fearnley explained to the VP of Sales, who was his immediate supervisor residing in Houston, Texas, and to the VP of Marketing that the “agent for Kazakhoil” was demanding that “unless we pay a commission relative to the KIO contract we can say goodbye to this and future business.” Fearnley also indicated that a decision was needed quickly, noting that Kazakhoil was expected to make a recommendation to the KIO tender team as to Baker Hughes’ bid the coming Tuesday, September 26, 2000, at a meeting in Kazakhstan and “unless we do this the recommendation for BH will be fought hard by Kazakhoil.” Fearnley went on to explain to the VP of Sales and to the

VP for Marketing that he now understood that a discounted 2% commission would “seal this support” for Baker Hughes’ bid.

Baker Hughes Hires the Agent

27. Almost immediately, Fearnley and the VP of Sales began to canvass the division Vice Presidents for their support for the 2% commission. By the following morning, Monday, September 25, 2000, Fearnley and the VP of Sales had secured approvals from senior officials of Baker Atlas and Baker Oil Tools, and soon thereafter had approval from INTEQ as well. Because any agent commission payments would also have a financial impact on expected revenues to the subcontractors who were associated with Baker Hughes’ bid (because the commission payments would be deducted from revenue due to the subcontractors), Fearnley also scrambled to get their approvals to the commission payments. One of the subcontractors gently pushed back on the necessity for the commission before agreeing to go forward: “As I am sure you will agree being held to ransom at this late date is not palatable. . . . Our response to the question is do we have any option?” Fearnley responded to the subcontractor that even though it was “distasteful,” it was necessary.

28. In the meantime, Fearnley was also attempting to formalize the agency relationship with the agent, a company based in the Isle of Man led by an individual citizen and resident in the United Kingdom. On that Sunday and Monday, September 24 and 25, 2000, Fearnley sent drafts to the agent’s principal of a one-page side letter reflecting Baker Hughes’ agreement to pay a 2% commission for the Karachaganak project based on the project’s revenues and a separate sales representation agreement that would appoint it as Baker Hughes’ agent for future services in Kazakhstan (excluding Karachaganak and certain other projects) at a commission of 3% of such services awarded. Fearnley’s cover e-mail to the agent’s principal attaching the side letter also referred to the link between the commission payment and approval

of Baker Hughes’ bid: “[y]ou will note the consideration has been greatly increased and trust this will receive the recognition it deserves in the necessary corners of Kazakhstan in confirming their support to Baker Hughes.”

29. By just after noon on Tuesday, September 26, 2000, on the same day as the meeting where Kazakhoil was expected to deliver its support, or not, for Baker Hughes’ bid to the KIO tender team, Fearnley finalized the commission arrangement with the agent. Sending the agent by e-mail a revised draft of the side letter and the sales representation agreement, Fearnley added a note that the signed sales representation agreement would be at the representative’s office in London “as soon as possible.”

30. By at least September 29, 2000, Baker Hughes had retained the agent on the terms set forth in the side letter. On that day, the agent’s representative sent the original of the side letter to the agent’s office in the Isle of Man for safekeeping.

31. The side letter was backdated to September 1, 2000, and provided for a 2% commission on revenues from the Karachaganak project, subject to Baker Hughes “being confirmed the winner of the tender and awarded the 3-year contract.” The side letter was not part of a formal sales representation agreement, and contained no FCPA language at all. Moreover, though it purported to obligate Baker Hughes to a 2% commission, the side letter was not subject to any prior legal review before it was submitted to the agent.

Baker Hughes’ Internal Controls Fail to Stop the Agent’s Hiring

32. On Tuesday evening, September 26, 2000, the VP of Marketing e-mailed his supervisor, Baker Hughes’ then President of Oil Field Operations and soon-to-be Chief Operating Officer, requesting a meeting that night in their Houston, Texas headquarters about the Karachaganak tender. The VP of Marketing summarized the agenda for their proposed meeting, stating that “the Kazakhs are now threatening to resist the [Karachaganak] award unless we pay

2% agency fees for all services.” In addition to laying out various options, the Vice President described the possible consequences of not acquiescing, including losing the Karachaganak contract and potentially another large Kazakhstan tender Baker Hughes was bidding on at the time.

33. The President of Oil Field Operations then held a meeting with the VP of Marketing in which they discussed Kazakhoil’s request that Baker Hughes retain the agent, the impact of paying a commission on their expected profit margins and other contract issues. When the VP of Marketing left the meeting, he had three directions from the President of Oil Field Operations: (i) to get the legal department involved in approving the hiring of the agent; (ii) to re-run their profitability numbers with the 2% agent commission built in, and (iii) to resolve the contract issues with their employee responsible for the legal negotiations on the contract terms.

34. On September 27, 2000, the VP of Marketing followed up with his reports, Fearnley and the VP of Sales, directing them not to sign on to the deal until they have all discussed the open issues, which included the “Kazakh agency fees, on top of very aggressive pricing.” The VP of Marketing also asked Fearnley to re-run the financial projections for the Karachaganak project including the impact of the 2% commission payments. Fearnley executed a sales representation agreement with the agent on Baker Hughes’ behalf, dated September 27, 2000 (“Sales Representation Agreement”), before the revised numbers had been completed. The VP of Sales, who had been in contact with Baker Atlas, INTEQ and Baker Oil Tools, later confirmed that despite the projected thin operating margins at the time of the bid, the divisions were satisfied they could absorb the additional 2% haircut on their profits due to the commission payments.

35. The Sales Representation Agreement purported to have commenced on September 1, 2000, and provided that the agent would receive a 3% commission on revenues

invoiced by Baker Hughes on certain Kazakhstan projects, and specifically excluded the Karachaganak and other projects. The Sales Representation Agreement was executed on a pre-2000 form that did not include Baker Hughes’ recently revised FCPA language. As noted above (in paragraph 31), Baker Hughes’ obligation to pay the agent a 2% commission on the Karachaganak project was covered by a separate side letter also dated September 1, 2000 and sent by e-mail to the agent on September 26, 2000.

36. On or about October 4, 2000, the VP of Marketing told one of Baker Hughes’ two most senior attorneys that the company planned to hire an agent in connection with the Karachaganak project and that the legal department should follow up with Fearnley to get the details. The senior attorney then forwarded to Fearnley a copy of the Company’s revised standard FCPA documentation that had been adopted in January 2000. These included standard forms of an agent’s contract, an agent’s questionnaire, a questionnaire on the agent’s references and a certification for the agent to execute. The senior attorney also asked whether the new procedures had been followed. Fearnley responded that he would attempt to substitute an agreement using the new, approved, form, and added: “There are still some issues such as a Dun and Bradstreet search to be done but I will follow all the issues as notified and advise you if we have any issues not in compliance with the thorough documents and procedures received.”

37. Fearnley failed to follow any of the FCPA procedures issued to him by Baker Hughes’ legal department. Baker Hughes’ legal department otherwise failed to follow up with Fearnley. No one else at the Company verified whether or not the revised FCPA procedures had been followed. Neither Fearnley, nor anyone else at Baker Hughes, conducted any meaningful due diligence with respect to the agent until 2003. In March 2003, Fearnley alerted the agent’s principal to the impending due diligence process, claiming that Fearnley himself would be “in sole charge of the process and business justification.” It was only during these due diligence

efforts that employees of Baker Hughes other than Fearnley learned for the first time the likely identity of the principals behind the agent.

Baker Hughes is Awarded the Karachaganak Tender

38. By October 12, 2000, less than three weeks after retaining the agent as Baker Hughes’ agent in Kazakhstan and more than one year after Baker Hughes commenced its effort to win the project, Fearnley received word that Baker Hughes would be receiving a Letter of Intent from the KIO designating Baker Hughes as the winner of the Karachaganak tender. On or about October 23, 2000, Baker Hughes formally was awarded the Karachaganak contract. In May 2001, Baker Hughes began making commission payments to the agent pursuant to the side letter based on 2% of revenues earned on the Karachaganak project.

Fearnley Amends Sales Representation Agreement

39. On or about November 3, 2002, or more than two years after Fearnley sent the side letter to the agent on Baker Hughes’ behalf to retain the agent on the Karachaganak project, and at a time when the Company had already made fourteen commission payments totaling approximately $2.6 million to the agent, a Baker Hughes tax manager identified the inconsistencies between the side letter and the second, more extensive, sales representation agreement with the agent. After Fearnley learned of the tax manager’s inquiry, he e-mailed the agent’s principal an amendment to the Sales Representation Agreement, providing for the 2% commission on the Karachaganak project. Although in his cover e-mail Fearnley referred to the fact that the side letter predated the signed Sales Representation Agreement, in the preamble to the attached amendment Fearnley described that “subsequent to our finalization of the [sales representation] Agreement a further change was agreed in relation to appointing [the agent] as Baker Hughes’ representatives in relation to the Karachaganak contract at a commission rate of 2% . . .” (italics added). The Company has no record of whether this amendment was ever

executed. Even though it is unknown whether the amendment was ever executed, Baker Hughes nevertheless continued to make payments to the agent on the same basis as it had before the amendment.

Payments to the Agent

40. From May 2001 to November 2003, Baker Hughes made 27 commission payments totaling approximately $4.1 million to the agent in connection with the Karachaganak contract. Approximately $1.8 million of these payments were made by Baker Hughes on behalf of its subcontractors on the project. All payments to the agent represented a 2% commission on net revenues earned by Baker Hughes and its subcontractors on the Karachaganak project. Although the agent was a registered Isle of Man company purportedly performing services for Baker Hughes in Kazakhstan, all of the commission payments were made from Baker Hughes’ U.S. accounts to a bank account in London in the name of the agent.

41. The commission payments were then recorded on the books and records of Baker Hughes by division according to their allocable portion of revenue earned on the Karachaganak contract. In each case, the respective divisions inaccurately recorded their allocations of the agent payments as “commissions,” “fees” or “legal services.” No legal or other identifiable services were performed by the agent for Baker Hughes.

42. Baker Hughes ultimately realized approximately $220 million in gross revenues on the Karachaganak project.

B. Fearnley Pressures Subcontractor to Hire the Agent on New Tender

43. In May 2002, one of Baker Hughes’ subcontractors on the Karachaganak project was bidding on several unrelated contracts for oil services tendered by the KIO. The subcontractor is an issuer under the Exchange Act. On or around May 28, 2002, Fearnley contacted the subcontractor’s business development manager for Kazakhstan and informed him

that Baker Hughes’ agent on the Karachaganak project was aware that the KIO was evaluating a bid from the subcontractor, and expressed an interest in representing the subcontractor on the same terms as it had with Baker Hughes on the Karachaganak project. No information was provided to the subcontractor as to how an Isle of Man company knew what bids were being evaluated by the KIO. The agent’s principal followed up on Fearnley’s message by forwarding on May 28 a draft agency agreement to the subcontractor’s business development manager, who then forwarded it to a senior executive for the division responsible for the tender.

44. On June 14, 2002, the agent’s principal contacted the division senior executive directly to find out which specific tenders the subcontractor was then bidding on with the KIO. Two days later, on Sunday, June 16, the senior executive responded by e-mail with reference numbers for its two bids, requested that the agent’s principal provide a status update on the tenders, and requested a further discussion with the agent as to how it could assist on one or both of the projects. During the week of June 17, 2002, before the agent’s principal responded to the senior executive, KIO contract management informed the subcontractor that it had been recommended for the project and that the details were being sent to KIO senior management for approval.

45. On July 9, 2002, three weeks after the subcontractor learned it had been recommended for the project, the agent’s principal responded by e-mail to the senior executive’s June 16 message, expressing that “the contract in question appears to be for Nitrogen/Helium leak testing services over a 2 year period.” With no further communication between the agent and the subcontractor, the subcontractor was formally awarded the tender on July 12, 2002. On July 18, 2002, the senior executive at the subcontractor e-mailed the agent that because it had already been awarded the subject tender, they would not be requiring the agent’s assistance on the project.

46. At this point, Fearnley surfaced again as a liaison for the agent. Fearnley contacted the senior executive on August 12, 2002, and informed him that the agent “gave support to [the subcontractor’s] bid and that is why you were awarded the contract.” Fearnley went on to suggest that if the subcontractor failed to keep a “promise” made to the agent, then this failure could impact the subcontractor’s work on the awarded contract and could impact Baker Hughes’ and the subcontractor’s work on the ongoing Karachaganak project as it prepared to come up for contract renewal.

47. On or around August 28, 2002, the subcontractor contacted Fearnley and informed him that the company agreed to pay the agent a 2% commission for the nitrogen leak testing project that was awarded to it by the KIO in the prior month. The subcontractor formally entered into a sales representation agreement with the agent in November 2002, nearly four months after the contract award. The sales representation agreement provided that in exchange for a 2% commission, the agent would, among other things, “work diligently to protect and promote the interests of [the subcontractor],” “promote and procure sales and to negotiate and assist in the conclusion of contracts,” and “assist [the subcontractor] in obtaining and expediting for [its] employees or its affiliates . . . all such visas, work or residence permits, quotas and permissions as may be required . . . .” The subcontractor executed this formal sales representation agreement, engaged the agent despite the fact that the agent had performed no services for the subcontractor in connection with the tender and performed no services after the bid was awarded, and paid approximately $20,000 to the agent’s London bank account.

C. Payments Directed by High-Ranking Executive of KazTransOil

48. From 1998 to 1999, a Baker Hughes operating subsidiary made payments to another agent with an offshore account at the direction of a high-ranking executive of

KazTransOil, the national oil transportation operator of the Republic of Kazakhstan. In that capacity, the executive was in a position to award business to Baker Hughes.

49. Baker Hughes’ wholly-owned subsidiary Baker Petrolite generally specializes in selling chemicals, such as corrosion inhibitors, used in oil services processes. In early 1998, Baker Petrolite (through a foreign subsidiary) was seeking to enter into a large chemical contract with KazTransOil. Before the agreement could be finalized, a Baker Petrolite District Manager learned that the contract was being delayed by KazTransOil. Shortly thereafter, the District Manager was contacted by an individual who purported to act on behalf of a company (“FT Corp.”), who offered to act as Baker Petrolite’s agent in connection with the chemical contract.

50. The District Manager informed his supervisor that Baker Petrolite was under pressure to hire FT Corp. as Baker Petrolite’s agent for fear that if it was not hired, the contract could have been awarded to a competitor. Although Baker Petrolite already had an agent assisting with chemical contracts in Kazakhstan, Baker Petrolite hired FT Corp. as its agent for the contract. Neither Baker Petrolite nor anyone at Baker Hughes conducted any due diligence with respect to FT Corp., or the individual who purported to work on its behalf, either before or after the engagement.

51. The agency agreement Baker Petrolite signed with FT Corp. was limited to a single page. The agreement contained no reference to the FCPA. Under the terms of the agreement, Baker Petrolite agreed to pay a commission to FT Corp., wired to a Swiss bank account, based on the cost per ton that the agent negotiated above the set price that Baker Petrolite established for the sale to KazTransOil. In exchange for this commission, the agent was to carry out “laboratory and field experiments” to demonstrate the suitability of Baker Petrolite’s corrosion inhibitor in the marketplace, carry out “marketing functions” to sell the chemical reagent, and to assist in getting a contract signed for not less than a fixed supply of the chemical

reagent at a set price. Baker Petrolite has no records demonstrating that FT Corp. ever performed the first two of the three enumerated services, or any other work after the award of the chemical contract. In fact, after Baker Petrolite was awarded the chemical contract with KazTransOil, FT Corp. did no other work for Baker Petrolite. By mid-June 1998, FT Corp. had succeeded in winning the contract for Petrolite and had negotiated a final price for the chemical that resulted in a commission of approximately 30%.

52. By mid-December 1998, with six stages of the 10-stage contract complete, Petrolite’s District Manager had learned that the particular individual with whom he had negotiated an agency agreement on behalf of FT Corp. was also a high-ranking executive of KazTransOil. Company documents from later periods also demonstrate that the District Manager interacted with this same individual on other contracts. Despite knowing that the individual was then a high-ranking executive of KazTransOil, Baker Hughes’ Baker Petrolite subsidiary nevertheless continued to make the commission payments to the agent through the end of the contract.

53. In total, between July 1998 and April 1999, Baker Hughes’ Baker Petrolite subsidiary paid approximately $1.05 million to FT Corp., via a Swiss bank account, in connection with business with KazTransOil totaling approximately $3,276,000 in gross revenues (reflecting approximately a 30% commission rate). Baker Petrolite inappropriately recorded these payments in its books and records as “commission” payments.

D. Books and Records and Internal Controls Violations

Payments with respect to Angola

54. From August 1998 to 2003, Baker Hughes paid in excess of $10.3 million in commissions to an Angolan agent under circumstances in which the company failed to adequately assure itself that such payments were not being passed on to employees of Sonangol,

Angola’s state-owned oil company, to obtain or retain business in Angola. In addition, between 1999 and 2002, Baker Hughes paid in excess of $1.2 million to another Angolan agent whose principal, Baker Hughes later learned when it conducted appropriate due diligence, was then the brother of a senior-level Sonangol employee.

Angolan Agent No. 1

55. Baker Hughes inherited its agency relationship with “Angolan Agent No. 1,” a dual citizen of Angola and Portugal, from the Western Geophysical division of Western Atlas Corporation (“Western Geo”). Prior to becoming an operating division of Baker Hughes as a result of its acquisition by Baker Hughes in August 1998, Western Geo was one of two operating subsidiaries of Western Atlas International Inc. (“Western Atlas”) focusing on seismic services throughout the world for offshore geophysical exploration.

56. Western Geo first hired Angolan Agent No. 1 as its agent in Angola in 1995 to assist it with obtaining seismic data processing work in Angola. The then-head of Sonangol’s Geophysical Department advised a Western Geo employee that in order for Western Geo to win the data processing work, it would have to hire Angolan Agent No. 1 as its agent. Western Geo followed this advice and subsequently hired Angolan Agent No. 1 in May 1995; as promised, Western Geo subsequently was awarded the data processing project.

57. Western Atlas’ other operating subsidiary, Western Atlas Logging Services (“Wireline”), which focused on measurements and analysis of the basic productive capacity at a well site (called “wireline logging”), also desired to break into the Angolan oil services market. In early 1996, Wireline hired Angolan Agent No. 1 at the urging of Sonangol employees and negotiated directly with a senior-level Sonangol employee over Angolan Agent No. 1’s rate of commission payments and the scope of his work.

58. Baker Hughes inherited these agency relationships with Angolan Agent No. 1, as a result of its acquiring Western Atlas in August 1998. At that time, the employees responsible for retaining Angolan Agent No. 1 for Western Atlas’ Western Geo and Wireline subsidiaries continued on as employees of Baker Hughes.

59. In 1998, a Baker Hughes employee told his supervisor at the time about his conversation with a senior-level Sonangol employee, wherein the employee revealed a detailed knowledge of Angolan Agent No. 1’s agency agreement, but his supervisor dismissed it as a function of the small Angolan community that harbored no secrets.

60. In April 2000, Baker Hughes was billed for the travel expenses from Angola to Portugal and back to Angola of a senior-level Sonangol employee and his family, and this travel expense was then deducted from the commission accrual for Angolan Agent No. 1. Baker Hughes otherwise maintained no documentation indicating that this travel was for, on behalf, or to the benefit of Baker Hughes, or that Baker Hughes had any legitimate reason for reimbursing the travel costs of the Sonangol employee.

61. Between late 2002 and 2004, and during an ongoing company dispute with Angolan Agent No. 1 over nonpayment of commissions, a Baker Hughes business development manager (the same Baker Hughes employee described above) heard directly and repeatedly from senior-level Sonangol employees that they wanted Baker Hughes to pay Angolan Agent No. 1 the disputed commissions. In February 2003, Baker Hughes paid Angolan Agent No. 1 a commission of approximately $381,000.

62. From 1998 to 2003, Baker Hughes paid Angolan Agent No. 1 over $10.3 million on gross revenues of approximately $149.9 million, and recorded in its books and records the payments made to Angolan Agent No. 1 as “commission” payments.

Angolan Agent No. 2

63. In April 2000, Baker Hughes’ INTEQ division formally engaged Angolan Agent No. 2 as its agent in Angola in connection with offshore work including a project called “Kizomba A.” Baker Hughes retained Angolan Agent No. 2, who was the brother of a senior-level Sonangol employee, without conducting any due diligence despite the fact that Baker Hughes was revamping its due diligence policies for retaining agents as of January 1, 2000. In total, between 1999 and 2002, INTEQ paid Angolan Agent No. 2 approximately $1.2 million in commission payments in connection with generating revenues to INTEQ of over $30 million, and accounted for such payments as “commissions” on its books and records.

64. In September 2002, INTEQ abruptly terminated its relationship with Angolan Agent No. 2. At least one of the reasons for Angolan Agent No. 2’s termination was that INTEQ’s Country Manager for Angola and its Regional Manager for Europe, Africa, and the Middle East had discovered that Angolan Agent No. 2 was the brother of a senior-level Sonangol employee. As part of the severance with Angolan Agent No. 2, INTEQ agreed to pay Angolan Agent No. 2 accrued commissions of nearly $500,000.

Payments in Nigeria to Reduce P.A.Y.E. Taxes

65. In May 2001, a subsidiary of Baker Hughes in Nigeria disregarded clear warnings of potential FCPA violations and paid Nigerian state tax officials, directly or indirectly, in exchange for receiving a reduced income tax bill, and then inaccurately recorded such payments on its books and records.

66. In May 2001, the local tax authority in Nigeria assessed a Nigerian subsidiary of Baker Hughes’ Baker Atlas division (“BA Nigeria”) for underpayment of certain local income taxes of 57 million Naira (approximately $500,000). This tax assessment (for “pay-as-you-earn” taxes or P.A.Y.E. taxes) was based on the fact that the number of expatriate employees listed on

BA Nigeria’s monthly tax returns was less than that listed on its immigration forms. By mid-May 2001, a BA Nigeria local accountant had met with tax officials to negotiate a possible settlement, and succeeded in negotiating a reduced settlement of at most 12 million Naira (approximately $105,000). The tax accountant was told by the Nigerian tax officials that after review with their supervisor, it was possible that they could agree to a discounted settlement of between 8.5 and 9 million Naira.

67. By May 16, 2001, negotiations had resulted in the Nigerian tax officials proposing that the tax assessment be settled by a payment of 12 million Naira split between a 6 million Naira payment to the Nigerian government and a 6 million Naira payment to then-unnamed Nigerian tax officials. On May 16, 2001, a BA Nigeria employee told his supervisor, the District Manager for Nigeria, that he had discussed the Nigerian tax officials’ proposal with Baker Hughes’ International Tax Manager for the Asia Pacific Region, and based on those discussions, a payment to the officials could violate the FCPA. A follow up email from the same employee indicated that he had then discussed the matter with the District Manager, who determined on his own that the FCPA would not be violated by making such a payment because “all companies are doing the same in Nigeria.”

68. Between May 16 and May 21, 2001, BA Nigeria reached an agreement with the tax authorities that if BA Nigeria paid approximately 4.2 million Naira to persons connected with the local tax authority, then its official P.A.Y.E. tax liability would be fixed at approximately 4.8 million Naira (for a total of 9 million Naira). On May 21, 2001, BA Nigeria received an official assessment from the tax authorities stating that BA Nigeria’s total outstanding P.A.Y.E. tax liability for 2000 was approximately 4.8 million Naira, or less than ten percent of the original assessment. On May 23, 2001, the District Manager authorized a payment for approximately 4.8 million Naira to the tax authorities. In addition, on that same day, the District Manager

authorized a second payment for approximately 4.2 million Naira to a Nigerian agent; the two payments totaled approximately 9 million Naira.

69. Although the Nigerian agent produced an invoice to BA Nigeria, dated May 18, 2001, indicating that he was the Group Managing Director of a local company and that he performed “tax consultancy matters” for BA Nigeria, that invoice was false because no such services were provided by the agent. The payment instead was made at the request of the Nigerian tax officials to obtain a reduction in BA Nigeria’s P.A.Y.E. tax liability.

70. Baker Hughes’ books and records indicate that the payments to the tax authority and to the Nigerian agent collectively were related to BA Nigeria’s reduction in its P.A.Y.E. tax assessment. Baker Hughes’ general ledgers reflect that the 4.8 million Naira payment to the Nigerian local tax authority and the 4.2 million Naira payment to the agent were recorded consecutively in the books as “miscellaneous expenses” and were similarly described as being related to “additional statutory tax levied 2000 audit.” In addition, BA Nigeria’s District Manager directed that the only supporting document to be retained for the payment to the agent be the May 21 official assessment letter.

Payments to Kazakh Company for Land Lease Option

71. In 2002, Baker Hughes sought access to land near the North Caspian Sea in Kazakhstan in connection with its bid on another oil services contract, this time involving an offshore development known as the KCO Project. The tender required Baker Hughes to demonstrate, among other things, that it had access to land adjacent to the Caspian Sea in which it could develop a fluids and cutting treatment service depot (or a “mud plant”).

72. Fearnley encouraged Baker Hughes to focus on a site at Bautino Bay, Kazakhstan; a plot of land owned by a Kazakh company (“SCo.”). In April 2002, Fearnley communicated to two Baker Hughes division employees why engaging in a land transaction with

SCo. would benefit Baker Hughes’ bid on the KCO Project, telling them in an e-mail that SCo. was “only a front for the real owners who are influential.” On other occasions, Fearnley indicated that an individual who held a high-ranking executive position within KazMunaiGas, the newly-organized national oil company of Kazakhstan formed in February 2002 from the merger of Kazakhoil and Transneftegas, had connections to SCo., and this was “another big influence factor for us winning the [KCO Project].” By at least September 2002, Fearnley was aware that a principal partner of SCo. was the same agent to which he had agreed in 2000, on Baker Hughes’ behalf, to make commission payments for the Karachaganak project.

73. By August 2002, Baker Hughes personnel working on the KCO Project bid understood that a former high-ranking exeuctive of Kazakhoil, and then-current high-ranking executive of KazMunaiGas, was directing certain of SCo.’s negotiations with Baker Hughes. In addition, Baker Hughes personnel knew that the same individual had recommended the Bautino Bay site owned by SCo. to Baker Hughes.

74. In early 2003, Baker Hughes authorized two payments totaling $60,000 to SCo. for an option lasting eight months to lease its parcel of land at Bautino Bay in connection with Baker Hughes’ bid on the KCO Project. The lease option agreement states that a company incorporated in the United Kingdom (“A Holdings”) was a fifty percent beneficial owner in the Kazakh company offering the land lease option to Baker Hughes. Due diligence should have revealed an affiliation between A Holdings and Baker Hughes’ agent for the Karachaganak project. Baker Hughes, however, made these option payments to SCo. without conducting any due diligence on the company. In addition, Baker Hughes did not adequately assure itself that payments to the Kazakh company would not be passed on, in whole or in part, to government officials in Kazakhstan in exchange for retaining or obtaining the oil services contract.

Ultimately, Baker Hughes allowed the option to lapse, which terminated after the commencement of the Commission’s investigation.

Payments to Agent N Corp.

75. Between March 1998 and September 2004, Baker Hughes’ wholly-owned subsidiary Baker Petrolite, specializing in sales of anti-corrosion products, made payments to its agent for Kazakhstan, Russia and Uzbekistan (“N Corp.”) totaling nearly $5.3 million on gross revenues estimated at approximately $65 million. These payments were made under circumstances in which Baker Petrolite failed to adequately assure itself that the payments were not being passed on to employees of state-owned oil companies in order to obtain or retain business for Baker Petrolite. Baker Petrolite recorded such payments on its books and records alternately in accounts described as “commissions” or in accounts described as “cost of goods sold.”

76. The commission payments Baker Petrolite paid to N Corp. were essentially equivalent to “finder’s fees.” Baker Petrolite would agree with the agent to sell a product to customers at a fixed price and N Corp. would keep as a commission any amount it could obtain on top of the fixed price. Over time, Baker Petrolite fixed the commission amount as a percentage of sales to specific continuing customers, including customers that were state-owned entities of the Republic of Kazakhstan.

77. Baker Petrolite either did not sign, or did not retain, any formal written consulting agreement with N Corp. until a consulting agreement was executed in January 2002, or nearly four years after N Corp. had commenced work on behalf of Baker Petrolite. Instead, the entire arrangement with N Corp. was based on oral agreements and written correspondence. Though Baker Hughes had revised its FCPA procedures in connection with the retention of agents, the 2002 consulting agreement did not contain the full FCPA provisions required by the new

procedures. In addition, N Corp. made it through Baker Hughes revised due diligence procedures, including its review by an outside law firm hired by the company to assist with its agent recertifications, until its relationship with Baker Hughes was terminated in late 2004.

78. From 1998 to early 2002, a substantial number of the commission payments were made, at N Corp.’s request, in cash (thereafter, the payments were all made by wire transfer). Some such payments were funded by providing a Baker Petrolite employee with cash advances that were later repaid via intercompany transfers.

79. When not paid in cash, Baker Petrolite generally paid N Corp., a registered Panamanian company, commission payments via wire transfer to five different bank accounts outside of the countries where services were apparently being performed, including two accounts in the United States and three accounts in Latvia.

80. In late 1999, the Baker Petrolite employee responsible for hiring N Corp., and requesting that commissions be paid to it, received $146,832.36 from N Corp. in the form of three checks drawn on one of N Corp.’s U.S. bank accounts.

81. In 2001, certain customers accepted increased prices from Baker Petrolite or modified their product supply orders from Baker Petrolite primarily as a result of Baker Petrolite’s decisions on the amount of commissions it would pay its agent N Corp. In this regard, Baker Petrolite did not ensure that the amount of commissions ultimately paid to N Corp. on behalf of its government-owned customers was not also linked to price and product order negotiations.

82. Baker Petrolite conducted no due diligence with respect to N Corp. until December 2001, or three years after N Corp. had first been engaged. When conducted, the due diligence revealed several “red flags,” including that the beneficial owners of N Corp. were unknown and that its business phone number was potentially linked to a property owned by the

Russian government. Despite such knowledge, Baker Petrolite continued to retain and pay commissions to N Corp. until late 2004, when Baker Petrolite terminated its relationship with N Corp.

Payments to Freight Forwarder to Bypass Customs Process in Indonesia

83. In Indonesia between 2000 and 2003, Baker Hughes’ Centrilift division, specializing in providing complete oil pumping systems, and its Baker Atlas division paid certain freight forwarders to import equipment into Indonesia using a “door-to-door” method that was designed to bypass the regular customs clearance process. In so doing, Centrilift and Baker Atlas failed to adequately assure themselves that the fees paid to the freight forwarders were not, in part, being passed on to Indonesian customs officials. Fees that Centrilift and Baker Atlas paid to the freight forwarders in connection with the “door-to-door” shipments were recorded to accounts for “Freight Courier Service” or “Freight Invoiced” on Centrilift’s books and records and to an account for “Shipping, Crating” on Baker Atlas’ books and records.

84. In a 2001 memo drafted by a consultant to Centrilift and distributed internally at the company among a region and country-level manager, the “door-to-door” process was described as an “illegal procedure” under Indonesian law “used to avoid the customs clearance process.” The memo further described “door-to-door” as an expeditious shipping process that required that a “fee [be] paid to the Indonesian customs officials by the freight forwarding company,” and that generally involved no paper work to the importer and no proof that any customs taxes or duties had in fact ever been paid. Nevertheless, the “door-to-door” practice at Centrilift continued in spite of the memo. In fact, when over one year later the region manager who had been privy to the consultant’s memo emailed subordinates stating that the “door-to-door” delivery of equipment was illegal and should be discontinued, this directive was ignored

and Centrilift employees continued to employ the “door-to-door” method of importing equipment into Indonesia until mid-2003.

85. At Baker Atlas, the “door-to-door” method was employed between 2000 and 2003 despite indications that the regular customs clearance process in Indonesia was being bypassed. These indications included the fact that Baker Atlas generally was invoiced a lump sum fee from the freight forwarder for expedited importing of equipment into Indonesia without any supporting documentation showing that customs duties had been paid. Moreover, if Baker Atlas had imported freight into Indonesia pursuant to the regular customs clearance process, it typically would have submitted for a refund of a portion of applicable customs duties; whereas, when the “door-to-door” method was used, Baker Atlas did not submit for a refund of customs duties.

Payments to Customs Brokers to Resolve Customs Deficiencies in Nigeria

86. In Nigeria between at least 2001 and 2005, Baker Hughes’ Baker Oil Tools division, operating through a company subsidiary called Baker Nigeria Limited (“BNL”), authorized certain customs brokers to “intervene” with Nigerian customs authorities on its behalf to resolve alleged underpayments of customs duties directly with the authorities. In connection with such “interventions,” BNL paid the customs brokers a fixed 50% amount of the alleged underpayment. Throughout this period, BNL paid in excess of $2.5 million to these customs brokers to resolve customs disputes with Nigerian authorities, BNL was not informed of the final resolution of the alleged underpayment, and BNL did not receive records of any payments supposedly paid to customs by such customs brokers.

87. In connection with revamping its compliance procedures, and after the initiation of the current investigation in August 2003, Baker Hughes conducted a worldwide review of customs procedures in each of its operating countries, including Nigeria. Though the review

included questionnaires and interviews of company employees, this customs practice did not come to light during that review process. Rather, the practice was not discovered until March 2005 by a Baker Oil Tools managing director who was handling a routine review of BNL invoices from customs processors and noted certain irregular charges. Baker Hughes recorded the fees paid to the customs brokers for these efforts as “customs processing” expenses of the brokers on its books and records.

Payments to Kazakh Nuclear Official

88. In March 2000, Baker Hughes’ Baker Atlas division desired to obtain a license in Kazakhstan, as required by Kazakh law, to import and operate tools with radioactive components. Baker Atlas was approached by a Kazakh individual who proposed that Baker Atlas pay $9,000 to a company where the Kazakh individual served as director in exchange for his procuring the applicable licenses. Two Baker Atlas employees independently identified the Kazakh individual as being a government official with (according to one employee) either the Kazakh Atomic Agency or (according to the other) the Kazakh Committee of Nuclear Energy at the time. Baker Atlas made the payment in cash directly to the Kazakh individual, and Baker Atlas obtained the necessary permit. Baker Atlas’ accounting records reflect neither any payment to the Kazakh individual nor his company, and no receipts or other document exist to reflect the recording of the transaction. In addition, no due diligence was conducted on the Kazakh individual or his company prior to the transaction.

E. Events Occuring After Entry of Commission’s 2001 Cease-and-Desist Order

89. The following events occurred following entry of the Commission’s 2001 cease-and-desist Order against Baker Hughes:

Baker Hughes made twenty-three commission payments totaling approximately $3.7 million to its agent retained in connection with the Company’s being

awarded the Karachaganak contract while knowing that such payments would, in whole or in part, be forwarded to a high-ranking executive or other senior-level employees at KazakhOil, Kazakhstan’s then national oil company;

	§		Baker Hughes’ Baker Petrolite subsidiary made fifty-six payments totaling approximately $3.2 million to its agent N Corp. while not adequately assuring itself that all or a portion of such funds were not being funneled to employees of state-owned oil companies in exchange for business obtained or retained;

	§		Baker Hughes made multiple payments to freight forwarders for “door-to-door” shipment of equipment into Indonesia while not adequately assuring itself that such funds, in part, were not being passed on to Indonesian customs officials;

	§		Baker Hughes made multiple payments in excess of $2.5 million to certain customs brokers in Nigeria to resolve alleged customs deficiencies while not adequately assuring itself that such payments, in part, were not being passed on to Nigerian customs officials;

	§		Baker Hughes made one payment totaling approximately $381,000 to Angolan Agent No. 1 while not adequately assuring itself that such money would not be funneled, in whole or in part, to senior-level employees of the Angolan government-owned oil company Sonangol;

	§		Baker Hughes made two payments totaling approximately $667,000 to Angolan Agent No. 2 while not adequately assuring itself that such funds were not being funneled to employees of the Angolan government-owned oil company Sonangol; and

	§		Baker Hughes made two payments totaling $60,000 to a Kazakhstan company to

purchase a land lease option while being aware of the company’s connections to a high-ranking executive of the Kazakh national oil company and to its agent for the Karachaganak contract.

CLAIMS FOR RELIEF

FIRST CLAIM

Violations of Commission Cease-and-Desist Order

[Baker Hughes]

90. Paragraphs 1 through 89 are re-alleged and incorporated by reference.

91. On September 12, 2001, the Commission ordered that Baker Hughes cease and desist from causing any violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. In the Matter of Baker Hughes Incorporated , Exchange Act Rel. No. 34-44784 (September 12, 2001).

92. By reason of the foregoing, the Company committed violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Accordingly, the Company has violated, and unless ordered to comply will violate, the Commission’s September 12, 2001 order.

SECOND CLAIM

Violations of Section 30A of the Exchange Act

[Baker Hughes]

93. Paragraphs 1 through 92 are re-alleged and incorporated by reference.

94. As described above, Baker Hughes, and certain of its subsidiaries, corruptly offered, promised to pay, or authorized illicit payments to a person, while knowing that all or a portion of those payments would be offered, give, or promised, directly or indirectly, to foreign officials for the purposes of influencing their acts or decisions in their official capacity, inducing them to do or omit to do actions in violation of their lawful duties, securing an improper

advantage, or inducing such foreign officials to use their influence with a foreign government or instrumentality thereof to assist Baker Hughes in obtaining or retaining business.

95. By reason of the foregoing, Baker Hughes violated the anti-bribery provisions of the FCPA, as codified at Section 30A of the Exchange Act [15 U.S.C. §78dd-1].

THIRD CLAIM

Violations of Section 13(b)(2)(A) of the Exchange Act

[Baker Hughes]

96. Paragraphs 1 through 95 are re-alleged and incorporated by reference.

97. As described above, Baker Hughes, and its subsidiaries, failed to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected its transactions and dispositions of its assets.

98. By reason of the foregoing, Baker Hughes violated the books-and-records provisions of the FCPA, as codified at Section 13(b)(2)(A) [15 U.S.C. §78m(b)(2)(A)].

FOURTH CLAIM

Violations of Section 13(b)(2)(B) of the Exchange Act
[Baker Hughes]

99. Paragraphs 1 through 98 are re-alleged and incorporated by reference.

100. As described above, with respect to improper payments to foreign officials, Baker Hughes and certain of its United States and foreign subsidiaries failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) payments were made in accordance with management’s general or specific authorization; and (ii) payments were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for its assets.

101. By reason of the foregoing, Baker Hughes violated Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)].

FIFTH CLAIM

Violations of Section 13(b)(5) of the Exchange Act

[Baker Hughes]

102. Paragraphs 1 through 101 are re-alleged and incorporated by reference.

103. By engaging in the conduct described above, Baker Hughes knowingly failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions were recorded in its books and records in accordance with Section 13(b)(2)(A) of the Exchange Act.

104. Baker Hughes also falsified, or caused to be falsified, its books and records.

105. By reason of the foregoing, Baker Hughes violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].

SIXTH CLAIM

Violations of Section 30A of the Exchange Act

and the Aiding and Abetting of those Violations

[Fearnley]

106. Paragraphs 1 through 4, 8, 11 through 47, and 71 through 74 are re-alleged and incorporated by reference.

107. As described above, Roy Fearnley, as an employee of Baker Hughes, corruptly offered, promised to pay, or authorized illicit payments to a person, while knowing that all or a portion of those payments would be offered, give, or promised, directly or indirectly, to foreign officials for the purposes of influencing their acts or decisions in their official capacity, inducing them to do or omit to do actions in violation of their lawful duties, securing an improper

advantage, or inducing such foreign officials to use their influence with a foreign government or instrumentality thereof to assist Baker Hughes in obtaining or retaining business.

108. By reason of the foregoing, Fearnley violated the anti-bribery provisions of the FCPA, as codified at Section 30A of the Exchange Act [15 U.S.C. § 78dd-1].

109. Fearnley knowingly provided substantial assistance to Baker Hughes in connection with its violations of Section 30A of the Exchange Act [15 U.S.C. § 78dd-1].

110. By reason of the foregoing, Fearnley aided and abetted Baker Hughes’ violations of Section 30A of the Exchange Act [15 U.S.C. §78dd-1].

SEVENTH CLAIM

Aiding and Abetting of Baker Hughes’ Violations

of Section 13(b)(2)(A) of the Exchange Act

[Fearnley]

111. Paragraphs 1 through 4, 8, 11 through 47, 71 through 74, and 106 through 110 are re-alleged and incorporated by reference.

112. As described above, Fearnley knowingly provided substantial assistance to Baker Hughes in connection with its violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A)].

113. By reason of the foregoing, Fearnley aided and abetted Baker Hughes’ violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].

EIGHTH CLAIM

Aiding and Abetting of Baker Hughes’ Violations

of Section 13(b)(2)(B) of the Exchange Act

[Fearnley]

114. Paragraphs 1 through 4, 8, 11 through 47, 71 through 74, 106 through 113 are re-alleged and incorporated by reference.

115. As described above, Fearnley knowingly provided substantial assistance to Baker Hughes in connection with its violations of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(B)].

116. By reason of the foregoing, Fearnley aided and abetted Baker Hughes’ violations of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)].

NINTH CLAIM

Violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder

[Fearnley]

117. Paragraphs 1 through 4, 8, 11 through 47, 71 through 74, 106 through 116 are re-alleged and incorporated by reference.

118. As described above, Fearnley knowingly circumvented a system of internal accounting controls.

119. Fearnley also caused to be falsified Baker Hughes’ books and records.

120. By reason of the foregoing, Fearnley violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rule 13b2-1 thereunder [17 C.F.R. § 240.13b2-1].

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that this Court enter a judgment:

A. Ordering Baker Hughes to comply with the Commission’s September 12, 2001 order issued in In the Matter of Baker Hughes Incorporated .;

B. Permanently enjoining Baker Hughes from violating Sections 30A, 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78dd-1; 78m(b)(2)(A) and (B) and 78m(b)(5)];

C. Permanently enjoining Defendant Fearnley from violating Sections 30A and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78dd-1 and 78m(b)(5)] and Rule 13b2-1 thereunder [17 C.F.R. § 240.13b2-1];

D. Permanently enjoining Defendant Fearnley from aiding and abetting violations of Section 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78dd-1; 78m(b)(2)(A) and (B) and 78m(b)(5)];

E. Ordering all defendants to disgorge ill-gotten gains, with prejudgment interest, wrongfully obtained as a result of their illegal conduct;

F. Ordering all defendants to pay civil penalties pursuant to Sections 21(d)(3) and 32(c) of the Exchange Act [15 U.S.C. §§ 78u(d)(3) and 78ff]; and

G. Granting such further relief as this Court may deem just and appropriate.

Dated: April 26, 2007


		Respectfully submitted,

		/s/ David Williams
		David Williams (“Atty. in Charge”) (CA # 18385)
		Christopher R. Conte
		Richard W. Grime
		Kevin M. Loftus
		Giles T. Cohen

		100 F Street, N.E.
		Washington, D.C. 20549-4631
		(202) 551-4548 (Williams)
		(202) 772-9233 (facsimile)
		Attorneys for Plaintiff,
		Securities and Exchange Commission

Exhibit 99.6

News Release


Contact:		Baker Hughes Incorporated
Gary R. Flaharty (713) 439-8039		P.O. Box 4740
H. Gene Shiels (713) 439-8822		Houston, Texas 77210-4740

Baker Hughes Settles Previously Disclosed FCPA Investigations

HOUSTON, April 26, 2007 — Baker Hughes Incorporated (NYSE: BHI; EBS) announced today that it has reached settlements with the United States Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). These parallel settlements resolve the investigations, disclosed in 2002 and 2003, into Baker Hughes’ operations in Angola, Kazakhstan and Nigeria. The total agreed-upon payments to settle these investigations are $44.1 million, for which the company recorded a reserve in the fourth quarter of 2006.

Under the terms of the settlements with the DOJ and SEC:

•		A subsidiary of the company pled guilty to violations of the Foreign Corrupt Practices Act (FCPA) as a result of payments made between 2001 and 2003 to a commercial agent retained in 2000 in connection with a project in Kazakhstan.

•		The company agreed with the SEC to the entry of a Consent Judgment charging violations of the anti-bribery provisions of the FCPA arising from the engagement of agents to obtain contracts in Kazakhstan. The Consent Judgment also charges violations of the books-and-records and internal-controls provisions, and the terms of a September 12, 2001 cease-and-desist order, arising from these and other activities in Kazakhstan, Angola, Nigeria, Indonesia, Russia, and Uzbekistan.

•		The company entered into a deferred prosecution agreement with the DOJ, under which the government will not further prosecute the company for these activities if the company meets the conditions of the agreement for two years. The company will hire a government-approved monitor to oversee its compliance activities for a three-year period .

Chad Deaton, chairman and chief executive officer of Baker Hughes, said, “Since the commencement of these investigations in 2002, we have cooperated fully with the SEC and DOJ. We conducted our own rigorous, independent investigation and we have openly shared our findings with these agencies. The acts which resulted in these enforcement actions are contrary to our core values, our policies and our expectations for ethical behavior. The company has terminated employees and commercial agents that it believes were directly involved. In addition, we have further strengthened the compliance culture within the company by making extensive improvements and enhancements to our compliance program.

“Our employees and management have demonstrated their strong commitment to ethical business conduct and strict compliance with the law over the past several years, and the progress of our programs to benchmark and to continue to improve our compliance are on track. There is no doubt that our renewed commitment to strong ethics and legal compliance complements our Best-in-Class technology and our reputation for reliability and project execution.”

Baker Hughes’ Compliance Program

Over the past several years Baker Hughes has embarked on a process to continuously upgrade its compliance program to a Best-in-Class standard and to minimize the role that commercial agents play in our business model. Highlights of this process include:

•		establishing Baker Hughes’ core values of Integrity, Performance, Teamwork and Learning, giving all employees worldwide a solid set of principles for making decisions every day;

•		eliminating 88% of the commercial agents previously used to obtain new business in international locations;

•		implementing a rigorous system for selection, certification, and regular re-certification of all non-U.S. commercial agents, and periodic legal audits and training of these agents to confirm that the agents’ activities remain in strict compliance with all Baker Hughes policies and the FCPA;

•		adopting enterprise-wide FCPA and compliance policies, and strengthening financial, managerial, and operational controls to ensure full compliance with the FCPA;

•		making organizational changes to place senior management, legal, compliance, and internal audit closer to the geographical areas we serve, and placing specialized compliance personnel into our division and region organizations to assist managers in ensuring that all employees and commercial agents fulfill their compliance responsibilities;

•		providing extensive mandatory computer-based and live FCPA training to tens of thousands of employees to instruct them about the company’s core values, policies, procedures that relate to compliance with the FCPA;

•		launching a systematic program to communicate the importance and priority that Baker Hughes places on FCPA compliance to the company’s employees, agents, consultants, distributors, and other business partners; governments and customers;

•		putting in place a whistleblower program that is designed to encourage timely reporting of all potential FCPA violations without fear of retaliation;

•		implementing a far-reaching program of quarterly disclosure controls and comprehensive ongoing risk assessment, benchmarking, and gap analysis designed to identify any areas of compliance or internal control weakness;

•		instituting periodic audits of the compliance program to measure its effectiveness; and


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taking swift disciplinary action including termination, for non-compliance with Baker Hughes policies and procedures.

Mr. Deaton said, “The significant steps we have taken over the past few years to strengthen our global compliance program will play an important role in reinforcing this company’s strong historical reputation for integrity and ethical behavior. Baker Hughes is committed to continued improvement in our compliance program with particular emphasis on the FCPA. We are ready to work closely with the compliance monitor to demonstrate the effectiveness of our current compliance program and to build upon the improvements we have already made.”

For more information on Baker Hughes’ program for ethical and legal compliance, visit the company’s web site at: http://www.bakerhughes.com/investor/about/our_commitment.htm

Forward-Looking Statements

This news release (and oral statements made regarding the subjects of this release) contain 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,” “ensure,” “expect,” “if,” “intend,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “would,” “may,” “likely” and similar expressions, and the negative thereof, are intended to identify forward-looking statements. There are many risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These forward-looking-statements are also affected by the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006; the Company’s subsequent quarterly reports on Form 10-Q; and those set forth from time to time in our other filings with the Securities and Exchange Commission. The documents are available through the company’s web site or through the SEC’s Electronic Data Gathering and Analysis Retrieval System (EDGAR) at http://www.sec.gov. We undertake no obligation to publicly update or revise any forward-looking statement.

The Forward-Looking Statements contained in this news release are also subject to the following risk factors:

Our expectations of success regarding the effectiveness of our ongoing compliance program is subject to the company’s ability to continue to work with agents and business partners as well as supervise, train and retain competent employees and the efforts of our employees to comply with the Baker Hughes Business Code of Conduct. Under the settlement agreements Baker Hughes is subject to a two-year deferred prosecution agreement and is enjoined by a court against any further violations of the FCPA. Accordingly, the settlement agreements reached with the SEC and DOJ could be substantially nullified and the company could be subject to severe sanctions and civil and criminal prosecution as well as fines and penalties in the event of


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a subsequent violation by the company or any of its employees or a failure of the company to meet all of the conditions contained in the agreements.

Our expectations regarding the impact of the settlement agreements with the SEC and DOJ and our ongoing business operations are subject to (1) our ability to hire and successfully coordinate with a government-approved monitor in connection with our compliance program and on-going operations (2) the potential impact of the settlement on the operations of the company and/or its subsidiaries and any legal action against the company and/or its subsidiaries in the countries that are the subject of the settlements and (3) the collateral impact of the agreement in the U.S. and other countries outside the United States where the company and/or its subsidiaries do business that may claim jurisdictions over any of the matters related to the DOJ and SEC investigations.

Baker Hughes is a leading provider of
drilling, formation evaluation, completion and production
products and services to the worldwide oil and gas industry.

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NOT INTENDED FOR BENEFICIAL HOLDERS


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