UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

OR

Commission File Number 1-9397

Baker Hughes Incorporated

3900 Essex Lane, Suite 1200, Houston, Texas
(Address of principal executive offices)
77027
(Zip Code)

Registrant’s telephone number, including area code: (713) 439-8600

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

As of October 29, 2004, the registrant has outstanding 335,469,673 shares of Common Stock, $1 par value per share.

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Baker Hughes Incorporated

See accompanying notes to consolidated condensed financial statements.

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Baker Hughes Incorporated

See accompanying notes to consolidated condensed financial statements.

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Baker Hughes Incorporated

See accompanying notes to consolidated condensed financial statements.

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Baker Hughes Incorporated

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 oil and natural gas industry on a worldwide basis 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, 2003. 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.

     Certain reclassifications, including reclassifications for deferred income taxes and other tax liabilities, have been made to the prior year’s consolidated condensed financial statements to conform with the current period presentation.

NOTE 2. STOCK-BASED COMPENSATION

     As allowed under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, we have elected to account for our stock-based compensation using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Under this method, no compensation expense is recognized when the number of shares granted is known and the exercise price of the stock option at the time of grant is equal to or greater than the market price of our common stock. Reported net income does not include any compensation expense associated with stock options but does include compensation expense associated with restricted stock awards.

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

These pro forma calculations may not be indicative of future amounts since additional awards in future years are anticipated.

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

NOTE 3. DISCONTINUED OPERATIONS

     In September 2004, we completed the sale of Baker Hughes Mining Tools (“BHMT”), a product line group within our Hughes Christensen division that manufactured rotary drill bits used in the mining industry. We received proceeds of $32.0 million, which are subject to post-closing adjustments to the purchase price. In the three months ended September 30, 2004, we recorded a gain on sale of $0.5 million, net of tax of $3.8 million, which consisted of a gain on disposal of $7.1 million offset by a loss of $6.6 million related to the recognition of the cumulative foreign currency translation adjustments into earnings.

     In January 2004, we completed the sale of BIRD Machine (“BIRD”), the remaining division of the former Process segment, and recorded an additional loss on sale of $0.5 million with no tax benefit. We received $5.6 million in proceeds in January 2004, which were subject to post-closing adjustments to the purchase price, and retained certain accounts receivable, inventories and other assets. During the second quarter of 2004, we made a net payment of $6.8 million to the buyer in settlement of the final purchase price adjustments. The adjustments were the result of changes in the value of assets sold to and liabilities assumed by the buyer during the time frame in which the initial sales price was negotiated and the date of the closing of the sale.

     In January 2003, we sold our interest in oil producing operations in West Africa and recorded a gain on sale of $4.1 million, net of a tax benefit of $0.2 million. In the first quarter of 2003, we also recorded an additional loss on the sale of EIMCO Process Equipment (“EIMCO”), which was sold in November 2002, due to purchase price adjustments of $2.5 million, net of tax of $1.3 million.

     We have reclassified our consolidated condensed financial statements for all prior periods presented to reflect these operations as discontinued.

     Summarized financial information from discontinued operations is as follows:

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

     Assets and liabilities of discontinued operations at December 31, 2003 are as follows:

NOTE 4. ACQUISITION

     In the second quarter of 2003, we made an acquisition with an aggregate purchase price of $12.7 million, of which $9.6 million was paid in cash. As a result of this acquisition, we recorded approximately $9.8 million of intangible assets through September 30, 2003. The purchase price is allocated based on fair value of the acquisition. Pro forma results of operations have not been presented because the effect of this acquisition was not material to our consolidated condensed financial statements.

NOTE 5. 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:

     Total accumulated other comprehensive loss consisted of the following:

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Baker Hughes Incorpo