10-K

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

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Fiscal Year Ended December 31, 2009
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-8514

SMITH INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

Delaware	95-3822631
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1310 Rankin Road Houston, Texas	77073 (Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code (281) 443-3370
Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $1.00 par value	New York Stock Exchange, Inc.
Preferred Share Purchase Rights	New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

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

The aggregate market value of the voting stock held by non-affiliates on June 30, 2009 was $5,614,831,358 (218,051,703) shares at the closing price on the New York Stock Exchange of $25.75. On June 30, 2009, 236,995,440 shares of common stock were outstanding, including shares held in Treasury. For this purpose all shares held by officers and directors and their respective affiliates are considered to be held by affiliates, but neither the Registrant nor such persons concede that they are affiliates of the Registrant.

There were 248,412,065 shares of common stock outstanding, net of shares held in Treasury, on February 25, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement related to the Registrant’s 2010 Annual Meeting of Stockholders will be incorporated by reference into Part III of this Form.

TABLE OF CONTENTS

PART I
	Item 1.	Business	1
	Item 1A.	Risk Factors	8
	Item 1B.	Unresolved Staff Comments	12
	Item 2.	Properties	12
	Item 3.	Legal Proceedings	13
	Item 4.	Reserved	13
PART II
	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
	Item 6.	Selected Financial Data	15
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	27
	Item 8.	Financial Statements and Supplementary Data	28
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	64
	Item 9A.	Controls and Procedures	64
	Item 9B.	Other Information	64
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	64
	Item 11.	Executive Compensation	64
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	64
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	65
	Item 14.	Principal Accountant Fees and Services	65
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	65
EX-10.2
EX-10.3
EX-10.9
EX-10.13
EX-10.17
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I

Item 1.   Business

General

Smith International, Inc. is a leading global provider of premium products and services used during the drilling, completion and production phases of oil and natural gas exploration and development activities. As used herein, “Smith,” the “Company,” “we,” “our” and “us” may refer to Smith International, Inc. and/or its subsidiaries.

The Company was incorporated in the state of California in January 1937 and reincorporated under Delaware law in May 1983. The Company’s executive offices are headquartered at 1310 Rankin Road, Houston, Texas 77073 and its telephone number is (281) 443-3370. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge on the Company’s website at www.smith.com as soon as reasonably practicable after the Company has electronically filed such material with, or furnished it to, the Securities and Exchange Commission. The Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the Audit Committee, Compensation and Benefits Committee and Nominating and Corporate Governance Committee are also available on the Investor Relations section of the Company’s website. The Company intends to disclose on its website any amendments or waivers to its Code of Business Conduct and Ethics that are required to be disclosed pursuant to Item 5.05 of Form 8-K. Printed copies of these documents are available without charge to stockholders upon request.

Our business is segregated into three operating segments, M-I SWACO, Smith Oilfield and Distribution, which is the basis upon which we report our results. We provide a comprehensive line of technologically-advanced products and engineering services, including drilling and completion fluid systems, solids-control and separation equipment, waste-management services, three-cone and diamond drill bits, borehole enlargement services, tubulars, directional systems, measurement-while-drilling and logging-while-drilling services, coiled tubing, cased-hole wireline and other complementary downhole tools and services. The Company also offers supply-chain management solutions through an extensive North American branch network providing pipe, valves and fittings as well as mill, safety and other maintenance products.

Financial information regarding reportable segments and international operations appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 16 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. Additional information related to business combinations appears in Note 3 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

Recent Developments

Schlumberger Limited Merger Agreement

On February 21, 2010, the Company, Schlumberger Limited (“Schlumberger”) and Turnberry Merger Sub, Inc., a wholly-owned subsidiary of Schlumberger, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Turnberry Merger Sub, Inc. will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Schlumberger, and each share of Company common stock will be converted into the right to receive 0.6966 shares of Schlumberger common stock (the “Merger”). Completion of the Merger is subject to (i) approval of the Merger by the stockholders of the Company, (ii) applicable regulatory approvals, including the termination or expiration of the applicable waiting period (and any extensions thereof) under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and European Community merger regulations, and (iii) other customary closing conditions.

Under the Merger Agreement, the Company agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally refrain from, among other things, acquiring new or selling existing businesses, incurring new indebtedness, repurchasing Company shares, issuing new capital stock or equity awards, or entering into new material contracts or commitments outside the ordinary course of business, without the consent of Schlumberger.

1

Stockholder Litigation

Subsequent to the announcement of the proposed combination of the Company and Schlumberger and through February 25, 2010, four putative class action lawsuits were commenced on behalf of stockholders of the Company against the Company and its directors in the District Court of Harris County, Texas, challenging the proposed transaction. One of the lawsuits also names Schlumberger and one of its affiliates as defendants. The lawsuits variously allege that the Company’s directors breached their fiduciary duties by, among other things, causing Smith to enter into the proposed transaction at an allegedly inadequate and unfair price and agreeing to transaction terms that improperly inhibit alternative transactions. One of the lawsuits separately alleges that the Company aided and abetted the directors’ breaches of fiduciary duties, and another of the lawsuits alleges that Schlumberger aided and abetted the directors’ breaches of fiduciary duties. The various complaints seek, among other things, an injunction barring defendants from consummating the proposed transaction, declaratory relief and attorneys’ fees. The Company believes that the lawsuits are without merit and intends to defend these lawsuits vigorously.

Where to Find Additional Information

Additional information about Schlumberger is included in documents that it has filed with the Securities and Exchange Commission. Additional information concerning the Merger is contained in Item 1A, Risk Factors, and in the proxy statement/prospectus and registration statement to be filed with the Securities and Exchange Commission. STOCKHOLDERS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT REGARDING THE PROPOSED TRANSACTION WHEN IT BECOMES AVAILABLE BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. These materials will be made available to the stockholders of Smith at no expense to them. Investors and security holders will be able to obtain the documents (when available) free of charge at the Securities and Exchange Commission’s website, www.sec.gov. In addition, such materials (and all other documents filed with the Securities and Exchange Commission) will be available free of charge at www.smith.com or www.slb.com. Such documents are not currently available. You may also read and copy any reports, statements and other information filed by Smith or Schlumberger with the Securities and Exchange Commission at the Securities and Exchange Commission public reference room at 100 F Street N.E., Room 1580, Washington, D.C. 20549. Please call the Securities and Exchange Commission at (800) 732-0330 or visit the Securities and Exchange Commission’s website for further information on its public reference room.

Each company’s directors and executive officers and other persons may be deemed, under Securities and Exchange Commission rules, to be participants in the solicitation of proxies in connection with the proposed transaction. Information regarding Schlumberger’s directors and officers can be found in its preliminary proxy statement filed with the Securities and Exchange Commission on February 9, 2010 and information regarding Smith’s directors and officers can be found in its proxy statement filed with the Securities and Exchange Commission on April 13, 2009. Additional information regarding the participants in the proxy solicitation and a description of their direct and indirect interests in the transaction, by security holdings or otherwise, will be contained in the proxy statement/prospectus and other relevant materials to be filed with the Securities and Exchange Commission when they become available.

Business Operations

M-I SWACO Segment

M-I SWACO, a majority-owned joint venture operation, is a leading supplier of drilling fluid systems engineered to improve wellbore quality and increase drilling performance. We also offer a broad range of waste management equipment and services, provide completion fluids and related tools and supply oilfield production chemicals.

M-I SWACO accounted for just over half of our total revenues in 2009, with more than three-quarters of the business concentrated in markets outside North America. Approximately 65 percent of M-I SWACO’s revenues relate to drilling fluid systems and related services, 20 percent to environmental and process solutions and the remainder is comprised of completion fluids, completion tools and production chemical offerings.

2

Drilling fluid systems are used to cool and lubricate the drill bit, contain formation pressures, suspend and remove rock cuttings from the hole and maintain the stability of the wellbore. Fluids are pumped downhole during drilling operations and are later returned to the surface where drill cuttings are removed, the fluid is reconditioned and then circulated back through the drill string. Fluid systems are engineered for specific drilling applications and reservoir environments to optimize drilling operations, typically combining a blend of weighting materials with a broad range of chemical additives to yield required performance characteristics.

Environmental and process solutions involve a wide array of equipment and services used to remove drill cuttings from the fluid system and collect, treat and dispose of drilling waste. Engineered screens, shakers and centrifuges are typically used to perform these services, resulting in extended fluid life, increased rates of penetration and reduced wear on sensitive directional drilling and other downhole equipment. Waste treatment services encompass a range of activities, including water treatment, site assessment, pit closure and remediation, drill cuttings injection and thermal processing.

Completion fluids, or clear brines, are solids-free, clear-salt solutions that are non-damaging to the producing formation. Operators use these specially designed fluid systems in combination with a range of specialty chemicals to control bottom-hole pressures, while meeting the specific corrosion inhibition, viscosity and fluid loss requirements necessary during the completion and workover phases of a well.

M-I SWACO’s primary competitors are Halliburton Company (“Halliburton”), Baker Hughes, Inc. (“Baker Hughes”) and Newpark Resources, Inc. Competition for drilling and completion fluids is based on a number of factors, including product quality and availability, wellsite engineering services, technical support, service response and price. Competition for our environmental and process solutions is based on product availability, equipment performance, technical support and price.

Smith Oilfield Segment

The Smith Oilfield operations provide a comprehensive suite of premium products and services used in oil and natural gas development activities.

The segment accounted for 27 percent of our total revenues in 2009, with 57 percent of the business base focused in the North American region. We are a global leader in the design, manufacture and marketing of drill bits and borehole enlargement tools, which on a combined basis, represents the segment’s largest product revenue component. The segment is also a leading supplier of drilling tools and services, tubulars, completion services and other related downhole solutions. The following provides a discussion of drill bits and borehole enlargement tools, directional drilling services and other key product offerings of the segment.

Drill bits are consumable products used during the drilling operation to cut the rock formation. The Company’s three-cone and diamond (or fixed cutter) drill bits are designed for premium market segments where faster penetration rates and increased footage provide significant economic benefits in lowering overall well costs. Borehole enlargement tools (or hole openers) and underreamers are placed above the bit in the drill string to create larger hole diameters in certain sections of the wellbore.

Drilling tools and services include directional drilling, measurement-while-drilling and logging-while-drilling services which reduce the operational and economic risks in both exploration and development drilling. Directional drilling services involve the use of skilled personnel to direct the drilling assembly along a predetermined path to enable the optimal recovery of oil and natural gas from a reservoir. Measurement-while-drilling products and services use downhole tools to help locate and direct the drill bit on a real-time basis to the intended target. Logging-while-drilling tools provide operators with real-time data about the physical properties of downhole formations and assist in improving drilling performance.

Premium tubular drill string components, such as drill collars and Hevi-Wate^tm drill pipe, are manufactured by Smith Oilfield in accordance with customer specifications while certain conventional drill pipe products are purchased for resale. In addition to the tubular product offerings, we offer proprietary downhole impact tools such as drilling jars and accelerators which can be added to the drill string to address potential drilling problems which may be encountered, including stuck pipe.

3

A variety of products and services are employed by operators after drilling is complete to bring the well online and to workover mature fields in a state of declining production. We provide a suite of completion and production related operations, including coiled tubing and cased-hole wireline services, packers and liner hangers. Coiled tubing and cased-hole wireline equipment, together with experienced personnel, are used in a variety of applications over the life of the well, such as perforating, wellbore cleanout and stimulation, cased-hole logging, and other intervention services. Engineered and manufactured products include production and service packers, which provide zonal isolation within the wellbore to direct oil and gas flow to the surface, and liner hangers for suspension of casing liners in deeper wells.

Fishing tools and services assist in locating, freeing and retrieving damaged or stuck tubulars, drilling tools or other non-drillable items in the wellbore, alleviating the need to drill around or abandon the well. Casing exit and multi-lateral systems allow the operator to divert around obstructions in the main wellbore or to reach multiple production zones from the main wellbore.

Smith Oilfield also leverages its proprietary suite of modeling and design software and application data together with its comprehensive product and service offerings to optimize the creation of the wellbore. Predictive knowledge gained through offset wells, product design and highly-trained engineers allows us to simulate the downhole environment to optimize bottom hole assembly components, drilling parameters and fluid hydraulics. Through collaborative exchanges with the clients’ engineers and rig-based drilling teams, we can test drill the well in a virtual environment to fully understand the application-specific challenges and effectively apply appropriate products and technologies to deliver enhanced performance improvement prior to beginning the drilling process.

Smith Oilfield’s major competitors in the drill bit business include Baker Hughes, Halliburton and National Oilwell Varco, Inc. (“National Oilwell”). With respect to drilling and completion services and tools, the segment’s primary competitors include Halliburton, Schlumberger, Baker Hughes and Weatherford International Ltd. (“Weatherford”). Competition for Smith Oilfield’s operations is based on a number of factors, including performance, price, reliability, experience and capabilities of service personnel, breadth of products and service offerings, and response time.

Distribution Segment

The Company’s Distribution operations provide products and services to the energy, refining, petrochemical, power generation and mining industries. The Distribution segment consists of the operations of our wholly-owned subsidiary, Wilson International, Inc. (“Wilson”) and a majority-owned interest in C.E. Franklin Ltd., a publicly-traded Canadian distribution company. We operate an extensive network of supply branches, service centers and sales offices through which we market pipe, valves and fittings as well as mill, safety and other maintenance products, predominately in the United States and Canada. In addition, we provide warehouse management, vendor integration and various surplus and inventory management services. The majority of our operations are focused on the distribution of maintenance, repair and operating supplies and equipment with the remainder associated with line pipe and automated valve products (including valve, actuator and control packages).

This segment accounted for 22 percent of our total revenues in 2009, with 95 percent of the business base concentrated in North America. Approximately three-quarters of the Distribution segment’s revenues were generated in the energy sector, which includes companies with operations in the petroleum industry’s pipeline sector and exploration and production companies. The remainder related to sales in the downstream and industrial market, including refineries, petrochemical and power generation plants and other energy-focused operations.

Our competitors in the energy sector operations include National Oilwell, McJunkin Red Man Corporation (“McJunkin”) and a significant number of smaller, locally-based operations. Our competitors in the downstream and industrial market include Hagemeyer NV, Ferguson Enterprises, Inc., McJunkin and W.W. Grainger, Inc. The distribution market is highly competitive involving numerous factors, including price, experience, customer service and equipment availability.

4

Non-U.S. Operations

Sales to oil and gas exploration and production markets outside the United States are a key strategic focus of Smith’s management. The Company markets its products and services through subsidiaries, joint ventures and sales agents located in virtually all petroleum-producing areas of the world, including Canada, Latin America, Europe/Africa and Middle East/Asia. Approximately 60 percent, 53 percent and 55 percent of the Company’s revenues in 2009, 2008 and 2007, respectively, were derived from equipment or services sold or provided outside the United States. The Company’s Distribution operations constitute 22 percent of the consolidated revenue base and are concentrated in North America which masks the geographic revenue mix of the Company’s oilfield operations. Excluding the impact of the Distribution operations, approximately 69 percent, 63 percent and 64 percent of the Company’s revenues were generated in non-U.S. markets in 2009, 2008 and 2007, respectively.

Smith has limited operations in countries which are subject to trade or economic sanctions or other restrictions imposed by the U.S. government. These countries include Iran, Syria and Sudan. Smith’s operations in these countries are conducted through non-U.S. wholly and partially owned affiliates. The Company is actively pursuing the termination of all business activities in Iran and Sudan. Approximately one percent of Smith’s annual revenue in each of the last three years was derived from these countries. Smith does not believe such to be strategically significant to its worldwide operations as a whole.

Historically, drilling activity outside the United States has been less volatile than U.S.-based activity as the high cost exploration and production programs outside the United States are generally undertaken by major oil companies, consortiums and national oil companies. These entities operate under longer-term strategic development plans than do the independent drilling operators that are more common in the U.S. market.

Sales and Distribution

Sales and service efforts are directed to end users in the exploration and production industry, including major and independent oil companies, national oil companies and independent drilling contractors. The Company’s products and services are primarily marketed through the direct sales force of each operating segment. In certain markets where direct sales efforts are not practicable, the Company utilizes independent sales agents, distributors or joint ventures.

The Company maintains field service centers, which function as a base for its global sales force and support the distribution and processing of our products and technologies, as well as the repair and maintenance of our rental equipment, in all major oil and gas producing regions of the world. The location of these service centers near the Company’s customers is an important factor in maintaining favorable customer relations.

Manufacturing

The Company’s manufacturing operations, along with quality control and engineering support, are designed to ensure that all products and services marketed by the Company will meet standards of performance and reliability consistent with the Company’s reputation in the industry.

Management believes that it generally has sufficient internal manufacturing capacity to meet anticipated demand for its products and services. During periods of peak demand, certain product lines utilize outside resources to provide additional manufacturing capacity.

Raw Materials

Through its company-owned mines in and outside the United States, M-I SWACO has the capability to produce a large portion of its requirements for barite and bentonite, which are typically added to engineered drilling fluid systems. Barite reserves are mined in the United States, the United Kingdom and Morocco. Bentonite is produced from ore deposits in the United States. Mining exploration activities continue worldwide to locate and evaluate ore bodies to ensure deposits are readily available for production when market conditions dictate. In addition to its own production, M-I SWACO purchases the majority of its worldwide barite requirement from suppliers outside the United States, mainly the People’s Republic of China, India and Morocco.

5

The Company purchases a variety of raw materials for the Smith Oilfield segment, including alloy and stainless steel bars, tungsten carbide inserts and forgings. Generally, the Company is not dependent on any single source of supply for any of its raw materials or purchased components, and believes that numerous alternative supply sources are available for all such materials. The Company does not currently expect any material interruption in supply, but there can be no assurance that there will be no price or supply issues over the long term.

Product Development, Engineering and Patents

The Company’s M-I SWACO and Smith Oilfield segments maintain product development and engineering departments whose activities are focused on improving existing products and services and developing new technologies to meet customer demands for improved drilling performance and environmental-based solutions for drilling and completion operations. The Company’s primary research facilities are located in Houston, Texas; Stavanger, Norway; Aberdeen, Scotland; and Florence, Kentucky.

The Company has historically invested significant resources in research and engineering in order to provide customers with broader product offerings and technologically-advanced products and services. The Company’s expenditures for research and engineering activities are attributable to the Company’s M-I SWACO and Smith Oilfield segments and totaled $141.0 million in 2009, $129.4 million in 2008 and $110.7 million in 2007. Research and engineering expenditures approximated 2.2 percent, 1.6 percent and 1.7 percent of the Company’s oilfield-related operations revenues in 2009, 2008 and 2007, respectively.

Although the Company has over 6,300 issued and pending patents and regards its patents and patent applications as important in the operation of its business, it does not believe that any significant portion of its business is materially dependent upon any single patent.

Employees

At December 31, 2009, the Company had 21,931 full-time employees throughout the world. Most of the Company’s employees in the United States are not covered by collective bargaining agreements except in certain U.S. mining operations of M-I SWACO and several distribution locations of Wilson. The Company considers its labor relations to be satisfactory.

6

Officers of the Registrant

The table below sets forth, as of February 25, 2010, the names and ages of the executive officers of the Company, including all positions and offices held by each in the past five years. Positions, unless otherwise specified, are with the Company.

Name and Age	Principal Current Occupation and Other Significant Positions Held
Doug Rock(63)	Chairman of the Board, since February 1991; Special Executive Advisor to the Chief Executive Officer, since January 2009; Chief Executive Officer, President and Chief Operating Officer, March 1989 to December 2008; Joined the Company in June 1974.
John Yearwood(50)	Chief Executive Officer, President and Chief Operating Officer, since January 2009; Executive Vice President and President of Smith Completion and Production, August 2008 to December 2008; Member of the Board, since December 2006; Senior Advisor to the Chief Executive Officer of Schlumberger, March 2006 to May 2008; Various positions at Schlumberger (most recently, President – North and South America, Oilfield Services), September 1980 to March 2006; Joined the Company as an employee in August 2008.
William Restrepo(50)	Senior Vice President, Chief Financial Officer and Treasurer, since October 2009; Executive Vice President, Chief Financial Officer and Secretary of Seitel, Inc., July 2005 to September 2009; Various financial and operational positions at Schlumberger (most recently, Vice President of Finance – North and South America, Oilfield Services), August 1985 to June 2005. Joined the Company in October 2009.
Malcolm W. Anderson(62)	Senior Vice President, Human Resources, since December 2006; Vice President, Human Resources, May 2004 to November 2006. Joined the Company in May 2004.
Richard E. Chandler, Jr.(53)	Senior Vice President and Secretary, since January 2006; General Counsel, since August 2005; Senior Vice President – Administration, General Counsel and Secretary of M-I SWACO, January 2004 to July 2005. Joined predecessor to M-I SWACO in December 1986.
Bryan L. Dudman(53)	Executive Vice President and President, Smith Drilling and Evaluation, since August 2008; President, Smith Services, January 2006 to July 2008; Senior Vice President Western Hemisphere Operations of M-I SWACO, May 1994 to December 2005; Joined the Company in January 1979.
John J. Kennedy(57)	President and Chief Executive Officer of Wilson, since June 1999; Joined the Company in November 1986.
Christopher I.S. Rivers(55)	President and Chief Executive Officer of M-I SWACO, since January 2009; Chief Operating Officer of M-I SWACO, October 2008 to December 2008; Executive Vice President Product Segments of M-I SWACO, April 2006 to September 2008; Vice President Eastern Hemisphere of M-I SWACO, January 2005 to March 2006; Joined the Company in July 1977.
Norman A. Mckay(50)	Executive Vice President and President of Smith Technologies, since November 2009; President Eastern Hemisphere of Exterran Holdings, Inc., April 2005 to October 2009; Various operational and management positions at Schlumberger (most recently Global Account Director, Oilfield Services), September 1981 to April 2005; Joined the Company in November 2009.
Peter J. Pintar(51)	Vice President Corporate Strategy and Development, since September 2005; Various positions at DTE Energy Company, including Director, Corporate Development, Managing Director, Venture Capital Investments; and Director, Investor Relations, October 1997 to August 2005; Joined the Company in September 2005.
Lee A. Turner(62)	Vice President QHSE, since January 2009; Vice President QHSE of M-I SWACO, January 2005 to December 2008; Joined M-I SWACO in January 2005.
Brian E. Taylor(47)	Vice President and Controller since September 2009; Various financial positions within the Company (most recently Vice President – Finance), June 2002 to August 2009; Vice President and Controller, September 1999 to May 2002; Joined the Company in September 1999.
Geraldine D. Wilde(59)	Vice President, Taxes and Assistant Treasurer, since February 1998; Joined predecessor to M-I SWACO in December 1986.

All officers of the Company are elected annually by the Board of Directors. They hold office until their successors are elected and qualified. There are no family relationships between the officers of the Company.

7

Item 1A.   Risk Factors

This document contains forward-looking statements within the meaning of the Section 21E of the Securities Exchange Act of 1934, as amended, concerning, among other things, our outlook, financial projections and business strategies, all of which are subject to risks, uncertainties and assumptions. These forward-looking statements are identified by their use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “project,” “should” and similar terms. These statements are based on certain assumptions and analyses that we believe are appropriate under the circumstances. Such statements are subject to, among other things, overall demand for and pricing of the Company’s products and services, general economic and business conditions, the level of oil and natural gas exploration and development activities, global economic growth and activity, political stability of oil-producing countries, finding and development costs of operations, decline and depletion rates for oil and natural gas wells, seasonal weather conditions, industry conditions, changes in laws or regulations, and other risk factors that are discussed below, many of which are beyond the control of the Company. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may differ materially from those expected, estimated or projected. Management believes these forward-looking statements are reasonable. However, you should not place undue reliance on these forward-looking statements, which are based only on our current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any of them in light of new information, future events or otherwise.

You should consider the following important factors that could cause our actual results to differ materially from those expressed in any forward-looking statement made by us or on our behalf.

Risks Related To Our Business

The significant deterioration in the global business environment and related factors could adversely impact our financial condition and results of operations.

The deterioration in the global business environment has led to a significant reduction in commodity prices from average levels reported in 2008, which has contributed to lower cash flow generation for oil and natural gas exploration and production companies. In addition, the reduction in the availability and increased cost of financing which began in the second half of 2008 had a significant impact on a number of our customers. These factors, if continued or worsened, could contribute to a sustained or further decline in our customers’ spending levels. As a result, we must manage our costs, including our workforce levels, to match the decline. A continued reduction in the level of future investment or our inability to reduce our costs sufficiently to match the material slowdown in drilling activity could have a material adverse effect on our results of operations, financial condition and cash flows.

Moreover, if the business environment experiences a significant deterioration from current levels, we may be required to record goodwill and/or other intangible asset impairment losses, which could have a material adverse effect on our results of operations and financial condition and our compliance with applicable debt covenants.

The financial and credit market environment may limit our ability to expand our business through acquisitions and to fund necessary expenditures.

The global financial and credit market environment has, at times, limited the availability of financing and increased costs when available. Any inability to access the credit and capital markets could limit our ability to make significant business acquisitions and pursue business opportunities. On February 21, 2010, we and Schlumberger entered into an Agreement and Plan of Merger pursuant to which a wholly-owned subsidiary of Schlumberger will merge with and into us and we will become a wholly-owned subsidiary of Schlumberger. If the Merger is not consummated, either we or our M-I SWACO joint venture partner, Schlumberger, can offer to sell to the other party its entire ownership interest in the joint venture in exchange for a cash purchase price specified by the offering partner. If the initiating partner’s offer to sell is not accepted, such party is obligated to purchase the other party’s interest at the same valuation per interest. If we agree to purchase Schlumberger’s joint venture interest, whether pursuant to these provisions or otherwise, we would need to fund the transaction. Our funding could include issuing equity, resulting in dilution to our existing stockholders, obtaining additional debt, which may require waivers of applicable debt covenants, or obtaining other financing, as well as using available cash to fund the purchase. This financing and/or use of cash could impact our ability to fund working capital requirements, make capital

8

expenditures and investments or fund other general corporate requirements, and could limit our ability to make future acquisitions. Should we instead not purchase Schlumberger’s interest, we would no longer have an interest in the joint venture. The failure to pursue significant acquisition opportunities, or the consequences of seeking waivers, issuing equity or obtaining other financing, could have a material adverse effect on our future results of operations, financial condition and cash flows.

We are dependent on the level of oil and natural gas exploration and development activities.

Demand for our products and services is dependent upon the level of oil and natural gas exploration and development activities. The level of worldwide oil and natural gas development activities is primarily influenced by the price of oil and natural gas, as well as price expectations. The current state of world economies could lead to further weakness in exploration and production spending levels, further reducing demand for our products and services and adversely impacting future results. In addition to oil and natural gas prices, the following factors impact exploration and development activity and may lead to significant changes in worldwide activity levels:

•  overall level of global economic growth and activity;

•  actual and perceived changes in the supply of and demand for oil and natural gas;

•  political stability and policies of oil-producing countries;

•  finding and development costs of operators;

•  decline and depletion rates for oil and natural gas wells;

•  seasonal weather conditions that temporarily curtail drilling operations; and

•  laws and regulations related to environmental or energy security matters, including those addressing alternative energy sources and the risks of global climate change.

Changes in any of these factors could adversely impact our financial condition, results of operations or cash flows.

A significant portion of our revenue is derived in markets outside of North America.

We are a multinational oilfield service company and generate the majority of our oilfield-related revenues in markets outside of North America. Changes in conditions within certain countries that have historically experienced a high degree of political and/or economic instability could adversely impact our operations in such countries and as a result our financial condition, results of operations or cash flows. Additional risks inherent in our non-North American business activities include:

•  changes in political and economic conditions in the countries in which we operate, including civil uprisings, riots and terrorist acts;

•  unexpected changes in regulatory requirements affecting oil and natural gas exploration and development activities;

•  fluctuations in currency exchange rates and the value of the U.S. dollar;

•  restrictions on repatriation of earnings or expropriation of property without fair compensation;

•  governmental actions that result in the deprivation of contract or proprietary rights in the countries in which we operate; and

•  governmental sanctions.

We operate in a highly technical and competitive environment.

We operate in a highly competitive business environment. Accordingly, demand for our products and services is largely dependent on our ability to provide leading-edge, technology-based solutions that reduce the operator’s overall cost of developing energy assets and to commercialize performance-driven new technology. If competitive

9

or other market conditions impact our ability to continue providing superior-performing product offerings, our financial condition, results of operations or cash flows could be adversely impacted.

Regulatory compliance costs and liabilities could adversely impact our earnings and cash available for operations.

We are exposed to a variety of federal, state, local and international laws and regulations relating to matters such as the use of hazardous materials, health and safety, labor and employment, import/export control, currency exchange, bribery, corruption and taxation, and the environment, including laws and regulations governing air emissions, wastewater discharges and waste management. These laws and regulations are complex, change frequently and have tended to become more stringent over time. In the event the scope of these laws and regulations expand in the future, the incremental cost of compliance could adversely impact our financial condition, results of operations or cash flows. For example, the adoption of more stringent laws and regulations that curtailed either directly or indirectly the level of oil and natural gas exploration and development activities could adversely affect our operations by limiting demand for our products and services.

Our industry is experiencing more litigation involving claims of infringement of intellectual property rights.

Over the past years, the industry in which we operate has experienced increased litigation related to the infringement of intellectual property rights. Although no material matters are pending or threatened at this time, we, as well as certain of our competitors, have been named as defendants in various intellectual property matters in the past. These types of claims are typically costly to defend, involve the risk of monetary judgments that, in certain circumstances, are subject to being enhanced and are often brought in venues that have proved to be favorable to plaintiffs. If we are served with any intellectual property claims that we are unsuccessful in defending, it could adversely impact our results of operations, financial condition and cash flows.

Our business operations in countries outside the United States are subject to a number of U.S. federal laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act as well as trade sanctions administered by the Office of Foreign Assets Control and the Commerce Department.

Our business operations in countries outside the United States are subject to a number of U.S. federal laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”) as well as trade sanctions administered by the Office of Foreign Assets Control (“OFAC”) and the Commerce Department. The FCPA is intended to prohibit bribery of foreign officials or parties and requires public companies in the United States to keep books and records that accurately and fairly reflect those companies’ transactions. OFAC and the Commerce Department administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm, and incarceration of our employees or restrictions on our operations. We have received an administrative subpoena with respect to our historical business practices in Iran and Sudan. We are conducting a review of our business activities involving Iran and Sudan, and are actively pursuing the termination of all business activities in Iran and Sudan. While the nature and scope of issues that may emerge from this review are yet to be determined, there is a risk that we could identify violations of U.S. sanctions laws, which if pursued by regulatory authorities, could result in administrative or criminal penalties which in certain circumstances could adversely impact our results of operations, financial condition and cash flows.

Our business may be affected by market or regulatory responses to climate change.

Climate change and greenhouse gas emissions are the subject of a significant attention within and outside the United States. Future environmental regulatory developments (such as restrictions, caps, taxes, or other controls) could adversely influence the cost of and demand for oil and natural gas. A reduction in demand for these commodities may result in a decline in exploration and production spending by our customers, which in turn could adversely impact demand and pricing for our products and services. Additionally, restrictions on emissions or other climate change related mandates could result in significant increases in the cost of our goods and services. There is no assurance that in response to escalating expenses, we could increase our prices to customers sufficiently to mitigate the financial impact

10

of such cost expansion. These factors, individually or together, or other unforeseen impacts of climate change regulation could have a material adverse effect on our results of operations, financial condition and cash flows.

Risks Related to the Pending Merger with Schlumberger

Our ability to complete the Schlumberger Merger is subject to stockholder approval, certain closing conditions and the receipt of consents and approvals from government entities which may impose conditions that could adversely affect us or cause the Merger to be abandoned.

The Merger Agreement contains certain closing conditions including approval of the Merger by Smith stockholders, the absence of injunctions or other legal restrictions and that no material adverse effect shall have occurred to either company. In addition, we will be unable to complete the merger until we receive approvals from the Department of Justice, the Federal Trade Commission, the European Commission and various other governmental entities. Regulatory entities may impose certain requirements or obligations as conditions for their approval. The Merger Agreement may require us to accept conditions from these regulators that could adversely impact the combined company. We can provide no assurance that we will satisfy the various closing conditions and obtain the necessary approvals or that any required conditions will not materially adversely affect us following the Merger. In addition, we can provide no assurance that these conditions will not result in the abandonment or delay of the Merger.

Failure to complete the Merger could negatively impact us.

If the Merger is not completed, our ongoing businesses and the market price of our common stock may be adversely affected and we will be subject to several risks, including being required, under certain circumstances, to pay a termination fee of $340 million; having to pay certain costs relating to the proposed merger, and diverting the focus of management from pursuing other opportunities that could be beneficial to us, in each case, without realizing any of the benefits of having the Merger completed.

The pendency of the Merger could adversely affect us.

In connection with the pending Merger, some of our customers may delay or defer purchasing decisions, which could negatively impact our revenues, earnings and cash flows regardless of whether the Merger is completed. Additionally, we have agreed in the Merger Agreement to refrain from taking certain actions with respect to our business and financial affairs during the pendency of the Merger, which restrictions could be in place for an extended period of time if completion of the Merger is delayed and could adversely impact our financial condition, results of operations or cash flows.

The combined company could incur substantial expenses related to the integration of the Company and Schlumberger.

We expect that the combined company will incur substantial expenses in connection with integrating our business, policies, procedures, operations, technologies and systems with those of Schlumberger. There are a large number of systems that must be integrated, including information management, purchasing, accounting and finance, sales, billing, payroll and benefits, fixed asset and lease administration systems and regulatory compliance. While we have assumed that a certain level of expenses would be incurred, there are a number of factors beyond the control of Schlumberger or us that could affect the total amount or the timing of all of the expected integration expenses. Moreover, many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings and revenue enhancements related to the integration of the businesses following the completion of the Merger. These integration expenses may result in the combined company taking significant charges against earnings following the completion of the Merger.

11

Following the Merger, the combined company may be unable to successfully integrate our business and Schlumberger’s business and realize the anticipated benefits of the Merger.

The Merger involves the combination of two companies which currently operate as independent public companies. The combined company will be required to devote management attention and resources to integrating its business practices and operations. Potential difficulties the combined company may encounter in the integration process include the following:

•  the inability to successfully integrate our business into Schlumberger’s business in a manner that permits the combined company to achieve the cost savings and operating synergies anticipated to result from the Merger, which would result in the anticipated benefits of the Merger not being realized partly or wholly in the time frame currently anticipated or at all;

•  lost sales and customers as a result of certain customers of either of the two companies deciding not to do business with the combined company;

•  integrating personnel from the two companies while maintaining focus on providing consistent, high quality products and customer service;

•  potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger; and

•  performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the Merger and integrating the companies’ operations.

In addition, we and Schlumberger have operated and, until the completion of the Merger, will continue to operate, independently. It is possible that the integration process could result in the diversion of each company’s management attention, the disruption or interruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers and employees or our ability to achieve the anticipated benefits of the Merger, or could reduce the earnings or otherwise adversely affect the business and financial results of the combined company.

We and Schlumberger may be unable to retain key employees.

In connection with the pending Merger, our current and prospective employees may experience uncertainty about their future roles with the combined company following the Merger, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the Merger. Additionally, our success after the Merger will depend in part upon our ability to retain key Schlumberger and Smith employees. Key employees may depart either before or after the Merger because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger. Accordingly, no assurance can be given that we will be able to retain key employees to the same extent that we or Schlumberger have been able to in the past.

Item 1B.   Unresolved Staff Comments

None.

Item 2.   Properties

The Company is headquartered in Houston, Texas and owns or leases numerous facilities in the United States and other countries in which we operate.

The Company’s principal manufacturing plants are located in: United States – Houston and Odessa, Texas, Ponca City and Tulsa, Oklahoma, Florence, Kentucky, Macon, Georgia, Provo, Utah, and Rancho Cucamonga, California; South America – Neuquen and Villa Regina, Argentina; Europe – Aberdeen and Edinburgh, Scotland, Berra, Saline and Scurelle, Italy, and Nivellas, Belgium; and Middle East/Asia – Jebel Ali, Dubai, and Changzhou, China.

The Company’s major mines and ore, drilling fluid and production chemical processing centers are located in: United States – Battle Mountain, Greystone and Mountain Springs, Nevada, Greybull, Wyoming, Amelia and Port

12

Fourchon, Louisiana, and Galveston, Texas; Canada – Spruce Grove, Alberta; and Europe – Aberdeen, Foss and Aberfly, Scotland, Karmoy, Norway, and Salzweld, Germany.

The principal distribution facilities of pipe, valves and fittings are located in: United States – LaPorte, Texas, Long Beach, California and South Plainfield, New Jersey; Canada – Edmonton, Alberta.

The Company considers its mines and manufacturing, processing and distribution facilities to be in good condition and adequately maintained. The Company also believes its facilities are suitable for their present and intended purposes and are generally adequate for the Company’s current and anticipated level of operations.

The table below shows our significant facilities and properties by segment and geographic area:

United

South

Middle East /

Segment

States

Canada

America

Europe

Asia

Total

M-I SWACO:

Manufacturing

3

–

–

3

–

6

Barite or bentonite mines

3

–

–

2

–

5

Ore, drilling fluid and production chemical processing

6

1

–

3

–

10

Smith Oilfield:

Manufacturing

8

–

2

4

2

16

Distribution:

Distribution centers

3

1

–

–

–

4

Item 3.   Legal Proceedings

Information relating to various commitments and contingencies, including legal proceedings, is described in Note 17, “Commitments and Contingencies,” and Note 19, “Subsequent Events (Unaudited),” of the Notes to Consolidated Financial Statements included elsewhere in this report on Form 10-K and is incorporated herein by reference.

Item 4.   Reserved

PART II

Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of the Company is traded on several market exchanges, including the New York Stock Exchange, under the symbol “SII”. The following are the high and low sale prices for the Company’s common stock as reported on the New York Stock Exchange Composite Tape for the periods indicated.

	2008 Common Stock								2009 Common Stock
	Q1		Q2		Q3		Q4		Q1		Q2		Q3		Q4
High	$	74.68	$	82.72	$	85.52	$	55.93	$	28.84	$	31.91	$	29.79	$	33.81
Low	$	53.49	$	66.42	$	55.36	$	19.67	$	18.92	$	21.97	$	22.61	$	26.01

On February 25, 2010, the Company had 1,650 common stock holders of record and the last reported closing price on the New York Stock Exchange Composite Tape was $40.83.

Stock Repurchases

The Company’s Board of Directors maintains a share repurchase program that allows for the purchase of up to 20 million shares of the Company’s common stock, subject to regulatory issues, market considerations and other relevant factors. During the year ended December 31, 2009, no shares were repurchased. Future repurchases under the program are also subject to the obligations under the Merger Agreement.

13

Certain participants in the long-term incentive plans surrender shares of common stock in order to satisfy tax withholding obligations. These shares are not considered acquisitions under the Company’s share repurchase program.

Dividend Program

The Company makes regular quarterly distributions under a cash dividend program. The Board of Directors declared dividends of $108.8 million, or $0.48 per share, $100.7 million, or $0.48 per share, and $80.1 million, or $0.40 per share, for the years ended December 31, 2009, 2008 and 2007, respectively.

The level of future dividend payments will be at the discretion of the Board of Directors, subject to the obligations under the Merger Agreement, which permit regular quarterly dividends in an amount up to $0.12 per share, and will depend upon the Company’s financial condition, earnings and cash flow from operations, the level of its capital expenditures, compliance with certain debt covenants, future business prospects and other factors that the Board of Directors deem relevant.

Five-Year Comparative Total Return

The following table and related graph shows Smith’s total stockholder return over the prior five-year period, as compared to the Standard & Poor’s 500 Stock Index and our Peer Group, assuming $100 investment in each on December 31, 2004 and the reinvestment of all dividends. Our Peer Group consists of the following companies, Baker Hughes Incorporated, BJ Services Company, Cameron International Corporation, Halliburton Company, National Oilwell Varco, Inc., Schlumberger Limited, and Weatherford International Ltd. The stockholder return set forth below is not necessarily indicative of future performance. The following graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Smith specifically incorporates it by reference into such filing.

	December 31,
	2004		2005		2006		2007		2008		2009
Smith International, Inc.	$	100.00	$	137.40	$	153.26	$	277.38	$	86.89	$	105.09
Standard & Poor’s 500 Stock Index		100.00		104.91		121.48		128.16		80.74		102.11
Peer Group		100.00		149.19		171.43		251.71		109.28		176.27

14

Item 6.   Selected Financial Data

	For the Years Ended December 31,
	2009		2008		2007		2006		2005
	(In thousands, except per share data)
Statements of Operations Data:
Revenues	$	8,218,559	$	10,770,838	$	8,764,330	$	7,333,559	$	5,579,003
Gross profit		2,250,080		3,428,916		2,855,657		2,344,271		1,685,138
Operating income		599,083		1,642,412		1,369,797		1,080,081		670,561
Net income attributable to Smith		148,469		767,284		647,051		502,006		302,305
Earnings per share – diluted basis		0.66		3.68		3.20		2.49		1.48
Balance Sheet Data:
Working capital	$	3,404,447	$	2,152,952	$	2,554,435	$	1,891,559	$	1,504,078
Total assets		10,739,415		10,816,224		6,061,880		5,335,475		4,059,914
Long-term debt		1,814,254		1,440,525		845,624		800,928		610,857
Smith stockholders’ equity		5,440,567		4,549,339		2,594,897		1,986,937		1,578,505
Cash dividends declared per common share		0.48		0.48		0.40		0.32		0.24

The Selected Financial Data above should be read together with the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K in order to understand factors, such as business combinations completed during 2009, 2008 and 2007, and charges, which may affect the comparability of the Selected Financial Data.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is provided to assist readers in understanding the Company’s financial performance during the periods presented and significant trends which may impact the future performance of the Company. This discussion should be read in conjunction with the Consolidated Financial Statements of the Company and the related notes thereto included elsewhere in this Form 10-K. This discussion includes forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from the statements we make in this section due to a number of factors that are discussed beginning on page 8.

Company Products and Operations

The Company is a leading global provider of premium products and services used during the drilling, completion and production phases of oil and natural gas development activities. In August 2008, we broadened our capabilities in key drilling and completion-related product technologies with the acquisition of W-H Energy Services, Inc. (“W-H”). We provide a comprehensive line of technologically-advanced products and engineering services, including drilling and completion fluid systems, solids-control and separation equipment, waste-management services, three-cone and diamond drill bits, borehole enlargement services, tubulars, directional systems, measurement-while-drilling and logging-while-drilling services, coiled tubing, cased-hole wireline and other complementary downhole tools and services. The Company also offers supply-chain management solutions through an extensive North American branch network providing pipe, valves and fittings as well as mill, safety and other maintenance products.

The Company’s operations are driven principally by the level of exploration and production (“E&P”) spending in major energy-producing regions around the world and the depth and complexity of these projects. Although E&P spending is significantly influenced by the market price of oil and natural gas, it may also be affected by supply and demand fundamentals, finding and development costs, decline and depletion rates, political actions and uncertainties, environmental concerns, the financial condition of independent E&P companies and the overall level of

15

global economic growth and activity. In addition, approximately five percent of the Company’s consolidated revenues relate to the downstream energy sector, including petrochemical plants and refineries, whose spending is largely impacted by the general condition of the U.S. economy.

Capital investment by energy companies is largely divided into two markets, which vary greatly in terms of primary business drivers and associated volatility levels. North American drilling activity is primarily influenced by natural gas fundamentals, with approximately 60 percent of the current rig count focused on natural gas finding and development activities. Conversely, drilling in areas outside of North America is more dependent on crude oil fundamentals, which influence three-quarters of international drilling activity. Historically, business in markets outside of North America has proved to be less volatile as the high cost E&P programs in these regions are generally undertaken by major oil companies, consortiums and national oil companies as part of a longer-term strategic development plan. Although 48 percent of the Company’s consolidated revenues were generated in North America during 2009, Smith’s profitability was influenced by business levels in markets outside of North America. The Distribution segment, which accounts for 22 percent of consolidated revenues and primarily supports a North American customer base, masks the geographic revenue mix of the Company’s oilfield operations. Excluding the impact of the Distribution segment, approximately 65 percent of the Company’s revenues were generated in markets outside of North America during 2009.

Finally, a number of factors have driven an increase in the importance of national oil companies (“NOCs”) in the global energy industry. NOCs currently control a substantial portion of world oil reserves and production. As we look forward, NOCs and their governments will likely have more control over the pace and the manner in which oil and gas resources are developed, which could have implications for Smith and other oilfield service industry participants. We believe we have been successful in developing strong business relationships with NOCs, which contribute a sizable portion of our revenues.

Business Outlook

The Company’s 2009 results were influenced by a material reduction in average worldwide drilling activity attributable to the significant slowdown experienced in the global economy. The impact of lower activity levels was partially offset by the large proportion of our oilfield business based in markets outside North America, areas that tend to be more stable from an oil and natural gas investment standpoint, and the various cost reduction measures undertaken by management to right-size global operations. The majority of the rig count decline was experienced in the United States where drilling activity was 44 percent below the average level reported in 2008. The decrease in U.S. drilling activity is primarily attributable to the lower number of land-based and shallow-depth offshore programs, which are generally more sensitive to commodity prices. Customer spending in most international and deepwater drilling markets, which are primarily driven by oil-directed activities, have been impacted to a lesser extent.

Near-term drilling activity will largely be influenced by natural gas fundamentals in the U.S. market and oil-targeted drilling projects outside of North America. On a worldwide basis, drilling activity in 2010 is currently expected to increase moderately over 2009 levels, influenced by continued low global energy demand and U.S. natural gas storage levels. Although additional deterioration in the global economic environment could lead to lower exploration and production spending, further reducing demand for the Company’s products and services and adversely impacting future results, the long-term outlook for the energy sector is favorable due to supply and demand fundamentals.

Our Merger Agreement with Schlumberger contains a number of restrictions on our operations during the pendency of the Merger. Our ability to implement our business plan and respond to market conditions will be subject to compliance with these obligations. Further information on these obligations can be found in the Merger Agreement and in the proxy statement/prospectus to be filed with the Securities and Exchange Commission.

Results of Operations

Segment Discussion

Our business is segregated into three operating segments, M-I SWACO, Smith Oilfield and Distribution, which is the basis upon which we report our results. The M-I SWACO segment consists of a majority-owned drilling fluid and environmental services joint venture operation. The Smith Oilfield segment is comprised of our wholly-owned drilling and completion services operations, which includes drill bits, directional drilling services and downhole tools. The

16

Distribution segment consists of the Wilson distribution operations and a majority-owned interest in CE Franklin Ltd., a publicly-traded Canadian distribution company. Finally, general corporate primarily reflects expenses related to corporate personnel, administrative support functions and long-term incentive compensation programs.

	For the Years Ended December 31,
	2009						2008						2007
	Amount			%			Amount			%			Amount			%
	(Dollars in thousands)
Financial Data
Revenues:
M-I SWACO	$	4,224,340			51		$	5,183,335			48		$	4,422,408			50
Smith Oilfield		2,225,048			27			2,848,804			26			2,210,161			26
Distribution		1,769,171			22			2,738,699			26			2,131,761			24
Total	$	8,218,559			100		$	10,770,838			100		$	8,764,330			100
Geographic Revenues:
United States:
M-I SWACO	$	861,052			10		$	1,295,477			12		$	1,172,448			13
Smith Oilfield		1,158,471			14			1,685,624			16			1,223,833			14
Distribution		1,300,417			16			2,099,609			19			1,571,525			18
Total United States		3,319,940			40			5,080,710			47			3,967,806			45
Canada:
M-I SWACO		150,526			2			178,814			2			181,249			2
Smith Oilfield		106,820			1			159,215			1			157,443			2
Distribution		380,922			5			513,069			5			432,738			5
Total Canada		638,268			8			851,098			8			771,430			9
Non-North America:
M-I SWACO		3,212,762			39			3,709,044			35			3,068,711			35
Smith Oilfield		959,757			12			1,003,965			9			828,885			10
Distribution		87,832			1			126,021			1			127,498			1
Total Non-North America		4,260,351			52			4,839,030			45			4,025,094			46
Total	$	8,218,559			100		$	10,770,838			100		$	8,764,330			100
Operating Income:
M-I SWACO	$	516,355			12		$	839,647			16		$	729,412			17
Smith Oilfield		229,063			10			746,826			26			619,038			28
Distribution		(33,894	)		(2	)		180,178			7			97,154			5
General corporate		(112,441	)			*		(124,239	)			*		(75,807	)			*
Total	$	599,083			7		$	1,642,412			15		$	1,369,797			16

*  not meaningful

17

	For the Years Ended December 31,
	2009				2008				2007
	Amount		%		Amount		%		Amount		%
Market Data
Average Worldwide Rig Count:(1)
United States		1,174		33		2,101		45		1,961		46
Canada		200		6		328		7		311		7
Non-North America		2,177		61		2,258		48		2,009		47
Total		3,551		100		4,687		100		4,281		100
Onshore		2,977		84		4,096		87		3,719		87
Offshore		574		16		591		13		562		13
Total		3,551		100		4,687		100		4,281		100
Average Commodity Prices:
Crude Oil ($/Bbl)(2)	$	62.09			$	99.75			$	72.36
Natural Gas ($/mcf)(3)		4.16				8.89				7.12

(1)	Source: M-I SWACO.
(2)	Average daily West Texas Intermediate (“WTI”) spot closing prices, as quoted by NYMEX.
(3)	Average daily Henry Hub, Louisiana spot closing prices, as quoted by NYMEX.

M-I SWACO Segment

Revenues

M-I SWACO primarily provides drilling and completion fluid systems and engineering and technical services to the oil and gas industry. Additionally, these operations provide oilfield production chemicals and manufacture and market equipment and services used for solids control, particle separation, pressure control, rig instrumentation and waste management. M-I SWACO is significantly influenced by its exposure to the global offshore market, which constitutes approximately 50 percent of the segment’s revenue base, and to exploration and production spending for land-based projects outside of North America, which contributes approximately 35 percent of the segment’s revenue base. Offshore drilling programs, which accounted for 16 percent of the worldwide rig count in 2009, are generally more revenue intensive than land-based projects due to the complex nature of the related drilling environment. M-I SWACO’s revenues totaled $4.2 billion for the year ended December 31, 2009, 19 percent below the level reported in the 2008 period. The year-over-year revenue decline was concentrated in the United States and the Europe/Africa region. The reduction in U.S. revenue levels was driven primarily by a decline in investment by exploration and production companies in land-based drilling projects and, to a lesser extent, reduced activity levels in the Gulf of Mexico. Revenues within the segment’s Europe/Africa operations were influenced primarily by lower land-based drilling in Russia and reduced shallow-water drilling programs in the North Sea and Caspian markets. For the year ended December 31, 2008, M-I SWACO reported revenues of $5.2 billion, an increase of 17 percent over the amounts reported in the 2007 fiscal year. Approximately two-thirds of the revenue improvement was attributable to growth in Eastern Hemisphere markets. The increase largely reflects a 27 percent increase in onshore business volumes, influenced by increased customer activity in the Former Soviet Union (“FSU”) region, and higher offshore spending in West Africa and the North Sea markets. Western Hemisphere revenues grew 15 percent above the prior-year level due to the impact of new land-based contract awards in Mexico and higher customer spending associated with unconventional U.S. land-based drilling projects.

Operating Income

Operating income for the M-I SWACO segment was $516.4 million, or 12.2 percent of revenues for the year ended December 31, 2009. Operating margins declined 4.0 percentage points from 2008 levels, reflecting the impact of lower business volumes and the loss of a higher proportion of environmental waste management and other

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service-based offerings, which generate better overall margins. Operating income decreased $323.3 million from the prior year, influenced by the sharp reduction in business activity, product mix factors and $25.1 million of cost associated with employee severance and other cost control measures. For the year ended December 31, 2008, M-I SWACO’s operating income totaled $839.6 million, or 16.2 percent of revenues. Operating income increased $110.2 million over the prior year; however, as a percentage of revenue, margins were 30 basis points below the comparable prior-year period. Several factors contributed to the operating margin performance, including the impact of a shift in business mix towards lower-relative margin, land-based programs which resulted in a lower proportion of premium drilling fluid revenues.

Smith Oilfield Segment

Revenues

The Smith Oilfield segment provides three-cone and diamond drill bits, tubulars, borehole enlargement tools, drill motors, directional drilling, measurement-while-drilling, and logging-while-drilling services, as well as completions, coiled tubing, cased-hole wireline and drilling related products and services. The Smith Oilfield segment has a high level of North American exposure with 57 percent of revenues concentrated in those markets, driven in part, by the significance of increased unconventional drilling projects in the U.S. land-based market and the complexity of drilling programs, which drive demand for a wider range of product offerings. Smith Oilfield revenues for the year ended December 31, 2009 were $2.2 billion, down 22 percent from the 2008 level. The revenue comparison is influenced by the addition of the W-H operations in August 2008, which partially offset the impact of the reported 43 percent decline in North American drilling activity. Excluding the impact of the retained W-H operations, Smith Oilfield revenues declined 35 percent from the prior year, attributable primarily to lower demand for drill bits and other drilling-related products and services, tubulars, and fishing and remedial services within the U.S. customer base. Increased competitive pricing pressures within the U.S. market as well as reduced customer activity in the FSU and the North Sea also contributed to the year-on-year decline. For the year ended December 31, 2008, Smith Oilfield revenues totaled $2.8 billion, a 29 percent improvement over the comparable prior-year period. The majority of the year-on-year revenue growth related to the addition of the W-H operations in August 2008. Excluding the impact of the acquired operations, Smith Oilfield revenues grew six percent above the prior-year level influenced by strong demand for drill bit products in key geographic markets, including the United States, Brazil and the FSU region.

Operating Income

Operating income for the Smith Oilfield segment was $229.1 million, or 10.3 percent of revenues, for the year ended December 31, 2009. The segment’s operating margins were 15.9 percentage points below the prior-year level. The margin decline is primarily attributable to changes in the business mix, the impact of increased competitive pricing pressure in the U.S. market and $25.4 million of charges incurred in connection with cost reduction measures. Inclusion for a full year of the acquired W-H product and service lines, which contribute lower relative margins, coupled with the loss of high-margin drill bit and premium tubular sales as well as high-fixed cost service revenues influenced the reported business mix. For the year ended December 31, 2008, Smith Oilfield’s operating income totaled $746.8 million, or 26.2 percent of revenues. The segment operating margins were 1.8 percentage points below the prior-year level, reflecting incremental operating margins of 20 percent. The addition of W-H’s operations, which carry lower margins on a comparative basis accounted for the margin decline.

Distribution Segment

Revenues

The Distribution segment markets pipe, valves, fittings and mill, safety and other maintenance products to energy and industrial markets, primarily through an extensive network of supply branches in the United States and Canada. The segment has the most significant North American revenue exposure of any of the Company’s operations with 95 percent of fiscal 2009 revenues generated in those markets. Moreover, approximately one-quarter of the segment’s revenues relate to sales in the downstream energy sector, including petrochemical plants and refineries, whose spending is largely influenced by the general state of the U.S. economic environment.

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Additionally, certain customers in this sector utilize petroleum products as a base material and, accordingly, are impacted by crude oil and natural gas prices. The Distribution segment generated revenues of $1.8 billion, a decline of 35 percent from the preceding year. Over 80 percent of the revenue decline was reported in the segment’s U.S. operations, where the reduction in drilling activity levels impacted completion services, resulting in reduced customer spending for maintenance, repair and operating supplies in the energy and industrial sector operations. The revenue decline also reflects lower demand and market pricing for line pipe products, which accounted for approximately one-third of the year-over-year decrease. For the year ended December 31, 2008, the Distribution segment reported revenues of $2.7 billion, 29 percent above the 2007 fiscal year. The majority of the revenue growth was attributable to increased demand for line pipe and other operating supplies associated with unconventional onshore drilling projects and pipeline expansion projects in the United States.

Operating Income

The Distribution segment reported an operating loss of $33.9 million in fiscal 2009. Distribution operating margins deteriorated 8.5 percentage points, influenced by the year-over-year decline in business volumes and lower product pricing. On an absolute dollar basis, reported operating results declined $214.1 million from the prior-year period, driven by the impact of lower revenue levels and pricing, partially offset by a reduction in variable-based operating expenditures. Operating income for the Distribution segment in fiscal 2008 was $180.2 million, or 6.6 percent of revenues. Segment operating margins improved 2.0 percentage points from 2007, reflecting improved business volumes and product pricing related to line pipe expansion projects in the energy sector. On an absolute dollar basis, operating income was $83.0 million above the prior-year period reflecting higher revenue volumes and improved gross profit levels, partially offset by growth in operating expenses to support the expanded business base.

Consolidated Discussion

For the periods indicated, the following table summarizes the consolidated results of operations of the Company and presents these results as a percentage of total revenues (dollars in thousands):

	For the Years Ended December 31,
	2009					2008					2007
	Amount			%		Amount			%		Amount			%
Revenues	$	8,218,559			100	$	10,770,838			100	$	8,764,330			100
Gross profit		2,250,080			27		3,428,916			32		2,855,657			33
Selling, general and administrative expenses		1,650,997			20		1,786,504			17		1,485,860			17
Operating income		599,083			7		1,642,412			15		1,369,797			16
Interest expense		150,277			1		89,765			1		69,990			1
Interest income		(2,510	)		—		(3,374	)		—		(4,068	)		—
Income before income taxes		451,316			6		1,556,021			14		1,303,875			15
Income tax provision		139,105			2		505,892			4		408,471			5
Noncontrolling interests in net income of subsidiaries		163,742			2		282,845			3		248,353			3
Net income attributable to Smith	$	148,469			2	$	767,284			7	$	647,051			7

2009 versus 2008

Consolidated revenues for the year ended December 31, 2009 were $8.2 billion, 24 percent below the level reported in 2008 or 27 percent lower after excluding revenues from the retained W-H operations acquired in August of 2008. The majority of the decline related to a 33 percent reduction in North American business volumes driven by a substantial slowdown in land-based drilling and completion activity, reduced shallow-water drilling programs in the Gulf of Mexico and increased competitive pricing pressure in the U.S. market. Revenues outside North America

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declined 12 percent period-to-period primarily associated with the reduced number of offshore programs in the North Sea market as well as lower exploration and production spending in the Former Soviet Union.

Gross profit declined 34 percent from 2008 to $2.3 billion in 2009. Gross profit margins declined 4.4 percentage points from the 2008 level, influenced by the sharp decline in market activity together with increased pricing pressures within the U.S. market. Changes in the relative business mix also influenced the year-over-year margin decline. On an absolute dollar basis, gross profit decreased $1.2 billion from the prior year, driven by the significant reduction in business volumes as well as pricing deterioration experienced in a number of the Company’s U.S. product and service offerings.

Selling, general and administrative expenses totaled $1.7 billion, an eight percent decrease from the amounts reported in the prior fiscal year. After excluding $60.8 million in charges associated primarily with personnel reductions and other cost-control activities, operating expenses declined $196.3 million from 2008. The decline in variable-based expenses, resulting from the reduction in activity levels and personnel reductions, was partially offset by incremental costs associated with the W-H operations. As a percentage of revenues, operating expenses increased 3.5 percentage points reflecting the impact of the significant decline in revenues on fixed cost coverage across sales and administrative functions.

Net interest expense, which represents interest expense less interest income, equaled $147.8 million for the 2009 fiscal year. The year-over-year reported growth in net interest expense of $61.4 million is attributable to higher interest rates associated with the refinancing of short-term indebtedness with a fixed-rate debt issuance during the first quarter of 2009 and to a lesser extent an approximate 50 percent increase in average borrowings outstanding.

Income tax provision totaled $139.1 million for the year ended December 31, 2009, resulting in an effective tax rate of 30.8 percent. The Company’s effective rate decreased 1.7 percentage points from the 2008 level reflecting a shift in pre-tax earnings towards the M-I SWACO operations which, due to the partnership structure in the United States, reports a lower effective rate. The effective tax rate was lower than the U.S. statutory rate due to the impact of M-I SWACO’s U.S. partnership earnings for which the noncontrolling partner is directly responsible for its related income taxes. The Company properly consolidates the pretax income related to the noncontrolling partner’s share of U.S. partnership earnings but excludes the related income tax provision.

Noncontrolling interest in net income of subsidiaries reflects the portion of the results of majority-owned operations which are applicable to the noncontrolling interest partners. Noncontrolling interest expense totaled $163.7 million in 2009, a $119.1 million decrease from the amount reported in the prior-year period, primarily associated with lower profitability levels in the M-I SWACO joint venture.

2008 versus 2007

Consolidated revenues totaled $10.8 billion for the year ended December 31, 2008, representing a 23 percent increase over amounts reported in the prior year. Excluding the impact of incremental revenues associated with the W-H transaction, base-business levels increased 17 percent over the prior-year period. The base-business improvement primarily reflects higher drilling and completion fluid volumes to support the eight percent growth in global land-based drilling activity and, to a lesser extent, increased demand for line pipe and other operating supplies associated with unconventional onshore drilling projects and pipeline expansion projects in the United States.

Gross profit increased to $3.4 billion in the 2008 fiscal year, reflecting a 20 percent improvement over the prior-year’s results. Gross profit margins declined approximately 80 basis points as compared to the 2007 fiscal year influenced, in part, by the lower proportion of offshore revenues which impacted sales volumes of premium drilling fluids. On an absolute dollar basis, gross profit increased $573.3 million over the prior year impacted by growth in overall business volumes and, to a lesser extent, incremental profitability associated with the acquired W-H business operations.

Selling, general and administrative expenses totaled $1.8 billion, a 20 percent increase over the amounts reported in the prior fiscal year. As a percentage of revenues, operating expenses declined approximately 40 basis points reflecting improved fixed cost coverage across sales and administrative functions. Higher variable-related costs associated with the expansion in base-business volumes and, to a lesser extent, operating expenses attributable to the acquired W-H business operations contributed to the reported expense growth.

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Net interest expense, which represents interest expense less interest income, equaled $86.4 million for the 2008 fiscal year. The $20.5 million year-over-year reported increase in interest reflects borrowings required to fund the W-H acquisition and, to a lesser extent, increased working capital investment. The impact of the higher incremental borrowings on interest expense was partially offset by the substantial decline in short-term Eurodollar interest rates experienced during fiscal 2008.

Income tax provision totaled $505.9 million for the year ended December 31, 2008, reflecting an effective tax rate of 32.5 percent. Excluding the impact of non-recurring tax benefits recognized during the prior fiscal year, the Company’s effective rate increased approximately 60 basis points. Net of non-recurring items, the increase was influenced by the W-H acquisition which resulted in a modest shift in the geographic mix of earnings towards a higher relative-rate tax jurisdiction. The effective tax rate was lower than the U.S. statutory rate due to the impact of M-I SWACO’s U.S. partnership earnings for which the noncontrolling partner is directly responsible for its related income taxes.

Noncontrolling interest in net income of subsidiaries reflects the portion of the results of majority-owned operations which are applicable to the noncontrolling interest partners. Noncontrolling interest expense totaled $282.8 million in 2008, a $34.5 million increase above the amount reported in the prior-year period, primarily associated with improved profitability levels in the M-I SWACO joint venture.

Liquidity and Capital Resources

Cash and cash equivalents increased $825.8 million during the year and equaled $988.3 million as of December 31, 2009. The Company generated $1.3 billion of cash flows from operations during 2009 which is an increase of $636.0 million from the amount provided in 2008. The year-over-year growth in cash flows from operations reflects the impact of substantial declines in working capital in response to the reduction in activity levels, and was partially offset by the reduction in profitability levels.

The Company used $277.5 million of the net cash provided by operations to fund investing activities. During 2009, the Company invested $294.1 million in property, plant and equipment, after considering proceeds from disposals, to support the geographic expansion of directional drilling and other operations outside North America and to maintain the existing capital base. The sale of certain non-core operations during early 2009 generated cash proceeds of $72.7 million which exceeded payments made to fund acquisitions in 2009.

Capital expenditures, after deducting proceeds from sales, are expected to total $320 million in 2010, approximately ten percent above the spending levels reported for 2009. The projected 2010 spending level reflects continued investment in geographic expansion, subject to the obligations under the Merger Agreement, as well as an expected modest recovery in North American drilling activity.

The Company completed a number of financing transactions during 2009 to recast scheduled maturities of debt, to provide additional liquidity for working capital requirements, and to allow for potential investments in acquisition candidates. In this regard, the Company completed a public offering of $300.0 million five-year and $700.0 million ten-year Senior Notes under an existing Indenture in March 2009. Net proceeds of $991.1 million were received in connection with the debt offering and were used to repay outstanding indebtedness under a $1.0 billion bridge loan facility, which was scheduled to expire in August 2009. Additionally, in November 2009, the Company completed a public offering of 28 million shares of common stock at $26.50 per share. Net cash proceeds to the Company after deducting underwriting discounts, commissions and other related expenses were $717.4 million.

During 2009, cash flows used in financing activities totaled $201.8 million. After excluding net proceeds from the offering of common stock, which remained in cash and cash equivalents as of December 31, 2009, cash flows used in financing activities were $919.2 million, including debt repayments of $638.0 million, payment of $105.2 million in common stock dividends and distributions of $106.0 million to a noncontrolling interest joint venture partner.

The Company’s primary internal source of liquidity is cash flow generated from operations. Cash flow generated from operations is primarily influenced by the level of worldwide drilling activity, which affects profitability levels and working capital requirements. Capacity under revolving credit agreements is also available,

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if necessary, to fund operating or investing activities. During the fourth quarter of 2009, the Company negotiated a $1.0 billion revolving credit facility with a syndicate of financial institutions and terminated its existing $400.0 million revolving credit facility. As of December 31, 2009, the Company had no amounts drawn or letters of credit issued under various U.S. revolving credit facilities, resulting in $1.4 billion of current capacity available for operating or investing needs. The Company also has revolving credit facilities in place outside of the United States, which are generally used to finance local operating needs. At the end of fiscal 2009, the Company had available borrowing capacity of $156.7 million under the non-U.S. borrowing facilities.

The Company’s external sources of liquidity include debt and equity financing in the public capital markets, if needed. The Company carries an investment-grade credit rating with recognized rating agencies, generally providing the Company with access to debt markets. The Company’s overall borrowing capacity is, in part, dependent on maintaining compliance with financial covenants under the various credit agreements and is subject to the obligations under the Merger Agreement. As of December 31, 2009, the Company was within the covenant compliance thresholds under its various loan indentures, as amended, providing the ability to access available borrowing capacity. Management believes internally-generated cash flow combined with capacity available under existing credit facilities will be sufficient to finance capital expenditures and working capital needs of the existing operations for the foreseeable future.

Management continues to evaluate opportunities to acquire products and businesses complementary to the Company’s operations, subject to the obligations under the Merger Agreement. In addition to potential external acquisition candidates, we and our M-I SWACO joint venture partner, Schlumberger, can offer to sell to the other party its entire ownership interest in the joint venture in exchange for a cash purchase price specified by the offering partner. If the initiating partner’s offer to sell is not accepted, such party is obligated to purchase the other party’s interest at the same valuation per interest. If we agree to purchase Schlumberger’s joint venture interest, whether pursuant to these provisions or otherwise, we would need to fund the transaction. Our funding could include issuing equity, resulting in dilution to our existing stockholders, obtaining additional debt, which may require waivers of applicable debt covenants, or obtaining other financing, as well as using available cash to fund the purchase. This financing and/or use of cash could impact our ability to fund working capital requirements, make capital expenditures and investments or fund other general corporate requirements, and could limit our ability to make future acquisitions. Should we instead not purchase Schlumberger’s interest, we would no longer have an interest in the joint venture. On February 21, 2010, we and Schlumberger entered into an Agreement and Plan of Merger pursuant to which a wholly-owned subsidiary of Schlumberger will merge with and into us and we will become a wholly-owned subsidiary of Schlumberger.

The Company makes regular quarterly distributions under a dividend program. The current annual payout under the program of approximately $120 million is expected to be funded with future cash flows from operations and, if necessary, amounts available under existing credit facilities. The level of future dividend payments will be at the discretion of the Company’s Board of Directors, subject to the obligations under the Merger Agreement, which permit regular quarterly dividends in an amount up to $0.12 per share, and will depend upon the Company’s financial condition, earnings, cash flows, compliance with certain debt covenants and other relevant factors.

The Company’s Board of Directors maintains a share repurchase program that allows for the repurchase of up to 20 million shares of the Company’s common stock, subject to regulatory issues, market considerations and other relevant factors. As of December 31, 2009, the Company had 15.2 million shares remaining under the current authorization. Future repurchases under the program may be executed from time to time, subject to the obligations under the Merger Agreement, in the open market or in privately negotiated transactions and will be funded with cash flows from operations or amounts available under existing credit facilities.

The Company believes it has sufficient existing manufacturing capacity to meet current demand for its products and services. Additionally, inflation has historically had only a moderate impact on the Company’s financial results. During 2008, the Company experienced escalation in transportation costs, steel, petrochemical and other commodity prices due to high crude oil and natural gas prices. While these costs declined in 2009 from 2008 average levels, inventory purchased during 2008 and sold during 2009 influenced the Company’s reported results during 2009, particularly within the Distribution segment. Based on the current global economic outlook,

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management believes wages and other costs that impact our businesses should be relatively stable for the foreseeable future.

The Company has not engaged in off-balance sheet financing arrangements through special purpose entities, and the consolidation of the Company’s noncontrolling ownership positions would not result in an increase in reported leverage ratios. The Company has no contractual arrangements in place that could result in the issuance of additional shares of the Company’s common stock at a future date other than the Company’s stock-based compensation program, which is discussed in Note 1, “Summary of Significant Accounting Policies,” and Note 15, “Long-Term Incentive Compensation.”

Contractual Obligations, Commitments and Contingencies

Contractual Obligations

The following table summarizes the Company’s debt maturities, estimated interest on fixed rate long-term debt and future minimum payments under non-cancelable operating leases having initial terms in excess of one year as of December 31, 2009 (in thousands):

	Amount of Commitment Expiration per Period
	Total		2010		2011-2012		2013-2014		After 2014
Debt maturities	$	2,173,022	$	358,768	$	540,341	$	299,360	$	974,553
Interest on fixed rate long-term debt		894,337		125,475		228,675		208,312		331,875
Operating lease commitments		373,065		90,334		104,598		60,101		118,032
Total	$	3,440,424	$	574,577	$	873,614	$	567,773	$	1,424,460

Amounts related to commitments under capital lease agreements, purchase obligations and other long-term liabilities reflected in the accompanying consolidated balance sheet, including pension and other postretirement obligations, have been excluded from the above table due to immateriality.

Moreover, the required disclosure related to the Company’s $69.3 million of liabilities associated with uncertain tax positions has been omitted from the above table. Due to the complex application of tax regulations, combined with our inability to predict when tax audits in various jurisdictions may be concluded, the Company is unable to reasonably estimate the timing of cash settlements, if any, related to its uncertain tax positions.

Standby Letters of Credit

In the normal course of business with customers, vendors and others, the Company is contingently liable for performance under standby letters of credit and bid, performance and surety bonds. Certain of these outstanding instruments guarantee payment to insurance companies which reinsure certain liability coverages of the Company’s insurance captive. Excluding the impact of these instruments, for which $18 million of related liabilities are reflected in the accompanying consolidated balance sheet, the Company was contingently liable for approximately $254 million of standby letters of credit and bid, performance and surety bonds at December 31, 2009. Management does not expect any material amounts to be drawn on these instruments.

Insurance

The Company maintains insurance coverage for various aspects of its business and operations. The Company has elected to retain a portion of losses that occur through the use of deductibles and retentions under its insurance programs. Amounts in excess of the self-insured retention levels are fully insured to limits believed appropriate for the Company’s operations. Self-insurance accruals are based on claims filed and an estimate for claims incurred but not reported. While management believes that amounts accrued in the accompanying consolidated financial statements are adequate for expected liabilities arising from the Company’s portion of losses, estimates of these liabilities may change as circumstances develop.

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Litigation

The Company is a defendant in various legal proceedings arising in the ordinary course of business. In the opinion of management, these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Subsequent to the announcement of the proposed combination of the Company and Schlumberger and through February 25, 2010, four putative class action lawsuits were commenced on behalf of stockholders of the Company against the Company and its directors in the District Court of Harris County, Texas, challenging the proposed transaction. One of the lawsuits also names Schlumberger and one of its affiliates as defendants. The lawsuits variously allege that the Company’s directors breached their fiduciary duties by, among other things, causing Smith to enter into the proposed transaction at an allegedly inadequate and unfair price and agreeing to transaction terms that improperly inhibit alternative transactions. One of the lawsuits separately alleges that the Company aided and abetted the directors’ breaches of fiduciary duties, and another of the lawsuits alleges that Schlumberger aided and abetted the directors’ breaches of fiduciary duties. The various complaints seek, among other things, an injunction barring defendants from consummating the proposed transaction, declaratory relief and attorneys’ fees. The Company believes that the lawsuits are without merit and intends to defend these lawsuits vigorously.

Environmental

The Company routinely establishes and reviews the adequacy of reserves for estimated future environmental clean-up costs for properties currently or previously operated by the Company. In the opinion of management, these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Critical Accounting Policies and Estimates

The discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates its estimates on an on-going basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following describes significant judgments and estimates used in the preparation of its consolidated financial statements:

Allowance for Doubtful Accounts.  The Company extends credit to customers and other parties in the normal course of business. Management regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, management makes judgments regarding the parties’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required.

Inventory Reserves.  The Company has made significant investments in inventory to service its customers around the world. On a routine basis, the Company uses judgments in determining the level of reserves required to state inventory at the lower of cost or market. Management’s estimates are primarily influenced by technological innovations, market fundamentals and the physical condition of products. Changes in these or other factors may result in adjustments to the carrying value of inventory.

Goodwill and Indefinite-Lived Intangible Assets.  The Company has made a number of business acquisitions which has resulted in the recording of a material amount of goodwill and certain indefinite-lived intangible assets. The Company is required to perform an annual impairment evaluation for these assets, which is largely influenced by future cash flow projections. Estimating future cash flows of the Company’s operations requires management to make judgments about future operating results and working capital requirements. Changes in cash flow assumptions or other factors that negatively impact the fair value of the

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operations would influence the evaluation and may result in the determination that a portion of the goodwill and indefinite-lived intangible assets is impaired when the annual analysis is performed.

Self-Insurance.  The Company maintains insurance coverage for various aspects of its business and operations. The Company retains a portion of losses that occur through the use of deductibles and retentions under self-insurance programs. Management regularly reviews estimates of reported and unreported claims and provides for losses through insurance reserves. As claims develop and additional information becomes available, adjustments to loss reserves may be required.

Income Taxes.  Deferred tax assets and liabilities are recognized for differences between the book basis and tax basis of the net assets of the Company. In providing for deferred taxes, management considers current tax regulations, estimates of future taxable income and available tax planning strategies. In certain cases, management has established reserves to reduce deferred tax assets to estimated realizable value. If tax regulations, operating results or the ability to implement tax planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. The Company recognizes tax benefits related to uncertain tax positions when, based on technical merits, it is more likely than not the respective positions will be sustained on examination by the taxing authorities. Adjustments to the recorded liabilities for uncertain tax positions may be required pursuant to the ultimate settlement of an income tax audit, the refinement of an estimate in light of changes to any facts or circumstances, or the expiration of a statute of limitations.

Recent Accounting Pronouncements

From time to time, new accounting standards and applicable updates are issued that are adopted by the Company as of the specified effective date.

During 2009, the Company adopted an update to existing accounting guidance which revised the accounting and disclosure requirements for acquisition transactions. The revised standard differs from the previous standard in that it requires the Company to expense professional fees and other transaction-related costs as incurred instead of capitalizing these costs as purchase price consideration. Additionally, the Company is required to estimate contingent assets, liabilities and transaction-related consideration as of the purchase date with future changes in the underlying estimates recognized in the statement of operations. Finally, the Company is also required to reflect any adjustments to deferred tax asset valuation allowances and income tax uncertainties associated with acquisitions as income tax expense rather than an adjustment to goodwill.

During 2009, the Company adopted the provisions of a new accounting standard which modified the accounting and disclosure requirements for subsidiaries which are not wholly-owned. In accordance with the provisions of the new accounting standard, the Company has reclassified the noncontrolling interest previously reflected as a long-term liability and included the amount as a component of stockholders’ equity in the accompanying consolidated balance sheets. Additionally, the Company has presented the net income attributable to the Company and the noncontrolling ownership interests separately in the accompanying consolidated statements of operations.

During 2009, the Company adopted the provisions of a new accounting standard which requires enhanced disclosure about derivative instruments. The standard requires the inclusion of tabular information reflecting the impact of derivative financial instruments on the Company’s consolidated financial position and results of operations.

Accounting Pronouncements Not Yet Effective

On January 1, 2010, the Company adopted a new accounting standard which amends previous guidance on the consolidation of variable interest entities (“VIE”). The standard modifies how an enterprise determines the primary beneficiary that would consolidate the VIE from a quantitative risks and rewards calculation to a qualitative approach. Such assessment is required to be performed on a continuous basis and is influenced by, among other things, an enterprise’s ability to direct the most significant activities that influence the VIE’s operating performance.

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The Company does not expect the adoption of this accounting standard to have a material impact on the Company’s consolidated financial statements.

In October 2009, the Financial Accounting Standards Board issued an update to existing guidance with respect to revenue recognition for arrangements with multiple deliverables. This update will allow allocation of consideration received for qualified separate deliverables based on estimated selling prices for both delivered and undelivered items when vendor-specific or third-party evidence is not available. Additionally, disclosure of the nature of multiple element arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required. The Company is currently evaluating this update, which will be adopted for new revenue arrangements entered into or materially modified beginning January 1, 2011.

Management believes the impact of other recently issued standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows upon adoption.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk primarily associated with changes in interest rates and foreign exchange rates and enters into various hedging transactions to mitigate these risks. The Company does not use financial instruments for trading or speculative purposes. See Note 10, “Financial Instruments,” to the Consolidated Financial Statements for additional discussion of hedging instruments.

The Company’s exposure to interest rate changes is managed and will be managed, subject to the obligations under the Merger Agreement, through the use of a combination of fixed and floating rate debt and by entering into interest rate contracts, from time to time, on a portion of its long-term borrowings. At December 31, 2009, the Company had one interest rate contract outstanding with a notional amount of $63.9 million, which converts the underlying floating interest rate debt to a fixed rate of 6.2 percent. At December 31, 2009 and 2008, 28 percent and 80 percent, respectively, of the Company’s total debt carried a variable interest rate. Management believes that it will be able to manage its remaining exposure to variable-rate debt instruments, if required, with interest rate contracts. Accordingly, significant interest rate changes are not expected to have a material near-term impact on the Company’s future earnings or cash flows.

The Company’s exposure to changes in foreign exchange rates is managed and will be managed, subject to the obligations under the Merger Agreement, primarily through the use of forward exchange contracts. These contracts increase or decrease in value as foreign exchange rates change, to protect the value of the underlying transactions denominated in foreign currencies. All currency contracts are components of the Company’s hedging program and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. The gains and losses on these contracts offset changes in the value of the related exposures. The terms of these contracts generally do not exceed two years. As of December 31, 2009, the notional amounts of fair value hedge contracts outstanding totaled $114.5 million and the fair value was less than the notional amount of these contracts by $1.7 million. There were no foreign exchange cash flow hedge contracts outstanding at December 31, 2009. As of December 31, 2008, the notional amount of fair value hedge contracts and cash flow hedge contracts outstanding were $235.5 million and $13.2 million, respectively, and the fair value was less than the notional amount of these contracts by $10.8 million. In some areas, where hedging is not cost effective, the Company addresses foreign currency exposure utilizing working capital management.

27

Item 8.   Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a – 15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable, not absolute, assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Company’s internal control over financial reporting was effective as of December 31, 2009.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, the independent registered public accounting firm who also audited the Company’s consolidated financial statements. The Deloitte & Touche LLP audit report on the effectiveness of the Company’s internal control over financial reporting appears on page 29 of this Annual Report on Form 10-K.

/s/  John Yearwood
John Yearwood
Chief Executive Officer, President
and Chief Operating Officer /s/  William Restrepo
William Restrepo
Senior Vice President, Chief Financial
Officer and Treasurer

28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Smith International, Inc.

Houston, Texas

We have audited the internal control over financial reporting of Smith International, Inc. and subsidiaries (the “Company”) as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2009 of the Company and our report dated March 1, 2010 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/  Deloitte & Touche LLP

Houston, Texas

March 1, 2010

29

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Smith International, Inc.

Houston, Texas

We have audited the accompanying consolidated balance sheets of Smith International, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in Part IV, Item 15 (a) (2). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Smith International, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/  Deloitte & Touche LLP

Houston, Texas

March 1, 2010

30

SMITH INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value data)

	December 31,
	2009			2008
ASSETS
Current Assets:
Cash and cash equivalents	$	988,346		$	162,508
Receivables, net (Note 1)		1,791,498			2,253,477
Inventories, net		1,820,355			2,367,166
Deferred tax assets, net		65,667			81,834
Prepaid expenses and other		149,370			221,399
Total current assets		4,815,236			5,086,384
Property, plant and equipment, net		1,923,465			1,844,036
Goodwill, net		3,068,828			3,016,425
Other intangible assets, net		614,086			637,450
Other assets		317,800			231,929
Total assets	$	10,739,415		$	10,816,224
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term debt	$	358,768		$	1,366,296
Accounts payable		589,748			979,000
Accrued payroll costs		146,364			178,040
Income taxes payable		82,260			92,922
Other		233,649			317,174
Total current liabilities		1,410,789			2,933,432
Long-term debt		1,814,254			1,440,525
Deferred tax liabilities		533,537			428,986
Other long-term liabilities		150,905			152,972
Commitments and contingencies (Note 17)
Stockholders’ Equity:
Preferred stock, $1 par value; 5,000 shares authorized; no shares issued or outstanding in 2009 or 2008		—			—
Common stock, $1 par value; 500,000 shares authorized; 266,125 shares issued in 2009 (236,726 shares issued in 2008)		266,125			236,726
Additional paid-in capital		2,706,564			1,975,102
Retained earnings		2,925,467			2,885,792
Accumulated other comprehensive income		24,115			(73,833	)
Less – Treasury securities, at cost; 17,891 common shares in 2009 (17,616 common shares in 2008)		(481,704	)		(474,448	)
Smith stockholders’ equity		5,440,567			4,549,339
Noncontrolling interests in subsidiaries		1,389,363			1,310,970
Total stockholders’ equity		6,829,930			5,860,309
Total liabilities and stockholders’ equity	$	10,739,415		$	10,816,224

The accompanying notes are an integral part of these consolidated financial statements.

31

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	For the Years Ended December 31,
	2009			2008			2007
Revenues:
Oilfield operations	$	6,449,388		$	8,032,139		$	6,632,569
Distribution operations		1,769,171			2,738,699			2,131,761
Total revenues		8,218,559			10,770,838			8,764,330
Costs and expenses:
Cost of oilfield revenues		4,404,039			5,069,274			4,119,137
Cost of distribution revenues		1,564,440			2,272,648			1,789,536
Selling, general and administrative expenses		1,650,997			1,786,504			1,485,860
Total costs and expenses		7,619,476			9,128,426			7,394,533
Operating income		599,083			1,642,412			1,369,797
Interest expense		150,277			89,765			69,990
Interest income		(2,510	)		(3,374	)		(4,068	)
Income before income taxes		451,316			1,556,021			1,303,875
Income tax provision		139,105			505,892			408,471
Net income		312,211			1,050,129			895,404
Noncontrolling interests in net income of subsidiaries		163,742			282,845			248,353
Net income attributable to Smith	$	148,469		$	767,284		$	647,051
Earnings per share:
Basic	$	0.67		$	3.70		$	3.23
Diluted		0.66			3.68			3.20
Weighted average shares outstanding:
Basic		222,353			207,400			200,244
Diluted		223,289			208,727			201,947

The accompanying notes are an integral part of these consolidated financial statements.

32

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the Years Ended December 31,
	2009			2008			2007
Cash flows from operating activities:
Net income	$	312,211		$	1,050,129		$	895,404
Adjustments to reconcile net income to net cash provided by operating activities, excluding the net effects of acquisitions:
Depreciation and amortization		364,858			263,443			193,296
LIFO inventory reserves		(38,111	)		95,591			22,712
Share-based compensation expense		45,978			43,443			34,239
Loss on interest rate derivative contract		2,481			29,881			—
Deferred income tax provision		24,687			3,734			22,265
Provision for losses on receivables		12,114			9,795			5,082
Foreign currency transaction (gain) loss		(4,391	)		7,509			4,059
Gain on disposal of property, plant and equipment		(35,584	)		(36,792	)		(21,133	)
Equity earnings, net of dividends received		(441	)		(10,352	)		(17,170	)
Gain on sale of operations		(4,952	)		—			(1,534	)
Changes in operating assets and liabilities:
Receivables		500,659			(307,002	)		(154,355	)
Inventories		638,849			(792,224	)		(202,436	)
Accounts payable		(402,025	)		294,218			(9,760	)
Other current assets and liabilities		(56,610	)		62,893			(58,262	)
Other non-current assets and liabilities		(58,581	)		(49,123	)		(23,920	)
Net cash provided by operating activities		1,301,142			665,143			688,487
Cash flows from investing activities:
Acquisition-related payments, net of cash acquired		(56,126	)		(1,670,987	)		(53,452	)
Purchases of property, plant and equipment		(370,879	)		(442,885	)		(355,821	)
Proceeds from disposal of property, plant and equipment		76,780			73,111			45,045
Proceeds from sale of operations		72,734			—			16,655
Net cash used in investing activities		(277,491	)		(2,040,761	)		(347,573	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		1,000,000			1,178,418			146,847
Principal payments of long-term debt		(628,830	)		(606,712	)		(272,676	)
Proceeds from (principal payment of) short-term bridge loan		(1,000,000	)		1,000,000			—
Net change in short-term borrowings		(9,176	)		(16,151	)		22,302
Debt issuance costs		(24,238	)		—			—
Settlement of interest rate derivative contract		(33,383	)		—			—
Proceeds from issuance of common stock		717,385			—			—
Purchases of common stock under Repurchase Program		—			(21,499	)		(83,529	)
Payment of common stock dividends		(105,234	)		(94,557	)		(76,026	)
Distributions to noncontrolling joint venture partner		(106,000	)		(55,187	)		(48,097	)
Other financing activities		(12,368	)		2,520			45,372
Net cash provided by (used in) financing activities		(201,844	)		1,386,832			(265,807	)
Effect of exchange rate changes on cash		4,031			(6,973	)		2,781
Increase in cash and cash equivalents		825,838			4,241			77,888
Cash and cash equivalents at beginning of year		162,508			158,267			80,379
Cash and cash equivalents at end of year	$	988,346		$	162,508		$	158,267
Supplemental disclosures of cash flow information:
Cash paid for interest	$	128,221		$	86,310		$	74,536
Cash paid for income taxes		232,536			419,994			384,145
Supplemental disclosures of non-cash transactions:
Shares issued in W-H transaction	$	—		$	1,403,617		$	—

The accompanying notes are an integral part of these consolidated financial statements.

33

SMITH INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)

											Accumulated			Treasury Securities
	Common Stock				Additional						Other			Common Stock						Smith’s			Noncontrolling			Total
	Number of				Paid-in			Retained			Comprehensive			Number of						Stockholders’			Interest in			Stockholders’
	Shares		Amount		Capital			Earnings			Income			Shares			Amount			Equity			Subsidiaries			Equity
Balance, January 1, 2007		214,947	$	214,947	$	442,155		$	1,653,480		$	23,227			(15,031	)	$	(346,872	)	$	1,986,937		$	922,114		$	2,909,051
Net income		—		—		—			647,051			—			—			—			647,051			248,353			895,404
Currency translation adjustments		—		—		—			—			46,743			—			—			46,743			21,654			68,397
Changes in fair value of derivatives, net of tax		—		—		—			—			506			—			—			506			—			506
Changes in pension and other postretirement benefits, net of tax		—		—		—			—			(2,636	)		—			—			(2,636	)		(3,043	)		(5,679	)
Comprehensive income		—		—		—			647,051			44,613			—			—			691,664			266,964			958,628
Purchases of common stock under Repurchase Program		—		—		—			—			—			(1,570	)		(83,529	)		(83,529	)		—			(83,529	)
Common stock dividends declared		—		—		—			(80,116	)		—			—			—			(80,116	)		—			(80,116	)
Distributions to noncontrolling joint venture partner		—		—		—			—			—			—			—			—			(48,097	)		(48,097	)
Vesting and exercise of restricted stock and stock options		2,639		2,639		57,035			—			—			(224	)		(12,781	)		46,893			—			46,893
Share-based compensation		—		—		34,239			—			—			—			—			34,239			—			34,239
Other		—		—		—			(1,191	)		—			—			—			(1,191	)		(10,208	)		(11,399	)
Balance, December 31, 2007		217,586		217,586		533,429			2,219,224			67,840			(16,825	)		(443,182	)		2,594,897			1,130,773			3,725,670
Net income		—		—		—			767,284			—			—			—			767,284			282,845			1,050,129
Currency translation adjustments		—		—		—			—			(96,533	)		—			—			(96,533	)		(37,279	)		(133,812	)
Changes in fair value of derivatives, net of tax		—		—		—			—			(43,244	)		—			—			(43,244	)		(1,649	)		(44,893	)
Changes in pension and other postretirement benefits, net of tax		—		—		—			—			(1,896	)		—			—			(1,896	)		1,337			(559	)
Comprehensive income		—		—		—			767,284			(141,673	)		—			—			625,611			245,254			870,865
Common stock issued in W-H acquisition		17,781		17,781		1,385,836			—			—			—			—			1,403,617			—			1,403,617
Purchases of common stock under Repurchase Program		—		—		—			—			—			(535	)		(21,499	)		(21,499	)		—			(21,499	)
Common stock dividends declared		—		—		—			(100,716	)		—			—			—			(100,716	)		—			(100,716	)
Distributions to noncontrolling joint venture partner		—		—		—			—			—			—			—			—			(55,187	)		(55,187	)
Vesting and exercise of restricted stock and stock options		1,359		1,359		12,394			—			—			(256	)		(9,767	)		3,986			—			3,986
Share-based compensation		—		—		43,443			—			—			—			—			43,443			—			43,443
Other		—		—		—			—			—			—			—			—			(9,870	)		(9,870	)
Balance, December 31, 2008		236,726		236,726		1,975,102			2,885,792			(73,833	)		(17,616	)		(474,448	)		4,549,339			1,310,970			5,860,309
Net income		—		—		—			148,469			—			—			—			148,469			163,742			312,211
Currency translation adjustments		—		—		—			—			55,525			—			—			55,525			27,952			83,477
Changes in fair value of derivatives, net of tax		—		—		—			—			40,215			—			—			40,215			319			40,534
Changes in pension and other postretirement benefits, net of tax		—		—		—			—			2,208			—			—			2,208			1,116			3,324
Comprehensive income		—		—		—			148,469			97,948			—			—			246,417			193,129			439,546
Issuance of common stock		28,000		28,000		689,385			—			—			—			—			717,385			—			717,385
Common stock dividends declared		—		—		—			(108,794	)		—			—			—			(108,794	)		—			(108,794	)
Distributions to noncontrolling joint venture partner		—		—		—			—			—			—			—			—			(106,000	)		(106,000	)
Vesting and exercise of restricted stock and stock options		1,399		1,399		(3,901	)		—			—			(275	)		(7,256	)		(9,758	)		—			(9,758	)
Share-based compensation		—		—		45,978			—			—			—			—			45,978			—			45,978
Other		—		—		—			—			—			—			—			—			(8,736	)		(8,736	)
Balance, December 31, 2009		266,125	$	266,125	$	2,706,564		$	2,925,467		$	24,115			(17,891	)	$	(481,704	)	$	5,440,567		$	1,389,363		$	6,829,930

The accompanying notes are an integral part of these consolidated financial statements.

34

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts are expressed in thousands, unless otherwise noted)

1.   Summary of Significant Accounting Policies

Basis of Presentation

Smith International, Inc. (“Smith” or the “Company”) provides a wide range of products and services used during the drilling, completion and production phases of oil and natural gas exploration and development activities. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States and all applicable financial statement rules and regulations of the Securities and Exchange Commission (the “Commission”). Management believes the consolidated financial statements present fairly the financial position, results of operations and cash flows of the Company as of the dates indicated.

The consolidated financial statements include the accounts of the Company and all wholly and majority-owned subsidiaries, after the elimination of all significant intercompany accounts and transactions. Investments in affiliates in which ownership interest ranges from 20 to 50 percent, and the Company exercises significant influence over operating and financial policies, are accounted for on the equity method. All other investments are carried at cost, which does not exceed the estimated net realizable value of such investments.

Use of Estimates

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities and the reported amounts of revenues and expenses. Management believes the most significant estimates and assumptions are associated with the valuation of accounts receivable, inventories, goodwill, indefinite-lived intangibles and deferred taxes as well as the determination of liabilities related to self-insurance programs. If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying consolidated financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts to provide for receivables which may ultimately be uncollectible. Reserves are determined in light of a number of factors including customer specific conditions, economic events and the Company’s historical loss experience. At December 31, 2009 and 2008, the allowance for doubtful accounts was $29.7 million and $29.3 million, respectively.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the average cost method for the majority of the Company’s inventories; however, certain of the Company’s U.S.-based inventories are valued utilizing the last-in, first-out (“LIFO”) method. Inventory costs consist of materials, labor and factory overhead.

Property, Plant and Equipment

Property, plant and equipment is stated at cost, net of accumulated depreciation. The cost of major renewals and betterments are capitalized if they extend the useful life of the asset, while expenditures for maintenance, repairs and minor improvements are charged to expense when incurred. A substantial portion of our rental tools are internally manufactured and reflect the capitalization of direct and indirect manufacturing costs. Internally

35

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

manufactured tools are classified as inventory until completed, at which time the cost is included as a capital expenditure and the resulting asset is reclassified to property, plant and equipment. When individual assets are sold or retired, the remaining cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the consolidated statement of operations.

Depreciation is generally provided by using the straight-line method over the estimated useful lives of the individual assets; however, for income tax purposes, accelerated methods of depreciation are used. The estimated useful lives used in computing depreciation generally range from 20 to 40 years for buildings, three to 25 years for machinery and equipment, and five to ten years for rental equipment. Leasehold improvements are amortized over the initial lease term or the estimated useful lives of the improvements, whichever is shorter. Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $303.4 million, $226.7 million and $161.6 million, respectively.

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair value of net assets acquired while intangible assets reflect the value of patents, trademarks and other identifiable assets. Recorded goodwill and indefinite-lived intangible asset balances are not amortized but, instead, are regularly evaluated for impairment. Finite-lived intangible assets are amortized on a straight-line basis over the periods expected to be benefited, ranging from three to 27 years, or on a basis that reflects the pattern in which the economic benefit of the intangible assets are realized.

Evaluating Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation is required, the estimated undiscounted future cash flows associated with the asset is compared to the asset’s carrying value to determine if impairment exists.

Goodwill and indefinite-lived intangible asset balances associated with each of the Company’s reporting units is reviewed for impairment on an annual basis or more frequently if circumstances indicate that an impairment may exist. The annual impairment reviews, which are prepared during the first quarter for goodwill and during the fourth quarter for indefinite-lived intangible assets, are largely influenced by projected future cash flows and, therefore, are significantly impacted by estimates and judgments.

Environmental Obligations

Expenditures for environmental obligations that relate to current operations are expensed or capitalized, as appropriate. Liabilities are recorded when environmental clean-up efforts are probable and their cost is reasonably estimated, and are adjusted as further information is obtained. Such estimates are based on currently enacted laws and regulations and are not discounted to present value.

Liabilities Related to Self-Insurance Programs

The Company is self-insured for certain casualty and employee medical insurance liabilities of its U.S. operations. Expenditures for casualty and medical claims are recorded when incurred after taking into consideration recoveries available under stop-loss insurance policies. Additionally, reserves are established to provide for the estimated cost of settling known claims as well as medical and casualty exposures projected to have been incurred but not yet reported.

Foreign Currency Translation and Transactions

For foreign subsidiaries which have designated the local currency as their functional currency, gains and losses resulting from balance sheet translation are included as a component of accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from balance sheet translation of foreign operations where

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the U.S. dollar is designated as the functional currency are included in selling, general and administrative expenses in the consolidated statements of operations.

Gains and losses resulting from non-functional currency transactions are included in selling, general and administrative expenses in the consolidated statements of operations.

Derivative Financial Instruments

The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in currency exchange rates and interest rates. The Company utilizes derivative financial instruments such as foreign exchange contracts, foreign exchange options and interest rate contracts to mitigate or eliminate certain of those risks. The Company does not enter into derivative instruments for speculative purposes.

The Company records changes in fair market value related to fair value hedges, which includes foreign exchange contracts, to selling, general and administrative expenses in the consolidated statements of operations. Changes in value related to cash flow hedges, which may include foreign exchange contracts, foreign exchange options and interest rate contracts, are recorded in accumulated other comprehensive income and are recognized in the consolidated statement of operations when the hedged item affects earnings.

The Company’s derivative financial instruments are carried at fair value, which is measured using the market approach valuation technique in accordance with the applicable accounting standard. We determine the value of our derivative financial instruments using composite quotes obtained from market pricing services or, in certain cases, active-market quotes obtained from financial institutions. The established fair value hierarchy divides fair value measurement into three broad levels: Level One is comprised of active-market quoted prices for identical instruments; Level Two is comprised of market-based data obtained from independent sources; and Level Three is comprised of non-market based estimates which reflect the best judgment of the Company.

Income Taxes

The Company accounts for income taxes using an asset and liability approach for financial accounting and income tax reporting based on enacted tax rates. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.

The Company addresses uncertain tax positions by making a determination of whether tax benefits claimed, or expected to be claimed, on a tax return should be recorded in the consolidated financial statements. The Company recognizes the tax benefit from an uncertain tax position when, based on technical merits, it is more likely than not the position will be sustained on examination by the taxing authorities.

Revenue Recognition

Revenues in the accompanying consolidated financial statements are separated into our two major business lines to provide additional information for use in analyzing the Company’s results. Generally, sales transactions are subject to contractual arrangements that specify price, general terms and conditions.

Transactions in our oilfield operations are primarily composed of rental and service revenues, but also include product and certain other revenues. Product revenues, net of applicable provisions for returns, are recognized when title and related risk of loss transfer to the customer and collectability is reasonably assured. In most cases, title and risk transfer upon product delivery; however, certain products are provided on a consigned basis with title and risk transferring when products are consumed. Rental, service and other revenues are recorded when such services are performed and collectability is reasonably assured. On a routine basis, our operating divisions provide multiple product and service offerings as part of a combined transaction. Service and rental revenues for these projects, which are of a short duration, are recognized when the project is complete.

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Sales transactions in our distribution operations are primarily composed of product revenues. Distribution sales, net of applicable provisions for returns, are recognized when goods are delivered to the customer and collectability is reasonably assured.

Noncontrolling Interests

During 2009, the Company adopted the provisions of a new accounting standard which modified the accounting and disclosure requirements for subsidiaries which are not wholly-owned. In accordance with the provisions of the new accounting standard, the Company has reclassified the noncontrolling interest previously reflected as a long-term liability and included the amount as a component of stockholders’ equity in the accompanying consolidated balance sheets. Additionally, the Company has presented the net income attributable to the Company and the noncontrolling ownership interests separately in the accompanying consolidated statements of operations. The noncontrolling interest amount primarily represents the share of M-I SWACO profits associated with the joint venture partner’s 40 percent interest in those operations. To a lesser extent, noncontrolling interests include the portion of C.E. Franklin Ltd. and other joint venture earnings applicable to the respective noncontrolling shareholders.

Long-Term Incentive Compensation

The Company’s Board of Directors and its stockholders have authorized a long-term incentive plan for the benefit of key employees. Although the plan provides for the issuance of various stock-based awards, the Compensation and Benefits Committee has elected to issue only restricted stock units subsequent to December 31, 2005.

Restricted stock units are considered compensatory awards and compensation expense related to these units is recognized over the established vesting period in the accompanying consolidated financial statements.

Other Recent Accounting Pronouncements

From time to time, new accounting standards and applicable updates are issued that are adopted by the Company as of the specified effective date.

During 2009, the Company adopted an update to existing accounting guidance which revised the accounting and disclosure requirements for acquisition transactions. The revised standard differs from the previous standard in that it requires the Company to expense professional fees and other transaction-related costs as incurred instead of capitalizing these costs as purchase price consideration. Additionally, the Company is required to estimate contingent assets, liabilities and transaction-related consideration as of the purchase date with future changes in the underlying estimates recognized in the statement of operations. Finally, the Company is also required to reflect any adjustments to deferred tax asset valuation allowances and income tax uncertainties associated with acquisitions as income tax expense rather than an adjustment to goodwill.

During 2009, the Company adopted the provisions of a new accounting standard which requires enhanced disclosure about derivative instruments. The standard requires the inclusion of tabular information reflecting the impact of derivative financial instruments on the Company’s consolidated financial position and results of operations.

Accounting Pronouncements Not Yet Effective

On January 1, 2010, the Company adopted a new accounting standard which amends previous guidance on the consolidation of variable interest entities (“VIE”). The standard modifies how an enterprise determines the primary beneficiary that would consolidate the VIE from a quantitative risks and rewards calculation to a qualitative approach. Such assessment is required to be performed on a continuous basis and is influenced by, among other things, an enterprise’s ability to direct the most significant activities that influence the VIE’s operating

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performance. The Company does not expect the adoption of this accounting standard to have a material impact on the Company’s consolidated financial statements.

In October 2009, the Financial Accounting Standards Board issued an update to existing guidance with respect to revenue recognition for arrangements with multiple deliverables. This update will allow allocation of consideration received for qualified separate deliverables based on estimated selling prices for both delivered and undelivered items when vendor-specific or third-party evidence is not available. Additionally, disclosure of the nature of multiple element arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required. The Company is currently evaluating this update, which will be adopted for new revenue arrangements entered into or materially modified beginning January 1, 2011.

Management believes the impact of other recently issued standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows upon adoption.

2.   Employee Severance and Other Costs

Due to the significant deterioration in North American drilling activity, the Company executed a number of cost reduction initiatives during 2009. These measures included substantial reductions in U.S. personnel levels and, to a lesser extent, the closing of certain manufacturing and production facilities. In connection with these activities, the Company incurred costs of $58.4 million for the year ended December 31, 2009.

3.   Acquisitions

From time to time, the Company enters into transactions involving the purchase of a full or partial ownership interest in complementary business operations.

During 2009, the Company completed four acquisitions in exchange for aggregate cash consideration of $56.1 million and the assumption of certain liabilities. The consideration primarily relates to the purchase of Cyclotech Limited, a company based in the United Kingdom that specializes in compact separation technologies and Precision Gas Well Testing, a U.S.-based company that provides pressure control solutions. The excess of the purchase price over the estimated fair value of net assets acquired approximated $28.8 million and has been recorded as goodwill in the December 31, 2009 consolidated balance sheet. Based on the structure of the transactions, the majority of the goodwill related to the acquisitions is not expected to be deductible for tax purposes.

The acquisitions discussed above have been recorded using the purchase method of accounting and, accordingly, the acquired operations have been included in the results of operations since the date of acquisition. The purchase price allocations related to these acquisitions are based on preliminary information and are subject to change when additional data concerning final asset and liability valuations is obtained; however, material changes in the preliminary allocations are not anticipated by management.

On August 25, 2008, Smith completed the acquisition of all of the outstanding equity interests in W-H Energy Services, Inc. (“W-H”). W-H was a leading provider of technologically-advanced drilling-related product offerings, including directional drilling, measurement-while-drilling and logging-while-drilling services. W-H also provided a broad range of products and services used by exploration and production companies to complete and produce wells, including coiled tubing services, cased-hole wireline and other related offerings. W-H’s business operations were historically concentrated in the United States.

In connection with the transaction, the Company issued 17.78 million common shares and paid $1.62 billion of cash to the former shareholders of W-H. The fair value of shares issued was determined using an average price of $78.94, which represents the Company’s average closing stock price for the five-day period beginning two days

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before the announcement of the transaction. The purchase price consideration related to the W-H acquisition consists of the following:

Shares issued	$	1,403,617
Cash paid, net		1,615,133
Consideration paid to former W-H equity holders		3,018,750
Acquired company transaction costs		12,874
	$	3,031,624

In addition to the W-H transaction, the Company completed six other acquisitions in 2008 in exchange for aggregate cash consideration of $41.3 million and the assumption of certain liabilities. The consideration primarily relates to the purchase of Norwegian-based Innovar Engineering AS, a company providing wellbore completion tool technology, and Caspian Downhole Services, a Kazakhstan-based provider of rental tool, machine shop and inspection services. The excess of the purchase price over the estimated fair value of net assets acquired approximated $12.7 million and has been recorded as goodwill in the December 31, 2008 consolidated balance sheet. Based on the structure of the transactions, the majority of the goodwill related to the 2008 acquisitions is not deductible for tax purposes.

During 2007, the Company completed five acquisitions in exchange for aggregate cash consideration of $39.9 million and the assumption of certain liabilities. These acquisitions have been recorded using the purchase method of accounting and, accordingly, the acquired operations have been included in the results of operations since the date of acquisition. The 2007 transactions primarily consist of the following:

On May 16, 2007, the Company acquired D.S.I. Inspection Services, Inc. (“DSI”) in exchange for cash consideration of approximately $16.7 million. DSI, based in the United States, is a provider of inspection, machine shop and other related services.

On December 3, 2007, CE Franklin acquired the outstanding stock of Jen Supply Ltd. (“Jen Supply”) in exchange for $12.4 million of cash and a $0.5 million note. Jen Supply, based in Alberta, Canada is an oilfield equipment distributor.

The excess of the purchase price over the estimated fair value of net assets acquired approximated $19.4 million, primarily pertaining to the DSI and Jen Supply transactions, and has been recorded as goodwill in the consolidated balance sheet. Based on the structure of the transactions, the majority of the goodwill related to the 2007 acquisitions is not deductible for tax purposes.

The following unaudited pro forma supplemental information presents consolidated results of operations as if the Company’s significant current and prior-year acquisitions had occurred on January 1, 2007. The unaudited pro forma data is based on historical information and does not include estimated cost savings; therefore, it does not purport to be indicative of the results of operations had the transaction occurred on the dates indicated or of future results for the combined entities (in thousands, except per share data):

	2009		2008		2007
Revenues	$	8,218,559	$	11,617,234	$	9,861,637
Net income attributable to Smith	$	148,469	$	846,235	$	694,515
Earnings per share:
Basic	$	0.67	$	3.86	$	3.19
Diluted	$	0.66	$	3.84	$	3.16

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The following schedule summarizes investing activities related to 2009, 2008 and 2007 acquisitions included in the consolidated statements of cash flows:

	2009			2008			2007
Fair value of tangible and identifiable intangible assets, net of cash acquired	$	97,426		$	1,670,731		$	26,185
Goodwill acquired		28,807			2,116,943			19,422
Payments to former shareholders of businesses acquired		825			1,727			13,522
Total liabilities assumed		(70,932	)		(714,797	)		(5,677	)
Fair value of shares issued		—			(1,403,617	)		—
Cash paid for acquisitions, net of cash acquired	$	56,126		$	1,670,987		$	53,452

4.   Dispositions

From time to time, the Company divests of select business operations. During 2009, the Company disposed of certain non-core operations acquired in connection with the W-H transaction. The Company received cash proceeds of $72.7 million and is entitled to future consideration in the event financial metrics established under earn-out arrangements are met. The accompanying consolidated statements of operations reflect no gain or loss associated with the sale of these operations. In addition, M-I SWACO disposed of certain non-core operations in exchange for consideration of $13.2 million. The pre-tax gain on this transaction was not material and has been reflected as a reduction in selling, general and administrative expenses in the accompanying consolidated statement of operations.

Additionally, during 2007, the Company completed the disposition of certain majority-owned venture operations in exchange for aggregate cash consideration of $16.7 million and eliminated related net assets, including $10.2 million of goodwill. The pre-tax gain on this transaction was not material and has been reflected as a reduction in selling, general and administrative expenses in the accompanying consolidated statement of operations.

5.   Earnings Per Share

Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to the potential dilution of earnings that could have occurred if additional shares were issued for stock option and restricted stock awards under the treasury stock method. For each of the periods presented, an immaterial number of outstanding stock-based awards were excluded from the

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computation of diluted EPS because they were anti-dilutive. The following schedule reconciles the income and shares used in the basic and diluted EPS computations (in thousands, except per share data):

	2009		2008		2007
Net income attributable to Smith	$	148,469	$	767,284	$	647,051
Weighted average number of common shares outstanding		222,353		207,400		200,244
Basic EPS	$	0.67	$	3.70	$	3.23
Net income attributable to Smith	$	148,469	$	767,284	$	647,051
Weighted average number of common shares outstanding		222,353		207,400		200,244
Dilutive effect of stock options and restricted stock units		936		1,327		1,703
		223,289		208,727		201,947
Diluted EPS	$	0.66	$	3.68	$	3.20

6.   Inventories

Inventories consist of the following at December 31:

	2009			2008
Raw materials	$	173,953		$	190,790
Work-in-process		163,489			202,019
Finished goods		1,656,648			2,186,203
		1,994,090			2,579,012
Reserves to state certain U.S. inventories (FIFO cost of $840,326 and $1,044,345 in 2009 and 2008, respectively) on a LIFO basis		(173,735	)		(211,846	)
	$	1,820,355		$	2,367,166

The Company’s reserves to state inventory on a LIFO basis declined $38.1 million in 2009, attributable primarily to reductions in the cost of steel and alloy products as well as reductions in quantities on-hand within the Distribution segment. For the year ended December 31, 2008, the Company recorded additional LIFO reserves of $95.6 million, reflecting the higher cost of steel and alloy products purchased in the Distribution segment and, to a lesser extent, modest cost inflation experienced in the Smith Oilfield manufacturing operations.

7.   Property, Plant and Equipment

Property, plant and equipment consist of the following at December 31:

	2009			2008
Land and improvements	$	88,154		$	77,463
Buildings		357,521			322,569
Machinery and equipment		1,181,269			1,048,821
Rental tools		1,435,870			1,292,796
		3,062,814			2,741,649
Less — Accumulated depreciation		(1,139,349	)		(897,613	)
	$	1,923,465		$	1,844,036

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8.   Goodwill and Other Intangible Assets

Goodwill

The following table presents goodwill on a segment basis as of the dates indicated, as well as changes in the account during the period shown.

			Smith
	M-I SWACO		Oilfield			Distribution			Consolidated
Balance as of December 31, 2007	$	707,165	$	137,732		$	51,545		$	896,442
Goodwill acquired		5,771		2,111,172			—			2,116,943
Purchase price and other adjustments		1,727		1,771			(458	)		3,040
Balance as of December 31, 2008		714,663		2,250,675			51,087			3,016,425
Goodwill acquired		26,227		2,580			—			28,807
Transfer between segments		10,320		(10,320	)		—			—
Purchase price and other adjustments		1,611		21,985			—			23,596
Balance as of December 31, 2009	$	752,821	$	2,264,920		$	51,087		$	3,068,828

Other Intangible Assets

The components of other intangible assets at December 31 are as follows:

													Weighted
	2009						2008						Average
	Gross						Gross						Amortization
	Carrying		Accumulated				Carrying		Accumulated				Period
	Amount		Amortization		Net		Amount		Amortization		Net		(Years)
Patents	$	445,973	$	83,387	$	362,586	$	426,772	$	52,175	$	374,597		13.9
Trademarks(a)		205,031		4,390		200,641		205,031		3,764		201,267		18.0
License agreements		41,677		20,517		21,160		32,416		17,311		15,105		8.1
Non-compete agreements		37,928		28,410		9,518		37,928		23,122		14,806		5.4
Customer relationships and contracts		58,438		38,257		20,181		58,438		26,763		31,675		7.1
	$	789,047	$	174,961	$	614,086	$	760,585	$	123,135	$	637,450		13.2

(a) Included within the gross carrying amount of trademarks is $195.7 million of indefinite-lived assets. The corresponding weighted average amortization period reflects the weighting of finite-lived trademarks.

Intangible amortization expense totaled $51.8 million, $36.0 million and $31.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. Amortization expense is expected to approximate $52 million for fiscal year 2010 and is anticipated to range between $34 million and $46 million per year for the 2011 – 2014 fiscal years.

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9.   Debt

The following summarizes the Company’s outstanding debt at December 31:

	2009			2008
Current:
Short-term borrowings	$	87,267		$	1,096,443
Current portion of long-term debt		271,501			269,853
Short-term borrowings and current portion of long-term debt	$	358,768		$	1,366,296
Long-Term:
Notes:
9.75% Senior Notes maturing March 2019 with an effective interest rate of 9.76%. Interest payable semi-annually (presented net of unamortized discount of $311)	$	699,689		$	—
8.63% Senior Notes maturing March 2014 with an effective interest rate of 8.71%. Interest payable semi-annually (presented net of unamortized discount of $836)		299,164			—
6.0% Senior Notes maturing June 2016 with an effective interest rate of 6.11%. Interest payable semi-annually (presented net of unamortized discount of $200 and $231 in 2009 and 2008, respectively)		274,800			274,769
6.75% Senior Notes maturing February 2011 with an effective interest rate of 6.83%. Interest payable semi-annually (presented net of unamortized discount of $19 and $131 in 2009 and 2008, respectively)		219,981			219,869
Bank revolvers payable:
$1.0 billion revolving note, expires March 2013		—			—
$375 million revolving note, expires July 2010		—			—
$400 million revolving note, cancelled December 2009		—			260,000
Term Loans:
$1.0 billion term loan payable to a syndicate of financial institutions. Principal due in semi-annual installments of $125.0 million through June 2012. Interest payable at Eurodollar rate of LIBOR plus 70 basis points (1.59% at December 31, 2009)		525,000			875,000
M-I SWACO £80 million term loan payable to a financial institution. Principal due in semi-annual installments of £6.7 million through December 2012. Interest payable at Eurocurrency rate of LIBOR plus 35 basis points (1.19% at December 31, 2009)		63,964			77,456
Other		3,157			3,284
		2,085,755			1,710,378
Less — Current portion of long-term debt		(271,501	)		(269,853	)
Long-term debt	$	1,814,254		$	1,440,525
Principal payments of long-term debt for years subsequent to 2009 are as follows:
2011	$	494,019
2012		46,322
2013		—
2014		299,360
Thereafter		974,553
	$	1,814,254

Short-term borrowings at December 31, 2009 primarily consist of amounts outstanding under lines of credit and short-term notes. Certain subsidiaries of the Company have unsecured credit facilities with non-U.S. financial institutions aggregating $285.6 million with $156.7 million of additional borrowing capacity available under these

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facilities at December 31, 2009. These borrowings had a weighted average interest rate of 10.1 percent and 12.4 percent at December 31, 2009 and 2008, respectively.

In December 2009, the Company entered into a $1.0 billion unsecured revolving credit facility provided by a syndicate of financial institutions, under which M-I SWACO can utilize up to $125 million. The revolving credit agreement allows for the election of interest at a base rate or a Eurodollar rate of LIBOR plus 250 basis points (2.75% at December 31, 2009), and requires the payment of a quarterly commitment fee of 37.5 basis points on the unutilized portion of the facility. The credit facility, which expires in March 2013, contains customary covenants and a debt-to-total capitalization limitation. Additionally, the Company terminated the $400 million unsecured revolving credit facility that was scheduled to expire in May 2010.

In March 2009, the Company entered into a $525.0 million term loan facility with a syndicate of financial institutions (the “Lenders”), which remained undrawn and was allowed to expire in June 2009. In July 2009, the Company entered into a new $375.0 million unsecured revolving credit facility provided by the Lenders, which allows for the election of interest at a base rate or a Eurodollar rate of LIBOR plus 250 basis points (2.75% at December 31, 2009) and requires the payment of a quarterly commitment fee of 32.5 basis points on the unutilized portion of the facility. The credit agreement, which expires in July 2010, contains customary covenants and a debt-to-capitalization limitation.

In March 2009, the Company completed a public offering of $300.0 million five-year and $700.0 million ten-year Senior Notes issued under an existing Indenture. The Indenture contains no financial covenants, nor any restrictions related to the payment of cash dividends to common stockholders. Net proceeds of $991.1 million were received in connection with the offering and were used to repay outstanding indebtedness under a $1.0 billion bridge loan facility, which was scheduled to expire in August 2009. The Senior Notes are unsecured obligations of the Company, carry a combined effective interest rate of 9.44 percent and require semi-annual interest payments.

In August 2008, the Company entered into a credit agreement consisting of a multi-year unsecured term loan facility of $1.0 billion and a 364-day unsecured bridge loan facility of $1.0 billion with a syndicate of five financial institutions. The credit agreement allows for the election of interest at a base rate, or a Eurodollar rate of LIBOR plus 70 basis points, and contains customary covenants, including a 45 percent debt-to-total capitalization limitation. Borrowings under the credit facility can be prepaid, in whole or in part, without penalty; however, upon the occurrence of certain events, mandatory prepayments are required.

The 6.0 percent and 6.75 percent Senior Notes are unsecured obligations of the Company issued under an existing Indenture. The Senior Notes are redeemable by the Company, in whole or in part, at any time prior to maturity at a redemption price equal to accrued interest plus the greater of the principal amount or the present value of the remaining principal and interest payments.

Borrowings under the M-I SWACO £80 million term loan are unsecured and require compliance with certain customary covenants, including debt-to-total capitalization and debt-to-EBITDA limitations. The term loan can be prepaid, in whole or in part, without penalty subject to required notice periods and compliance with minimum prepayment amounts.

The Company was in compliance with its loan covenants under the various loan agreements, as amended, at December 31, 2009.

10.   Financial Instruments

Derivative Instruments

The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in currency exchange rates and interest rates. In an effort to mitigate these risks, the Company enters into derivative financial instruments which are accounted for as cash flow or fair value

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hedges in accordance with the authoritative accounting standard. The Company does not enter into derivative instruments for speculative purposes.

For foreign exchange and interest rate derivative instruments that do not qualify as cash flow hedges, realized and unrealized gains and losses are recognized currently through earnings. Foreign exchange hedge contracts not designated as cash flow hedges with a notional amount of $114.5 million and $235.5 million were outstanding as of December 31, 2009, and 2008, respectively.

For foreign exchange and interest rate derivative instruments that qualify as cash flow hedges, realized and unrealized gains and losses are deferred to accumulated other comprehensive income (“AOCI”) and recognized in the consolidated statements of operations when the hedged item affects earnings. As of December 31, 2009, the Company had one outstanding interest rate cash flow hedge contract with a notional amount of $63.9 million and no outstanding foreign exchange cash flow hedge contracts. As of December 31, 2008, the notional amounts for interest rate cash flow hedge contracts and foreign exchange cash flow hedge contracts were $277.5 million and $13.2 million, respectively.

The Company entered into three interest rate contracts and subsequent extensions during fiscal 2008 in anticipation of a planned public debt issuance. At December 31, 2008, unrealized mark-to-market losses of $59.8 million associated with these cash flow hedge transactions were deferred as a component of AOCI. Contract extensions expiring subsequent to December 31, 2008 did not qualify as cash flow hedge transactions resulting in the recognition of a $56.9 million mark-to-market gain in the first quarter of 2009.

The 2009 public debt transaction did not include a longer-tenor debt issuance as contemplated in the cash flow hedge transaction and a future transaction of this tenor is probable of not occurring. Accordingly, $59.3 million of the mark-to-market loss previously deferred as a component of AOCI was reclassified into earnings in the first quarter of 2009, offsetting the $56.9 million mark-to-market gain discussed above. Approximately $3.6 million of losses deferred in AOCI related to interest rate derivative contracts, or $1.6 million net of taxes and noncontrolling interests, will be reclassified into earnings during fiscal 2010.

In addition to the $2.4 million net mark-to-market interest rate derivative loss recognized in 2009, the Company has recognized $15.3 million of derivative contract losses in the consolidated statements of operations for the year ended December 31, 2009. For the years ended December 31, 2008 and 2007, the Company recognized derivative contract losses of $37.3 million and $4.1 million, respectively, in the consolidated statements of operations. The following table provides required information with respect to the classification and loss amounts recognized in income as well as the derivative-related contract losses deferred in AOCI for the year ended December 31, 2009:

Derivatives Designated	Gain (Loss)			Location of	Gain (Loss)			Location of Gain (Loss)	Gain (Loss)
as Cash Flow Hedging	Recognized			Gain (Loss) Reclassified	Reclassified From			Recognized in Income	Recognized in Income
Instruments —	in AOCI			from AOCI to Income	AOCI to Income			(Ineffective)	(Ineffective)
Interest rate contracts	$	(2,057	)	Interest expense	$	(3,296	)	Selling, general and administrative expenses	$	(76	)
Foreign exchange contracts		(1,061	)	Cost of oilfield revenues		(2,572	)			—
Total	$	(3,118	)		$	(5,868	)		$	(76	)

	Location of Gain (Loss)	Gain (Loss)
Derivatives not Designated —	Recognized in Income	Recognized in Income
Foreign exchange contracts	Selling, general and administrative expenses	$	(9,361	)

The fair value of outstanding foreign exchange derivative instruments is determined using composite pricing from published financial market sources whereas the fair value of the outstanding interest rate derivative instruments is determined by obtaining quoted prices in active markets for similar contracts. Both measurement

46

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

methodologies are classified as Level Two tier under the applicable accounting standard. The recorded fair value of derivative instruments is as follows:

	Asset Derivatives				Liability Derivatives
	Classification		Fair Value		Classification		Fair Value
Derivatives Designated as Hedging Instruments — Interest rate contracts			$	—		Other current liabilities	$	(4,621	)
Foreign exchange contracts		Prepaid expenses and other		—				—
Derivatives Not Designated as Hedging Instruments — Foreign exchange contracts		Prepaid expenses and other		2,648		Other current liabilities		(4,140	)
Total			$	2,648			$	(8,761	)

Other Financial Instruments

The fair value of outstanding long-term debt instruments is determined using quoted prices for similar debt instruments, which is classified as a Level Two tier measurement methodology under the applicable accounting standard. As of December 31, 2009, the fair value of long-term debt instruments approximated $2.33 billion and the recorded value totaled $2.09 billion. The fair and recorded values of long-term debt instruments totaled $1.63 billion and $1.71 billion, respectively, as of December 31, 2008.

The fair value of the remaining financial instruments, including cash and cash equivalents, receivables, payables and short-term borrowings, approximates the carrying value due to the nature of these instruments.

Concentration of Credit Risk

The Company sells its products and services to numerous companies in the oil and natural gas industry. The significant energy industry concentration has the potential to impact the Company’s exposure to credit risk, either positively or negatively, because customers may be similarly affected by changes in economic or other conditions. Although this concentration could affect the Company’s overall exposure to credit risk, management believes that the Company is exposed to minimal risk since the majority of its business is conducted with major companies within the industry. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral for its accounts receivable. In some cases, the Company will require payment in advance or security in the form of a letter of credit or bank guarantee.

11.   Income Taxes

The geographical sources of income before income taxes for the three years ended December 31, were as follows:

	2009			2008		2007
United States	$	(66,154	)	$	821,812	$	644,283
Non-United States		517,470			734,209		659,592
Total	$	451,316		$	1,556,021	$	1,303,875

47

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The income tax provision is summarized as follows:

	2009			2008			2007
Current:
United States	$	(63,477	)	$	237,022		$	172,948
Non-United States		178,369			250,168			208,352
State		(474	)		14,968			4,906
		114,418			502,158			386,206
Deferred:
United States		37,684			17,140			21,849
Non-United States		(12,997	)		(13,758	)		381
State		—			352			35
		24,687			3,734			22,265
Income tax provision	$	139,105		$	505,892		$	408,471

The Company’s income tax provision includes amounts related to the anticipated repatriation of certain earnings of its non-U.S. subsidiaries. Undistributed earnings above the amounts upon which taxes have been provided, which approximated $334.7 million at December 31, 2009, are intended to be permanently invested by the Company. It is not practicable to determine the amount of applicable taxes that would be incurred if any of such earnings were repatriated.

The consolidated effective tax rate (as a percentage of income before income taxes) is reconciled to the U.S. federal statutory tax rate as follows:

	2009			2008			2007
U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
Noncontrolling partners’ share of U.S. partnership earnings		(3.9	)		(2.9	)		(3.0	)
Non-deductible expenses		2.2			0.9			1.1
Benefit of extraterritorial income exclusion, manufacturer’s production exclusion and research credits		—			(0.6	)		(0.9	)
State taxes, net		(0.1	)		1.0			0.3
Non-U.S. tax provisions which vary from the U.S. rate/non-U.S. losses with no tax benefit realized		(2.5	)		(0.9	)		(1.2	)
Change in valuation allowance		0.1			—			(0.1	)
Other items, net		0.1			—			0.1
Effective tax rate		30.9	%		32.5	%		31.3	%

48

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of deferred taxes at December 31 are as follows:

	2009			2008
Deferred tax liabilities attributed to the excess of net book basis over remaining tax basis (principally depreciation and amortization):
United States	$	(451,524	)	$	(380,850	)
Non-United States		(92,101	)		(79,418	)
Total deferred tax liabilities		(543,625	)		(460,268	)
Deferred tax assets attributed to net operating loss and tax credit carryforwards:
United States		17,776			—
Non-United States		28,181			16,034
Other deferred tax assets (principally accrued liabilities not deductible until paid and inventory reserves):
United States		53,513			83,441
Non-United States		29,775			33,077
Subtotal		129,245			132,552
Valuation allowance		(15,630	)		(14,696	)
Total deferred tax assets		113,615			117,856
Net deferred tax liabilities	$	(430,010	)	$	(342,412	)
Balance sheet presentation:
Deferred tax assets, net	$	65,667		$	81,834
Other assets		41,542			12,691
Income taxes payable		(3,682	)		(7,951	)
Deferred tax liabilities		(533,537	)		(428,986	)
Net deferred tax liabilities	$	(430,010	)	$	(342,412	)

As of December 31, 2009, the accompanying consolidated balance sheet includes $17.8 million of deferred tax assets associated with foreign tax credits available to offset taxes in the United States through 2019 and $28.2 million of deferred tax assets associated with operating loss carryforwards in tax jurisdictions outside the United States. Although a significant portion of the net operating losses will carryforward indefinitely and are available to reduce future tax liabilities of the respective foreign entity, management currently believes that the majority of these assets will not be realized and has, accordingly, established a $15.6 million valuation reserve.

In addition to the tax liabilities discussed above, the Company establishes reserves for positions taken on tax matters which, although considered appropriate under the regulations, could potentially be successfully challenged by authorities during a tax audit or review. The accompanying consolidated balance sheets include liabilities of $69.3 million and $56.3 million to provide for uncertain tax positions taken as of December 31, 2009 and 2008, respectively.

The liability for uncertain tax positions as of December 31, 2009, which is primarily reflected in other long-term liabilities, consists of $50.3 million of unrecognized tax benefits, $13.4 million of interest and $5.6 million of penalties. Although the Company does not expect to report a significant change in the amount of liabilities recorded for uncertain tax positions during the next twelve-month period, changes in the recorded reserves could impact future reported results. Accordingly, if the Company’s uncertain tax positions were allowed by the relevant taxing authorities during a review or expired unchallenged, approximately $48.6 million of the liability for uncertain tax

49

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

positions would be recorded as a reduction in income tax provision with the remaining $20.7 million recorded as a decrease to other balance sheet accounts.

The following table discloses changes in liabilities recorded for uncertain tax positions for the periods presented:

	2009			2008			2007
Balance at beginning of year	$	41,011		$	34,538		$	22,629
Additions for tax positions of prior years		1,576			7,829			7,271
Reductions for tax positions of prior years		(794	)		(3,202	)		(2,758	)
Additions for tax positions in the current year		8,936			2,146			8,324
Settlements with tax authorities		—			(300	)		(200	)
Reductions due to the lapse of applicable statute of limitations		(468	)		—			(728	)
Balance at end of year	$	50,261		$	41,011		$	34,538

The Company records penalty and interest amounts related to income tax matters as income tax provision in the accompanying consolidated financial statements. For the years ended December 31, 2009 and 2008, income tax provision includes interest and penalties of $2.4 million and $1.6 million, respectively.

The Company operates in more than 70 countries and is subject to income taxes in most of those jurisdictions. The following table summarizes the earliest tax years that remain subject to examination by taxing authorities in the major jurisdictions in which the Company operates:

Jurisdiction	Earliest Open Tax Period
Canada		2001
Norway		1999
Russia		2006
United Kingdom		2003
United States		2001

12.   Stockholders’ Equity

Issuance of Common Stock

In November 2009, the Company completed a public offering of 28 million shares of common stock at $26.50 per share. Net cash proceed to the Company after deducting underwriting discounts, commissions and other related expenses were $717.4 million.

Dividend Program

The Board of Directors declared payments under the Company’s regular quarterly cash dividend program of $108.8 million, or $0.48 per share; $100.7 million, or $0.48 per share; and $80.1 million, or $0.40 per share, for the years ended December 31, 2009, 2008 and 2007, respectively.

Common Stock Repurchases

The Company’s Board of Directors maintains a share repurchase program that allows for the purchase of up to 20 million shares of the Company’s common stock, subject to regulatory issues, market considerations and other relevant factors (the “Repurchase Program”). There were no share purchases for the year ended December 31, 2009. The Company purchased $21.5 million and $83.5 million of common stock during 2008 and 2007, respectively, under the authorized Repurchase Program. As of December 31, 2009, approximately 15.2 million shares remained

50

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

available for purchase under the program which may be executed from time to time in the open market. Common stock obtained by the Company through the Repurchase Program has been added to the Company’s treasury stock holdings.

In addition, certain participants in the long-term incentive plans surrender shares of common stock in order to satisfy tax withholding obligations. The Company acquired an immaterial number of shares in the prior three year period which have been added to the Company’s treasury stock holdings and may be used in the future for acquisitions or other corporate purposes. These shares are not considered acquisitions under the Company’s Repurchase Program.

Stockholder Rights Plan

On June 8, 2000, the Company adopted a Stockholder Rights Plan (the “Rights Plan”). As part of the Rights Plan, the Company’s Board of Directors declared a dividend of one junior participating preferred stock purchase right (“Right”) for each share of the Company’s common stock outstanding on June 20, 2000. The Board also authorized the issuance of one such Right for each share of the Company’s common stock issued after June 20, 2000 until the occurrence of certain events. As further discussed in Note 19, the Company’s Rights Plan was amended subsequent to December 31, 2009.

Except with respect to the contemplated business combination with Schlumberger, the Rights are exercisable upon the occurrence of certain events related to a person (an “Acquiring Person”) acquiring or announcing the intention to acquire beneficial ownership of 20 percent or more of the Company’s common stock. In the event any person becomes an Acquiring Person, each holder (except an Acquiring Person) will be entitled to purchase, at an effective exercise price of $87.50, subject to adjustment, shares of common stock having a market value of twice the Right’s exercise price. The Acquiring Person will not be entitled to exercise these Rights. In addition, if at any time after a person has become an Acquiring Person, the Company is involved in a merger or other business combination transaction, or sells 50 percent or more of its assets or earning power to another entity, each Right will entitle its holder to purchase, at an effective exercise price of $87.50, subject to adjustment, shares of common stock of such other entity having a value of twice the Right’s exercise price. After a person or group becomes an Acquiring Person, but before an Acquiring Person owns 50 percent or more of the Company’s common stock, the Board may extinguish the Rights by exchanging one share of common stock, or an equivalent security, for each Right, other than Rights held by the Acquiring Person.

In the event the Rights become exercisable and sufficient shares of the Company’s common stock are not authorized to permit the exercise of all outstanding Rights, the Company is required under the Rights Plan to take all necessary action including, if necessary, seeking stockholder approval to obtain additional authorized shares.

The Rights are subject to redemption at the option of the Board of Directors at a price of one-quarter of a cent per Right until the occurrence of certain events. The Rights currently trade with Smith common stock, have no voting or dividend rights and expire on June 8, 2010.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income in the accompanying consolidated balance sheets consists of the following:

	2009			2008
Currency translation adjustments	$	31,290		$	(24,235	)
Fair value of derivatives		(2,274	)		(42,489	)
Pension and other postretirement benefits		(4,901	)		(7,109	)
Accumulated other comprehensive income	$	24,115		$	(73,833	)

51

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13.   Retirement Plans

Defined Contribution Plans

The Company established the Smith International, Inc. 401(k) Retirement Plan (the “Smith Plan”) for the benefit of all eligible employees. Employees may voluntarily contribute a percentage of their compensation, as defined, to the Smith Plan. The Company makes basic, retirement and, in certain cases, discretionary matching contributions to each participant’s account under the Smith Plan. Participants receive a basic match on contributions to the Smith Plan of up to 11/2 percent of qualified compensation and a retirement contribution ranging from two percent to six percent of qualified compensation. In addition, the Board of Directors may provide discretionary profit-sharing contributions based upon financial performance to participants who are employed by the Company on December 31.

The Company also maintains the Wilson 401(k) Retirement Plan (the “Wilson Plan”) under which participating employees may voluntarily contribute a percentage of their compensation, as defined, to the Wilson Plan. Wilson makes matching contributions to each participant’s account ranging from 1/4 percent to six percent of qualified compensation. In addition, the Board of Directors may provide discretionary profit-sharing contributions based upon financial performance to participants who are employed by Wilson on December 31.

M-I SWACO has a company Profit-Sharing and Savings Plan (the “M-I Retirement Plan”) under which participating employees may voluntarily contribute a percentage of their compensation, as defined. At its discretion, M-I SWACO may make basic, matching and in certain cases, discretionary matching contributions to each participant’s account under the M-I Retirement Plan. Participants are eligible to receive a basic contribution equal to three percent of qualified compensation, and a full match on employee contributions of up to 11/2 percent of qualified compensation. In addition, the Board of Directors may provide discretionary profit-sharing contributions based upon financial performance to participants who are employed by M-I SWACO on December 31.

W-H maintained a 401(k) Plan (“W-H Plan”) under which employees could defer up to specified percentages of their annual compensation and receive discretionary matching and profit sharing awards. Legacy W-H employees participated in this program through December 31, 2008 at which time the W-H Plan was merged into the Smith Plan.

The Company recognized expense totaling $37.7 million, $48.9 million, and $43.8 million in 2009, 2008 and 2007, respectively, related to Company contributions to the plans.

Certain of the Company’s subsidiaries sponsor various defined contribution plans. The Company’s contributions under these plans for each of the three years in the period ended December 31, 2009 were immaterial.

Deferred Compensation Plans

The Company maintains Supplemental Executive Retirement Plans, non-qualified, deferred compensation programs, for the benefit of officers and certain other eligible employees of the Company. Participants may contribute up to 100 percent of cash compensation, on a pre-tax basis, as defined. Plan provisions allow for retirement and matching contributions, similar to those provided under the Company’s defined contribution programs, and, in certain cases, an interest contribution in order to provide a yield on short-term investments equal to 120 percent of the long-term applicable federal rate, as defined.

In the event of insolvency or bankruptcy, plan assets are available to satisfy the claims of all general creditors of the Company. Accordingly, the accompanying consolidated balance sheets reflect the aggregate participant balances as both an asset and a liability of the Company. As of December 31, 2009 and 2008, $57.1 million and $52.8 million, respectively, are included in other assets with a corresponding amount recorded in other long-term liabilities.

52

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the years ended December 31, 2009, 2008 and 2007, Company contributions to the plans totaled $2.4 million, $2.0 million and $1.3 million, respectively.

14.   Employee Benefit Plans

Pension Plans

The Company currently maintains various defined benefit pension plans covering certain U.S. and international employees. Future benefit accruals and the addition of new participants under the U.S. plans were frozen prior to 1998. The following tables disclose the changes in benefit obligations and plan assets during the periods presented and reconcile the funded status of the plans to the amounts included in the accompanying consolidated balance sheets:

	United States						International
	2009			2008			2009			2008
Changes in benefit obligations:
Benefit obligations at beginning of year	$	19,197		$	19,523		$	43,419		$	47,403
Service cost		—			—			6,239			4,820
Interest cost		1,277			1,206			2,484			1,888
Actuarial loss (gain)		2,121			(506	)		(9,106	)		(1,811	)
Exchange rate changes and other		—			(354	)		9,035			(8,657	)
Benefits paid		(775	)		(672	)		(270	)		(224	)
Benefit obligations at end of year	$	21,820		$	19,197		$	51,801		$	43,419
Changes in plan assets:
Fair value of plan assets at beginning of year	$	13,208		$	19,180		$	30,151		$	30,392
Actual return on plan assets		2,882			(4,946	)		820			(2,703	)
Employer contributions		255			—			9,110			5,114
Exchange rate changes and other		(63	)		(354	)		7,108			(2,428	)
Benefits paid		(775	)		(672	)		(270	)		(224	)
Fair value of plan assets at end of year	$	15,507		$	13,208		$	46,919		$	30,151
Funded status	$	(6,313	)	$	(5,989	)	$	(4,882	)	$	(13,268	)
Amounts recognized in the consolidated balance sheet:
Other long-term liabilities	$	(6,313	)	$	(5,989	)	$	(4,882	)	$	(13,268	)
Amounts in accumulated other comprehensive income:
Net actuarial loss	$	4,911		$	5,067		$	3,236		$	5,213
Prior service costs		—			—			25			27
Net amount recognized	$	4,911		$	5,067		$	3,261		$	5,240

53

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net periodic benefit expense and the weighted average assumptions used to determine the net periodic benefit expense for the fiscal years ended December 31, and the projected benefit obligation at December 31 are as follows:

	United States									International
	2009			2008			2007			2009			2008			2007
Components of net periodic benefit expense:
Service cost	$	—		$	—		$	—		$	6,239		$	4,820		$	4,461
Interest cost		1,277			1,206			1,179			2,484			1,888			1,925
Return on plan assets		(884	)		(1,239	)		(1,336	)		(2,175	)		(1,717	)		(2,142	)
Amortization of prior service cost		—			—			—			8			7			8
Amortization of loss		749			87			219			517			427			67
Net periodic benefit expense	$	1,142		$	54		$	62		$	7,073		$	5,425		$	4,319
Other changes in plan assets and benefit obligations recognized in other comprehensive income, net of tax and noncontrolling interest:
Net (gain) loss arising during the year	$	593		$	3,375		$	(959	)	$	(1,454	)	$	(498	)	$	4,721
Amortization of prior service cost		—			—			—			(8	)		(7	)		(8	)
Amortization of net loss		(749	)		(87	)		(219	)		(517	)		(427	)		(67	)
Other comprehensive (income) loss	$	(156	)	$	3,288		$	(1,178	)	$	(1,979	)	$	(932	)	$	4,646
Net periodic benefit expense:
Discount rate		6.6	%		6.3	%		5.8	%		5.1	%		4.9	%		5.7	%
Expected return on plan assets		8.5	%		8.5	%		8.5	%		6.2	%		5.7	%		6.6	%
Projected benefit obligation:
Discount rate		5.6	%		6.6	%		6.3	%		5.4	%		5.1	%		4.9	%
Expected return on plan assets		8.5	%		8.5	%		8.5	%		6.2	%		5.7	%		6.6	%

In determining the expected return on pension plan assets, the Company considers the investment mix, the historical market performance and economic and other indicators of future performance. The Company primarily utilizes a mix of insurance contracts, common stock and fixed income index funds to generate asset returns comparable with the general market. The investment mix of pension assets at December 31 is summarized in the following table:

	United States						International
	2009			2008			2009			2008
Insurance contracts		—	%		—	%		100	%		100	%
Common stock and related index funds		70			71			—			—
Fixed income securities and related index funds		25			25			—			—
Other		5			4			—			—
Total		100	%		100	%		100	%		100	%

For pension plans with accumulated benefit obligations in excess of plan assets, the following table sets forth the projected and accumulated benefit obligations and the fair value of plan assets as of December 31:

	United States				International
	2009		2008		2009		2008
Projected benefit obligation	$	21,820	$	19,197	$	7,316	$	5,699
Accumulated benefit obligation		21,820		19,197		6,411		4,956
Plan assets at fair value		15,507		13,208		3,591		3,112

54

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On January 1, 2008, the Company adopted fair value accounting standards which divides fair value measurement into three broad levels: Level One is comprised of active-market quoted prices for identical instruments; Level Two is comprised of market-based data obtained from independent sources; and Level Three is comprised of non-market based estimates which reflect the best judgment of the Administrative Committee. The Company’s U.S and international pension plan assets are classified as Level Two following the prescribed methodology. The following table sets forth the Company’s U.S and international pension plan assets, at fair value as of December 31, 2009:

	Cash		U.S. Equity		International		Corporate		Insurance
	Equivalents		Securities		Equity Securities		Bonds		Contracts
U.S. pension plans	$	719	$	8,700	$	2,211	$	3,877	$	—
International pension plans		—		—		—		—		46,919
Total	$	719	$	8,700	$	2,211	$	3,877	$	46,919

Estimated future benefit payments based on projected future service are expected to range between $1.2 million and $2.0 million a year for the next five years and approximate $12.9 million for the five-year period ending December 31, 2010. Company contributions to the pension plans during 2010 are expected to approximate $6.4 million.

Postretirement Benefit Plans

The Company and certain subsidiaries have postretirement benefit plans which provide health care benefits to a limited number of retirees. Individuals who elect to contribute premiums are eligible to participate in the Company’s medical and prescription drug programs, with certain limitations. In addition to premiums, the retiree is responsible for deductibles and any required co-payments and is subject to annual and lifetime dollar spending caps.

55

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2009			2008
Changes in benefit obligations:
Benefit obligations at beginning of year	$	9,397		$	9,386
Service cost		—			349
Interest cost		299			572
Plan participants’ contributions		547			551
Future retiree benefit curtailment		(4,419	)		—
Actuarial loss (gain)		150			(533	)
Benefits paid		(743	)		(928	)
Benefit obligations at end of year	$	5,231		$	9,397
Changes in plan assets:
Fair value of plan assets at beginning of year	$	—		$	—
Employer contributions		196			377
Plan participants’ contributions		547			551
Benefits paid		(743	)		(928	)
Fair value of plan assets at end of year	$	—		$	—
Funded status	$	(5,231	)	$	(9,397	)
Amounts recognized in the consolidated balance sheet:
Other long-term liabilities	$	(5,231	)	$	(9,397	)
Amounts in accumulated other comprehensive income:
Net actuarial gain	$	(3,271	)	$	(3,198	)

Net periodic benefit expense and the weighted average assumptions used to determine the net periodic benefit expense for the fiscal years ended December 31, and the projected benefit obligation at December 31 are as follows:

	2009			2008			2007
Components of net periodic benefit expense:
Service cost	$	—		$	349		$	381
Interest cost		299			572			563
Amortization of gain		(292	)		(235	)		(157	)
Future retiree benefit curtailment		(4,260	)		—			—
Net periodic benefit expense	$	(4,253	)	$	686		$	787
Other changes in plan assets and benefit obligations recognized in other comprehensive income, net of tax and noncontrolling interest:
Net gain arising during the year	$	(365	)	$	(695	)	$	(989	)
Amortization of net gain		292			235			157
Other comprehensive income	$	(73	)	$	(460	)	$	(832	)
Net periodic benefit expense:
Discount rate		6.2	%		6.3	%		5.8	%
Projected benefit obligation:
Discount rate		5.5	%		6.2	%		6.3	%

56

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The assumed health care cost trend rates used to determine the projected postretirement benefit obligation at December 31 are as follows:

	2009			2008
Health care cost trend rate for current year		9.7	%		10.1	%
Rate that the cost trend rate gradually declines (ultimate trend rate)		5.0	%		5.0	%
Year that the rate reaches the ultimate trend rate		2023			2016

A one-percentage point change in assumed health care cost trend rates would have the following effects on the benefit obligations and the aggregate of the service and interest cost components of the postretirement benefits expense:

	One-Percentage-Point		One-Percentage-Point
	Increase		Decrease
Effect on total service and interest cost	$	1	$	(17	)
Effect on accumulated postretirement benefit obligation		24		(317	)

Estimated future benefit payments based on projected future service are expected to approximate $0.4 million a year for the next five years and $2.0 million for the five-year period ending December 31, 2019. Company contributions to the postretirement benefit plans during 2010 are expected to be comparable to the 2009 levels.

15.   Long-Term Incentive Compensation

As of December 31, 2009, the Company had outstanding restricted stock and stock option awards granted under the Third Amended and Restated 1989 Long-Term Incentive Compensation Plan (the “LTIC Plan”). As of December 31, 2009, 381,081 shares were authorized for future issuance pursuant to the Plan. Additionally, the Company assumed the W-H stock option plan in 2008 under which no further awards may be granted.

Restricted Stock Units

The restricted stock program consists of a combination of performance-based restricted stock units (“performance-based units”) and time-based restricted stock units (“time-based units”). The number of performance-based units issued under the program, which can range from zero to 150 percent of the target units granted, is solely dependent upon the financial metrics achieved by the Company in the fiscal year subsequent to the award. A summary of the Company’s restricted stock program is presented below (in thousands, except fair value data):

	Time-Based Awards					Performance-Based Awards					Total
	No. of			Fair		No. of			Fair		Restricted
	Units			Value(a)		Units			Value(a)		Stock Units
Outstanding at December 31, 2008		2,599		$	32.57		1,639		$	31.60		4,238
Granted		790			26.08		1,006			26.61		1,796
Performance adjustment(b)		—			—		(428	)		23.38		(428	)
Forfeited		(231	)		34.39		(74	)		34.89		(305	)
Vested		(792	)		35.26		(348	)		49.08		(1,140	)
Outstanding at December 31, 2009		2,366		$	29.33		1,795		$	27.52		4,161

(a)	Reflects the weighted average grant-date fair value.
(b)	Performance-based units related to the December 2008 grants adjusted based on financial metrics achieved in 2009.

57

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The total intrinsic value of restricted stock units vested during the years ended December 31, 2009, 2008 and 2007 was $33.1 million, $24.8 million, and $48.7 million, respectively. In addition, restrictions on approximately 1.2 million restricted stock units outstanding at December 31, 2009 are expected to lapse and issue during the 2010 fiscal year.

Stock Options

Stock options are generally granted at the fair market value on the date of grant, vest over a four-year period and expire ten years after the date of grant. A summary of the Company’s stock option program is presented below (in thousands, except per share and contractual life data):

	Shares					Weighted Average
	Under			Weighted Average		Remaining		Aggregate Intrinsic
	Option			Exercise Price		Contractual Life		Value
Outstanding at December 31, 2008		1,150		$	19.58
Forfeited		(12	)		21.15
Exercised		(79	)		12.98
Outstanding at December 31, 2009		1,059		$	20.05		3.55	$	7,978
Exercisable at December 31, 2009		1,057		$	20.01		3.55	$	7,978

The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $1.2 million, $25.5 million, and $69.0 million, respectively.

Share-based Compensation Expense

Compensation expense for stock options and time-based units is recognized over the four-year vesting period. For performance-based units, compensation expense is recognized over the three-year vesting period. Compensation expense for performance-based and time-based units is determined using the grant-date fair value whereas share-based compensation related to stock option awards is calculated using an open-form (lattice) model with specific assumptions.

Share-based compensation expense, consisting of restricted stock unit and stock option awards, for the year ended December 31, 2009, 2008 and 2007 was $46.0 million, $43.4 million and $34.2 million, respectively, and net of taxes and noncontrolling interests, was $26.0 million, $24.8 million and $20.6 million, respectively.

The total unrecognized share-based compensation expense, consisting of restricted stock and stock options, for awards outstanding as of December 31, 2009 was $109.3 million, or approximately $67.3 million net of taxes and noncontrolling interests, which will be recognized over a weighted-average period of 2.6 years.

16.   Industry Segments and International Operations

The Company is a global provider of products and services used during the drilling, completion and production phases of oil and natural gas development activities. Our business is segregated into three operating segments, M-I SWACO, Smith Oilfield and Distribution, which is the basis upon which we report our results.

The M-I SWACO segment consists of a majority-owned drilling fluid and environmental services joint venture operation. The Smith Oilfield segment is comprised of our wholly-owned drilling and completion services operations, which includes drill bits, directional drilling services and downhole tools. The Distribution segment consists of the Wilson distribution operations and a majority-owned interest in CE Franklin Ltd., a publicly-traded Canadian distribution company. Finally, general corporate primarily reflects expenses related to corporate personnel, administrative support functions and long-term incentive compensation programs.

58

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents financial information for each reportable segment:

	2009			2008			2007
Revenues:
M-I SWACO	$	4,224,340		$	5,183,335		$	4,422,408
Smith Oilfield		2,225,048			2,848,804			2,210,161
Distribution		1,769,171			2,738,699			2,131,761
	$	8,218,559		$	10,770,838		$	8,764,330
Operating Income:
M-I SWACO	$	516,355		$	839,647		$	729,412
Smith Oilfield		229,063			746,826			619,038
Distribution		(33,894	)		180,178			97,154
General corporate		(112,441	)		(124,239	)		(75,807	)
	$	599,083		$	1,642,412		$	1,369,797
Capital Expenditures:
M-I SWACO	$	126,677		$	210,471		$	184,027
Smith Oilfield		233,751			221,269			149,829
Distribution		4,556			7,238			6,929
General corporate		5,895			3,907			15,036
	$	370,879		$	442,885		$	355,821
Depreciation and Amortization:
M-I SWACO	$	129,170		$	123,227		$	111,618
Smith Oilfield		218,925			133,459			75,494
Distribution		4,737			4,736			4,763
General corporate		12,026			2,021			1,421
	$	364,858		$	263,443		$	193,296
Total Assets:
M-I SWACO	$	4,108,917		$	4,124,291		$	3,589,790
Smith Oilfield		5,048,135			5,473,372			1,579,541
Distribution		668,227			1,070,909			752,221
General corporate		914,136			147,652			140,328
	$	10,739,415		$	10,816,224		$	6,061,880

59

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes charges, included within selling, general and administrative expenses, on a reportable segment basis:

	2009		2008		2007
M-I SWACO	$	25,080	$	4,000	$	—
Smith Oilfield		25,417		—		—
Distribution		2,359		731		—
General corporate		7,986		29,881		—
	$	60,842	$	34,612	$	—

Charges reported in 2009 include $58.4 million associated with employee severance and other cost reduction measures and $2.4 million related to the settlement of an interest rate derivative contract. In 2008, the reported charges include a $29.9 million loss on an interest rate derivative contract and $4.7 million of hurricane-related losses.

The following table presents consolidated revenues by region:

	2009		2008		2007
United States	$	3,319,940	$	5,080,710	$	3,967,806
Canada		638,268		851,098		771,430
North America		3,958,208		5,931,808		4,739,236
Latin America		1,003,864		987,104		738,026
Europe/Africa		2,079,139		2,569,803		2,105,745
Middle East/Asia		1,177,348		1,282,123		1,181,323
Non-North America		4,260,351		4,839,030		4,025,094
	$	8,218,559	$	10,770,838	$	8,764,330

The following table presents net property, plant and equipment by region:

	2009		2008		2007
United States	$	1,255,137	$	1,269,691	$	588,345
Canada		59,921		45,241		52,596
North America		1,315,058		1,314,932		640,941
Latin America		149,769		115,269		95,834
Europe/Africa		336,278		297,209		266,437
Middle East/Asia		122,360		116,626		102,668
Non-North America		608,407		529,104		464,939
	$	1,923,465	$	1,844,036	$	1,105,880

The Company’s expenditures for research and engineering activities are attributable to the Company’s oilfield operations and totaled $141.0 million in 2009, $129.4 million in 2008 and $110.7 million in 2007.

17.   Commitments and Contingencies

Leases

The Company routinely enters into operating and capital leases for certain of its facilities and equipment. Amounts related to assets under capital lease were immaterial for the periods presented. Rent expense totaled $223.3 million, $207.7 million and $166.5 million in 2009, 2008 and 2007, respectively.

60

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Future minimum payments under non-cancelable operating leases having initial terms of one year or more are as follows:

	Amount
2010	$	90,334
2011		59,253
2012		45,345
2013		34,656
2014		25,445
2015-2019		73,717
Thereafter		44,315
	$	373,065

In the normal course of business, the Company enters into lease agreements with cancellation provisions as well as agreements with initial terms of less than one year. The costs related to these leases have been reflected in rent expense but have been appropriately excluded from the future minimum payments presented above.

M-I SWACO Noncontrolling Interest

The Company and its M-I SWACO joint venture partner, Schlumberger Limited (“Schlumberger”), can offer to sell to the other party its entire ownership interest in the joint venture in exchange for a cash purchase price specified by the offering partner. If the initiating partner’s offer to sell is not accepted, such party is obligated to purchase the other party’s interest at the same valuation per interest. If the Company agrees to purchase Schlumberger’s joint venture interest, whether pursuant to these provisions or otherwise, Smith would need to fund the transaction. The Company’s funding could include issuing equity, resulting in dilution to existing stockholders, obtaining additional debt, which may require waivers of applicable debt covenants, or obtaining other financing, as well as using available cash to fund the purchase. Should the Company instead not purchase Schlumberger’s interest, the Company would no longer have an interest in the joint venture.

Standby Letters of Credit

In the normal course of business with customers, vendors and others, the Company is contingently liable for performance under standby letters of credit and bid, performance and surety bonds. Certain of these outstanding instruments guarantee payment to insurance companies which reinsure certain liability coverages of the Company’s insurance captive. Excluding the impact of these instruments, for which $18 million of related liabilities are reflected in the accompanying consolidated balance sheet, the Company was contingently liable for approximately $254 million of standby letters of credit and bid, performance and surety bonds at December 31, 2009. Management does not expect any material amounts to be drawn on these instruments.

Insurance

The Company maintains insurance coverage for various aspects of its business and operations. The Company has elected to retain a portion of losses that occur through the use of deductibles and retentions under its insurance programs. Amounts in excess of the self-insured retention levels are fully insured to limits believed appropriate for the Company’s operations. Self-insurance accruals are based on claims filed and an estimate for claims incurred but not reported. While management believes that amounts accrued in the accompanying consolidated financial statements are adequate for expected liabilities arising from the Company’s portion of losses, estimates of these liabilities may change as circumstances develop.

61

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Litigation

The Company is a defendant in various legal proceedings arising in the ordinary course of business. In the opinion of management, these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Environmental

The Company routinely establishes and reviews the adequacy of reserves for estimated future environmental clean-up costs for properties currently or previously operated by the Company. In the opinion of management, these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

18.   Quarterly Information (Unaudited)

	First		Second		Third		Fourth		Year
			(In thousands, except per share data)
2009
Revenues	$	2,411,479	$	1,944,289	$	1,879,024	$	1,983,767	$	8,218,559
Gross profit		692,302		529,030		499,740		529,008		2,250,080
Net income attributable to Smith		96,935		24,386		7,035		20,113		148,469
Earnings per share:
Basic		0.44		0.11		0.03		0.09		0.67
Diluted		0.44		0.11		0.03		0.09		0.66
2008
Revenues	$	2,370,998	$	2,494,158	$	2,849,311	$	3,056,371	$	10,770,838
Gross profit		781,484		807,452		906,798		933,182		3,428,916
Net income attributable to Smith		174,991		183,273		209,843		199,177		767,284
Earnings per share:
Basic		0.87		0.91		1.00		0.91		3.70
Diluted		0.87		0.91		1.00		0.91		3.68

19.   Subsequent Events (Unaudited)

Devaluation of Venezuelan Bolivar Fuertes

In January 2010, the Venezuelan government announced a devaluation of the Venezuelan bolivar fuertes which modified the official fixed rate from 2.15 Venezuelan bolivar fuertes per U.S. dollar to a multi-rate system. The Company accounts for its operations in Venezuela using the U.S. dollar as its functional currency. Exchange rates used in translating Venezuelan bolivar fuertes denominated transactions, assets and liabilities subsequent to the devaluation date are dependent upon a number of factors, including the nature of contracts and the types of goods and services provided, which are currently expected to range between 2.6 and 4.3 Venezuelan bolivar fuertes per U.S. dollar. In connection with the revaluation of its Venezuelan bolivar fuertes denominated net asset position, the Company expects to record a pre-tax loss ranging between $10 million and $20 million in the first quarter of 2010. While the change in exchange rates will, at least initially, result in a reduction in the U.S. dollar equivalents for revenues earned and expenses incurred denominated in local currency, such change is not expected to have a material impact on the Company’s consolidated results of operations.

62

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Schlumberger Limited Merger Agreement

On February 21, 2010, the Company, Schlumberger Limited (“Schlumberger”) and Turnberry Merger Sub, Inc., a wholly-owned subsidiary of Schlumberger, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Turnberry Merger Sub, Inc. will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Schlumberger, and each share of Company common stock will be converted into the right to receive 0.6966 shares of Schlumberger common stock (the “Merger”). Completion of the Merger is subject to (i) approval of the Merger by the stockholders of the Company, (ii) applicable regulatory approvals, including the termination or expiration of the applicable waiting period (and any extensions thereof) under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and European Community merger regulations, and (iii) other customary closing conditions.

Under the Merger Agreement, the Company agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally refrain from, among other things, acquiring new or selling existing businesses, incurring new indebtedness, repurchasing Company shares, issuing new common stock or equity awards, or entering into new material contracts or commitments outside the normal course of business, without the consent of Schlumberger.

Additionally, the Company’s Rights Plan further discussed in Note 12 was amended on February 21, 2010 to make it inapplicable to the contemplated business combination with Schlumberger.

Stockholder Litigation

Subsequent to the announcement of the proposed combination of the Company and Schlumberger and through February 25, 2010, four putative class action lawsuits were commenced on behalf of stockholders of the Company against the Company and its directors in the District Court of Harris County, Texas, challenging the proposed transaction. One of the lawsuits also names Schlumberger and one of its affiliates as defendants. The lawsuits variously allege that the Company’s directors breached their fiduciary duties by, among other things, causing Smith to enter into the proposed transaction at an allegedly inadequate and unfair price and agreeing to transaction terms that improperly inhibit alternative transactions. One of the lawsuits separately alleges that the Company aided and abetted the directors’ breaches of fiduciary duties, and another of the lawsuits alleges that Schlumberger aided and abetted the directors’ breaches of fiduciary duties. The various complaints seek, among other things, an injunction barring defendants from consummating the proposed transaction, declaratory relief and attorneys’ fees. The Company believes that the lawsuits are without merit and intends to defend these lawsuits vigorously.

63

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.   Controls and Procedures

Evaluation of disclosure controls and procedures.  Our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of December 31, 2009. Based upon that evaluation, our principal executive and financial officers concluded that as of December 31, 2009, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.  There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Design and evaluation of internal control over financial reporting.  Management’s Report on Internal Control over Financial Reporting and the Report of the Independent Registered Public Accounting Firm on the effectiveness of the Company’s internal control over financial reporting are set forth in Part II, Item 8 of this report on Form 10-K and are incorporated herein by reference.

Item 9B.   Other Information

None.

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

Information concerning the directors is set forth following the caption “Proposal 1: Election of Directors” in the Company’s definitive proxy statement to be filed no later than 120 days after the end of the fiscal year covered by this Form 10-K (the “Proxy Statement”), which information is incorporated herein by reference. Information concerning our executive officers and Code of Business Conduct and Ethics are set forth in Item 1 appearing in Part I of this Form 10-K. Information concerning compliance with Section 16(a) of the Exchange Act is set forth following the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.

Information concerning the Corporate Governance of the Company is set forth following the caption “Corporate Governance” in the Proxy Statement and is incorporated herein by reference.

Item 11.   Executive Compensation

Information for this item is set forth following the captions “Executive Compensation” and “Corporate Governance” in the Company’s Proxy Statement and is incorporated herein by reference.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information for this item is set forth following the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Company’s Proxy Statement and is incorporated herein by reference.

64

Item 13.   Certain Relationships and Related Transactions, and Director Independence

Information for this item is set forth following the captions “Certain Relationships and Related Transactions” and “Corporate Governance” in the Company’s Proxy Statement and is incorporated herein by reference.

Item 14.   Principal Accountant Fees and Services

Information for this item is set forth following the captions “Fees Paid to Deloitte & Touche LLP” and “Services Provided by Deloitte & Touche LLP” in the Company’s Proxy Statement and is incorporated herein by reference.

PART IV

Item 15.   Exhibits and Financial Statement Schedules

		Page
		Reference
(a)(1)	Financial statements included in this report:
	Management’s Report on Internal Control Over Financial Reporting		28
	Reports of Independent Registered Public Accounting Firm		29
	Consolidated Balance Sheets at December 31, 2009 and 2008		31
	Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007		32
	Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007		33
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007		34
	Notes to Consolidated Financial Statements		35
(2)	Financial Statement Schedule II — Valuation and Qualifying Accounts and Reserves		69

All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or notes thereto.

(3) Exhibits

Exhibits designated with an “*” are filed, and with an “**” are furnished, as an exhibit to this Annual Report on Form 10-K. Exhibits designated with a “+” are identified as management contracts or compensatory plans or arrangements. Exhibits previously filed as indicated below are incorporated by reference.

3	.1	—	Restated Certificate of Incorporation of the Company dated July 26, 2005, as amended on June 4, 2008. Filed as Exhibit 3.1 to the Company’s report on Form 10-Q for the quarter ended June 30, 2008 and incorporated herein by reference.
3	.2	—	Amended and Restated Bylaws of the Company dated October 22, 2008. Filed as Exhibit 3.1 to the Company’s report on Form 8-K filed on October 28, 2008 and incorporated herein by reference.
4	.1	—	Rights Agreement, dated as of June 8, 2000, between the Company and First Chicago Trust Company of New York, as Rights Agent. Filed as Exhibit 4.1 to the Company’s report on Form 8-A, dated June 15, 2000, and incorporated herein by reference.
4	.2	—	Amendment to Rights Agreement dated June 8, 2000, by and among the Company and First Chicago Trust Company of New York and effective as of October 1, 2001. Filed as Exhibit 4.1 to the Company’s report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.
4	.3	—	Amendment No. 2 to Rights Agreement by and among the Company and EquiServe Trust Company, N.A. and effective as of December 31, 2002. Filed as Exhibit 4.3 to the Company’s report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.

65

4	.4	—	Amendment No. 3, dated as of February 21, 2010, to the Rights Agreement, dated as of June 8, 2000, between Smith International, Inc. and Computershare Trust Company, N.A. as rights agent. Filed as Exhibit 4.1 to the Company’s report on Form 8-K filed on February 22, 2010 and incorporated herein by reference.
4	.5	—	Form of Indenture between the Company and The Bank of New York, as Trustee. Filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-3 dated August 22, 1997 and incorporated herein by reference.
4	.6	—	First Supplemental Indenture dated as of March 19, 2009, between Smith International, Inc. and the Bank of New York Mellon, as Trustee, with respect to the issuance of the 8.625% Senior Notes due 2014 and the 9.750% Senior Notes due 2019. Filed as Exhibit 4.1 to the Company’s report on Form 8-K filed on March 20, 2009 and incorporated herein by reference.
4	.7	—	Form of Senior Note due 2011. Filed as Exhibit 4.1 to the Company’s report on Form 8-K filed on February 15, 2001 and incorporated herein by reference.
4	.8	—	Form of 8.625% Senior Notes due 2014. Filed as Exhibit 4.2 to the Company’s report on Form 8-K filed on March 20, 2009 and incorporated herein by reference.
4	.9	—	Form of Senior Note due 2016. Filed as Exhibit 4.1 to the Company’s report on Form 8-K filed on June 15, 2006 and incorporated herein by reference.
4	.10	—	Form of 9.750% Senior Notes due 2019. Filed as Exhibit 4.3 to the Company’s report on Form 8-K filed on March 20, 2009 and incorporated herein by reference.
10	.1+	—	Smith International, Inc. Third Amended and Restated 1989 Long-Term Incentive Compensation Plan, effective January 1, 2008. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on May 19, 2008 and incorporated herein by reference.
10	.2+*	—	First Amendment to the Smith International, Inc. Third Amended and Restated 1989 Long-Term Incentive Compensation Plan.
10	.3+*	—	Second Amendment to the Smith International, Inc. Third Amended and Restated 1989 Long-Term Incentive Compensation Plan.
10	.4+	—	Smith International, Inc. Form of Nonstatutory Option Agreement as amended December 2006. Filed as Exhibit 10.5 to the Company’s report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10	.5+	—	Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December 2005. Filed as Exhibit 10.4 to the Company’s report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
10	.6+	—	Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December 2006. Filed as Exhibit 10.7 to the Company’s report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10	.7+	—	Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December 2007. Filed as Exhibit 10.7 to the Company’s report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
10	.8+	—	Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December 2008. Filed as Exhibit 10.7 to the Company’s report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference.
10	.9+*	—	Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December 2009.
10	.10+	—	Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement as amended December 2006. Filed as Exhibit 10.9 to the Company’s report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10	.11+	—	Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement as amended December 2007. Filed as Exhibit 10.10 to the Company’s report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
10	.12+	—	Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement as amended December 2008. Filed as Exhibit 10.11 to the Company’s report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference.

66

10	.13+*	—	Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement as amended December 2009.
10	.14+	—	Director Compensation Summary of Smith International, Inc. effective January 1, 2008. Filed as Exhibit 10.11 to the Company’s report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
10	.15+	—	Form of Director Indemnification Agreement as of February 28, 2007. Filed as Exhibit 10.28 to the Company’s report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10	.16+	—	Smith International, Inc. Supplemental Executive Retirement Plan, as amended to date. Filed as Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.
10	.17+*	—	Smith International, Inc. Post-2004 Supplemental Executive Retirement Plan, as Amended and Restated Effective as of January 1, 2008.
10	.18+	—	Smith International, Inc. Amended and Restated Executive Officer Annual Incentive Plan effective as of January 1, 2008, dated October 17, 2007. Filed as Exhibit 10.14 to the Company’s report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
10	.19+	—	Employment Agreement effective January 1, 2009 between the Company and Doug Rock. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on December 19, 2008 and incorporated herein by reference.
10	.20+	—	Amended and Restated Employment Agreement dated December 31, 2008 between the Company and Bryan L. Dudman. Filed as Exhibit 10.19 to the Company’s Form 10-K for the year ended December 31, 2008 and incorporated herein by reference.
10	.21+	—	Form of Change-of-Control Employment Agreement as of April 2006. Filed as Exhibit 10.2 to the Company’s report on Form 8-K filed on May 1, 2006 and incorporated herein by reference.
10	.22+	—	Form of Change-of-Control Employment Agreement as of December 2008. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on December 23, 2008 and incorporated herein by reference.
10	.23+	—	Form of Change-of-Control Employment Agreement as of January 1, 2020. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on January 26, 2010 and incorporated herein by reference.
10	.24+	—	Form of Employment Agreement for Advisors as of April 2006. Filed as Exhibit 10.3 to the Company’s report on Form 8-K filed on May 1, 2006 and incorporated herein by reference.
10	.25+	—	Letter Agreement on Non-Competition between the Company and Loren K. Carroll dated May 9, 2008. Filed as Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by reference.
10	.26+	—	Separation Agreement dated September 25, 2009, executed on September 28, 2009, between Margaret K. Dorman and Smith International, Inc. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on October 1, 2009 and incorporated herein by reference.
10	.27+	—	Form of General Release between Margaret K. Dorman and Smith International, Inc. Filed as Exhibit 10.2 to the Company’s report on Form 8-K filed on October 1, 2009 and incorporated herein by reference.
10	.28+	—	Letter Agreement dated October 1, 2009 between William Restrepo and Smith International, Inc. Filed as Exhibit 10.3 to the Company’s report on Form 8-K filed on October 1, 2009 and incorporated herein by reference.
10	.29	—	Credit Agreement dated as of May 5, 2005 among the Company and M-I L.L.C., the Lenders From Time to Time Party Thereto and Comerica Bank, as Administrative Agent, ABN AMRO Bank N.V., as Syndication Agent, Den Norske Bank ASA, as Documentation Agent, and Calyon New York Branch and RBS Securities Corporation, as Co-Lead Arrangers and Joint Bookrunners. Filed as Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference.
10	.30	—	Third Amendment to May 5, 2005 Credit Agreement, dated March 3, 2009, among Smith International, Inc., M-I L.L.C., Comerica Bank, as administrative agent, the other agents named therein, and the lender parties thereto. Filed as Exhibit 10.2 to the Company’s report on Form 8-K filed on March 9, 2009 and incorporated herein by reference.

67

10	.31	—	Termination Notice related to the $400 Million Smith International, Inc. and M-I LLC Revolving Credit Facility dated May 5, 2005 between the Company and M-I LLC as borrowers and Comerica Bank as Administrative Agent for the Lenders therein. Filed as Exhibit 10.2 to the Company’s report on Form 8-K filed on December 14, 2009 and incorporated herein by reference.
10	.32	—	Credit Agreement dated as of August 20, 2008 among the Company, Fortis Bank SA/NV, New York Branch, as administrative agent, the other agents named therein, and the lenders parties thereto. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on August 25, 2008 and incorporated herein by reference.
10	.33	—	First Amendment to August 20, 2008 Credit Agreement, dated March 3, 2009, among Smith International, Inc., Fortis Bank SA/NV, New York Branch, as administrative agent, the other agents named therein and the lender parties thereto. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on March 9, 2009 and incorporated herein by reference.
10	.34	—	Credit Agreement, dated as of March 9, 2009, among Smith International, Inc., the Lenders from time to time party thereto, and DBN NOR Bank ASA, as administrative agent Calyon New York Branch, as syndication agent, Wells Fargo Bank, N.A., as senior managing agent, and DNB NOR Bank ASA and Calyon New York Branch as co-lead arrangers and joint bookrunners. Filed as Exhibit 10.3 to the Company’s report on Form 8-K filed on March 9, 2009 and incorporated herein by reference.
10	.35	—	Credit Agreement, dated as of July 24, 2009, among Smith International, Inc., the Lenders from time to time party thereto, and DNB NOR Bank ASA, as administrative agent, Wells Fargo Bank, N.A., as syndication agent, Calyon New York Branch, as senior managing agent, and DNB NOR Bank ASA and Wells Fargo Securities. LLC as co-lead arrangers and joint bookrunners. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on July 27, 2009 and incorporated herein by reference.
10	.36	—	Credit Agreement, dated as of December 10, 2009, among Smith International, Inc. and M-I LLC, the Lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent; Wells Fargo Bank, N.A., as syndication agent; Calyon New York Branch, DNB NOR Bank ASA and Fortis Bank SA/NV, New York Branch, as co-documentation agents; J.P. Morgan Securities Inc., Wells Fargo Securities, LLC, Calyon New York Branch, DNB NOR Bank ASA, as co-lead arrangers; and J.P. Morgan Securities Inc. and Wells Fargo Securities, LLC, as joint bookrunners. Filed as Exhibit 10.1 to the Company’s report on Form 8-K filed on December 14, 2009 and incorporated herein by reference.
10	.37	—	Agreement and Plan of Merger, dated as of February 21, 2010, by and among Schlumberger Limited (Schlumberger N.V.), Turnberry Merger Sub Inc., and Smith International, Inc. Filed as Exhibit 2.1 to the Company’s report on Form 8-K filed on February 22, 2010 and incorporated herein by reference.
21	.1*	—	Subsidiaries of the Company.
23	.1*	—	Consent of Independent Registered Public Accounting Firm.
31	.1*	—	Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2*	—	Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1**	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

68

SCHEDULE II

SMITH INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)

			Additions				Deductions
	Balance at		Charged							Balance at
	Beginning of Year		to Expense		Other(a)		Write-offs			End of Year
Allowance for doubtful accounts:
Year ended December 31, 2009	$	29,338	$	12,114	$	—	$	(11,718	)	$	29,734
Year ended December 31, 2008		17,278		9,795		9,022		(6,757	)		29,338
Year ended December 31, 2007		16,709		5,082		—		(4,513	)		17,278

(a) Amount represents accounts receivable reserves related to acquisitions made by the Company.

69

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

SMITH INTERNATIONAL, INC.

By:  /s/  John Yearwood

John Yearwood

Chief Executive Officer, President

and Chief Operating Officer

March 1, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the date indicated:

/s/  Doug Rock Doug Rock	Chairman of the Board	March 1, 2010
/s/  John Yearwood John Yearwood	Chief Executive Officer, President and Chief Operating Officer (principal executive officer) and Director	March 1, 2010
/s/  William Restrepo William Restrepo	Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer)	March 1, 2010
/s/  Loren K. Carroll Loren K. Carroll	Director	March 1, 2010
/s/  Dod A. Fraser Dod A. Fraser	Director	March 1, 2010
/s/  James R. Gibbs James R. Gibbs	Director	March 1, 2010
/s/  Robert Kelley Robert Kelley	Director	March 1, 2010
/s/  Luiz Rodolfo Landim Machado Luiz Rodolfo Landim Machado	Director	March 1, 2010
/s/  Duane Radtke Duane Radtke	Director	March 1, 2010

70

EX-10.2

EXHIBIT 10.2

FIRST AMENDMENT TO THE
SMITH INTERNATIONAL, INC.
THIRD AMENDED AND RESTATED
1989 LONG-TERM INCENTIVE COMPENSATION PLAN
(As Amended and Restated as of January 1, 2008)

W I T N E S S E T H

     WHEREAS, Smith International, Inc. (the “Company”) maintains the Smith International, Inc. Third Amended and Restated 1989 Long-Term Incentive Compensation Plan, as amended and restated effective as of January 1, 2008 (the “Plan”) for the purpose of providing additional incentives to officers and other valued employees of the Company; and

     WHEREAS, in Section 9.7 of the Plan, the Board of Directors of the Company (the “Board”) reserved the right to amend the Plan at any time; and

     WHEREAS, the Board now desires to amend the Plan to incorporate certain transition rules under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”);

     NOW, THEREFORE, the Plan is hereby amended by this First Amendment thereto, as follows:

     1. Section 9.18 is deleted, in its entirety, and replaced with the following new Section 9.18:

     9.18 Section 409A Compliance

To the extent that the Plan provides for the payment of amounts that constitute “nonqualified deferred compensation” under Code Section 409A, the Plan is intended to comply with the provisions of Section 409A so as to prevent the inclusion in gross income of any amounts deferred hereunder in a taxable year that is prior to the taxable year or years in which such amounts would otherwise be actually distributed and made available to Grantees or beneficiaries. Notwithstanding any other Plan provision to the contrary, payment of Incentive Awards under the Plan before December 31, 2008 may, at the Grantee’s election, be deferred or accelerated to a date that Grantee specifies in such election, subject to approval by the Committee, provided that (a) no amount otherwise payable in 2007 shall be deferred beyond 2007, (b) no amount otherwise payable after 2007 shall be accelerated and paid in 2007, (c) no amount otherwise payable in 2008 shall be deferred beyond 2008 unless the Grantee’s election was made not later than December 31, 2007, and (d) no amount otherwise payable after 2008 shall be accelerated and paid in 2008 unless the Grantee’s election was made not later than December 31, 2007. In the event that the Internal Revenue Service (or other governmental entity) extends this transition rule under Code Section 409A, such extension shall automatically apply to the Plan.

[Signature page follows.]

     IN WITNESS WHEREOF, this First Amendment to the Plan is hereby executed on this ___day of                     , 2008, to be effective as of the execution date.

ATTEST:	SMITH INTERNATIONAL, INC.
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

EX-10.3

EXHIBIT 10.3

SECOND AMENDMENT TO THE
SMITH INTERNATIONAL, INC.
THIRD AMENDED AND RESTATED
1989 LONG-TERM INCENTIVE COMPENSATION PLAN
(As Amended and Restated Effective as of January 1, 2008)

W I T N E S S E T H

     WHEREAS, Smith International, Inc. (the “Company”) maintains the Smith International, Inc. Third Amended and Restated 1989 Long-Term Incentive Compensation Plan, as Amended and Restated effective as of January 1, 2008 (the “Plan”), for the purpose of providing additional incentives to officers and other valued employees of the Company; and

     WHEREAS, in Section 9.7 of the Plan, the Board of Directors of the Company (the “Board”) reserved the discretionary right to amend the Plan at any time; and

     WHEREAS, the Board now desires to amend the Plan to permit Grantees to elect to defer the receipt of Shares payable upon the vesting of Restricted Stock Unit Awards;

     NOW, THEREFORE, effective as December 1, 2009, the Plan is hereby amended by this Second Amendment thereto, as follows:

     1. A new Section 5.2(d) is added to the Plan and the existing Section 5.2(d) is deleted in its entirety:

(d) Initial Deferral of Restricted Stock Unit Awards. As permitted in the discretion of the Committee and subject to such terms and conditions as required by the Committee, a Grantee may elect in writing to defer the receipt of Shares that become payable upon vesting of a Restricted Stock Unit Award; provided, however, that such election be made by the Grantee not later than by the end of the calendar year that immediately precedes the calendar year during which the applicable performance period begins. Notwithstanding the previous sentence, at the discretion of the Committee and subject to such terms and conditions as required by the Committee, a Grantee who is first eligible to participate in the Plan under Section 1.7 may elect in writing to defer receipt of his initial Restricted Stock Unit Award under the Plan within thirty (30) days after the grant date of such Restricted Stock Unit Award. Any deferral election made by the Grantee pursuant to this Section 5.2(d) must be consistent with the requirements of Code Section 409A and shall be construed accordingly.

     2. A new Section 5.2(e) is hereby added to the Plan:

(e) Subsequent Deferrals. As permitted in the discretion of the Committee and subject to such terms and conditions as required by the Committee, if a Grantee has previously made an initial deferral election pursuant to Section 5.2(d), the Grantee may elect in writing to defer the receipt of Shares payable upon vesting of the outstanding Restricted Stock Unit Award; provided, however, that (i) such election will not take effect until at least twelve (12) months after the date upon which the election is made by the Grantee, (ii) except in the case of payment on account of the Grantee’s death or Disability, the payment with respect to which such election is made must be deferred for a period of not less than five (5) years from the date the payment would otherwise have been paid, and (iii) such election may not be made less than twelve (12) months prior to the date the payment was otherwise scheduled to be made. Any subsequent deferral election made by the Grantee pursuant to this Section 5.2(e) must be consistent with the requirements of Code Section 409A and shall be construed accordingly.

     3. Section 9.6 is hereby deleted in its entirety and replaced with the following:

          9.6 [RESERVED].

     IN WITNESS WHEREOF, this Second Amendment to the Plan is hereby approved and executed on this ___day of ___, 2009, to be effective as of December 1, 2009.

ATTEST:	SMITH INTERNATIONAL, INC.
By:	By:
Name:	Name:

Title:	Title:
Date:	Date:

EX-10.9

EXHIBIT 10.9

Grantee:     <Name>

Employee Number:     <Employee Number>

Grant ID:     <ID>

Grant Date:     <GrantDate>

Grant Expiration (10-years from Grant Date):     <ExpirationDate>

Grant Price:      $0.00

Grant Type: Time-Based Restricted Stock Units

Total Restricted Stock Units:     <Total Units>

Vesting Date	Units
<VestDate1>	<Installment1>
<VestDate2>	<Installment2>
<VestDate3>	<Installment3>
<VestDate4>	<Installment4>
Total	<Total Units>

SMITH INTERNATIONAL, INC.
RESTRICTED STOCK UNIT AGREEMENT

     THIS RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”) is made and entered into by and between Smith International, Inc., a Delaware corporation (the “Company”) and the individual named above, an individual and Employee of the Company or one of its Subsidiaries (“Grantee”), on the issue date (or grant date) indicated above, subject to the terms and provisions of the Smith International, Inc., Third Amended and Restated 1989 Long-Term Incentive Compensation Plan, as amended from time to time (the “Plan”). The Plan is hereby incorporated herein in its entirety by this reference. Capitalized terms not otherwise defined in this Agreement shall have the meaning given to such terms in the Plan.

     WHEREAS, Grantee is an Employee of the Company or one of its Subsidiaries, and in connection therewith, the Company desires to grant to Grantee restricted stock units (“Units”), subject to the terms and conditions of this Agreement and the Plan, with a view to increasing Grantee’s interest in the Company’s success and growth; and

     WHEREAS, Grantee desires to be the holder of such Units subject to the terms and conditions of this Agreement;

     NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

     1. Grant of Units. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to Grantee the number of units indicated above. On any date, the value of each Unit shall be the Fair Market Value of one share of the Company’s Common Stock (“Share”), $1.00 par value, as determined pursuant to the Plan. Each Unit represents an unsecured promise of the Company to deliver Shares to Grantee pursuant to the terms and conditions of the Plan and this Agreement. As a holder of Units, Grantee has only the rights of a general unsecured creditor of the Company.

     2. Transfer Restrictions. Grantee shall not sell, assign, transfer, exchange, pledge, encumber, gift, devise, hypothecate or otherwise dispose of (collectively, “Transfer”) any Units granted hereunder. Any purported Transfer of Units in breach of this Agreement shall be void and ineffective, and shall not operate to Transfer any interest or title in the purported transferee.

     3. Vesting and Payment of Units.

          (a) Vesting Generally. Grantee’s interest in the Units granted hereunder shall vest in accordance with the schedule above, conditioned on Grantee’s continued employment with the Company or one of its Subsidiaries as of each such vesting date (the “Vesting Date”), except as provided in Section 4 hereof; provided, however, that within ninety (90) days after the Units are granted, the Grantee must open a brokerage account with the brokerage firm or third-party administrator designated by the Company to receive the Shares obtained pursuant to
Section 3(b), or such Units shall be forfeited and lapse without further notice.

          (b) Settlement of Units. Subject to Section 6 hereof, the Company shall grant to Grantee within thirty (30) days after each Vesting Date, or such other date upon which Units become vested as provided in this Agreement, a number of Shares equal to the number of such vested Units (provided Grantee has not terminated employment prior to such Vesting Date), unless otherwise provided under Section 4 hereof. Each vested Unit shall thus be exchanged by the Company for one Share, and such Unit shall be cancelled as of the effective time of such exchange as reflected on the Company’s stock records. All Shares delivered to or on behalf of Grantee in exchange for vested Units shall be free of any further vesting, transfer or other restrictions, except as may otherwise be required by securities law or other applicable law as determined by the Company.

          (c) Dividends, Splits and Voting Rights. If the Company (i) declares a stock dividend or makes a distribution on Common Stock in Shares, (ii) subdivides or reclassifies outstanding Shares into a greater number of Shares or (iii) combines or reclassifies outstanding Shares into a smaller number of Shares, then the number of Units granted under this Agreement shall be proportionately increased or reduced, as applicable, so as to prevent the enlargement or dilution of Grantee’s rights and duties hereunder. The determination of the Compensation and Benefits Committee (the “Committee”) of the Company’s Board of Directors regarding such adjustments shall be binding. Until such time as Shares are actually delivered to Grantee in exchange for vested Units pursuant to Section 3(b) (above), Grantee shall have no voting, dividend or other ownership rights in such Shares.

     4. Forfeiture.

          (a) Termination Due to Death or Disability. If Grantee’s employment with the Company or one of its Subsidiaries is terminated due to death or Disability of Grantee, then, in either such event, all outstanding Units hereunder shall become fully vested as of such termination date and payable to Grantee in Shares within thirty (30) days after such date.

          For purposes of this Section 4(a), “Disability” means, as determined by the Committee in its discretion exercised in good faith, a physical or mental condition of Grantee that would entitle Grantee to payment of disability income payments under the Company’s long-term disability insurance policy or plan for employees, as then effective, if any; or in the event that Grantee is not covered, for whatever reason, under the Company’s long-term disability insurance policy or plan, “Disability” means a permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). A determination of Disability may be made by a physician selected or approved by the Committee and, in this respect, Grantee must submit to any reasonable examination(s) required by such physician upon request in order to render an opinion regarding whether there is a Disability.

          (b) Termination Other than Death or Disability. If Grantee’s employment with the Company or one of its Subsidiaries is voluntarily or involuntarily terminated by the Company or one of its Subsidiaries or Grantee for any reason other than due to death or Disability, then Grantee shall immediately forfeit all Units which are not already vested as of such date. Upon the forfeiture of any Units hereunder, Grantee shall cease to have any rights in connection with such Units as of the date of such forfeiture. A transfer of employment by Grantee, without an interruption of employment service, between or among the Company and any Subsidiary of the Company shall not be considered a termination of employment for purposes of this Agreement.

     5. Grantee’s Representations. Notwithstanding any provision hereof to the contrary, Grantee hereby agrees and represents that Grantee will not acquire any Shares, and that the Company will not be obligated to issue any Shares to Grantee hereunder, if the issuance of such Shares constitutes a violation by Grantee or the Company of any law or regulation of any governmental authority. Any determination in this regard that is made by the Committee, in good faith, shall be final and binding. The rights and obligations of the Company and Grantee are subject to all applicable laws and regulations.

     6. Tax Withholding. To the extent that the receipt of Shares hereunder results in compensation income to Grantee for local income tax purposes under applicable law, the Company, in its complete discretion, is authorized to (a) withhold, at such time as determined by the Company, from any cash or other remuneration (including withholding from delivery to Grantee a number of Shares, based on the market value of such Shares, as of the applicable Vesting Date), or a

combination thereof, then or thereafter payable to Grantee, the sum that the Company requires to meet its tax withholding obligations under applicable law or regulation (the “Withholding Liability”); (b) require Grantee to pay an amount, at such time as the Company shall specify, equal to the Withholding Liability in cash, by certified or cashier’s check payable to the Company, or in any other form acceptable to the Company; or (c) cause a sale or sales of Shares on behalf of Grantee pursuant to which all or a portion of the proceeds are paid to the Company to satisfy the Withholding Liability and all remaining proceeds (if any) are delivered to Grantee, and Grantee agrees to take all such action as may be necessary or appropriate to effect such sales. Further, the Company’s obligation to deliver vested Shares, or any stock certificate or certificates representing vested Shares, to Grantee shall be subject to, and conditioned upon, payment of the Withholding Liability.

     7. Par Value Paid Consideration for Shares. In addition to the valuable services rendered by Grantee for the Company, upon the issuance of any Shares after they become vested hereunder, to the extent permitted by applicable law, a portion of the resulting compensation that is includible in Grantee’s income for income tax purposes under applicable law shall represent consideration paid by Grantee for such Shares in an amount equal to the aggregate par value of such vested Shares.

     8. Miscellaneous.

          (a) No Fractional Shares. All provisions of this Agreement concern whole Shares. If the application of any provision hereunder would yield a fractional Share, such fractional Share shall be rounded down to the next whole Share.

          (b) No Effect on Employment or Service. Grantee acknowledges and agrees that the vesting of the Units pursuant to Section 3 hereof is earned only by continuing as an employee. Grantee further acknowledges and agrees that this Agreement, the transactions contemplated hereunder and the vesting schedule set forth herein do not constitute an express or implied promise of continued engagement as an employee for the vesting period, for any period, or at all, and will not interfere with Grantee’s right, or the Company’s or Subsidiary’s right, to terminate Grantee’s relationship as an employee at any time.

          (c) Dispute Resolution. To the extent permitted by applicable law, any dispute or controversy arising out of or relating to this Agreement, or any breach hereof, shall be resolved by binding arbitration in accordance with (i) the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (“AAA”) before a single arbitrator (unless otherwise mutually agreed by the parties) as selected pursuant to the Rules and (ii) the Federal Arbitration Act. Judgment on any award rendered by the arbitrator may be entered in any court of competent jurisdiction. The venue for any arbitration proceeding shall be in Harris or Montgomery County, Texas, except if otherwise mutually agreed by the parties. The fees of the AAA and the arbitrator shall be split equally by the parties. All other costs and expenses, including attorneys’ fees, relating to the resolution of any such dispute shall be borne by the party incurring such costs and expenses.

          (d) Tax Consultation. Grantee understands that he or she may suffer adverse tax consequences as a result of the grant, vesting or settlement of the Units granted hereunder. Grantee represents that he or she has consulted with any tax consultants he or she deems advisable in connection with the acquisition or disposition of the Units and that he or she is not relying on the Company or Subsidiary for any tax advice.

          (e) Nature of the Grant. In accepting this Agreement, Grantee acknowledges that:

               (i) the Plan is established voluntarily by the Company, it is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

               (ii) the grant of the Units is voluntary and occasional and does not create any contractual or other right to receive future awards of Units, or benefits in lieu of Units, even if Units have been awarded repeatedly in the past;

               (iii) all decisions with respect to future grants of Units, if any, will be at the sole discretion of the Company;

               (iv) Grantee’s participation in the Plan is voluntary;

               (v) Units are an extraordinary item that do not constitute compensation of any kind for services of any kind rendered to the Company or any Subsidiary, and Units are outside the scope of Grantee’s employment contract, if any;

               (vi) Units are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or any Subsidiary;

               (vii) the future value of the underlying Shares is unknown and cannot be predicted with certainty;

               (viii) the value of the Shares acquired upon settlement of the Units may increase or decrease in value; and

               (ix) in consideration of the grant of the Units, no claim or entitlement to compensation or damages arises from termination of the Units or diminution in value of the Units or Shares acquired upon settlement of the Units resulting from termination of Grantee’s employment by the Company or any Subsidiary (for any reason whatsoever and whether or not in breach of local labor laws), and Grantee irrevocably releases the Company and each Subsidiary from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, Grantee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.

          (f) Data Privacy Notice and Consent. Grantee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described in this Agreement by and among, as applicable, the Company and its Subsidiaries and other affiliates for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan.

               Grantee understands that the Company and its Subsidiaries may hold certain personal information about Grantee, including, but not limited to, Grantee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company and its Subsidiaries, details of all Units or any other entitlement to Shares awarded, canceled, vested, unvested or outstanding in Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”).

               Grantee understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in Grantee’s country or elsewhere, and that the recipients’ countries may have different data privacy laws and protections than Grantee’s country. Grantee understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative. Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker, escrow agent or other third party with whom the Shares received upon settlement of the Units may be deposited. Grantee understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. Grantee understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consent herein, in any case without cost, by contacting in writing his or her local human resources representative. Grantee understands, however, that refusal or withdrawal of consent may affect his or her ability to participate in the Plan and, to the extent permitted by applicable law, may void this Agreement. For more information on the consequences of his or her refusal to consent or withdrawal of consent, Grantee understands that he or she may contact his or her local human resources representative.

          (g) Language. If Grantee has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

          (h) Delivery of Documents and Notices. Any document relating to participating in the Plan and/or notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery, by telegram, telex, telecopy or similar facsimile means, electronic delivery, or upon deposit in the U.S. Post Office or foreign postal service, by certified or registered mail, return receipt requested, with postage and fees prepaid, addressed to the Company at its then-current main corporate address or by electronic mail to StockLink@smith.com, and to Grantee at his or her address indicated on the Company’s records, at the e-mail address, if any, provided for Grantee by the Company or its Subsidiary, or at such other address and number as a party has previously designated in writing from time to time to the other party.

               (i) Description of Electronic Delivery. The Plan documents, which may include but do not necessarily include the Plan Prospectus, this Agreement and U.S. financial reports of the Company, may be delivered to Grantee electronically. Such means of delivery may include but do not necessarily include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via electronic mail or such other delivery determined at the Company’s discretion.

               (ii) Consent to Electronic Delivery. Grantee acknowledges that Grantee has read this Section 8(h) of this Agreement and consents to the electronic delivery of the Plan documents. Grantee acknowledges that he or she may receive from the Company a paper copy of any documents delivered electronically at no cost if Grantee contacts the Company by telephone, through a postal service or electronic mail at StockLink@smith.com. Grantee further acknowledges that Grantee will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, Grantee understands that Grantee must provide the Company or any designated third party with a paper copy of any documents delivered electronically by Grantee if electronic delivery fails. Grantee understands that Grantee’s consent may be revoked or changed, including any change in the electronic mail address to which documents are delivered (if Grantee has provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at StockLink@smith.com. Finally, Grantee understands that he or she is not required to consent to electronic delivery but that, to the extent permitted by applicable law, such refusal may affect Grantee’s ability to participate in the Plan.

          (i) Amendment, Termination and Waiver. This Agreement may be amended, modified, terminated or superseded only by written instrument executed by or on behalf of the Company and by Grantee. Any waiver of the terms or conditions hereof shall be made only by a written instrument executed and delivered by the party waiving compliance. Any waiver granted by the Company shall be effective only if executed and delivered by a duly authorized executive officer of the Company other than Grantee. The failure of any party at any time or times to require performance of any provisions hereof shall in no manner affect the right to enforce the same. No waiver by any party of any term or condition herein, or the breach thereof, in one or more instances shall be deemed to be, or construed as, a further or continuing waiver of any such condition or breach or a waiver of any other condition or the breach of any other term or condition.

          (j) Governing Law and Severability. This Agreement shall be governed by the internal laws, and not the laws of conflict, of the State of Texas. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect.

          (k) Successors and Assigns. This Agreement shall bind, be enforceable by, and inure to the benefit of, the Company and its successors and assigns, and Grantee and Grantee’s permitted assigns under the Plan in the event of death or Disability.

[Signature page follows]

     IN WITNESS WHEREOF, this Restricted Stock Unit Agreement is approved, granted and executed as of the date first written above.

SMITH INTERNATIONAL, INC.
By:
Name:	Malcolm W. Anderson
Title:	Senior Vice President, Human Resources

EX-10.13

Exhibit 10.13

Grantee: <Name>

Employee Number: <Employee Number>

Grant ID: <ID>

Grant Date: <GrantDate>

Grant Expiration (10-years from Grant Date): <ExpirationDate>

Grant Price: $<GrantPrice>

Grant Type: Performance-Based Restricted Stock Units

Total Target Restricted Stock Units: <Total Units>

Vesting Date	Target Units
<VestDate1>	<Installment1>
<VestDate2>	<Installment2>
<VestDate3>	<Installment3>
TOTAL	<Total Units>

SMITH INTERNATIONAL, INC.
PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT

     THIS PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”) is made and entered into by and between Smith International, Inc., a Delaware corporation (the “Company”) and the individual named above, an individual and Employee of the Company or one of its Subsidiaries (“Grantee”), on the issue date (or grant date) indicated above, subject to the terms and provisions of the Smith International, Inc., Third Amended and Restated 1989 Long-Term Incentive Compensation Plan, as amended from time to time (the “Plan”). The Plan is hereby incorporated herein in its entirety by this reference. Capitalized terms not otherwise defined in this Agreement shall have the meaning given to such terms in the Plan.

     WHEREAS, Grantee is an Employee of the Company or one of its Subsidiaries, and in connection therewith, the Company desires to grant to Grantee performance-based restricted stock units, subject to the terms and conditions of this Agreement and the Plan, with a view to increasing Grantee’s interest in the Company’s success and growth; and

     WHEREAS, Grantee desires to be the holder of such units subject to the terms and conditions of this Agreement;

     NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

     1. Grant of Target Units. Subject to the terms and conditions of this Agreement and the Plan, the Company hereby grants to Grantee the number of shares indicated above Target Units (“Target Units”). Subject to Section 3 hereof, each Target Unit shall initially represent one share of the Company’s Common Stock (“Share”), $1.00 par value. Each Target Unit represents an unsecured promise of the Company to deliver Shares to Grantee pursuant to the terms and conditions of the Plan and this Agreement. As a holder of Target Units, Grantee has only the rights of a general unsecured creditor of the Company.

     2. Transfer Restrictions. Grantee shall not sell, assign, transfer, exchange, pledge, encumber, gift, devise, hypothecate or otherwise dispose of (collectively, “Transfer”) any Target Units granted hereunder. Any purported Transfer of Target Units in breach of this Agreement shall be void and ineffective, and shall not operate to Transfer any interest or title in the purported transferee.

     3. Performance Criteria and Stock Awards. Upon satisfaction of the Performance Criteria as established by the Compensation and Benefits Committee of the Company’s Board of Directors (the “Committee”) no later than ninety (90) days after the beginning of the Performance Period to which this Agreement relates, the Company shall determine the number of Shares payable to Grantee as provided under this Agreement, subject to certification by the Committee that the specified Performance Criteria have been satisfied. The Performance Criteria are hereby incorporated into this Agreement by reference. The maximum number of Shares of the Company’s Common Stock that will be awarded under this Agreement is determined as a percentage of Grantee’s Target Units, with such percentage based on the annual Performance Criteria as established by the Committee in accordance with the terms of the Plan.

     4. Vesting and Payment of Target Units.

          (a) Grantee’s interest in the Target Units granted hereunder shall vest in accordance with the schedule above, conditioned on Grantee’s continued employment with the Company or one of its Subsidiaries as of each such vesting date (the “Vesting Date”), except as provided in Section 5 hereof; provided, however, that within ninety (90) days after the Target Units are granted the Grantee must open a brokerage account with a brokerage firm or third-party administrator designated by the Company to receive the Shares obtained pursuant to Section 4(b), or such units shall be forfeited and lapse without further notice.

          (b) Settlement of Target Units. Subject to Section 7 hereof, the Company shall grant to Grantee, within two and one-half (2¹/2) months after the end of the calendar year in which Target Units become vested pursuant to Section 4(a) above, a number of Shares equal to the number of such vested Target Units determined in accordance with Sections 3 and 4, (provided Grantee has not terminated employment prior to the applicable Vesting Date) unless otherwise provided under Section 5 hereof. Each vested Target Unit shall thus be exchanged by the Company for one Share, and such Target Unit shall be cancelled as of the effective time of such exchange as reflected on the Company’s stock records. All Shares delivered to or on behalf of Grantee in exchange for vested Target Units shall be subject to any further vesting, transfer or other restrictions as may be required by securities law or other applicable law as determined by the Company.

          (c) Dividends, Splits and Voting Rights. If the Company (i) declares a stock dividend or makes a distribution on Common Stock in Shares, (ii) subdivides or reclassifies outstanding Shares into a greater number of Shares, or (iii) combines or reclassifies outstanding Shares into a smaller number of Shares, then the number of Target Units granted under this Agreement shall be proportionately increased or reduced, as applicable, so as to prevent the enlargement or dilution of Grantee’s rights and duties hereunder. The determination of the Committee regarding such adjustments shall be binding. Until such time as Shares are actually delivered to Grantee in exchange for vested Target Units pursuant to Section 4(b) (above), Grantee shall have no voting, dividend or other ownership rights in such Shares.

     5. Forfeiture.

          (a) Termination Due to Death or Disability. If Grantee’s employment with the Company or one of its Subsidiaries is terminated due to death or Disability of Grantee, then, in either such event, all outstanding Units hereunder shall become fully vested as of such termination date and shall be payable to Grantee, or Grantee’s Beneficiary in the event of Grantee’s death, in Shares at 100% of the target level for the designated Performance Criteria Pursuant to Section 3. Such payment shall be made within thirty (30) days after such date; provided, however, that if Grantee’s employment with the Company is terminated due to death or Disability of Grantee before the date upon which the number of Shares payable to Grantee is determined under Section 3, then payment for such outstanding Units that are payable hereunder shall be made to Grantee, or Grantee’s Beneficiary in the event of Grantee’s death, within the time provided under Section 4(b).

          For purposes of this Section 5(a), “Disability” means, as determined by the Committee in its discretion exercised in good faith, a physical or mental condition of Grantee that would entitle Grantee to payment of disability income payments under the Company’s long-term disability insurance policy or plan for employees, as then effective, if any; or in the event that Grantee is not covered, for whatever reason, under the Company’s long-term disability insurance policy or plan, “Disability” means a permanent, and total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). A determination of Disability may be made by a physician selected or approved by the Committee and, in this respect, Grantee must submit to any reasonable examination(s) required by such physician upon request in order to render an opinion regarding whether there is a Disability.

          (b) Termination Other than Death or Disability. If Grantee’s employment with the Company or one of its Subsidiaries is voluntarily or involuntarily terminated by the Company or one of its Subsidiaries or Grantee for any reason other than due to death or Disability, then Grantee shall immediately forfeit all Target Units which are not already vested as of such date. Upon the forfeiture of any Target Units hereunder, Grantee shall cease to have any rights in connection with such Target Units as of the date of such forfeiture. A transfer of employment by Grantee, without an interruption of employment service, between or among the Company and any Subsidiary of the Company shall not be considered a termination of employment for purposes of this Agreement.

     6. Grantee’s Representations. Notwithstanding any provision hereof to the contrary, Grantee hereby agrees and represents that Grantee will not acquire any Shares, and that the Company will not be obligated to issue any Shares to Grantee hereunder, if the issuance of such Shares constitutes a violation by Grantee or the Company of any law or regulation of any governmental authority. Any determination in this regard that is made by the Committee, in good faith, shall be final and binding. The rights and obligations of the Company and Grantee are subject to all applicable laws and regulations.

     7. Tax Withholding. To the extent that the receipt of Shares hereunder results in compensation income to Grantee for income tax purposes under applicable law, the Company, in its complete discretion, is authorized to (a) withhold, at such time as determined by the Company, from any cash or other remuneration (including withholding from delivery to Grantee a number of Shares, based on the market value of such Shares, as of the applicable Vesting Date), or combination thereof, then or thereafter payable to Grantee, an amount that the Company requires to meet its tax withholding obligations under applicable law or regulation (the “Withholding Liability”); or (b) require Grantee to pay an amount, at such time as the Company shall specify, equal to the Withholding Liability in cash, by certified or cashier’s check payable to the Company, or in any other form acceptable to the Company. Further, the Company’s obligation to deliver vested Shares, or any stock certificate or certificates representing vested Shares, to Grantee shall be subject to, and conditioned upon, payment of the Withholding Liability.

     8. Par Value Paid Consideration for Shares. In addition to the valuable services rendered by Grantee for the Company, upon the issuance of any Shares after they become vested hereunder, to the extent permitted by applicable law, a portion of the resulting compensation that is includible in Grantee’s income for income tax purposes under applicable law shall represent consideration paid by Grantee for such Shares in an amount equal to the aggregate par value of such vested Shares.

     9. Miscellaneous.

          (a) No Fractional Shares. All provisions of this Agreement concern whole Shares. If the application of any provision hereunder would yield a fractional Share, such fractional Share shall be rounded down to the next whole Share.

          (b) No Effect on Employment or Service. Grantee acknowledges and agrees that the vesting of the Units pursuant to Section 4 hereof is earned only by continuing as an employee. Grantee further acknowledges and agrees that this Agreement, the transactions contemplated hereunder and the vesting schedule set forth herein do not constitute an express or implied promise of continued engagement as an employee for the vesting period, for any period, or at all, and will not interfere with Grantee’s right, or the Company’s or Subsidiary’s right, to terminate Grantee’s relationship as an employee at any time.

          (c) Dispute Resolution. To the extent permitted by applicable law, any dispute or controversy arising out of or relating to this Agreement, or any breach hereof, shall be resolved by binding arbitration in accordance with (i) the Commercial Arbitration Rules (“Rules”) of the American Arbitration Association (“AAA”) before a single arbitrator (unless otherwise mutually agreed by the parties) as selected pursuant to the Rules and (ii) the Federal Arbitration Act. Judgment on any award rendered by the arbitrator may be entered in any court of competent jurisdiction. The venue for any arbitration proceeding shall be in Harris or Montgomery County, Texas, except if otherwise mutually agreed by the parties. The fees of the AAA and the arbitrator shall be split equally by the parties. All other costs and expenses, including attorneys’ fees, relating to the resolution of any such dispute shall be borne by the party incurring such costs and expenses.

          (d) Tax Consultation. Grantee understands that he or she may suffer adverse tax consequences as a result of the grant, vesting or settlement of the Units granted hereunder. Grantee represents that he or she has consulted with any tax consultants he or she deems advisable in connection with the acquisition or disposition of the Units and that he or she is not relying on the Company or Subsidiary for any tax advice.

          (e) Nature of the Grant. In accepting this Agreement, Grantee acknowledges that:

               (i) the Plan is established voluntarily by the Company, it is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

               (ii) the grant of the Units is voluntary and occasional and does not create any contractual or other right to receive future awards of Units, or benefits in lieu of Units, even if Units have been awarded repeatedly in the past;

               (iii) all decisions with respect to future grants of Units, if any, will be at the sole discretion of the Company;

               (iv) Grantee’s participation in the Plan is voluntary;

               (v) Units are an extraordinary item that do not constitute compensation of any kind for services of any kind rendered to the Company or any Subsidiary, and Units are outside the scope of Grantee’s employment contract, if any;

               (vi) Units are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or any Subsidiary;

               (vii) the future value of the underlying Shares is unknown and cannot be predicted with certainty;

               (viii) the value of the Shares acquired upon settlement of the Units may increase or decrease in value; and

               (ix) in consideration of the grant of the Units, no claim or entitlement to compensation or damages arises from termination of the Units or diminution in value of the Units or Shares acquired upon settlement of the Units resulting from termination of Grantee’s employment by the Company or any Subsidiary (for any reason whatsoever and whether or not in breach of local labor laws), and Grantee irrevocably releases the Company and each Subsidiary from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, Grantee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.

          (f) Data Privacy Notice and Consent. Grantee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described in this Agreement by and among, as applicable, the Company and its Subsidiaries and other affiliates for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan.

               Grantee understands that the Company and its Subsidiaries may hold certain personal information about Grantee, including, but not limited to, Grantee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company and its Subsidiaries, details of all Units or any other entitlement to Shares awarded, canceled, vested, unvested or outstanding in Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”).

               Grantee understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in Grantee’s country or elsewhere, and that the recipients’ countries may have different data privacy laws and protections than Grantee’s country. Grantee understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative. Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker, escrow agent or other third party with whom the Shares received upon settlement of the Units may be deposited. Grantee understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. Grantee understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consent herein, in any case without cost, by contacting in writing his or her local human resources representative. Grantee understands, however, that refusal or withdrawal of consent may affect his or her ability to participate in the Plan and, to the extent permitted by applicable law, may void this Agreement. For more information on the consequences of his or her refusal to consent or withdrawal of consent, Grantee understands that he or she may contact his or her local human resources representative.

          (g) Language. If Grantee has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

          (h) Delivery of Documents and Notices. Any document relating to participating in the Plan and/or notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery, by telegram, telex, telecopy or similar facsimile means, electronic delivery, or upon deposit in the U.S. Post Office or foreign postal service, by certified or registered mail, return receipt requested, with postage and fees prepaid, addressed to the Company at its then-current main corporate address or by electronic mail to StockLink@smith.com, and to Grantee at his or her address indicated on the Company’s records, at the e-mail address, if any, provided for Grantee by the Company or its Subsidiary, or at such other address and number as a party has previously designated in writing from time to time to the other party.

               (i) Description of Electronic Delivery. The Plan documents, which may include but do not necessarily include the Plan Prospectus, this Agreement and U.S. financial reports of the Company, may be delivered to Grantee electronically. Such means of delivery may include but do not necessarily include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via electronic mail or such other delivery determined at the Company’s discretion.

               (ii) Consent to Electronic Delivery. Grantee acknowledges that Grantee has read this Section 9(h) of this Agreement and consents to the electronic delivery of the Plan documents. Grantee acknowledges that he or she may receive from the Company a paper copy of any documents delivered electronically at no cost if Grantee contacts the Company by telephone, through a postal service or electronic mail at StockLink@smith.com. Grantee further acknowledges that Grantee will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, Grantee understands that Grantee must provide the Company or any designated third party with a paper copy of any documents delivered electronically by Grantee if electronic delivery fails. Grantee understands that Grantee’s consent may be revoked or changed, including any change in the electronic mail address to which documents are delivered (if Grantee has provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at StockLink@smith.com. Finally, Grantee understands that he or she is not required to consent to electronic delivery but that, to the extent permitted by applicable law, such refusal may affect Grantee’s ability to participate in the Plan.

          (i) Amendment, Termination and Waiver. This Agreement may be amended, modified, terminated or superseded only by written instrument executed by or on behalf of the Company and by Grantee. Any waiver of the terms or conditions hereof shall be made only by a written instrument executed and delivered by the party waiving compliance. Any waiver granted by the Company shall be effective only if executed and delivered by a duly authorized executive officer of the Company other than Grantee. The failure of any party at any time or times to require performance of any provisions hereof shall in no manner affect the right to enforce the same. No waiver by any party of any term or condition herein, or the breach thereof, in one or more instances shall be deemed to be, or construed as, a further or continuing waiver of any such condition or breach or a waiver of any other condition or the breach of any other term or condition.

          (j) Governing Law and Severability. This Agreement shall be governed by the internal laws, and not the laws of conflict, of the State of Texas. The invalidity of any provision of this Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect.

          (k) Successors and Assigns. This Agreement shall bind, be enforceable by, and inure to the benefit of, the Company and its successors and assigns, and Grantee and Grantee’s permitted assigns under the Plan in the event of death or Disability.

[Signature page follows.]

     IN WITNESS WHEREOF, this Restricted Stock Unit Agreement is approved, granted and executed as of the date first written above.

SMITH INTERNATIONAL, INC.
By:
	Name:	Malcolm W. Anderson
	Title:	Senior Vice President, Human Resources

EX-10.17

EXHIBIT 10.17

SMITH INTERNATIONAL, INC.

POST-2004 SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN

(As Amended and Restated Effective as of January 1, 2008)

TABLE OF CONTENTS

	Page
ARTICLE ONE ESTABLISHMENT, PURPOSE AND STATUS OF THE PLAN		1
1.1 Background		1
1.2 Purpose of Plan		1
1.3 Status of Plan		1
ARTICLE TWO DEFINITIONS		1
2.1 Account		1
2.2 Active Participant		1
2.3 Administrative Committee		1
2.4 Advance Distribution Election		1
2.5 Affiliated Entity		1
2.6 Beneficiary		2
2.7 Board		2
2.8 Bonus		2
2.9 Change of Control		2
2.10 Code		2
2.11 Company		2
2.12 Compensation		2
2.13 Compensation Committee		2
2.14 Deferral Agreement		2
2.15 Deferred Compensation Ledger		2
2.16 Determination Date		3
2.17 Elective Deferral Contribution		3
2.18 Employee		3
2.19 Employment		3
2.20 Employer		3
2.21 ERISA		3
2.22 Executive Staff Participant		3
2.23 Financial Emergency		3
2.24 Funds		3
2.25 401(k) Plan		3
2.26 Insolvent		4
2.27 Interest Equivalents		4
2.28 Investment Experience		4
2.29 Participant		4
2.30 Plan		4
2.31 Plan Year		4
2.32 Separation from Service		4
2.33 Specified Employee		4
2.34 Subsidiary		4
2.35 Total and Permanent Disability		5
2.36 Trust		5
2.37 Trust Agreement		5
2.38 Trustee		5
2.39 Valuation Date		5
ARTICLE THREE ADMINISTRATION		5
3.1 Composition of Administrative Committee		5
3.2 Administration of Plan		5
3.3 Action by Committee		5
3.4 Delegation		6
3.5 Reliance Upon Information		6
3.6 Responsibility and Indemnity		6

	Page
ARTICLE FOUR PARTICIPATION		7
4.1 Eligibility of Employees		7
4.2 Notification of Eligible Employees		7
4.3 Compensation and Bonus Deferral Agreement		7
4.4 Leave of Absence		8
4.5 Employer Contributions		8
4.6 Vesting		11
4.7 Election of Manner of Payment		11
ARTICLE FIVE DEFERRAL OF COMPENSATION AND ALLOCATION OF INTEREST EQUIVALENTS		12
5.1 Deferral of Compensation and/or Bonus		12
5.2 Allocation of Investment Experience to Accounts		12
5.3 Investment of Accounts		12
5.4 Interest Equivalents		12
5.5 Participants’ Rights Under the Trust		13
5.6 Determination of Account		13
ARTICLE SIX DISTRIBUTIONS		13
6.1 Amount of Deferred Compensation Subject to Distribution		13
6.2 Forms of Distribution Following Determination Date Except for Death		13
6.3 Form of Death Distribution		14
6.4 Timing of Distributions		14
6.5 Advance Distribution Election Required		15
6.6 Withdrawal due to Financial Emergency		15
6.7 Trust and Payor of Deferred Compensation		15
6.8 Reimbursement of Participant		16
6.9 Facility of Payments		16
6.10 Beneficiary Designations		17
6.11 Withholding of Taxes		17
6.12 Distribution due to Qualified Domestic Relations Order		17
ARTICLE SEVENRIGHTS OF PARTICIPANTS		17
7.1 Annual Statement to Participants		17
7.2 Limitation of Rights		18
7.3 Nonalienation of Benefits		18
7.4 Claims Procedures		19
ARTICLE EIGHT MISCELLANEOUS		21
8.1 Amendment or Termination of the Plan		21
8.2 Powers of the Company		21
8.3 Adoption of Plan by Affiliated Entity		22
8.4 Waiver		22
8.5 Notice		22
8.6 Severability		22
8.7 Gender, Tense and Headings		22
8.8 Governing Law		22

SMITH INTERNATIONAL, INC.
POST-2004 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

(As Amended and Restated Effective as of January 1, 2008)

ARTICLE ONE

ESTABLISHMENT, PURPOSE AND STATUS OF THE PLAN

     1.1 Background. Smith International, Inc. (the “Company”) originally established the “Smith International, Inc. Post-2004 Supplemental Executive Retirement Plan” (the “Plan”), effective as of December 31, 2004. The Company hereby amends and restates the Plan under the form of this Plan document, as effective as of January 1, 2008, for the primary purpose of incorporating changes required under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).

     1.2 Purpose of Plan. The Plan is maintained for the purpose of advancing the interests of the Company and its stockholders by enhancing the Company’s ability to attract and retain highly qualified executives. The Company anticipates that accomplishment of those objectives will be facilitated by providing Participants with a mechanism through which they may provide for their retirement (or other deferred compensation needs) by electing to defer all or a portion of their Compensation and/or Bonuses.

     1.3 Status of Plan. The Plan is intended as an unfunded plan to be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and as such it is intended that the Plan be exempt from the participation and vesting, funding, and fiduciary responsibility requirements of Title I of ERISA. The Plan is also intended to qualify for simplified reporting under U.S. Department of Labor Regulation Section 2530.104-23, which provides for an alternative method of compliance for plans described in such regulation. The Plan is not intended to satisfy the qualification requirements of Section 401 of the Internal Revenue Code of 1986, as amended (the “Code”). The Plan is intended to comply with the requirements of Code Section 409A for deferred compensation plans and is to be construed in accordance with Code Section 409A and the authority issued thereunder.

ARTICLE TWO

DEFINITIONS

     In addition to the terms defined in the text hereof, each term below shall have the meaning assigned thereto for all purposes of the Plan unless the context reasonably requires a broader, narrower or different meaning.

     2.1 Account. “Account” means, with respect to each Participant, the Account reflecting his interest under the Plan under the Deferred Compensation Ledger, as established and maintained pursuant to Article Five hereof. The Administrative Committee may establish subaccounts for Participants under their Accounts as it may deem appropriate from time to time.

     2.2 Active Participant. “Active Participant” means a Participant who is currently eligible to authorize a Deferral Agreement and to receive an allocation of Employer contributions to his Account.

     2.3 Administrative Committee. “Administrative Committee” means the committee described in Article Three of the Plan.

     2.4 Advance Distribution Election. “Advance Distribution Election” means a separate written agreement entered into by and between the Employer and a Participant which specifies the Participant’s election as to the method that the deferred amount is to be paid, such as lump sum or installment payments.

     2.5 Affiliated Entity. “Affiliated Entity” means an entity which is affiliated by common ownership or control with the Company as determined and designated by the Compensation Committee, CEO or the Administrative Committee in its discretion.

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     2.6 Beneficiary. “Beneficiary” means the beneficiary or beneficiaries designated by the Participant to receive any amounts distributable under the Plan upon his death.

     2.7 Board. “Board” means the Board of Directors of the Company.

     2.8 Bonus. “Bonus” means any amount payable to the Participant during a Plan Year as an award granted under the Smith International, Inc. Executive Officer Annual Incentive Plan (or any successor thereto) or under any other bonus or cash incentive program maintained by the Company or an Adopting Employer.

     2.9 Change of Control. “Change of Control” means the occurrence of any of the following:

(a)	any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) being or becoming the “beneficial owner” as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the then outstanding securities of such Employer;
(b)	the first purchase of the Company’s common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company);
(c)	the approval by the Company’s stockholders of a merger or consolidation, a sale or disposition of all or substantially all of the Company’s assets or a plan of liquidation or dissolution of the Company; or
(d)	during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company ceasing for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company’s stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.

     Notwithstanding the above provisions of this Section 2.9, Change of Control shall have the meaning set forth in Code Section 409A(a)(2)(A)(v) and any regulations issued thereunder, which are incorporated herein by this reference, but only to the extent inconsistent with the above provisions as determined by the Compensation Committee.

     2.10 Code. “Code” means the Internal Revenue Code of 1986, as amended, and the regulations and other authority issued thereunder by the appropriate governmental authority. References herein to any Section of the Code shall include references to any successor Section or provision of the Code.

     2.11 Company. “Company” means Smith International, Inc. or any successor in interest thereto.

     2.12 Compensation. “Compensation” means the salary, perquisite payments, and other cash remuneration that is payable by the Employer to the Employee during a Plan Year for compensatory services rendered, excluding any Bonuses, severance payments, and reimbursements of business and other expenses.

     2.13 Compensation Committee. “Compensation Committee” means the Compensation and Benefits Committee of the Board.

     2.14 Deferral Agreement. “Deferral Agreement” means a separate written agreement entered into by and between the Employer and an Active Participant prior to the commencement of a Plan Year, which agreement describes the terms and conditions of such Active Participant’s deferred compensation arrangement hereunder for the Plan Year. The Deferral Agreement shall be executed and dated by the Active Participant and shall specify the amount of Compensation and/or Bonus related to services to be performed during the Plan Year, by percentage or dollar amount, to be deferred.

     2.15 Deferred Compensation Ledger. “Deferred Compensation Ledger” means the appropriate accounting records maintained by the Administrative Committee which set forth the name of each Participant and his Account transactions reflecting (a) the amount of Compensation and Bonus deferred pursuant to Article Four, (b) the amount of Employer contributions made on behalf of the Participant pursuant to Article Four, (c) the amount of Investment Experience credited or charged to the Participant’s Account pursuant to Article Five, and (d) the amount of any distributions or withdrawals pursuant to Article Six. The Deferred Compensation Ledger shall be utilized solely as a device for the measurement and determination of the contingent amounts to be paid to Participants under the Plan. The Deferred

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Compensation Ledger shall not constitute or be treated as an escrow, trust fund, or any other type of funded account of whatever kind for Code or ERISA purposes and, moreover, contingent amounts credited thereto shall not be considered “plan assets” for ERISA purposes. In addition, no economic benefit or constructive receipt of income shall be provided to any Participant for purposes of the Code unless and until cash payments under the Plan are actually made to the Participant. The Deferred Compensation Ledger merely provides a record of the bookkeeping entries relating to the contingent benefits that the Employer intends to provide to Participants and thus reflects a mere unsecured promise to pay such amounts in the future.

     2.16 Determination Date. “Determination Date” means, with respect to a Participant, the date of his Separation from Service due to his death, Disability or other Separation from Service.

     2.17 Elective Deferral Contribution. “Elective Deferral Contribution” means any amount of a Participant’s Compensation and/or Bonus which he elects to defer hereunder and to have such deferred amount credited to his Account.

     2.18 Employee. “Employee” means a member of a select group of management or highly compensated employees of the Employer, as determined by the Compensation Committee for each Plan Year.

     2.19 Employment. “Employment” means employment as an Employee. In this regard, neither the transfer of a Participant from employment by the Company to employment by an Affiliated Entity nor the transfer of a Participant from employment by an Affiliated Entity to employment by the Company shall be deemed to be a Separation from Service by the Participant. Moreover, a Participant shall not be deemed to have incurred a Separation from Service because of his approved temporary absence from active employment on account of illness or authorized vacation, or during another approved and temporary leave of absence granted by the Employer.

     2.20 Employer. “Employer” means the Company and each Affiliated Entity which has adopted the Plan with the consent of the Compensation Committee or the Administrative Committee.

     2.21 ERISA. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations and other authority issued thereunder by the appropriate governmental authority. References herein to any section of ERISA shall include references to any successor section or provision of ERISA.

     2.22 Executive Staff Participant. “Executive Staff Participant” means a Participant who is designated by the Compensation Committee, in its discretion, as an Executive Staff Participant. An Executive Staff Participant will generally be a senior officer of the Employer who is a member of the Employer’s Executive Staff; provided, however, only Participants so designated by the Compensation Committee shall be deemed Executive Staff Participants for purposes of this Plan. Executive Staff Participants shall be designated by name in resolutions adopted by the Compensation Committee from time to time, and any Participant may be added or deleted from the list of Executive Staff Participants by the Compensation Committee in its absolute discretion at any time. Executive Staff Participants are eligible to receive additional Employer contributions in accordance with Section 4.5.

     2.23 Financial Emergency. “Financial Emergency” means an unforeseeable emergency and severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or of a dependent (as defined in Code Section 152(a)) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

     Withdrawals of amounts from the Participant’s Account due to a Financial Emergency, pursuant to Section 6.6, shall only be permitted to the extent reasonably necessary to satisfy the emergency need plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). The Administrative Committee, in its discretion, shall determine whether a Financial Emergency has occurred and the amount needed to satisfy the emergency need, and each such determination shall be made in accordance with the requirements of Code Section 409A. The Participant must provide the Administrative Committee with the information that it requests to make these determinations.

     2.24 Funds. “Funds” means the investment funds designated from time to time for the deemed investment of Accounts pursuant to Article Five.

     2.25 401(k) Plan. “401(k) Plan” means the Smith International, Inc. 401(k) Retirement Plan, as it may be amended from time to time, or any successor defined contribution plan maintained by the Company which is intended to qualify under Sections 401(a) and 401(k) of the Code.

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     2.26 Insolvent. “Insolvent” means either (a) the Employer is unable to pay its debts as they become due, or (b) the Employer is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.

     2.27 Interest Equivalents. “Interest Equivalents” means the hypothetical amounts credited as interest to the Participant’s Account, as a component of Investment Experience, pursuant to Section 5.4.

     2.28 Investment Experience. “Investment Experience” means the hypothetical amounts credited (as income, gains or appreciation on any hypothetical investments in Funds or other investments permitted by the Trustee) or charged (as losses or depreciation on any such hypothetical investments) to the balances in the Participant’s Account pursuant to Article Five, including, without limitation, Interest Equivalents.

     2.29 Participant. “Participant” means an Employee who has been selected by the Compensation Committee to participate in the Plan. An Employee or former Employee (or a Beneficiary thereof in the event of death) who still has an Account balance shall be deemed a Participant hereunder regardless of whether he is an Active Participant.

     2.30 Plan. “Plan” means the Smith International, Inc. Post-2004 Supplemental Executive Retirement Plan as set forth herein, and as it may be amended from time to time. This Plan is a separate and distinct plan from the Smith International, Inc. Supplemental Executive Retirement Plan which was “frozen” by the Compensation Committee effective as of December 31, 2004.

     2.31 Plan Year. “Plan Year” means the calendar year commencing on January 1 and ending on December 31.

     2.32 Separation from Service. “Separation from Service” means the Participant’s separation from service with the Employer within the meaning of Code Section 409A.

     2.33 Specified Employee. “Specified Employee” means any Participant who is a “key employee” (as defined in Code Section 416(i) without regard to Code Section 416(i)(5)) of the Company (or an entity which is considered to be a single employer with the Company under Code Section 414(b) or 414(c)), as determined under Code Section 409A at any time during the twelve (12) month period ending on December 31, but only if the Company has any stock that is publicly traded on an established securities market (or otherwise as prescribed by Code Section 409A), and shall include the following:

(a)	an officer of the Company or Affiliated Entity having compensation (as defined in Code Section 415(c)(3)) for the applicable Plan Year greater than $130,000, as adjusted under Code Section 416(i)(1);
(b)	any person owning (or considered as owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Company or Affiliated Entity or stock possessing more than five percent (5%) of the total combined voting power of such stock, or if the Company or Affiliated Employer is not a corporation, any person owning more than five percent (5%) of the capital or profits interest of the Company or Affiliated Entity; or
(c)	a person who would be described in clause (b) above if “one percent (1%)” were substituted for “five percent (5%)” each place it appears in such clause (b), and whose aggregate annual compensation (as defined in Code Section 415(c)(3)) from the Company and any Affiliated Entity is more than $150,000.

     For purposes of determining ownership under this Section 2.33, the aggregation rules of Code Sections 414(b), (c) and (m) shall not apply. For purposes of clause (a) above, no more than fifty (50) Employees (or, if lesser, the greater of three (3) or ten percent (10%) of the Employees) shall be treated as officers.

     Notwithstanding the foregoing, a Participant who is a Specified Employee, as determined under this Section 2.33, will be deemed to be a Specified Employee solely for the period of April 1 to March 31 following such December 31, except as otherwise may be required by Code Section 409A.

     2.34 Subsidiary. “Subsidiary” means any subsidiary of the Company as defined under Code Section 424(f).

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     2.35 Total and Permanent Disability. “Total and Permanent Disability” means the Participant is (a) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering Employees of the Employer. Any determination of Total and Permanent Disability shall be made in accordance with the requirements of Code Section 409A.

     2.36 Trust. “Trust” means a grantor trust, as described in Code Sections 671-677, of the type commonly referred to as a “rabbi trust” which has been created under the Trust Agreement and pursuant to which the Employer may place assets to “informally fund” contingent benefits payable under the Plan.

     2.37 Trust Agreement. “Trust Agreement” means the Smith International, Inc. Post-2004 Supplemental Executive Retirement Plan Trust Agreement, as it may be amended from time to time, which embodies the terms and conditions of the Trust.

     2.38 Trustee. “Trustee” means the duly appointed and acting trustee of the Trust, and any successor thereto.

     2.39 Valuation Date. “Valuation Date” means the last day of each calendar quarter and any other interim date, as determined by the Administrative Committee, for the valuation of Participants’ Accounts.

ARTICLE THREE

ADMINISTRATION

     3.1 Composition of Administrative Committee. The Administrative Committee shall be comprised of such officers of the Employer as chosen by the Compensation Committee to constitute the Administrative Committee. Each member of the Administrative Committee shall serve at the pleasure of the Compensation Committee and the Compensation Committee may remove or replace a member of the Administrative Committee pursuant to procedures established by the Compensation Committee.

     A member of the Administrative Committee may also be a Participant. A member of the Administrative Committee who is also a Participant shall not vote or otherwise act on any matter relating solely to himself.

     The members of the Administrative Committee shall not receive any special compensation for serving in their capacities as members of the Administrative Committee but shall be reimbursed by the Company for any reasonable expenses incurred in connection therewith. No bond or other security need be required of the Administrative Committee or any member thereof.

     3.2 Administration of Plan. The Administrative Committee shall operate, administer, interpret, construe and construct the Plan, including correcting any defect, supplying any omission or reconciling any inconsistency. The Administrative Committee shall have all powers necessary or appropriate to implement and administer the terms and provisions of the Plan, including the power to make findings of fact. The determination of the Administrative Committee as to the proper interpretation, construction, or application of any term or provision of the Plan shall be final, binding, and conclusive with respect to all interested persons.

     In addition, the Trustee may take investment directions from the Administrative Committee, in which case the Administrative Committee shall implement the provisions of Section 5.3 regarding investment of Account balances. The Administrative Committee shall have the authority to select any Fund or other prudent investment vehicles that are available for hypothetical investment by Participants of their Account balances in assets held by the Trust. Furthermore, the Administrative Committee shall direct the Trustee in matters relating to the distribution to Participants of amounts credited to their Accounts in accordance with the terms of the Plan.

     3.3 Action by Committee. A majority of the members of the Administrative Committee shall constitute a quorum for the transaction of business, and the vote of a majority of those members present at any meeting at which a quorum is present shall decide any question brought before the meeting and shall be the act of the Administrative Committee. In addition, the Administrative Committee may take any other action otherwise proper under the Plan by an affirmative vote, taken without a meeting, of a majority of its members.

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     3.4 Delegation. The Administrative Committee may, in its discretion, delegate one or more of its duties to its designated agents or to employees of an Employer, but may not delegate its authority to make the determinations specified in the first paragraph of Section 3.2.

     3.5 Reliance Upon Information. No member of the Administrative Committee shall be liable for any decision, action, omission, or mistake in judgment, provided that he acted in good faith in connection with the administration of the Plan. Without limiting the generality of the foregoing, any decision or action taken by the Administrative Committee in reasonable reliance upon any information supplied to it by the Board, the Compensation Committee, any employee of an Employer, the Employer’s legal counsel, or the Employer’s independent accountants shall be deemed to have been taken in good faith.

     The Administrative Committee may consult with legal counsel, who may be counsel for the Employer or other counsel, with respect to its obligations or duties hereunder, or with respect to any action, proceeding or question at law, and shall not be liable with respect to any action taken, or omitted, in good faith pursuant to the advice of such counsel.

     3.6 Responsibility and Indemnity. To the full extent permitted by law, Smith International, Inc. and each other adopting Employer (collectively, the “Employer”) jointly and severally shall defend, indemnify and hold harmless each past, present and future member of the Administrative Committee and each other employee who acts in the capacity of an agent, delegate or representative of the Administrative Committee under the Plan (hereafter, all such indemnified persons shall be jointly and severally referred to as “Plan Administration Employee”) against, and each Plan Administration Employee shall be entitled without further act on his part to indemnity from the Employer for, any and all losses, claims, damages, judgments, settlements, liabilities, expenses and costs (and all actions in respect thereof and any legal or other costs and expenses in giving testimony or furnishing documents in response to a subpoena or otherwise), including the cost of investigating, preparing or defending any pending, threatened or anticipated action, claim, suit or other proceeding, whether or not in connection with litigation in which the Plan Administration Employee is a party (collectively, the “Losses”), as and when incurred, directly or indirectly, relating to, based upon, arising out of, or resulting from his being or having been a Plan Administration Employee; provided, however, that such indemnity shall not include any Losses incurred by such Plan Administration Employee (i) with respect to any matters as to which he is finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence, bad faith or intentional misconduct in the performance of his duties as a Plan Administration Employee, or (ii) with respect to any matter to the extent that a settlement thereof is effected in an amount in excess of the amount approved by the Company (which approval shall not be unreasonably withheld). The foregoing right of indemnification shall be in addition to any liability that the Employer may otherwise have to the Plan Administration Employee.

     The Employer’s obligation hereunder to indemnify the Plan Administration Employee shall exist without regard to the cause or causes of the matters for which indemnity is owed and expressly includes (but is not limited to) the Losses, directly or indirectly, relating to, based upon, arising out of, or resulting from any one or more of the following:

(a)	the sole negligence or fault of any Plan Administration Employee or combination of Plan Administration Employees;
(b)	the sole negligence or fault of the Employer;
(c)	the sole negligence or fault of third parties;
(d)	the concurrent negligence of fault or any combination of the Plan Administration Employee and/or the Employer and/or any third party; and
(e)	Any other conceivable or possible combination of fault or negligence, it being the specific intent of the Employer to provide the maximum possible indemnification protection hereunder, but excluding any such Losses that are found by a court of competent jurisdiction to have resulted from the gross negligence, bad faith or intentional misconduct of the Plan Administration Employee.

     The Plan Administration Employee shall have the right to retain counsel of its own choice to represent it provided that such counsel is acceptable to the Employer, which acceptance shall not be unreasonably withheld. The Employer shall pay the fees and expenses of such counsel, and such counsel shall to the full extent consistent with its professional responsibilities cooperate with the Employer and any counsel designated by it. The Employer shall be liable for any

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settlement of any claim against the Plan Administration Employee made with the written consent of the Employer which consent shall not be unreasonably withheld.

     The foregoing right of indemnification shall inure to the benefit of the successors and assigns, and the heirs, executors, administrators and personal representatives of each Plan Administration Employee, and shall be in addition to all other rights to which the Plan Administration Employee may be entitled as a matter of law, contract, or otherwise.

ARTICLE FOUR

PARTICIPATION

     4.1 Eligibility of Employees. The Compensation Committee shall have the sole and exclusive authority and discretion to designate Employees who are eligible to participate in the Plan as Active Participants. Only Employees who are members of a select group of management or highly compensated Employees for purposes of ERISA shall be eligible for selection by the Compensation Committee.

     The Compensation Committee shall also have the authority and discretion to deem any Employee as no longer an Active Participant effective as of the first day of the next Plan Year; provided, however, such action shall not be effective before the date that the Participant receives written notice of same. Any Participant whose Employment is terminated, for whatever reason, shall not be an Active Participant effective as of his Separation from Service date. A person who is no longer an Active Participant shall still be considered a Participant for other purposes hereunder until he has received a total distribution of his Account balance.

     4.2 Notification of Eligible Employees. Within thirty (30) days prior to the beginning of each Plan Year, the Administrative Committee, as directed by the Compensation Committee, shall notify in writing each of the Employees who are eligible to elect to defer Compensation under the Plan. The Compensation Committee shall also have the right to designate Employees as Active Participants at any time during a Plan Year. Each Employee who has been designated as an Active Participant by the Compensation Committee in any Plan Year shall remain eligible to defer Compensation and/or Bonuses hereunder unless and until the Compensation Committee determines that he is no longer eligible to authorize such deferrals and notifies Employee of same. An Employee (or in the event of his death, his Beneficiary) shall be a Participant hereunder as long as he has any balance credited to his Account, regardless of whether he is eligible to authorize Compensation and/or Bonus deferrals hereunder as an Active Participant. Only Employees who are designated as Active Participants for a Plan Year may authorize deferrals or have Employer contributions made on their behalf.

     4.3 Compensation and Bonus Deferral Agreement. After an Employee has been notified by the Administrative Committee that he is eligible to participate in the Plan for the relevant Plan Year as an Active Participant, he must, in order to defer Compensation and/or Bonus with respect to services to be performed during such Plan Year, notify the Administrative Committee of his deferral election by completing and executing a Deferral Agreement prior to the end of the Plan Year which precedes the Plan Year to which such Deferral Agreement relates. The Employee may elect to defer up to one hundred percent (100%) of his Compensation and/or Bonus for a Plan Year or the portion thereof that he is an Active Participant. Any Deferral Agreement that is not completed and signed by the Employee, and received and accepted by the Administrative Committee (or its delegate), on or prior to the last day of the Plan Year immediately preceding the Plan Year for which the Employee is notified that he may make a deferral election, shall be treated as the Employee’s election not to defer Compensation or Bonus for that Plan Year.

     If, after the commencement of a Plan Year, an Employee is designated by the Compensation Committee as an Active Participant for the first time under this Plan or any other plan maintained by the Employer that is an “account balance” plan within the meaning of, and subject to, Code Section 409A, the newly eligible Active Participant, in order to defer Compensation hereunder, must complete and execute a Deferral Agreement and return it to the Administrative Committee (or its delegate) within thirty (30) days of the effective date on which the Employee first became an Active Participant. Such Deferral Agreement shall only apply to defer Compensation and/or Bonus for services to be performed for the remainder of the Plan Year by the Active Participant, provided that such services are to be performed subsequent to receipt and approval of his Deferral Agreement by the Administrative Committee.

     The amount of Compensation elected to be deferred pursuant to a Deferral Agreement shall be withheld on a pro rata basis from the Active Participant’s regular payments of Compensation for each pay period during the Plan Year or portion thereof during which such Deferral Agreement is in effect, unless otherwise designated by the Active Participant in his Deferral Agreement. In the event that a Trust is maintained, Compensation deferrals shall promptly be delivered to the Trustee by the Employer.

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     Regardless of any services performed during a year on behalf of the Company, no Participant will accrue any right to receive any Bonus until it is actually awarded to him. An Active Participant’s election to defer all or any portion of his Bonus that may be awarded with respect to any Plan Year must be made prior to the first day of the Plan Year in which services will be performed for which such Bonus amount is to be paid.

     The dollar amount or percentage of a Bonus elected to be deferred under this Section 4.3 shall be deferred in one lump sum and shall be deemed to have been deferred on the date the deferred portion of the Bonus would otherwise have been paid to the Active Participant in the absence of his deferral election. Any Bonus deferral election made hereunder shall be void and ineffective to the extent that no Bonus is awarded to the Active Participant with respect to services performed during the Plan Year.

     To the extent required under payroll tax law or regulation, the deferred amount of any Compensation or Bonus elected hereunder may be reduced by the Administrative Committee in order to provide taxable, non-deferred wages sufficient to cover required withholding taxes.

     4.4 Leave of Absence. If an Active Participant is authorized by his Employer for any reason to take a paid leave of absence from Employment, the Participant shall continue to be considered in Employment and his Elective Deferral Contributions shall continue to be withheld during such paid leave of absence. If an Active Participant is authorized by his Employer for any reason to take an unpaid leave of absence from Employment, the Participant shall continue to be considered in Employment and the Participant shall be excused from making Elective Deferral Contributions from his Compensation until the Participant returns to a paid Employment status. Upon his return from the unpaid leave, Elective Deferral Contributions shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the Participant’s Deferral Agreement, if any, as in effect for that Plan Year, i.e., the same percentage or dollar amount that was being withheld prior to the unpaid leave of absence shall resume after return to active service, but no make-up contributions shall be made for the unpaid leave period. A leave of absence shall not affect any previously elected Bonus deferral.

     4.5 Employer Contributions.

     (1) Age-Weighted Contributions. Subject to the following provisions of this subsection that apply to Executive Staff Participants, effective as of the last day of each 3-month quarter during a Plan Year, an Age-Weighted Contribution shall be allocated and credited by the Administrative Committee to the Account of each Active Participant who has entered into a Deferral Agreement covering that quarter. The Age-Weighted Contribution shall be based on the Active Participant’s Age-Weighted Contribution Percentage (“AWCP”) as determined based on the schedule set forth below:

Age as of Anniversary of
Participant’s Date of Birth	AWCP
Under Age 40		2.00	%
40-44		2.50	%
45-49		3.00	%
50-54		4.00	%
55-59		5.00	%
60 or older		6.00	%

     An Active Participant’s AWCP shall change as of the first payroll period beginning in the month following the month in which the anniversary of the Active Participant’s date of birth occurs. To compute an Active Participant’s Age-Weighted Contribution for a Plan Year, his AWCP shall be multiplied by the Active Participant’s (i) “Total 401(k) Compensation” for the Plan Year (defined below) minus his (ii) “Net 401(k) Compensation” for the Plan Year (defined below).

     “Total 401(k) Compensation” means the total of all cash amounts payable by the Employer to or for the benefit of an Active Participant for services rendered or labor performed while an Active Participant during the Plan Year (including overtime pay, Bonuses, “perq pay,” plus incentive or other supplemental pay and amounts that he could have received in cash (i) in lieu of an Elective Deferral Contribution to this Plan or a 401(k) salary deferral contribution made under the 401(k) Plan and (ii) had he not entered into a salary reduction agreement pursuant to a cafeteria plan under Section 125 of the Code), minus (i) severance pay, (ii) any amount attributable to the grant,

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vesting or payout of any equity-based incentive award to the Active Participant, and (iii) the proceeds from the Active Participant’s exercise of any stock options. The Total 401(k) Compensation of any Active Participant taken into account for purposes of the Plan shall be prorated for (i) a Plan Year of less than twelve months (other than the first Plan Year) or (ii) in the case of an Active Participant who is either an Active Participant for less than the entire Plan Year or receives Compensation for less than the entire Plan Year. Total 401(k) Compensation shall not be reduced or otherwise affected by any limits that apply under the 401(k) Plan.

     “Net 401(k) Compensation” means the total of all cash amounts payable by the Employer to or for the benefit of an Active Participant for services rendered or labor performed while an Active Participant during a Plan Year (including overtime pay, Bonuses, “perq pay,” plus incentive or other supplemental pay and amounts which he could have received in cash (i) in lieu of a 401(k) salary deferral contribution made under the 401(k) Plan and (ii) had he not entered into a salary reduction agreement pursuant to a cafeteria plan under Section 125 of the Code), minus (i) severance pay, (ii) any amount attributable to the grant, vesting or payout of any equity-based incentive award to the Active Participant, (iii) the proceeds from the Active Participant’s exercise of any stock options, and (iv) the Active Participant’s Elective Deferral Contributions to this Plan or to another deferred compensation program other than 401(k) salary deferral contributions made under the 401(k) Plan. The “Net 401(k) Compensation” of any Active Participant taken into account for purposes of the Plan shall be limited to $210,000 for the Plan Year with such amount to be (i) adjusted automatically to reflect any cost-of-living increases authorized by Section 401(a)(17) of the Code and (ii) prorated for (a) a Plan Year of less than twelve months or (b) in the case of an Active Participant who is either an Active Participant for less than the entire Plan Year or receives Compensation for less than the entire Plan Year.

     Notwithstanding the preceding provisions of this subsection, the Employer’s Age-Weighted Contribution (“AWC”) with respect to each Executive Staff Participant shall be determined by the Administrative Committee or its delegate for each 3-month quarter during each Plan Year in accordance with the provisions of this paragraph. The Age-Weighted Contribution Percentage (“AWCP”) shall be six percent (6%) for each Executive Staff Participant. The AWC of each Executive Staff Participant shall be computed in accordance with the following formula: (6% x A) - B = AWC. For purposes of this formula, A equals the Executive Staff Participant’s Total 401(k) Compensation, and B equals the dollar amount of the age-weighted, profit sharing contribution, if any, for the applicable 3-month quarter that has been or will be contributed by the Employer on behalf of the Executive Staff Participant under the terms of the 401(k) Plan. Effective as of the last day of each 3-month quarter during a Plan Year, the AWC for each Executive Staff Participant shall be allocated and credited by the Administrative Committee to his account under the Deferred Compensation Ledger.

     (2) Make-up Matching Contributions. The provisions of this subsection 4.5(2) shall apply only to those Active Participants who (i) have authorized elective deferral contributions under the 401(k) Plan during the Plan Year and (ii) have entered into a Deferral Agreement hereunder for the Plan Year. To the extent that an Active Participant authorized elective deferral contributions under the 401(k) Plan during a Plan Year but his account thereunder is precluded from receiving an allocation of any matching contributions under the 401(k) Plan that it otherwise would have been eligible to receive, as the result of non-discrimination limits imposed by the average deferral percentage (“ADP”) test or the actual contribution percentage (“ACP”) test under the Code, then such Active Participant shall be eligible to receive a “Make-up Matching Contribution” under this Plan for that Plan Year. The Make-up Matching Contribution shall be equal to the difference between (i) the total matching contributions that the Active Participant’s account under the 401(k) Plan would have been allocated for the Plan Year without regard to the ADP and ACP tests, and (ii) the amount of matching contributions actually allocated to his account under the 401(k) Plan for the Plan Year. The Make-up Matching Contributions shall be allocated and credited by the Administrative Committee to the affected Active Participant’s Account, effective as of the last day of the Plan Year. Notwithstanding the preceding provisions of this subsection, no Make-up Matching Contribution shall be credited by the Administrative Committee on behalf of any Active Participant who is not in Employment on the last day of such Plan Year for any reason.

     (3) Matching Contributions.

     (a) Non-Executive Staff Participants. The provisions of this subsection 4.5 (3)(a) shall apply only to those Active Participants who (a) have entered into a Deferral Agreement for the Plan Year and (b) are not Executive Staff Participants. The Matching Contribution (“MC”) of such an eligible Participant for a Plan Year shall be computed as follows:

MC = The lesser of: [.015A + (.985A x B)] or [(6% x C) - (D + E)]

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For purposes of this formula:

A equals the aggregate dollar amount of elective deferral contributions that the Active Participant made to this Plan for the Plan Year, pursuant to his Deferral Agreement, that were credited to his Account;

B equals the matching contribution percentage designated under section 3.03(b) (or its successor) of the 401(k) Plan for the Plan Year;

C equals the Active Participant’s Total 401(k) Compensation (as defined in Section 4.5(1)) minus any (i) Bonus paid during the Plan Year and (ii) retention or similar payments paid during the Plan Year;

D equals the maximum dollar amount of matching contributions that could be credited to the Active Participant’s account under the 401(k) Plan for the Plan Year (regardless of the actual amount of matching contributions credited to the Active Participant’s 401(k) Plan account); and

E equals the Make-up Matching Contributions, if any, that were credited to the Active Participant’s Account for the Plan Year pursuant to subsection 4.5(2) above.

For example, assume that for a Plan Year (i) the Active Participant’s Account was credited with elective deferral contributions of $8,000 under this Plan; (ii) the matching contribution percentage under section 3.03(b) (or its successor) of the 401(k) Plan for such Plan Year was 100% (but not exceeding 1.50% of the compensation deferred under the 401(k) Plan); (iii) the Active Participant’s Total 401(k) Compensation (excluding his Bonus, if any) was $125,000; (iv) his account could have been credited with a maximum dollar amount of $1,875 in matching contributions under the 401(k) Plan (1.50% of Total 401(k) Compensation (or such other percentage designated under section 3.03(b) of the 401(k) Plan or any successor provision); and (v) his Account under this Plan was credited with a $1,000 Make-up Matching Contribution.

MC = The lesser of: [(.015 x $8,000) + ($7880 x 100%)] or [(6% x 125,000) - ($1,875 + $1,000)]

MC = The lesser of: $8,000 or $4,625 (i.e., $7,500 - $2,875)

MC = $4,625

     The MC shall be computed, allocated and credited to the Active Participant’s Account effective as of the last day of the Plan Year. Notwithstanding the preceding provisions of this subsection, no Matching Contribution shall be credited for a Plan Year on behalf of any Active Participant who is not in Employment on the last day of such Plan Year for any reason.

     (b) Executive Staff Participants. The Company’s Matching Contribution (“MC”) with respect to each Executive Staff Participant shall be determined in accordance with the provisions of this subsection 4.6(3)(b) which shall apply regardless of whether or not (i) the Executive Staff Participant is also a member of the 401(k) Plan or has entered into a Deferral Agreement under this Plan, or (ii) any matching contributions were credited to his 401(k) Plan account during the Plan Year. The MC of an Executive Staff Participant for a Plan Year shall be computed as follows:

X = The lesser of: (A + B) or (6% x C).

MC = X - (D + E).

For purposes of this formula: A equals the aggregate dollar amount of elective deferral contributions that the Executive Staff Participant made to this Plan for the Plan Year, pursuant to his Deferral Agreement, that were credited to his Account; B equals the maximum dollar amount of elective deferral contributions that could be credited to the Executive Staff Participant’s Account under the 401(k) Plan for the Plan Year under Code Section 402(g) (regardless of the Executive Staff Participant’s actual elective deferral contributions under the
401(k) Plan); C equals the Executive Staff Participant’s Total 401(k) Compensation (as defined in Section 4.5(1)) for the Plan Year; D equals the maximum matching contributions that could

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be credited to the Executive Staff Participant’s account under the 401(k) Plan for the Plan Year (regardless of the actual amount of the Executive Staff Participant’s matching contributions credit to his 401(k) Plan account); and E equals the Make-up Matching Contributions, if any, that were credited to the Executive Staff Participant’s Account for the Plan Year pursuant to subsection 4.5(2) above. For example, assume that for a Plan Year, an Executive Staff Participant (i) earned Total 401(k) Compensation of $300,000; (ii) authorized and was credited with elective deferral contributions under this Plan of $11,000; (iii) could have deferred a maximum of $15,500 to the 401(k) Plan for the Plan Year under Code Section 402(g); (iv) could have received a maximum matching contribution under the 401(k) Plan of $4,500 for the Plan year (the lesser of $15,500 or 1.50% of compensation as limited under Code Section 401(a)(17) for the Plan Year); and (v) his Account under this Plan was not credited with any Make-up Matching Contributions for the Plan Year.

X = the lesser of: ($15,500 + $11,000) or (6% x $300,000)

X = $18,000

MC = $18,000 - ($4,500 + 0)

MC = $13,500.

     The MC shall be computed, allocated and credited by the Administrative Committee to the Executive Staff Participant’s Account effective as of the last day of the Plan Year. Notwithstanding the previous provisions of this subsection, no MC shall be credited by the Administrative Committee for a Plan Year on behalf of any Executive Staff Participant who is not in Employment on the last day of such Plan Year for any reason.

     The Compensation Committee may, in its discretion, determine that the matching contribution percentage for purposes of the preceding provisions of this subsection 4.5(3)(b) shall not be 100% as described above (i.e., a dollar-for-dollar match but not in excess of 6% of the Executive Staff Participant’s Total 401(k) Compensation); for example, the Compensation Committee may determine that the matching contribution percentage under the 401(k) Plan for the Plan Year shall also apply under this subsection 4.5(3)(b) for Executive Staff Participants. In such event, the formula at subsection 4.5(3)(a) which incorporates a 100% match of the first 1.50% of elective deferral contributions shall apply for the Plan Year for Executive Staff Participants. Any such determination made by the Compensation Committee shall be recorded in a duly adopted resolution and communicated in writing to the Executive Staff Participants prior to the beginning of each applicable Plan Year.

     (4) Discretionary Profit Sharing Contributions. The Compensation Committee may, in its discretion, determine the amount, if any, of the Employer’s profit sharing contribution for a Plan Year and how such amount is to be allocated and credited between and among the Participants’ Accounts. A Participant shall not be entitled to share in the allocation of any such Employer profit sharing contribution for a Plan Year if he is not in Employment on the last day of the Plan Year for any reason. The Compensation Committee shall have no obligation to authorize any such profit sharing contributions hereunder for any Plan Year.

     4.6 Vesting. All contributions made by Participants and the Employer hereunder shall be fully vested and nonforfeitable at all times. All Investment Experience credited on all contributions shall also be fully vested and nonforfeitable at all times.

     4.7 Election of Manner of Payment. At the time that a Participant makes a deferral election under Section 4.3, the Participant shall also elect (on an Advance Distribution Election form) the manner in which his distribution shall be paid following his Determination Date after Separation from Service from among the following options:

(a)

Lump sum payment; or

(b)

If the distributable portion of the Account balance is at least $25,000 on the Determination Date, annual installments to be paid during a period specified by the Participant of not less than two (2) nor more than twenty (20) years. If the distributable amount is less than $25,000, it shall automatically be paid in a lump sum distribution without regard to any installment option that may have been elected by the Participant. Should a Participant elect annual installments under this

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Section 4.7, each installment payment shall be treated as a separate payment under Code Section 409A.

ARTICLE FIVE

DEFERRAL OF COMPENSATION AND ALLOCATION
OF INTEREST EQUIVALENTS

     5.1 Deferral of Compensation and/or Bonus. If an Active Participant has elected to defer Compensation and/or a Bonus hereunder for a Plan Year, the deferred amounts shall not be paid when they otherwise would have been paid in the absence of such election. A bookkeeping entry to reflect the deferred amounts shall be credited by the Administrative Committee to the Active Participant’s Account under the Deferred Compensation Ledger. With respect to Compensation and Bonuses deferred hereunder for a Plan Year, each such deferred amount shall be credited to the Active Participant’s Account under the Deferred Compensation Ledger as of the date it otherwise would have been paid to the Active Participant and shall reflect a mere unsecured promise by the Employer to pay such amount in the future.

     5.2 Allocation of Investment Experience to Accounts. As of each Valuation Date, the Administrative Committee or its delegate shall determine the Investment Experience for the applicable accounting period and, as soon as practicable after such period, shall post and credit the amount of Investment Experience to each Participant’s Account effective as of the end of such period. Each Account for which there was a positive balance at any time during the applicable valuation period shall be entitled to an allocation and crediting of Investment Experience for that valuation period regardless of whether the Participant is still an Active Participant.

     5.3 Investment of Accounts. The Administrative Committee shall permit each Participant to request that the amounts credited to his Account under the Deferred Compensation Ledger be invested in any one or a combination of Funds (or other investment vehicles) which have been designated by the Administrative Committee as available for hypothetical investment under the Plan. However, except as provided in the next sentence, the Trustee shall make the final investment decision, which may or may not correspond to the Participant’s request. In the event that a Participant is serving as Trustee, the Administrative Committee, and not the Trustee, shall make the final decision with respect to the hypothetical investment of such Participant’s Account. Subject to Section 5.4 for Interest Equivalents, the Investment Experience posted and credited to each Participant’s Account shall be based upon the Investment Experience of the actual investments made by the Trustee in which the Participant’s Account balance is hypothetically invested. Notwithstanding any contrary provision of the Plan or Trust Agreement, no direct investment in securities issued by the Company or its Affiliated Entities shall be permitted under the Plan or Trust.

     Except as otherwise provided below, each Participant shall advise the Administrative Committee, or any agent appointed by such Committee, of his request with respect to the hypothetical investment of the amounts credited to his Account. Each Participant’s investment request shall be in a form and manner, and in the minimum increments, as prescribed by the Administrative Committee. Each Participant may, on any business day on which the applicable financial markets are open, communicate directly with any appointed mutual fund company, financial consultant, or other appropriate agent or delegate of the Administrative Committee to request a change in the combination of Funds (or other investment vehicle) in which his Account is hypothetically invested. The Administrative Committee may direct the Trustee concerning the Funds in which the Participant’s Account shall be hypothetically invested in the absence of an investment request from such Participant, or in the event that any such request is not followed by the Administrative Committee or Trustee for whatever reason.

     In addition, notwithstanding any contrary provision of the Plan or Trust Agreement, neither the Administrative Committee nor Trustee shall be bound to follow the investment request of any Participant. Subject to Section 5.4, the Investment Experience posted to each Participant’s Account shall be based solely on the Investment Experience of the actual Funds or other investments authorized by the Administrative Committee or Trustee, as applicable, in which the Participant’s Account balance was hypothetically invested. Investment Experience shall be allocated to the Participant’s Account as directed by the Administrative Committee.

     5.4 Interest Equivalents. To the extent that all or any portion of a Participant’s Account is deemed to have been hypothetically invested in a Fund that is a money market mutual fund, the Participant’s Account will be credited with the Interest Equivalent described below in this Section 5.4 instead of the actual investment return generated by the deemed investment in the money market mutual fund. In addition, if a Trust is maintained, all deferrals of Compensation and Bonus authorized by Participants shall be credited with Interest Equivalents by the Employer from the date otherwise payable by the Employer to the Participants until the date that such amounts are paid to the Trustee for investment in Funds or other

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investment vehicles. Compensation and Bonuses being deferred during a calendar quarter shall be considered to be invested on the mid-point day of the calendar quarter during which such amounts would otherwise have been payable to the Participant and shall be credited with Interest Equivalents accordingly for that calendar quarter. Interest Equivalents shall be computed by the Administrative Committee pursuant to non-discriminatory procedures maintained by the Administrative Committee from time to time, and such amounts shall be posted and credited to each affected Participant’s Account by the Administrative Committee.

     Crediting of Interest Equivalents hereunder shall be made only to the Accounts of those affected Participants who are current Employees. Therefore, for example, if a Participant has terminated Employment but has not yet received a distribution of the entire amount credited to his Account by the end of the month in which he is terminated, the Investment Experience that is deemed to be credited to such Participant’s Account (to the extent of the portion of the Account that is hypothetically invested in the money market mutual fund) after the last day of such month shall only be the actual investment return realized by the deemed investment in the money market mutual fund, and not the greater Interest Equivalent.

     All amounts credited to a Participant’s Account, to the extent such amounts are either (i) deemed to have been invested in a Fund that is a money market mutual fund or (ii) withheld by the Employer from a Participant’s Compensation or Bonus but not yet paid to the Trustee for investment in any Fund (or other investment vehicle), shall be credited quarterly with Interest Equivalents. The rate of Interest Equivalents shall be equal to 120% of the long-term, applicable federal rate (AFR) for quarterly compounding for the last month of the calendar quarter immediately preceding the calendar quarter in which the Interest Equivalents are to be credited. For example, for purposes of crediting Interest Equivalents for the 3-month quarter ending December 31 of a given Plan Year, 120% of the AFR rate for September of that Plan Year will be used.

     Allocations of Interest Equivalents shall be computed and credited by the Administrative Committee based on the balances credited to the Participant’s Account as of the last day of each calendar quarter during a Plan Year, i.e., March 31, June 30, September 30 and December 31. In the event of a distribution following a Determination Date, the applicable portion of the Participant’s Account balance deemed to be invested in a Fund that is a money market fund shall be credited with Interest Equivalents based on such applicable portion as of the last day of the month which includes the Determination Date.

     Interest Equivalents credited to the Participant’s Account shall be compounded quarterly and shall increase the contingent benefits receivable by the Participant in the future.

     5.5 Participants’ Rights Under the Trust. The assets of the Trust shall be held for the benefit of the Participants in accordance with the terms of the Plan and the Trust Agreement. In accordance with applicable provisions of the Trust Agreement, the assets of the Trust shall remain subject to the claims of the general creditors of the Employer, and the rights of the Participants to the amounts in the Trust shall be limited as provided in the Plan and Trust Agreement in the event that the Employer becomes Insolvent.

     5.6 Determination of Account. The aggregate amount credited to a Participant’s Account under the Deferred Compensation Ledger shall consist of (i) the aggregate amount of deferred Compensation and/or Bonuses and Employer Contributions made pursuant to Article Four, plus (or minus) (ii) the aggregate amount of Investment Experience credited or charged to such Account pursuant to Article Five, minus (iii) the aggregate amount of any distributions or withdrawals made from such Account pursuant to Article Six.

ARTICLE SIX

DISTRIBUTIONS

     6.1 Amount of Deferred Compensation Subject to Distribution. As of the Participant’s Determination Date, the aggregate amount credited to his Account maintained under the Deferred Compensation Ledger shall become distributable in accordance with the provisions of Section 6.2.

     6.2 Forms of Distribution Following Determination Date Except for Death. Upon the occurrence of a Determination Date (except due to the Participant’s death) and prior to a Change of Control, the Participant’s Account balance shall become distributable in the form of payment prescribed in Section 4.7. All distributions shall be paid in cash.

     If there is no form of distribution election elected by the Participant pursuant to Section 4.7, the form of distribution following a Determination Date shall automatically be a lump sum payment. A Participant cannot elect to retain his

13

distributable Account balance in the Plan following his Determination Date except for any remaining unpaid installments during the installment period.

     Notwithstanding any provision hereof to the contrary, with respect to any Determination Date resulting from a Separation from Service within the 12-month period following a Change of Control, all distributions under the Plan shall automatically be paid in lump sum payments, no installment payments may be elected and no prior installment election shall be honored. Following a Change of Control, a lump sum payment shall be made to each Participant who incurs a Separation from Service within 12 months after the Change of Control date. In such event, the lump sum distribution shall be paid within thirty (30) days after the Participant’s Separation from Service date.

     Notwithstanding any previous installment payment election that may have been made by the Participant, the aggregate of any remaining installment payments due to a Participant who had incurred a Separation from Service at any time prior to the Change of Control shall be paid to such Participant in a lump sum within 30 days after the Change of Control date.

     6.3 Form of Death Distribution. If the Determination Date results from the death of the Participant, his designated Beneficiary (pursuant to Section 6.10) shall automatically receive a lump sum cash distribution of the Participant’s Account balance within sixty (60) days following the date of Participant’s death and, therefore, installment payments, or continued installment payments, shall not be available as a distribution option following the Participant’s death, even if previously elected by the Participant or Beneficiary. If the Participant dies while receiving installment payments before receiving all of such installment payments, his designated Beneficiary (pursuant to Section 6.10) shall automatically receive a lump sum cash distribution of the Participant’s remaining Account balance within sixty (60) days following the date that the Administrative Committee is notified of the Participant’s death.

     Notwithstanding the preceding paragraph of this Section 6.3, if (a) the Participant’s Account balance at the time of his death is at least one million dollars ($1,000,000) and (b) the Participant had an installment distribution election in effect at the time of his death, then the Participant’s installment election shall be honored and his designated Beneficiary shall receive installment payments over the installment period, or remaining installment period, that had been elected by the Participant prior to his death; provided, however, if the elected installment period or remaining installment period, as applicable, is longer than five (5) years from the date of Participant’s death, the installment payments shall be made over an installment period that ends on the last day of the year that is five years from the end of the year in which the Participant’s death occurred. In this event, the installment payment period shall be automatically shortened pursuant to this provision and the maximum installment period shall thus not exceed the 5-year period specified in the immediately preceding sentence. All installment payments shall be made in substantially equal annual payments over the installment period, and each installment payment shall be treated as a separate payment under Code Section 409A.

     6.4 Timing of Distributions.

(a)	Lump Sum Distribution. Lump sum distributions shall be made as soon as administratively feasible following the end of the calendar quarter in which the Participant’s Determination Date occurs, but in no event later than thirty (30) days following such date.
	Notwithstanding the above, any distribution payable to a Specified Employee due to the Specified Employee’s Separation from Service (for any reason except due to his death) shall not be made before the earlier of the date which is six (6) months after the date of his Separation from Service.
(b)	Installment Payments. Annual installment payments shall commence as soon as administratively feasible following the end of the calendar quarter in which the Participant’s Determination Date occurs, but in no event later than thirty (30) days following such date. Thereafter, the remaining installment payments shall be made as of the annual anniversary of the first installment date. Each installment payment shall be treated as a separate payment under Code Section 409A.
	Notwithstanding the above, any distribution payable to a Specified Employee due to the Specified Employee’s Separation from Service (for any reason except due to his death) shall not commence earlier than the date which is six (6) months after the date of his Separation from Service.
(c)	Changes in Time and Form of Distribution. If a Participant has not commenced receiving payments under this Section 6.4, the Participant may petition the Administrative Committee in writing to request that the form of distribution be changed from a lump sum distribution to an

14

installment payment option; provided, however, any such election to delay his distribution or change the form of payment:

(1)	will not be effective until at least 12 months after the date on which the election is made;
(2)	must be made at least 12 months before the distribution is otherwise payable; and
(3)	in the case of an election related to a payment other than a payment made due to the Participant’s death, Total and Permanent Disability, or Financial Emergency, the first payment with respect to which such election is made is deferred for a period of not less than five (5) years from the date such payment would otherwise have been made.

     6.5 Advance Distribution Election Required. The Participant’s election as to the form of his distribution hereunder with respect to any Plan Year must be made prior to the first day of the Plan Year in which the services will be performed for which the Compensation or Bonus relates. If the Participant or Beneficiary, as applicable, validly elects annual installment payments, then Investment Experience shall continue to be credited by the Administrative Committee to undistributed amounts allocated to the Participant’s Account. Pending receipt of any distribution from the Plan, the Participant or Beneficiary shall remain subject to Section 7.2 and other applicable provisions of the Plan.

     6.6 Withdrawal due to Financial Emergency. A Participant who believes he has suffered a Financial Emergency may in writing request a distribution of the portion of his Account balance needed to satisfy the emergency need. The Administrative Committee will review the Participant’s request to determine whether, in its discretion, a Financial Emergency has occurred and, if so, the amount reasonably needed to satisfy the emergency need.

     If the Administrative Committee, in its discretion, determines that a Participant has suffered a Financial Emergency, the Administrative Committee may direct payment to the Participant of only that portion, if any, of his Account balance which is attributable to his Compensation and Bonus deferral contributions and is necessary to satisfy the emergency need.

     A Participant requesting a withdrawal for Financial Emergency must petition the Administrative Committee in writing and provide such information as the Administrative Committee may request to support the withdrawal request. The Administrative Committee, in its discretion, shall determine whether a Financial Emergency under the Plan has occurred and the minimum amount needed to satisfy the emergency need, plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).

     Only one withdrawal for a Financial Emergency may be made by Participant in any 24-month period. If, subject to the sole discretion of the Administrative Committee, the petition for payout is approved, the payout shall be made within 60 days of the date of approval. A request for a withdrawal under this Section 6.6 must be accompanied by (a) a letter signed by the Participant describing all the circumstances and the resources he has available to meet the need and a certification that the resources listed in the definition of Financial Emergency and all others are unavailable/insufficient/non-existent to meet the need, (b) copies of the appropriate official documentation (e.g., bills, eviction or foreclosure notices or documents showing that such are impending), and (c) statement of monthly household income and expenses (with explanations for unusual items).

     If the withdrawal is approved in its discretion, the Administrative Committee shall authorize a distribution to the Participant in the amount reasonably necessary to satisfy the Financial Emergency. No Interest Equivalents shall be credited to the Participant’s Account during a calendar quarter with respect to the amount distributed to satisfy the Financial Emergency.

     6.7 Trust and Payor of Deferred Compensation. Benefits payable under the Plan with respect to a Participant’s Account shall be the obligation of, and payable by, the Company; provided, however, the Company may, in its complete discretion, obtain reimbursement from any adopting Employer which employed the Participant. Adoption and maintenance of the Plan by the Employer shall not, for that reason, create a joint venture or partnership relationship between or among such entities for purposes of payment of benefits under the Plan or for any other purpose.

     In order to meet its contingent obligations under the Plan, the Employer shall not set aside any assets or otherwise create any type of fund in which any Participant, or any person claiming under such Participant, has an interest other than that of an unsecured general creditor of the Employer or which would provide any Participant, or any person claiming under such

15

Participant, with a legally enforceable right to priority over any general creditor of the Employer in the event that the Employer becomes Insolvent.

     The Employer intends for the Plan to recognize the value to the Employer of the past and present services of Participants and to encourage and assure their continued service with the Employer by making more adequate provision for their future retirement security. The maintenance of the Plan is, in part, made necessary by certain benefit limitations which are imposed on the 401(k) Plan by the Code. The Plan is intended to constitute an unfunded, unsecured plan of deferred compensation for a select group of management or highly compensated employees of the Employer. Plan benefits herein provided are to be paid out of the Employer’s general assets. Nevertheless, subject to the terms hereof and of the Trust Agreement, the Employer may transfer money or other property to the Trustee and the Trustee shall pay Plan benefits to Participants and their beneficiaries out of the Trust fund. To the extent the Employer transfers assets to the Trustee, the Administrative Committee may, but need not, establish procedures for the Trustee to invest the Trust assets in Funds or otherwise in accordance with each Participant’s designated deemed investments pursuant to Article Five, but only with respect to the portion of the Trust assets equal to such Participant’s Account balance.

     The Compensation Committee or Board may establish the Trust and direct the Company to enter into the Trust Agreement. In such event, the Company shall remain the owner of all assets in the Trust Fund and the assets shall be subject to the claims of the Employer’s creditors if the Employer ever becomes Insolvent. The Chief Executive Officer of the Company and the Board shall each have the duty to inform the Trustee in writing if the Employer becomes Insolvent. Such notice given under the preceding sentence by any party shall satisfy all of the parties’ duty to give notice. When so informed, the Trustee shall suspend payments to the Participants and hold the assets for the benefit of the Employer’s general creditors. If the Trustee receives a written allegation that the Employer is Insolvent, the Trustee shall suspend payments to the Participants and hold the Trust fund for the benefit of the Employer’s general creditors, and shall determine within the period specified in the Trust Agreement whether the Employer is Insolvent. If the Trustee determines that the Employer is not Insolvent, the Trustee shall resume payments to the Participants. No Participant or Beneficiary shall have any preferred claim to, or any beneficial ownership interest in, any assets of the Trust Fund.

     During any period in which a Trust is in existence, benefits payable under the Plan shall be payable by the Trustee in accordance with the terms, provisions, conditions and limitations of the Plan and Trust Agreement. To the extent that any distribution described in the immediately preceding sentence does not fully satisfy the obligation for any benefit due under the Plan, the Employer shall remain fully liable and obligated for full payment of any unpaid benefit due and payable under the Plan.

     6.8 Reimbursement of Participant. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and other expenses which the Participant (or any Beneficiary thereof) may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Employer, the Participant or others concerning the validity or enforceability of, or liability under, any provision of this Plan or any guarantee of performance thereof (including, without limitation, as a result of any contest by the Participant about the amount of any benefits due pursuant to the Plan), plus in each case interest on any delayed payment at the applicable interest rate specified in Section 5.4 for Interest Equivalents. To the extent that the Employer is found under a final decree of a court of competent jurisdiction to have engaged in an intentional breach of contract without good cause, bad faith or fraudulent conduct hereunder in delaying or failing to make any payment due under this Plan, then the amount found due to any Participant shall be fully paid to the Participant within thirty (30) days of such determination. The Company authorizes Participant to engage counsel of his choice to represent him in any such dispute. This Section 6.8 shall not be construed to limit or foreclose any court or arbitrator from imposing any other awards or remedies. Notwithstanding the above, no reimbursement shall be made for legal fees and other expenses incurred after the last day of the second taxable year of the Participant following the taxable year in which the Participant incurs a Separation from Service, and reimbursement will not be made later than the last day of the third taxable year of the Participant following the taxable year of the Participant’s Separation from Service.

     6.9 Facility of Payments. If the Administrative Committee determines that any person entitled to payments under the Plan is physically or mentally incompetent to receive or properly receipt for such payments, the Company shall make such payments or, if applicable, the Administrative Committee shall direct the Trustee to make the payments, to the legal guardian or other personal representative of such person for the use and benefit of such person. If the Administrative Committee for any reason is unable to determine with reasonable certainty the proper person to pay pursuant to the immediately preceding sentence, the Company shall pay or, if applicable, the Administrative Committee shall direct the Trustee to pay, any amounts due hereunder into a court of competent jurisdiction in an interpleader proceeding for purposes of being directed by such court as to the proper disposition of such amounts. Any such payments so made by the Company or the Trustee, to the extent of the amounts thereof, shall be a full and complete discharge of any liability or obligation of the Plan, Trust, Employer, Administrative Committee, Compensation Committee, Board and other interested parties, therefor.

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     6.10 Beneficiary Designations. Each Employee, upon becoming a Participant, shall file with the Administrative Committee (or its delegate) a designation of one or more Beneficiaries to whom benefits otherwise payable to the Participant shall be made in the event of his death prior to the complete distribution of his Account balance. A Beneficiary designation shall be on the form prescribed by the Administrative Committee and shall be effective when received and accepted by the Administrative Committee. A Participant may, from time to time, revoke or change his Beneficiary designation by filing a new designation form with the Administrative Committee. The last valid designation received by the Administrative Committee shall be controlling; provided, however, that no Beneficiary designation, or change or revocation thereof, shall be effective unless received prior to the Participant’s death, and shall not be effective as of a date prior to its receipt by the Administrative Committee

     If no valid and effective Beneficiary designation exists at the time of the Participant’s death, or if no designated Beneficiary survives the Participant, or if such designation conflicts with applicable law, the payment of the Participant’s Account balance shall be made to the Participant’s surviving lawful spouse, if any. If there is no surviving spouse, then payment of the Account balance shall be made to the executor or administrator of the Participant’s estate, or if there is no administration on Participant’s estate, in accordance with the laws of descent and distribution as determined by the Company. If the Administrative Committee is in doubt as to the right of any person to receive such amount, it may direct that the amount be paid into any court of competent jurisdiction in an interpleader action, and such payment shall be a full and complete discharge of any liability or obligation under the Plan or Trust Agreement to the full extent of such payment.

     6.11 Withholding of Taxes. The Administrative Committee shall direct the Employer or, if appropriate, the Trustee, to withhold from the amount of benefits payable under the Plan all federal, state and local taxes required to be withheld under any applicable law or governmental regulation or ruling.

     For each payroll period in which an Elective Deferral Contribution is being withheld, the Employer shall ratably withhold from that portion of the Active Participant’s Compensation or Bonus that is not being deferred, the Active Participant’s share of FICA, FUTA other applicable employment taxes that are required to be withheld with respect to such Elective Deferral Contributions.

     With respect to Employer contributions pursuant to Section 4.5, the Employer shall withhold the Active Participant’s required share of FICA, FUTA or and other applicable employment taxes from the Active Participant’s Compensation or Bonus that is not being deferred. Such taxes shall be withheld at the same time that the Employer contributions are credited to the Deferred Compensation Ledger.

     6.12 Distribution due to Qualified Domestic Relations Order. A distribution may be allowed for a “qualified domestic relations order” (“QDRO”) as described in Code Section 414(p). The Administrative Committee shall establish procedures to determine whether domestic relations orders submitted to the Administrative Committee or its delegate under Section 3.4, are QDROs and to administer distributions under any valid QDROs. If the Administrative Committee or its delegate, in its discretion, determines a domestic relations order to be a QDRO, the Administrative Committee or its delegate may direct payment only from the portion, if any, of the Account balance which is attributable to Participant’s Compensation and Bonus deferral contributions and is necessary to satisfy the QDRO.

ARTICLE SEVEN

RIGHTS OF PARTICIPANTS

     7.1 Annual Statement to Participants. As soon as practicable after the end of each Plan Year, or at such other time as the Administrative Committee determines to be appropriate, the Administrative Committee shall cause to be prepared and delivered to each Participant a written statement showing the following information and such other information that the Administrative Committee decides is appropriate:

(a)	The beginning balances in the Participant’s Account under the Deferred Compensation Ledger as of the first day of the Plan Year;
(b)	The amount of Compensation and Bonuses deferred for the Plan Year and credited to the Participant’s Account for the Plan Year;

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(c)	The amount of Employer contributions for the Plan Year that were credited to the Participant’s Account for the Plan Year;
(d)	The adjustments to the Participant’s Account to reflect the crediting of Investment Experience and any distributions or withdrawals made during the Plan Year; and
(e)	the ending balances in the Participant’s Account as of the last day of the Plan Year.

     7.2 Limitation of Rights. Nothing in this Plan shall be construed to:

(a)	Give any individual who is employed by an Employer any right to be a Participant unless and until such person is selected by the Compensation Committee.
(b)	Give any Participant any rights, other than as an unsecured general creditor of the Employer, with respect to the Compensation, Bonuses, Employer contributions and Investment Experience credited to his Account under the Deferred Compensation Ledger until such amounts are actually distributed to him;
(c)	Limit in any way the right of the Employer to terminate a Participant’s Employment with the Employer;
(d)	Give a Participant or any other person any interest in any fund or in any specific asset of the Employer;
(e)	Give a Participant or any other person any interests or rights other than those of an unsecured general creditor of the Employer;
(f)	Be evidence of any agreement or understanding, express or implied, that the Employer will employ a Participant in any particular position, at any particular rate of remuneration, or for any particular time period; or
(g)	Create a fiduciary relationship between the Participant and the Employer, Compensation Committee, and/or Administrative Committee.

     7.3 Nonalienation of Benefits. No right or benefit under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same will be void and without effect. No right or benefit hereunder shall in any manner be liable for or subject to any debts, contracts, liabilities or torts of the person entitled to such benefits. If any Participant or Beneficiary hereunder shall become bankrupt or attempt to anticipate, alienate, assign, sell, pledge, encumber, or charge any right or benefit hereunder, or if any creditor shall attempt to subject the same to a writ of garnishment, attachment, execution, sequestration, or any other form of process or involuntary lien or seizure, then such right or benefit shall be held by the Company for the sole benefit of the Participant or Beneficiary, his spouse, children, or other dependents, or any of them, in such manner as the Administrative Committee shall deem proper, free and clear of the claims of any party.

     The withholding of taxes from benefit payments hereunder; the recovery under the Plan of overpayments of benefits previously made to a Participant; the transfer of benefit rights from the Plan to another plan; the direct deposit of benefit payments to an account in a banking institution (if not actually part of an arrangement constituting an assignment or alienation); or an in-service distribution under Section 6.6, shall not be construed as an assignment or alienation for purposes of the first paragraph of this Section.

     The first paragraph of this Section shall not preclude (a) the Participant from designating a Beneficiary to receive any benefit payable hereunder upon his death, or (b) the executors, administrators, or other legal representatives of the Participant or his estate from assigning any rights hereunder to the person or persons entitled thereto.

     In the event that any Participant’s or Beneficiary’s benefits hereunder are garnished or attached by order of any court, the Company or Trustee may bring an action or a declaratory judgment in a court of competent jurisdiction to determine the proper recipient of the benefits to be paid under the Plan. During the pendency of said action, any benefits that become payable shall be held as credits to the Participant’s Account or, if the Company prefers, paid into the court as they become payable, to be distributed by the court to the recipient as the court deems proper at the close of said action.

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     7.4 Claims Procedures.

(a)	Filing a Claim. A Participant or his authorized representative may file a claim for benefits under the Plan (hereafter, referred to as a “Claimant”). Any claim must be in writing and submitted to the Administrative Committee at such address as may be specified from time to time. Claimants will be notified in writing of approved claims, which will be processed as claimed. A claim is considered approved only if its approval is communicated in writing to the Claimant.
(b)	Denial of Claim. In the case of the denial of a claim respecting benefits paid or payable with respect to a Claimant, a written notice will be furnished to the Claimant within 90 days of the date on which the claim is received by the Administrative Committee. If special circumstances (such as for a hearing) require a longer period, the Claimant will be notified in writing, prior to the expiration of the 90-day period, of the reasons for an extension of time; provided, however, that no extension will be permitted beyond 90 days after expiration of the initial 90-day period.
(c)	Reasons for Denial. A denial or partial denial of a claim will be dated and signed by the Administrative Committee and will clearly set forth:

(1)	the specific reason or reasons for the denial;
(2)	specific reference to pertinent Plan provisions on which the denial is based;
(3)	a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and
(4)	an explanation of the procedure for review of the denied or partially denied claim set forth below, including the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

(d)	Review of Denial. Upon denial of a claim, in whole or in part, a Claimant or his duly authorized representative will have the right to submit a written request to the Administrative Committee for a full and fair review of the denied claim by filing a written notice of appeal with the Administrative Committee within 60 days of the receipt by the Claimant of written notice of denial of the claim. A Claimant or the Claimant’s authorized representative will have, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits and may submit issues and comments in writing. The review will take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
	If the Claimant fails to file a request for review within 60 days of the denial notification, the claim will be deemed abandoned and the Claimant precluded from reasserting it. If the Claimant does file a request for review, his request must include a description of the issues and evidence he deems relevant. Failure to raise issues or present evidence on review will preclude those issues or evidence from being presented in any subsequent proceeding or judicial review of the claim.
(e)	Decision Upon Review. The Administrative Committee will provide a prompt written decision on review. If the claim is denied on review, the decision shall set forth:

(1)	the specific reason or reasons for the adverse determination;
(2)	specific reference to pertinent Plan provisions on which the adverse determination is based;
(3)	a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits; and

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(4) a statement describing any voluntary appeal procedures offered by the Plan and the Claimant’s right to obtain the information about such procedures, as well as a statement of the Claimant’s right to bring an action under ERISA Section 502(a).

	A decision will be rendered no more than 60 days after the Administrative Committee’s receipt of the request for review, except that such period may be extended for an additional 60 days if the Administrative Committee determines that special circumstances (such as for a hearing) require such extension. If an extension of time is required, written notice of the extension will be furnished to the Claimant before the end of the initial 60-day period.
	To the extent of its responsibility to review the denial of benefit claims, the Administrative Committee will have full authority to interpret and apply in its discretion the provisions of the Plan. The decision of the Administrative Committee will be final and binding upon any and all Claimants, including, but not limited to, Participants, and any other individuals making a claim through them.
(f)	Other Procedures. Notwithstanding the foregoing, the Administrative Committee, in its discretion, may adopt different procedures for different claims without being bound by past actions. Any procedures adopted, however, shall be designed to afford a Claimant a full and fair review of his claim and shall comply with applicable regulations under ERISA.
(g)	Finality of Determinations; Exhaustion of Remedies. To the extent permitted by law, decisions reached under the claims procedures set forth in this Section shall be final and binding on all parties. No legal action for benefits under the Plan shall be brought unless and until the Claimant has exhausted his remedies under this Section. In any such legal action, the Claimant may only present evidence and theories which the Claimant presented during the claims procedure. Any claims which the Claimant does not in good faith pursue through the review stage of the procedure shall be treated as having been irrevocably waived. Judicial review of a Claimant’s denied claim shall be limited to a determination of whether the denial was an abuse of discretion based on the evidence and theories the Claimant presented during the claims procedure. Any suit or legal action initiated by a Claimant under the Plan must be brought by the Claimant no later than one year following a final decision on the claim for benefits by the Administrative Committee. The one-year limitation on suits for benefits will apply in any forum where a Claimant initiates such suit or legal action.
(h)	Effect of Committee Action. The Plan shall be interpreted by the Administrative Committee in accordance with the terms of the Plan and their intended meanings. However, the Administrative Committee shall have the discretion to make any findings of fact needed in the administration of the Plan, and shall have the discretion to interpret or construe ambiguous, unclear or implied (but omitted) terms in any fashion that the Administrative Committee deems to be appropriate in its sole judgment. The validity of any such finding of fact, interpretation, construction or decision shall not be given de novo review if challenged in court, by arbitration or in any other forum, and shall be upheld unless clearly arbitrary or capricious. To the extent the Administrative Committee has been granted discretionary authority under the Plan, the Administrative Committee’s prior exercise of such authority shall not obligate it to exercise its authority in a like fashion thereafter. If, due to errors in drafting, any Plan provision does not accurately reflect its intended meaning, as demonstrated by consistent interpretations or other evidence of intent, or as determined by the Administrative Committee in it sole and exclusive judgment, the provision shall be considered ambiguous and shall be interpreted by the Administrative Committee in a fashion consistent with its intent, as determined by the Administrative Committee in its sole discretion. The Administrative Committee, without the need for approval by the Board, may amend the Plan retroactively to cure any such ambiguity. This Section 7.4 may not be invoked by any person to require the Plan to be interpreted in a manner which is inconsistent with its interpretation by the Administrative Committee. All actions taken and all determinations made in good faith by the Administrative Committee shall be final and binding upon all persons claiming any interest in or under the Plan.

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ARTICLE EIGHT

MISCELLANEOUS

     8.1 Amendment or Termination of the Plan. The Compensation Committee or the Administrative Committee may amend or terminate the Plan at any time effective as of the date specified by said Committee, including amendments with a retroactive effective date; provided, however, the provisions of Section 8.2 may not be amended without the consent of at least two-thirds (2/3) of all affected Participants and no amendment may be made which affects the rights or duties of the Compensation Committee hereunder without its consent. In addition, unless the particular Participant (or his Beneficiary in the event of death) consents in writing, no such amendment or termination shall adversely affect any rights of such Participant or Beneficiary to any amounts which are required to be allocated and credited hereunder to his Account at such time.

     Notwithstanding the immediately preceding paragraph, the Plan may be amended by the Compensation Committee or the Administrative Committee at any time prior to a Change of Control if required to ensure that the Plan is characterized as a “top-hat plan” of deferred compensation maintained for a select group of management or highly compensated employees as described under ERISA Sections 201(2), 301(a)(3), and 401(a)(1), or to conform the Plan to the requirements of ERISA, for “top-hat plans” or “supplemental executive retirement plans” or the requirements of the Code for deferred compensation plans including Code Section 409A. No such amendment for this exclusive purpose shall be considered prejudicial to the interest of a Participant or a Beneficiary hereunder.

     Following a Change of Control, any amendment or termination of the Plan (which is proposed by the Compensation Committee or Administrative Committee pursuant to the immediately preceding paragraph) shall require the written consent of a majority of the then Participants. For purposes of this Plan, when the consent of a majority of the Participants is required, the determination of majority consent shall be based upon receiving the consent of any combination of Participants whose sum of Account balances under the Plan as of the time of determination is greater than fifty percent (50%) of the sum of all Account balances for all Participants at such time, rather than upon receiving the consent of a majority of the number of Participants. For purposes of this determination, Beneficiaries of deceased Participants shall be considered Participants.

     If the consent of a majority of the Participants is required for the amendment or termination of the Plan, then the Administrative Committee shall be responsible for securing such Participant consents in a timely and confidential fashion and, unless ordered by a court of competent jurisdiction, shall not reveal to the Company, the Board, Compensation Committee or any other interested party any information concerning such consents, except whether the required majority has been achieved. The decision whether or not to consent is the responsibility of the Participant in the exercise of his judgment, and notice of such consent or failure to consent shall be administered in a confidential manner to protect the identity of the Participant. Any consent of a Participant required under this Section 8.1 shall be deemed given if no written objection from such Participant is received by the person soliciting such consents on behalf of the Participants within fifteen (15) days after a written notice requesting such consent and indicating such 15-day response period has been sent postpaid by United States registered or certified mail with return receipt requested, and such return receipt has been returned indicating receipt of such notice by the Participant.

     In the event of termination of the Plan, there shall be no Active Participants, and the Account balance of each Participant shall not be distributable except in accordance with Article Six. In accordance with Code Section 409A, termination of the Plan shall not, by itself, create a distribution event for Participants.

     8.2 Powers of the Company. The existence of outstanding and unpaid benefits under the Plan shall not affect in any way the right or power of the Employer to make or authorize any adjustments, recapitalization, reorganization or other changes in the Employer’s capital structure or in its business, or any merger or consolidation of the Employer, or any issue of bonds, debentures, common or preferred stock, or the dissolution or liquidation of the Employer, or any sale or transfer of all or any part of their assets or business, or any other act or corporate proceeding, whether of a similar character or otherwise.

     Should the Employer (or any successor thereto) elect to dissolve, enter into a sale of its assets, or enter into any reorganization incident to which it is not the surviving entity, unless the surviving or successor entity shall formally agree to assume and continue the Plan, and Trust if applicable, the Plan shall terminate with respect to the Employer (or any successor thereto) on the earlier of the date of closing or the effective date of such transaction. In such event, there shall be no Active Participants of that Employer, and the Account balance of each affected Participant shall not be distributable except in accordance with Article Six.

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     Should any successor to the Company assume and continue the Plan, and Trust if applicable, incident to a transaction described in the immediately preceding paragraph, the affected Participants’ Account balances shall not be distributable except in accordance with Article Six.

     8.3 Adoption of Plan by Affiliated Entity. Any Affiliated Entity may adopt the Plan with the consent of the Compensation Committee or the Administrative Committee, effective as of the date specified by the respective Committee. Any Affiliated Entity which has adopted the Plan shall not be responsible for the administration of the Plan, and its Employees who are eligible to participate herein shall be selected as provided herein.

     8.4 Waiver. No term or condition of this Plan shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this Plan, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. Any waiver by either party hereto of a breach of any provision of the Plan by the other party shall not operate or be construed as a waiver by such party of any subsequent breach thereof.

     8.5 Notice. Except as provided in Section 8.1, any notice required or permitted to be given under this Plan shall be sufficient if in writing and delivered via telecopier, messenger, or overnight courier with appropriate proof of receipt, or sent by U.S. registered or certified or registered mail, return receipt requested, to the appropriate person or entity at the address last furnished by such person or entity. Such notice shall be deemed given as of the date of delivery to the recipient or, if delivery is made by mail, as of the date shown on the receipt for registration or certification.

     8.6 Severability. In the event that any provision of the Plan is declared invalid and not binding on the parties hereto in a final decree or order issued by a court of competent jurisdiction, such declaration shall not affect the validity of the other provisions of the Plan to which such declaration of invalidity does not relate and such other provisions shall remain in full force and effect.

     8.7 Gender, Tense and Headings. Whenever the context requires, words of the masculine gender used herein shall include the feminine and neuter, and words used in the singular shall include the plural. The words “hereof,” “hereunder,” “herein,” and similar compounds of the word “here” shall refer to the entire Plan and not to any particular term or provision of the Plan. Headings of Articles and Sections, as used herein, are inserted solely for convenience and reference and shall not affect the meaning, interpretation or scope of the Plan.

     8.8 Governing Law. The Plan shall be subject to and governed by the laws of the State of Texas (other than such laws relating to choice of laws), except to the extent preempted by ERISA, the Code or other controlling federal law.

[Signature page follows.]

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     IN WITNESS WHEREOF, this Plan is approved and executed by a duly authorized officer of the Company, on this 22^nd day of October 2009, to be effective as of January 1, 2008.

ATTEST:		SMITH INTERNATIONAL, INC.
By:	/s/ PAMELA L KUNKEMOELLER	By:	/s/ MALCOLM W. ANDERSON
Name:	Pamela L. Kunkemoeller	Name:	Malcolm W. Anderson
Title:	Asst. General Counsel — Corporate	Title:	SVP Human Resources
	& Asst. Secretary

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EX-21.1

EXHIBIT 21.1

Significant Subsidiaries

     The following table sets forth all subsidiaries of Smith International, Inc., other than inactive and insignificant subsidiaries that, considered in the aggregate, would not constitute a significant subsidiary, indicating the percentage of issued and outstanding voting securities beneficially owned by it:

		% of Direct and
Name of Subsidiary	Where Incorporated	Indirect Ownership
CE Franklin Ltd.	Canada		53	%
Smith International Acquisition Corp.	Delaware		100	%
Smith International Canada, Ltd.	Canada		100	%
Smith International (North Sea) Limited	United Kingdom		100	%
W-H Energy Services, LLC	Texas		100	%
Wilson International, Inc.	Delaware		100	%

     All of the above subsidiaries are included in the Company’s consolidated financial statements.

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-151897, 333-153175, 333-141049, 333-88918, 333-65912, 333-76633, 333-76635, 333-75763, 33-56693, 33-69840, 33-31556, and 2-76939 on Form S-8 and in No. 333-153631 on Form S-3 of our reports dated March 1, 2010, relating to the consolidated financial statements and financial statement schedule of Smith International, Inc. (which report expresses an unqualified opinion) and the effectiveness of internal control over financial reporting appearing in this Annual Report on Form 10-K of Smith International, Inc. for the year ended December 31, 2009.

/s/ Deloitte & Touche LLP

Houston, Texas
March 1, 2010

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John Yearwood, certify that:

1. I have reviewed this annual report on Form 10-K of Smith International, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report based on such evaluation; and

d. Disclosed in this annual 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: March 1, 2010	/s/ John Yearwood
	John Yearwood
	Chief Executive Officer, President and Chief Operating Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William Restrepo, certify that:

1. I have reviewed this annual report on Form 10-K of Smith International, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report based on such evaluation; and

d. Disclosed in this annual 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: March 1, 2010	/s/ William Restrepo
	William Restrepo
	Senior Vice President, Chief Financial Officer and Treasurer

EX-32.1

EXHIBIT 32.1

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 Annual Report of Smith International, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), We, John Yearwood, Chief Executive Officer, President and Chief Operating Officer, and William Restrepo, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 1, 2010	/s/ John Yearwood
	John Yearwood
	Chief Executive Officer, President and Chief Operating Officer
Date: March 1, 2010	/s/ William Restrepo
	William Restrepo
	Senior Vice President, Chief Financial Officer and Treasurer

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The certification the registrant furnishes in this exhibit is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the Securities and Exchange Commission shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing.