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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended September 30, 2004



OR



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



For the Transition Period Fromto.



Commission file number 1-10570



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BJ SERVICES COMPANY

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 63-0084140                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|5500 Northwest Central Drive, Houston, Texas                   |  | 77092                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code: (713) 462-4239



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Securities registered pursuant to Section 12(b) of the Act:



|                                      |  |                                          
|------------------------------------- |  | -----------------------------------------
|Title of each class                   |  | Name of each exchange on which registered
|Common Stock $.10 par value per share |  | New York Stock Exchange                  
|Preferred Share Purchase Rights       |  | New York Stock Exchange                  
|7% Series B Notes due 2006            |  | New York Stock Exchange                  



Securities
Registered Pursuant to Section 12(g) of the Act: None



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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  x.



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



At January 14, 2005, the registrant had outstanding 162,455,493 shares of
Common Stock, $.10 par value per share. The aggregate market value of the Common Stock on March 31, 2004 (based on the closing prices in the daily composite list for transactions on the New York Stock Exchange) held by nonaffiliates of the
registrant was approximately $7.0 billion.



DOCUMENTS
INCORPORATED BY REFERENCE:



Portions of the
registrants Proxy Statement for the Annual Meeting of Stockholders to be held March 24, 2005 are incorporated by reference into Part III of this Form 10-K.



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TABLE OF CONTENTS



|         |  |          |  |                                                                                       |  |     
|-------- |  | -------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |          |  |                                                                                       |  | Page
|PART I   |  |         
|         |  |          | 
|         |  | Item 1.  |  | Business                                                                              |  | 3   
|         |  | Item 2.  |  | Properties                                                                            |  | 16  
|         |  | Item 3.  |  | Legal Proceedings                                                                     |  | 17  
|         |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 19  
|         | 
|PART II  |  |         
|         |  |          | 
|         |  | Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 20  
|         |  | Item 6.  |  | Selected Financial Data                                                               |  | 22  
|         |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 23  
|         |  | Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 40  
|         |  | Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 41  
|         |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 78  
|         |  | Item 9A. |  | Controls and Procedures                                                               |  | 78  
|         |  | Item 9B. |  | Other Information                                                                     |  | 78  
|         | 
|PART III |  |         
|         |  |          | 
|         |  | Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 79  
|         |  | Item 11. |  | Executive Compensation                                                                |  | 79  
|         |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 79  
|         |  | Item 13. |  | Certain Relationships and Related Transactions                                        |  | 79  
|         |  | Item 14. |  | Principal Accountant Fees and Services                                                |  | 79  
|         | 
|PART IV  |  |         
|         |  |          | 
|         |  | Item 15. |  | Exhibits and Financial Statement Schedules                                            |  | 80  



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PART I



ITEM 1. BUSINESS



General



BJ Services Company (the Company), whose operations trace back
to the Byron Jackson Company (which was founded in 1872), was organized in 1990 under the corporate laws of the state of Delaware. The Company is a leading provider of pressure pumping and other oilfield services for the petroleum industry
worldwide. The Companys pressure pumping services consist of cementing and stimulation services used in the completion of new oil and natural gas wells and in remedial work on existing wells, both onshore and offshore. Other oilfield services
include completion tools, completion fluids, casing and tubular services, production chemical services, and precommissioning, maintenance and turnaround services in the pipeline and process business, including pipeline inspection.



Since its organization, the Company has completed several acquisitions,
including the acquisition of OSCA, Inc. (OSCA) on May 31, 2002, a completion services (pressure pumping), completion tools and completion fluids company based in Lafayette, Louisiana, with operations primarily in the U.S., Gulf of
Mexico, Brazil and Venezuela.



During the year ended September
30, 2004, the Company generated approximately 83% of its revenue from pressure pumping services and 17% from other oilfield services. Over the same period, the Company generated approximately 52% of its revenue from U.S. operations and 48% from
international operations. For geographic revenue and long-lived assets and segment revenue, operating income and identifiable asset details for each of the three years ended September 30, 2004, see Note 8 of the Notes to Consolidated Financial
Statements.



The Company conducts its operations
through three principal segments:



| |  | U.S./Mexico Pressure Pumping Services.This segment includes: (1) cementing services and (2) stimulation services, which consists of fracturing, acidizing, sand control,
nitrogen, coiled tubing and service tools.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | International Pressure Pumping Services.This segment includes: (1) cementing services and (2) stimulation services, which consists of fracturing, acidizing, sand control,
nitrogen, coiled tubing and service tools.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other Oilfield Services.This segment includes: (1) casing and tubular services, (2) process and pipeline services, (3) production chemical services, (4) completion tools and
(5) completion fluids.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pressure Pumping Services



Pressure pumping services are provided by the Company to
major and independent oil and natural gas producing companies, as well as national oil companies, for the purpose of completing new oil and natural gas wells, maintaining existing oil and natural gas wells, and enhancing the production of oil and
natural gas from formations in reservoirs. Pressure pumping services are provided through the Companys U.S./Mexico Pressure Pumping Segment and the International Pressure Pumping Segment. These services are provided both on land and offshore
on a 24-hour, on-call basis through regional and district facilities in approximately 200 locations worldwide.



Cementing Services



The
Companys cementing services, which accounted for approximately 35% of total pressure pumping revenue during fiscal 2004, consists of blending high-grade cement and water with various solid and liquid additives to create a cement
slurry that is pumped into a well between the casing and the wellbore. The cement slurry is designed to achieve the proper cement set-up time, compressive strength and fluid loss control, and can be modified to address different well depths,
downhole temperatures and pressures, and formation characteristics.



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The Company provides central, regional and district laboratory testing services to evaluate slurry
properties, which can vary by cement supplier and based on the qualities of local water sources. Job design recommendations are developed by the Companys field engineers to achieve desired compressive strength and bonding characteristics.



The principal application for cementing services used in
oilfield operations is primary cementing, or cementing between the casing pipe and the wellbore during the drilling and completion phase of a well. Primary cementing is performed to (i) isolate fluids behind the casing between productive formations
and other formations that would damage the productivity of hydrocarbon producing zones or damage the quality of freshwater aquifers, (ii) seal the casing from corrosive formation fluids and (iii) provide structural support for the casing string.
Cementing services are also utilized when recompleting wells from one producing zone to another and when plugging and abandoning wells.



For revenue by product line for each of the three years ended September 30, 2004, see Note 8 of the Notes to Consolidated Financial Statements.



Stimulation Services



The Companys stimulation services, which accounted for approximately
63% of total pressure pumping revenue during fiscal 2004, consist of fracturing, acidizing, sand control, nitrogen, coiled tubing and service tools. The Company participates in the offshore stimulation market through the use of skid-mounted pumping
units and the operation of several stimulation vessels, including one in the North Sea, three in the Gulf of Mexico and four in South America.



The Company believes that as oil and natural gas production continues to decline in key producing fields of the U.S. and certain international regions,
the demand for fracturing and other stimulation services is likely to increase. Consequently, the Company has been increasing its pressure pumping capabilities in the U.S. and internationally over the past several years. These services are designed
to improve the flow of oil and natural gas from producing formations and are summarized below.



Fracturing. Fracturing services are performed to enhance the production of oil and natural gas from formations having such permeability that the natural flow is restricted. The fracturing process consists of
pumping a fluid into a cased well at sufficient pressure to fracture the producing formation (fracturing fluid). Sand, bauxite or synthetic proppants are suspended in the fracturing fluid and are pumped into the fracture to prop it open.
The size of a fracturing job is generally expressed in terms of pounds of proppant, which can exceed 200,000 lbs. In some cases, fracturing is performed by an acid solution pumped under pressure without a proppant or with small amounts of proppant.
The main pieces of equipment used in the fracturing process are a blender, which blends the proppant and chemicals into the fracturing fluid, multiple pumping units capable of pumping significant volumes at high pressures, and a monitoring van
equipped with real-time monitoring equipment and computers used to control the fracturing process. The Companys fracturing units are capable of pumping slurries at pressures of up to 20,000 pounds per square inch. In 1998, the Company embarked
on a program to replace its aging U.S. fracturing pump fleet with new, more efficient and higher horsepower pressure pumping equipment. The Company has made significant progress with this program, which is now approximately 83% complete. During
fiscal 2004, the Company expanded this U.S. fleet recapitalization initiative to include additional equipment, such as cementing, nitrogen and acidizing and will begin recapitalizing the pressure pumping equipment in Canada in fiscal 2005.



An important element of fracturing services is the design of
the fracturing treatment, which includes determining the proper fracturing fluid, proppants and injection program to maximize results. The Companys field engineering staff provide technical evaluation and job design recommendations as an
integral element of its fracturing service for the customer. Technological developments in the industry over the past several years have focused on proppant concentration control (i.e., proppant density), liquid gel concentrate capabilities,
computer design and monitoring of jobs and cleanup properties for fracturing fluids. The Company has introduced equipment and products to respond to these technological advances.



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Acidizing. Acidizing enhances the flow rate of oil and natural gas from wells with reduced flow
caused by formation damage from drilling or completion fluids or the gradual build-up of materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge
crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. The Company maintains a fleet of mobile acid transport and pumping units to provide acidizing services for the onshore market and maintains acid storage and
pumping equipment on most of its offshore stimulation vessels.



Sand Control. Sand control services involve pumping gravel to fill the cavity created around a wellbore during drilling. The gravel provides a filter for the exclusion of formation sand from the producing wellbore. Oil and natural
gas are then free to move through the gravel into the wellbore. These services are utilized primarily in unconsolidated sandstone reservoirs, mostly in the Gulf of Mexico, the North Sea, Venezuela, Brazil, Trinidad, West Africa, China, Indonesia and
India. Completion tools, as described elsewhere herein, are often utilized in conjunction with sand control services.



Nitrogen. There are a number of uses for nitrogen, an inert gas, in pressure pumping operations. Used alone, it is effective in displacing fluids
in various oilfield applications, including underbalanced drilling. However, nitrogen is used principally in applications supporting the Companys coiled tubing and stimulation services.



Coiled Tubing. Coiled tubing services involve injecting coiled tubing
into wells to perform various well-servicing operations. The application of coiled tubing has increased in recent years due to improvements in coiled tubing technology. Coiled tubing is a flexible steel pipe with a diameter of less than five inches
manufactured in continuous lengths of thousands of feet and wound or coiled along a large reel on a truck or skid-mounted unit. Due to the small diameter of coiled tubing, it can be inserted through existing production tubing and used to perform
workovers without using a larger, costlier workover rig. The other principal advantages of employing coiled tubing in a workover include (i) not having to shut-in the well during such operations, thereby allowing production to continue
and reducing the risk of formation damage to the well, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, which must be jointed and unjointed, (iii) the ability to direct fluids
into a wellbore with more precision, allowing for localized stimulation treatments and providing a source of energy to power a downhole motor or manipulate downhole tools and (iv) enhanced access to remote or offshore fields due to the smaller size
and mobility of a coiled tubing unit. The Company has developed a line of specialty downhole tools that may be attached to coiled tubing, including rotary jetting equipment and through-tubing inflatable packer systems.



Service Tools. The Company provides service tools and technical
personnel for well servicing applications in select markets throughout the world. Service tools, which are used to perform a wide range of downhole operations to maintain or improve a well, generally are rented by customers from the Company. While
marketed separately, service tools are usually provided during the course of providing other pressure pumping services.



Other Oilfield Services



The Companys other oilfield services accounted for approximately 17% of the Companys total revenue in fiscal 2004. The other oilfield services
segment consists of casing and tubular services, process and pipeline services, production chemicals, and, with the acquisition of OSCA on May 31, 2002, completion tools and completion fluids services in the U.S. and select markets internationally.
Revenue for this segment for each of the three years ended September 30, 2004, is presented in Note 8 of the Notes to Consolidated Financial Statements.



Casing and Tubular Services. Casing and tubular services comprise installing or running casing and production tubing into a wellbore.
Casing is run to protect the structural integrity of the wellbore and to seal various zones in the well. These services are provided primarily during the drilling and completion phases of a well. Production tubing is run inside the casing. Oil and
natural gas are produced through the tubing. These services are provided during the completion and workover phases. The Companys casing and tubular services business has historically been focused in the North Sea and selected international
markets outside of North America. However, with the fiscal year 2004 acquisitions of Cajun Tubular Services, Inc. and Petro-Drive,



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a division of Grant Prideco, Inc. (see Note 3 of the Notes to Consolidated Financial Statements), the Companys business expanded into the Gulf of
Mexico and other international markets.



Process and
Pipeline Services. The Company provides a wide range of services to the process industry, which includes oil and natural gas production, refineries, gas and petrochemical plants and the power industry. These services cover two main areas: (i)
the precommissioning of new plants and (ii) maintenance services to existing plants. The services offered consist primarily of testing, cleaning, drying and inerting, using several different technologies. Nitrogen/helium leak testing is used to
locate and quantify small leaks on hydrocarbon systems. Leak testing is used on both new and old facilities to minimize the risk of hydrocarbon leaks, improving safety and minimizing greenhouse gas emissions. Systems can be cleaned by flushing,
jetting, pigging or chemical means to ensure debris is removed from the system prior to start-up, thus minimizing damage to expensive process equipment.



Our pipeline services also consist of precommissioning and maintenance services. Due to regulatory requirements or safety concerns, new pipelines are
often tested prior to their initial use. Pipeline testing typically involves filling the pipeline with water under operating pressures and drying the pipelines. Pipeline drying is carried out using dry air, nitrogen or vacuum. Many pipelines require
cleaning while on line both to help ensure the integrity of the pipeline and to maximize product throughput. The Company offers several techniques for this, including gel cleaning, which is used to carry large amounts of debris out of
the pipeline, and various solvent treatments to remove debris.



The Companys pipeline inspection business uses intelligent pigs to assist pipeline operators in assessing the integrity of their pipelines. Pigs are mechanical devices that are propelled through a pipeline. The Company has
developed two principal pipeline inspection tools: one tool monitors metal loss from the interior pipe wall caused by either corrosion or mechanical damage, and a second tool monitors pipeline geometry (dents, buckles and wrinkles) and position
(latitude, longitude and height) using an inertial guidance system which allows the production of as-built maps of the pipeline as well as the calculation of critical strains due to pipeline movement. Using the information collected by these tools,
pipeline operators are able to carry out structural analysis to ascertain if the pipeline is fit for purpose.



Production Chemical Services. Production chemical services are provided to customers in the upstream and downstream oil and natural gas businesses.
These services involve the design of treatments and the sale of products to reduce the negative effects of corrosion, scale, paraffin, bacteria, and other contaminants in the production and processing of oil and natural gas. Customers engaged in
crude oil production, natural gas processing, raw and finished oil and natural gas product transportation, operating refineries and petrochemical manufacturing use these products. Production chemical services operations address two principal
priorities: (1) the protection of the customers capital investment in metal goods, such as downhole casing and tubing, pipelines and process vessels, and (2) the treatment of fluids to allow them to meet the specifications of the
particular operation, such as production transferred to a pipeline or fuel sold at a marketing terminal.



Completion Tools.The Company designs, builds and installs downhole completion tools that deploy gravel to control the migration of
reservoir sand into the well and direct the flow of oil and natural gas into the production tubing. The Company has a specialty tool manufacturing plant in Mansfield, Texas that manufactures some of the components required in the completion tools.
In addition, spare parts for completion tools and production packers are sold to customers that have purchased tools in the past.



The Companys completion tools are sold as complete systems, which are customized based on each wells particular mechanical and reservoir
characteristics, such as downhole pressure, wellbore size and formation type. Many wells produce from more than one productive zone simultaneously. Depending on the customers preference, the Company has the ability to install tools that can
either isolate one producing zone from another or integrate the production from multiple zones. Once the tool systems are designed and customized, each is inspected for quality assurance before it is delivered to the well location. The
Companys field specialists, working with the rig crews, deploy completion tools in the well during the completion process.



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To further enhance reservoir optimization, the Company has also developed the tools necessary to provide
the operator with intelligent completion capabilities. The Companys tools selectively control flow from multiple productive zones in the same wellbore from a remote activation site on surface. The Company from time to time may also
outsource the equipment necessary to monitor downhole parameters such as temperature, pressure and reservoir flow to allow optimization of well productivity.



In addition to tools that are designed to control sand migration, the Company also provides completion tools that are generally used in conventional
completions for reservoirs that do not require sand control. These tools include non-proprietary production packers and other tools that are delivered through distribution networks located in key domestic markets and select international markets.



In July 2004, the Company began the construction of a well
screen manufacturing facility in Houston, Texas, which will be completed in the first calendar quarter of 2005. Well screens are sections of perforated pipe wrapped with wire that are integrated into the production tubing and are designed to prevent
the flow of gravel into the producing wellbore that is pumped in during the sand control operation (see Pressure Pumping Services above). Well screens are critical to the success of wells in unconsolidated sandstone reservoirs and are
integrated with the completion program (sand control, completion tools and well screens) for sand control. Well screens are utilized primarily in unconsolidated sandstone reservoirs, mostly in the Gulf of Mexico, the North Sea, Venezuela, Brazil,
Trinidad, West Africa, China, Indonesia and India.



Completion Fluids.The Company sells and reclaims clear completion fluids and performs related fluid maintenance activities, such as filtration and reclamation. Completion fluids are used to control well pressure and facilitate other
completion activities, while minimizing reservoir damage. The Company provides commodity completion fluids as well as a broad line of specially formulated and customized fluids for critical completion applications.



Completion fluids are available either as pure salt solutions or in
combination with other materials for increased flexibility and greater cost-effectiveness. These fluids are solids-free and therefore will not plug oil and natural gas formations. In contrast, drilling mud, the fluid typically used during drilling
and for some well completions, contains solids to achieve densities greater than water. These solids plug the reservoir, causing reservoir damage and restricting the flow of oil and natural gas into the well. When completion fluids are placed into a
well, they typically become contaminated with solids that are left in the well after drilling mud is displaced. To remove these contaminants, the Company deploys filtering equipment and technicians that work in conjunction with the Companys
on-site fluid engineers to maintain the solids-free condition of the completion fluids throughout the project. The Company provides an entire range of completion fluids, as well as all support services needed to properly apply completion fluids in
the field, including filtration, on-site engineering, additives and rental equipment.



Raw Materials & Equipment



Principal
materials utilized in pressure pumping include cement, fracturing proppants, acid, guar polymers, nitrogen, carbon dioxide and other bulk chemical additives. The Company purchases its principal materials from several suppliers and produces certain
materials through company-owned blending facilities in Germany, Singapore, Canada, the U.S. and Brazil. Sufficient material inventories are generally maintained to allow the Company to provide on-call services to its customers to whom the materials
are sold in the course of providing pressure pumping services.



Repair parts and maintenance items for pressure pumping equipment are carried in inventory at levels that the Company believes will allow continued operations without significant downtime caused by parts shortages. The Company has
experienced only intermittent tightness in supply or extended lead times in obtaining necessary supplies of these materials or repair parts. The Company is not dependent on any single source of supply for any materials; however, loss of one or more
of our suppliers could disrupt production.



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Pressure pumping services are provided utilizing complex truck or skid-mounted equipment designed and
constructed for the particular pressure pumping service furnished. After equipment is transported to a well location it is configured with appropriate connections to perform the services required. The mobility of this equipment permits the Company
to provide pressure pumping services to wellsites in virtually all geographic areas around the world. Most units are equipped with computerized systems that allow for real-time monitoring and control of the cementing and stimulation processes.
Management believes that the Companys pressure pumping equipment is adequate to service both current and projected levels of market activity in the near term.



The Company believes that coiled tubing and other materials utilized in performing coiled tubing services are and will
continue to be widely available from a number of manufacturers. Although there are only three principal manufacturers of the reels which the coiled tubing is wrapped, the Company has not experienced any difficulty in obtaining coiled tubing reels in
the past and anticipates no such difficulty in the foreseeable future.



Nitrogen is one of the principal materials utilized in the other oilfield services lines. The Company purchases nitrogen from several suppliers. The Company has experienced only intermittent tightness in supply or extended lead times in
obtaining necessary supplies of these materials or repair parts and does not anticipate any chronic shortage of any of these items in the foreseeable future.



Engineering and Support Services



The Companys research and development organization is divided into seven areas: Product Development, Applied Technology, Software Applications,
Instrumentation Engineering, Mechanical Engineering, Coiled Tubing Engineering and Completion Tools Engineering.



Product Development. The product development laboratory specializes in developing products with enhanced performance characteristics in the
fracturing, acidizing, sand control and cementing operations (i.e., fracturing fluid and cement slurry). As fluids must perform under a wide range of downhole pressures, temperatures and other conditions, this process is a critical element in
developing products to meet customer needs.



Applied
Technology. The Applied Technology group (ATG) is primarily responsible for supporting technical and engineering applications on a global basis for the five primary service product lines that the Company offers (acidizing, cementing, completion
services, coiled tubing and fracturing). In addition to providing engineering support, the ATG is responsible for: improving the internal technology transfer within the Company, developing and maintaining all of the support documentation for the
Companys chemical products and systems, as well as managing and maintaining all of the intellectual property. Another key responsibility of the ATG is to guide and prioritize the technology development based on feedback from operations and
direct client interaction.



Software Applications.The
Companys software applications group develops and supports a wide range of proprietary software utilized in the monitoring of both cement and stimulation job parameters. This software, combined with the Companys internally developed
monitoring hardware, allows for real-time job control as well as post-job analysis.



Instrumentation Engineering. The pressure pumping industry utilizes an array of monitoring and control instrumentation as an integral element of providing cementing and stimulation services. The Companys
monitoring and control instrumentation, developed by its instrumentation engineering group, complements its products and equipment and provides customers with real-time monitoring of critical applications.



Mechanical Engineering. Though similarities exist between the major
pressure pumping competitors in the general design of their pumping equipment, the actual engine/transmission configurations as well as the mixing and blending systems differ significantly. Additionally, different approaches to the integrated
control systems



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result in equipment designs which are usually distinct in performance characteristics for each competitor. The Companys mechanical engineering group is
responsible for the design of virtually all of the Companys primary pumping and blending equipment. The Companys mechanical engineering group provides new product design as well as support to the rebuilding and field maintenance
functions.



Coiled Tubing Engineering. The coiled tubing
engineering group provides most of the support and research and development activities for the Companys coiled tubing services, including coiled tubing drilling technology. The Company is also actively involved in the ongoing development of
downhole tools that may be attached to the end of coiled tubing.



Completion Tools Engineering. The completions tools research group specializes in the designing, manufacturing and testing of completion tools. Since the Companys tools are often installed miles below the earths surface,
it is critical that potential design flaws be diagnosed and prevented prior to installation. Optimal tool configuration is determined by considering a variety of factors, including different raw materials, operating conditions and design
specifications.



Manufacturing



The Company has three main manufacturing facilities. In addition to the
engineering facility, the Companys research and technology center in Tomball, Texas also houses its main equipment and instrumentation manufacturing facility. The Companys facility in Mansfield, Texas produces certain components and
spare parts required for the assembly of downhole completion tools and service tools. In addition, the Company will complete the construction of a well screen manufacturing facility in Houston, Texas in the first calendar quarter of 2005.



The Company also has smaller manufacturing capabilities in
several international locations. The Company employs outside vendors for manufacturing various units, engine and transmission rebuilding, and certain fabrication work, but is not dependent on any one source.



Competition



Pressure Pumping Services.There are two primary companies with which
the Company competes in pressure pumping services worldwide, Halliburton Energy Services, a division of Halliburton Company, and Schlumberger Ltd. These companies have operations in most areas in which the Company operates. Halliburton Energy
Services and Schlumberger are larger in terms of overall pressure pumping revenue. It is estimated that these two competitors, along with the Company, provide approximately 90% of the worldwide pressure pumping services to the industry. Several
smaller companies compete with the Company in certain areas of the U.S. and in certain international locations. The principal methods of competition which apply to the Companys business are its prices, technology, service record and reputation
in the industry.



Other Oilfield Services. The Company
believes that it is one of the largest suppliers of casing and tubular services in the North Sea and has expanded such services into other international markets in the past several years and into the U.S. in fiscal 2004 with the acquisition of Cajun
Tubular Services, Inc. and Petro-Drive. The largest worldwide provider of casing and tubular services is Weatherford International, Inc. In addition, the Company competes with Franks International Inc. in the Gulf of Mexico and certain
international markets. The Company believes it is the largest provider of commissioning and leak detection services and one of the largest providers of pipeline inspection services. Pipeline Integrity International Ltd. (a division of General
Electric) and H. Rosen Engineering GmbH are our principal competitors in pipeline inspection. There are several competitors significantly larger than the Company in production chemical services. The Companys principal competitors in completion
fluids are Baroid Corporation, a subsidiary of Halliburton Company; M-I LLC, a joint venture of Smith International, Inc. and Schlumberger Limited; and Tetra Technologies, Inc. The Companys principal competitors in completion tools are
Halliburton Energy Services, a division of Halliburton Company,



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Schlumberger Limited, Baker Hughes Incorporated and Weatherford International, Inc. The principal methods of competition which apply to the Companys
business are its prices, technology, service record and reputation in the industry.



Markets and Customers



Demand for the
Companys services and products depends primarily upon the number of oil and natural gas wells being drilled (rig count), the depth and drilling conditions of such wells, the number of well completions and the level of workover
activity worldwide. With the exception of Canada during spring break-up, the Company is not significantly impacted by seasonality. Spring break-up is the period during which snow and ice begin to melt and heavy equipment is not permitted on the
roads, resulting in lower drilling activity.



The
Companys principal customers consist of major and independent oil and natural gas producing companies, as well as national oil companies. During fiscal 2004, the Company provided services to several thousand customers, none of which accounted
for more than 5% of consolidated revenue. While the loss of certain of the Companys largest customers could have a material adverse effect on Company revenue and operating results in the near term, management believes the Company would be able
to obtain other customers for its services in the event of a loss of any of its largest customers.



United States. The United States represents the largest single pressure pumping market in the world. The Company provides its pressure pumping
services to its U.S. customers through a network of more than 50 locations throughout the U.S., a majority of which offer both cementing and stimulation services. Demand for the Companys pressure pumping services in the U.S. is primarily
driven by oil and natural gas drilling activity, which tends to be extremely volatile depending on the current and anticipated prices of oil and natural gas. During the last 10 years, the lowest U.S. rig count averaged 601 in fiscal 1999 and the
highest U.S. rig count averaged 1,172 in fiscal 2001. In fiscal 2004, the U.S. rig count averaged 1,155, a 20% increase over fiscal 2003. For the 12 months ended September 30, 2003, the active U.S. rig count averaged 966 rigs, an 11% increase from
fiscal 2002. The Companys management believes that average rig count for fiscal 2005 will be approximately 6% higher than the average rig count in fiscal 2004, essentially flat with average rig count during the quarter ended September 30, 2004
of approximately 1,229 rigs. During fiscal 2002, the Company expanded its deepwater offshore stimulation capabilities in the Gulf of Mexico through the acquisition of OSCA, which added two stimulation vessels, and the commissioning of the Blue
Ray stimulation vessel in November 2001.



International. The Company operates in approximately 49 countries in the major international oil and natural gas producing areas of Latin America, Europe, Africa, Russia, Asia, Canada and the Middle East. The Company generally
provides services to its international customers through wholly-owned foreign subsidiaries. Additionally, the Company holds certain controlling or minority interests in several joint venture companies, through which it conducts a portion of its
international operations.



Many countries in which we operate
are subject to political, social and economic risks which may cause volatility within any given country. However, the Companys revenue is less volatile because we operate in approximately 49 countries, which provides somewhat of a balance. Due
to the significant investment in and complexity of international projects, management believes drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing.
Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent producer in North America. During the last 10
years, the lowest international rig count averaged 828 in fiscal 1999 and the highest international rig count averaged 1,184 in fiscal 2004. International activities have been increasingly important to the Companys results of operations since
1992, when the Company implemented a strategy to expand its international presence. During fiscal 2001, the Company completed expansion projects in Saudi Arabia, Kazakhstan and West Africa. In fiscal 2002, the Company expanded in Russia through the
purchase of additional workover rigs and enhanced its market position in the Brazilian offshore market with the addition of the Blue Shark stimulation vessel. In



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addition, the Company expanded its service offering in Brazil through the acquisition of OSCA, and by acquiring the assets and business of a leading provider
of coiled tubing services in Brazil. During fiscal 2003, the Company established a new operating base in El Salvador to provide pumping services to clients operating in the area. In addition, during fiscal 2003 the Companys pumping service
activities were expanded to New Zealand, Mozambique and Turkey to provide services for drilling, workover and stimulation projects. In January 2004, the Company completed the commissioning of another stimulation vessel, the Blue Angel,
which is currently under contract and is operating offshore Brazil.



The Company now operates in most of the major oil and natural gas producing regions of the world. International operations are subject to risks that can materially affect the sales and profits of the Company, including currency exchange
rate fluctuations, the impact of inflation, governmental expropriation, currency exchange controls, political instability and other risks. The risk of currency exchange rate fluctuations and its impact on net income is mitigated through the use of
natural hedges whereby the Company invoices for work performed in certain countries in both U.S. dollars and local currency. The Company attempts to match the amounts invoiced in local currency with the amount of expenses denominated in local
currency.



Employees



At September 30, 2004, the Company had a total of 12,825 employees.
Approximately 62% of the Companys employees were employed outside the United States. At September 30, 2004, the Company had a sufficient number of trained employees to meet customer requirements. In periods of rapidly expanding activity, the
Company may increase the number of contract personnel to compensate for any temporary shortages in labor.



Governmental and Environmental Regulation



The Companys business is affected both directly and indirectly by governmental regulations relating to the oil and natural gas industry in general, as well as environmental and safety regulations which have
specific application to the Companys business.



The
Company, through the routine course of providing its services, handles and stores bulk quantities of hazardous materials. In addition, leak detection services involve the inspection and testing of facilities for leaks of hazardous or volatile
substances. If leaks or spills of hazardous materials handled, transported or stored by the Company occur, the Company may be responsible under applicable environmental laws for costs of remediating any damage to the surface or sub-surface
(including aquifers). Accordingly, the Company has implemented and continues to implement various procedures for the handling and disposal of hazardous materials. Such procedures are designed to minimize the occurrence of spills or leaks of these
materials.



The Company has implemented and continues to
implement various procedures to further assure its compliance with environmental regulations. Such procedures generally pertain to the operation of underground storage tanks, disposal of empty chemical drums, improvement to acid and wastewater
handling facilities and cleaning certain areas at the Companys facilities. In addition, the Company maintains insurance for certain environmental liabilities, which the Company believes is reasonable based on its experience and knowledge of
the industry.



The Comprehensive Environmental Response,
Compensation and Liability Act, also known as Superfund, imposes liability without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a hazardous
substance into the environment. Certain disposal facilities that are owned by third parties but are used by the Company or its predecessors have been investigated under state and federal Superfund statutes, and the Company is currently named
as a potentially responsible party for cleanup at four such sites. Although the Companys level of involvement varies at each site, the Company is one of numerous parties named and will be obligated to pay an allocated share of the cleanup
costs. While it is not feasible to predict the outcome of these matters with certainty, management believes that their ultimate resolution should not have a material adverse effect on the Companys results of operations or financial position.



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Research and Development



The Companys research and development activities are focused on improving existing products and services and developing new technologies designed
to meet industry and customer needs. The Company currently holds numerous patents of varying remaining duration. Although such patents, in the aggregate, are important to maintaining the Companys competitive position, no single patent is
considered to be of a critical or essential nature to the Companys ongoing operations. The Company also utilizes technologies owned by third parties under various license arrangements, generally ranging from 10 to 20 years in duration,
relating to certain products or techniques. None of these license arrangements is material to the Companys overall operations.



Pressure Pumping Services Research & Development



The Company has a history of developing patented, industry-leading well stimulation technologies such as Spectra Frac G® high-performance fracturing fluid, introduced in 1991, polymer-specific enzyme
fluid breakers, first commercialized in the early 1990s, and EZ Clean®, launched in 1993, a polymer-specific enzyme treatment designed to remediate reservoirs that have been damaged by previous fracturing efforts. In 1998, the Company released Vistar® low-polymer fracturing fluids capable of providing optimum placement of proppant in the
reservoir while minimizing fracture damage. During 2003, the Company introduced LiteProp, lightweight proppants (patented and patents pending). These low-density proppants produce greater propped fracture length and conductivity than is produced by conventional proppants placed with the use of
heavier gelled fluid systems.



Other stimulation technologies
include the patented BJ Sandstone Acid system,
introduced in 1994, which is designed to enhance production in sandstone reservoirs and remove damage accumulated during previous fracturing and work over efforts.



The Company also developed AquaCon, a relative permeability modifier treatment, which was patented in 1991 and has been demonstrated to be an effective
water control system for reducing undesirable water production, while increasing oil or natural gas production. The Companys patented Liquid Stone® cement slurry is a premixed cement blend which, unlike conventional cement slurries, is storable in its liquid form for weeks or months prior
to use. The slurry is premixed, and no on-site mixing equipment is required. It can be pumped through rig pumps.



Other Oilfield Services Research & Development



The Company has development leading technologies for its coil tubing services. The patented Tornado cleanout system provides an effective method for removing sand and other fill material
from wells at much greater efficiencies than previously obtainable. The Roto-Pulse gravel pack cleaning system is used in removing material plugging a gravel pack. During 2001 and 2002, the Company developed the LEGS (lateral entry guidance system) tool for use with coiled tubing operations in horizontal wells. The LEGS tool provides the technology to locate and
successfully guide the coil tubing into horizontal wells in order to perform coiled tubing workover operations.



The Company has developed a broad line of completion tool systems, including conventional completions and horizontal well completions in both
gravel-packed and conventional configurations. The PAC valve (pressure actuated circulating valve) is a key component enabling interventionless intelligent completion systems. During 2000 and 2001, the Company successfully field tested the
TST-3 service tool packer. This packer provides
the latest in service tool technology and operational efficiency. During 2001 and 2002, the Company successfully field tested a composite drillable bridge plug, the Python, for which patents have been granted and are pending. The Python plug performs at temperatures in excess of 375°F
and differential pressures greater than 10,000 pounds per square inch.



The Company intends to continue to devote significant resources to its research and development efforts. For information regarding the amounts of research and development expenses for each of the three fiscal years ended September 30, 2004,
see Note 12 of the Notes to Consolidated Financial Statements.



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Risk Factors



This document and the Companys other filings with the Securities and Exchange Commission and other materials released to the public contain
forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements discuss the Companys prospects, expected revenue, expenses and profits, strategies for its operations
and other subjects, including conditions in the oilfield service and oil and natural gas industries and in the United States and international economy in general.



Our forward-looking statements are based on assumptions that we believe to be reasonable but that may not prove to be
accurate. All of the Companys forward-looking information is, therefore, subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors,
these risks and uncertainties include the risk factors discussed below.



Business Risks. The Companys results of operations could be adversely affected if its business assumptions do not prove to be accurate or if adverse changes occur in the Companys business environment, including the
following areas:



| |  | potential declines or increased volatility in oil and natural gas prices that would adversely affect our customers and the energy industry,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | declines in drilling activity,
| | - | ------------------------------



| |  | reduction in prices or demand for our products and services,
| | - | ------------------------------------------------------------



| |  | general global economic and business conditions,
| | - | ------------------------------------------------



| |  | the ability of the Organization of the Petroleum Exporting Countries (OPEC) to set and maintain production levels for oil,
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | the Companys ability to successfully integrate acquisitions,
| | - | -------------------------------------------------------------



| |  | our ability to generate technological advances and compete on the basis of advanced technology,
| | - | -----------------------------------------------------------------------------------------------



| |  | delays in oil and natural gas activity permitting,
| | - | --------------------------------------------------



| |  | the potential for unexpected litigation or proceedings,
| | - | -------------------------------------------------------



| |  | competition and consolidation in our businesses and
| | - | ---------------------------------------------------



| |  | potential higher prices for products used by the Company in its operations.
| | - | ---------------------------------------------------------------------------



Risks of Economic Downturn. In the event of an economic downturn in the United States or globally, there may be decreased demand and lower prices
for oil and natural gas and therefore for our products and services. The Companys customers are generally involved in the energy industry, and if these customers experience a business decline, we may be subject to increased exposure to credit
risk. If an economic downturn occurs, our results of operations may be adversely affected.



Risks from Operating Hazards. The Companys operations are subject to hazards present in the oil and natural gas industry, such as fire, explosion, blowouts and oil spills. These incidents as well as
accidents or problems in normal operations can cause personal injury or death and damage to property or the environment. The customers operations can also be interrupted. From time to time, customers seek to recover from the Company for damage
to their equipment or property that occurred while the Company was performing work. Damage to the customers property could be extensive if a major problem occurred. For example, operating hazards could arise:



| |  | in the pressure pumping, completion fluids, completion tools and casing and tubular services, during work performed on oil and natural gas wells,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | in the production chemical business, as a result of use of the Companys products in oil and natural gas wells and refineries, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | in the process and pipeline business, as a result of work performed by the Company at petrochemical plants as well as on pipelines.
| | - | -----------------------------------------------------------------------------------------------------------------------------------



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Risks from Unexpected Litigation. The Company has insurance coverage against operating hazards,
which it believes is customary in the industry. This insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The Companys insurance premiums can be increased or decreased based on the claims made by the
Company under its insurance policies. The insurance does not cover damages from breach of contract by the Company or based on alleged fraud or deceptive trade practices. Whenever possible, the Company obtains agreements from customers that limit the
Companys liability. Insurance and customer agreements do not provide complete protection against losses and risks, and the Companys results of operations could be adversely affected by unexpected claims not covered by insurance.



Risks from International Operations. The Companys
international operations are subject to special risks that can materially affect the Companys sales and profits. These risks include:



| |  | limits on access to international markets,
| | - | ------------------------------------------



| |  | unsettled political conditions, war, civil unrest, and hostilities in some petroleum-producing and consuming countries and regions where we operate or seek to operatefor
example, the national strike in Venezuela disrupted the Companys ability to provide services and products to its customers in Venezuela in 2003 and may do so again in 2005,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | fluctuations and changes in currency exchange rates,
| | - | ----------------------------------------------------



| |  | the impact of inflation and
| | - | ---------------------------



| |  | governmental action such as expropriation of assets, general legislative and regulatory environment, exchange controls, changes in global trade policies such as trade restrictions
and embargoes imposed by the United States and other countries, and changes in international business, political and economic conditions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Weather. The Companys performance is significantly impacted by the demand for natural gas in North America. Warmer than normal winters in
North America, among other factors, may adversely impact demand for natural gas and, therefore, demand for the Companys services. Conversely, colder than normal winters may positively impact demand for natural gas and the Companys
services.



In addition, our U.S. operations could be materially
affected by severe weather in the Gulf of Mexico. Severe weather, such as hurricanes, may cause:



| |  | evacuation of personnel and curtailment of services,
| | - | ----------------------------------------------------



| |  | damage to offshore drilling rigs resulting in suspension of operations, and
| | - | ---------------------------------------------------------------------------



| |  | damage to our equipment.
| | - | ------------------------



Credit.If the Companys credit rating is downgraded below investment grade, holders of the convertible senior notes can require the Company
to repurchase these notes (see Note 5 to the Notes to the Consolidated Financial Statements). In addition, such downgrades could increase our costs of obtaining, or make it more difficult to obtain or issue, new debt financing. If our credit rating
is downgraded, we could be required to, among other things, pay additional interest under our credit agreements, or provide additional guarantees, collateral, letters of credit or cash for credit support obligations.



Other Risks. Other risk factors that could cause actual results to be
different from the results we expect include:



| |  | changes in environmental laws and other governmental regulations and
| | - | --------------------------------------------------------------------



| |  | changes in the conduct of business, logistics, supply, transportation and security measures in effect since September 11, 2001.
| | - | -------------------------------------------------------------------------------------------------------------------------------



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Many of these risks are beyond the control of the Company. In addition, future trends for pricing,
margins, revenue and profitability remain difficult to predict in the industries we serve and under current economic and political conditions. Except as required by applicable law, we do not assume any responsibility to update any of our
forward-looking statements.



Available Information



Information regarding the Company, including corporate governance policies,
ethics policies and charters for the committees of the board of directors can be found on the Companys internet website at http://www.bjservices.com. In addition, 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 Exchange Act are made available free of charge on the Companys internet website on the same day that we
electronically file such material with, or furnish it to, the Securities and Exchange Commission.



Executive Officers of the Registrant



The current executive officers of the Company and their positions and ages are as follows:



|                    |  |     |  |                                                              |  |                
|------------------- |  | --- |  | ------------------------------------------------------------ |  | ---------------
|Name                |  | Age |  | Position with the Company                                    |  | OfficeHeldSince
|J. W. Stewart       |  | 60  |  | Chairman of the Board, President and Chief Executive Officer |  | 1990           
|Mark Airola         |  | 46  |  | Assistant General Counsel and Chief Compliance Officer       |  | 2003           
|Susan Douget        |  | 44  |  | Director of Human Resources                                  |  | 2003           
|David Dunlap        |  | 43  |  | Vice President and PresidentInternational Division          |  | 1995           
|Mark Hoel           |  | 46  |  | Vice PresidentTechnology and Logistics                      |  | 2002           
|Brian McCole        |  | 45  |  | Controller                                                   |  | 2002           
|Margaret B. Shannon |  | 55  |  | Vice PresidentGeneral Counsel                               |  | 1994           
|Jeffrey E. Smith    |  | 42  |  | Treasurer                                                    |  | 2002           
|T. M. Whichard      |  | 46  |  | Vice PresidentFinance and Chief Financial Officer           |  | 2002           
|Kenneth A. Williams |  | 54  |  | Vice President and PresidentU.S. Division                   |  | 1991           



Mr. Stewart joined
Hughes Tool Company in 1969 as Project Engineer. He served as Vice PresidentLegal and Secretary of Hughes Tool Company and as Vice PresidentOperations for a predecessor of the Company prior to being named President of the Company in
1986. In 1990, he was also named Chairman and Chief Executive Officer of the Company.



Mr. Airola joined the Company as Assistant General Counsel in 1995 from Cooper Industries, Inc., a diversified manufacturing company, where he served as Senior Litigation Counsel. He was named Chief Compliance Officer
in 2003.



Ms. Douget joined the Company in 1979 and was
promoted to Director, Human Resources in 2003. Prior to being promoted Director, she held various positions within the Human Resources function.



Mr. Dunlap joined the Company in 1984 as a District Engineer and was named Vice PresidentInternational Division in 1995. He has previously served as
Vice PresidentSales for the Coastal Division of North America and U.S. Sales and Marketing Manager.



Mr. Hoel joined the Company in 1992 as an Account Manager and was named Region Sales Manager in 1993. He served as Vice President of Sales for the U.S.
Western Division from 1996 until 2002, when he was named Vice PresidentTechnology and Logistics.



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Mr. McCole originally joined the Company as Director of Internal Audit in 1991. He also served as
Controller of the Asia Pacific Region and Controller of BJ Chemical Services (formerly BJ Unichem). He left the Company in 1998 and returned in 2001 to serve as Director of Internal Audit until becoming Controller in 2002. From 1998 to 2001, he
served in various financial positions in Cooper Energy Services, a division of Cooper Cameron Corporation.



Ms. Shannon joined the Company in 1994 as Vice PresidentGeneral Counsel from the law firm of Andrews Kurth LLP, where she had been a partner since
1984.



Mr. Smith joined the Company in 1990 as Financial
Reporting Manager. He also served as Director, Financial Planning. In 1997 he was promoted to Director, Business Development, a position he held until being named Treasurer in 2002. Prior to joining BJ Services, he held various positions with Baker
Hughes Incorporated.



Mr. Whichard joined the Company as Tax
and Treasury Manager in 1989 from Weatherford International and was named Treasurer in 1992 and Vice President in 1998. Prior to being named Vice President, Finance and Chief Financial Officer in 2002, he served in various positions including
Treasurer, Tax Director and Assistant Treasurer.



Mr. Williams
joined the Company in 1973 and has since held various positions in the U.S. operations. Prior to being named Vice PresidentU.S. Division in 1991, he served as Region ManagerWestern U.S. and Canada.



ITEM 2. PROPERTIES



The Company
leases its corporate office located in Houston, Texas. During fiscal 2004, the Company acquired land in Houston, Texas to begin building a new corporate office, which is expected to be completed in December 2005. Properties are either owned or
leased and typically serve all of our business lines. These properties are located near major oil and natural gas fields to optimally address our customers needs. Administrative offices and facilities have been built on these properties to
support our business through regional and district facilities in approximately 200 locations worldwide, none of which are individually significant due to the mobility of the equipment, as discussed in the Raw Materials and Equipment
section.



In addition, the Company owns three manufacturing
facilities. The Companys research and technology center in Tomball, Texas also houses its main equipment and instrumentation manufacturing facility. The Companys facility in Mansfield, Texas produces certain components and spare parts
required for the assembly of downhole completion tools and service tools. In addition, the Company will complete the construction of a well screen manufacturing facility in Houston, Texas in the first calendar quarter of 2005.



The Companys equipment consists primarily of pressure pumping and
blending units and related support equipment such as bulk storage and transport units. Although a portion of the Companys U.S. pressure pumping and blending fleet is being utilized through a servicing agreement with an outside party (see
Lease and Other Long-Term Commitments in Note 10 of the Notes to the Consolidated Financial Statements), the majority of its worldwide fleet is owned and unencumbered. The Companys tractor fleet, most of which is owned, is used to
transport the pumping and blending units. The majority of the Companys light duty truck fleet, both in the U.S. and international operations, is also owned.



The Company believes that its facilities are adequate for its current operations. For additional information with respect to
the Companys lease commitments, see Note 10 of the Notes to the Consolidated Financial Statements.



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ITEM 3. LEGAL PROCEEDINGS



Litigation



The Company, through performance of its service
operations, is sometimes named as a defendant in litigation, usually relating to claims for bodily injuries or property damage (including claims for well or reservoir damage). The Company maintains insurance coverage against such claims to the
extent deemed prudent by management. Further, through a series of acquisitions, the Company assumed responsibility for certain claims and proceedings made against the Western Company of North America, Nowsco Well Service Ltd., OSCA and other
companies whose stock we acquired in connection with their businesses. Some, but not all, of such claims and proceedings will continue to be covered under insurance policies of the Companys predecessors that were in place at the time of the
acquisitions.



Although the outcome of the claims and
proceedings against the Company (including Western, Nowsco and OSCA) cannot be predicted with certainty, management believes that there are no existing claims or proceedings that are likely to have a material adverse effect on the Companys
financial position or results of operations for which it has not already provided.



Chevron Phillips Litigation



On July 10, 2002,
Chevron Phillips Chemical Company (Chevron Phillips) filed a lawsuit against the Company for patent infringement in the United States District Court for the Southern District of Texas (Corpus Christi). The lawsuit relates to a patent
issued in 1992 to the Phillips Petroleum Company (Phillips). This patent (the 477 patent) relates to a method for using enzymes to decompose used drilling mud. Although the Company has its own patents for remediating damage
resulting from drill-in fluids (as opposed to drilling muds) in oil and natural gas formations (products and services which are offered under the registered MUDZYMES trademark), the Company approached Phillips for a license of the
477 patent. The Company was advised that Phillips had licensed this patent on an exclusive basis to Geo-Microbial Technologies, Inc. (GMT), a company co-owned by a former Phillips employee who is one of the inventors on the
477 patent, and that the Company should deal with GMT in obtaining a sublicense. The Company entered into a five year sublicense agreement with GMT in 1997.



Early in 2000, Phillips advised the Company that Phillips had reportedly terminated the license agreement between Phillips
and GMT for GMTs non-payment of royalties and that the Companys sublicense had also been terminated. Even though the Company believes that its sublicense with GMT was not properly terminated and the Companys MUDZYMES treatments may
not be covered by the 477 patent, in 2000, the Company stopped offering its enzyme product for use on drilling mud and drill-in fluids in the U.S. Nevertheless, Chevron Phillips claimed that the use of enzymes in fracturing fluids and other
applications in the oil and natural gas industry falls under the 477 patent. Further, even though its patent is valid only in the United States, Chevron Phillips requested that the court award it damages for the Companys use of enzymes
in foreign countries on the theory that oil produced from wells treated with enzymes is being imported into the United States.



The Company and Chevron Phillips reached a settlement agreement on August 1, 2004 under which the Company purchased the 477 patent from Chevron
Phillips in exchange for cash and certain royalty payments on the Companys use of MUDZYMES in the future.



HalliburtonPython Litigation



On June 27, 2002, Halliburton Energy Services, Inc. filed suit against the Company and Weatherford International, Inc. for patent infringement in
connection with drillable bridge plug tools. These tools are used to isolate portions of a well for stimulation work, after which the plugs are milled out using coiled tubing or a workover rig. Halliburton claims that tools offered by the Company
(under the trade name Python) and Weatherford infringe two of its patents for a tool constructed of composite material. The lawsuit was filed in the United States District Court for the Northern District of Texas (Dallas). Halliburton
requested that the District



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Court issue a temporary restraining order and a preliminary injunction against both Weatherford and the Company to prevent either company from selling
competing tools. On March 4, 2003, the District Court issued its opinion denying Halliburtons requests. The Court denied Halliburtons motion to reconsider and Halliburton filed an appeal with the Court of Appeals for the Federal Circuit.
Oral arguments took place on June 10, 2004, and on June 14, 2004, the Court of Appeals issued its ruling affirming the District Courts opinion. On July 6, 2004, Halliburton submitted both of its patents for re-examination to the U.S. Patent
Office, seeking to re-affirm the validity of its patents. The Company has filed its own request for re-examination of the patents. The lawsuit pending in the Northern District of Texas was dismissed on November 16, 2004, at the request of
Halliburton. The dismissal was without prejudice, meaning that Halliburton has the right to re-file this lawsuit and may do so depending on the outcome of the re-examination process referenced above. The Company has filed a motion with
the Court requesting that the Court reinstate the case solely for the purpose of conducting a Markman hearing to construe the construction of the claims in the Halliburton patent. Irrespective of the outcome of the pending motion or the
patent re-examination, the Company does not expect the outcome of this matter to have a material adverse effect on its financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of this
matter or future lawsuits, if any, that may be filed.



HalliburtonVistar Litigation



On March
17, 2000, the Company filed a lawsuit against Halliburton Energy Services in the United States District Court for the Southern District of Texas (Houston). In the lawsuit, the Company alleged that a well fracturing fluid system used by Halliburton
infringes a patent issued to the Company in January 2000 for a method of well fracturing referred to by the Company as Vistar®. This case was tried in March and April of 2002. The jury reached a verdict in favor of the Company on April 12, 2002. The jury determined that
the Companys patent was valid and that Halliburtons competing fluid system, Phoenix, infringed the Companys patent. The District Court entered a judgment for $101.1 million and a permanent injunction preventing Halliburton from
using its Phoenix system. On August 6, 2003, a three-judge panel of the Court of Appeals for the Federal Circuit in Washington, D.C. unanimously affirmed the judgment in the Companys favor. On October 17, 2003, the Federal Circuit denied
Halliburtons request for a re-hearing. Halliburton filed a Petition for Writ of Certiorari with the U.S. Supreme Court on January 15, 2004. On April 5, 2004 the Supreme Court notified the parties that it would not hear Halliburtons
appeal. On April 14, 2004, Halliburton transferred the sum of $106.4 million to the Company, representing full payment of the original judgment, certain court costs, and interest accrued through that date. During the quarter ended June 30, 2004, the
Company recorded a gain of $86.4 million, net of legal fees ($56 million after taxes) in Other income/(expense)net in the Consolidated Statement of Operations, reflecting receipt of this sum.



Newfield Litigation



On April 4, 2002, a jury rendered a verdict adverse to OSCA in connection with litigation pending in the United States
District Court for the Southern District of Texas (Houston). The lawsuit, filed by Newfield Exploration on September 8, 2000, arose out of a blowout that occurred in 1999 on an offshore well owned by Newfield. The jury determined that OSCAs
negligence caused or contributed to the blowout and that it was responsible for 86% of the damages suffered by Newfield. The total damage amount awarded to Newfield was $15.5 million (excluding pre- and post-judgment interest). The Court delayed
entry of the final judgment in this case pending the completion of the related insurance coverage litigation filed by OSCA against certain of its insurers and its former insurance broker. The Court elected to conduct the trial of the insurance
coverage issues based upon the briefs of the parties. In the interim, the related litigation filed by OSCA against its former insurance brokers for errors and omissions in connection with the policies at issue in this case has been stayed. On
February 28, 2003, the Court issued its Final Judgement in connection with the Newfield claims, based upon the jurys verdict. The total amount of the verdict against OSCA is $15.6 million, inclusive of interest. At the same time, the Court
issued its ruling on the related insurance dispute finding that OSCAs coverage for this loss is limited to $3.8 million. Motions for New Trial have been denied by the Judge and the case is now on appeal to the U.S. Court of Appeals for the
Fifth Circuit, both with regard to the liability case and the insurance coverage issues. Oral argument has been scheduled for April of 2005. Great Lakes Chemical Corporation, which formerly



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owned the majority of the outstanding shares of OSCA, has agreed to indemnify the Company for 75% of any uninsured liability in excess of $3 million arising
from the Newfield litigation. Taking this indemnity into account, the Companys share of the uninsured portion of the verdict is approximately $5.7 million. The Company is fully reserved for its share of this liability.



Asbestos Litigation



In August 2004, certain predecessors of the Company were named as defendants in four lawsuits filed in the Circuit Courts of
Jones and Smith Counties in Mississippi. These four lawsuits include 118 individual plaintiffs alleging that they suffer various illnesses from exposure to asbestos. The lawsuits assert claims of unseaworthiness, negligence, and strict liability,
all based upon the status of the Companys predecessors as Jones Act employers. These cases include numerous defendants and, in general, the defendents are all alleged to have manufactured, distributed or utilized products containing asbestos.
No discovery has been conducted to date, and the Company has not been provided with sufficient information to determine the number of plaintiffs who claim to have been exposed to asbestos while employed by the Company, the capacity in which they
were employed, nor their medical condition. Accordingly, the Company is unable to estimate its potential exposure to these lawsuits. The Company and its predecessors in the past maintained insurance which it believes will be available to address any
liability arising from these claims. The Company intends to defend itself vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome of these lawsuits to have a material adverse effect on
its financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these lawsuits or additional similar lawsuits, if any, that may be filed.



Environmental



Federal, state and local laws and regulations govern the Companys operation of underground fuel storage tanks. Rather
than incur additional costs to restore and upgrade tanks as required by regulations, management has opted to remove the existing tanks. The Company has completed the removal of these tanks and has remedial cleanups in progress related to the tank
removals. In addition, the Company is conducting environmental investigations and remedial actions at current and former company locations and, along with other companies, is currently named as a potentially responsible party at four third-party
owned waste disposal sites. An accrual of approximately $2.7 million has been established for such environmental matters, which is managements best estimate of the Companys portion of future costs to be incurred. Insurance is also
maintained for environmental liabilities.



The Company was
notified on May 19, 2003, that misdemeanor criminal charges had been filed against it in connection with the illegal disposal of allegedly hazardous waste from its facility in Ardmore, Oklahoma. The Companys investigation of this incident
concluded that a former employee at the facility, a product handler, had removed and improperly disposed of drums from the facility in September of 2001, without instructions from, or the knowledge of, the management at this location. The product
handler provided a written statement to the investigating authorities in which he admitted having disposed of the drums without instructions from anyone at the Company and that he knew that his actions were prohibited under law. The criminal
proceedings have been dismissed and the Company entered into a Consent Order (a civil proceeding) regarding this matter on March 24, 2004 with the State of Oklahoma, Department of Environmental Quality. A fine of $50,000 was assessed, $25,000 of
which has been paid in cash. The Company expects to receive credit for the balance of the fine by performing cementing services for the Oklahoma Department of Environmental Quality. The Company is also required to pay drum disposal costs of $5,770.



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



No matters were submitted for stockholders vote during the fourth quarter of the fiscal year ended September 30, 2004.



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##### Table of Contents

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | ---------------------------------------------------------------------



The Common Stock of the Company began trading on The New York Stock Exchange in July 1990 under the symbol BJS.
At January 14, 2005, there were approximately 1,803 holders of record of the Companys Common Stock.



The following table sets forth for the periods indicated the high and low sales prices per share for the Companys Common Stock reported on the NYSE
composite tape:



|            |  |                         |       |     |   |      
|----------- |  | ----------------------- | ----- | --- | - | -----
|            |  | Common StockPrice Range
|            |  | High                    |       | Low
|Fiscal 2003 |  |                         |       |     |   |      
|1stQuarter  |  | $                       | 35.45 |     | $ | 24.31
|2ndQuarter  |  |                         | 36.23 |     |   | 29.25
|3rdQuarter  |  |                         | 42.40 |     |   | 33.80
|4thQuarter  |  |                         | 39.19 |     |   | 32.51
|Fiscal 2004 |  |                         |       |     |   |      
|1stQuarter  |  |                         | 37.19 |     |   | 30.11
|2ndQuarter  |  |                         | 45.78 |     |   | 34.85
|3rdQuarter  |  |                         | 47.75 |     |   | 39.71
|4thQuarter  |  |                         | 54.00 |     |   | 44.48



From its initial
public offering in 1990 until 2004, BJ Services did not pay any cash dividends to its stockholders. However, on July 22, 2004, the Company announced the initiation of a regular quarterly cash dividend and declared a dividend of $.08 per common
share, paid on October 15, 2004 to stockholders of record at the close of business on September 15, 2004, in the aggregate amount of $12.9 million. The Company anticipates paying cash dividends in the amount of $.08 per common share on a quarterly
basis in fiscal 2005. However, our Board of Directors must approve the dividend each quarter and has the ability to change the dividend policy at any time.



At September 30, 2004, there were 173,755,324 shares of Common Stock issued and 161,868,839 shares outstanding. On December 19, 1997, the Companys
Board of Directors authorized a stock repurchase program of up to $150 million (subsequently increased to $300 million in May 1998, to $450 million in September 2000, to $600 million in July 2001 and again to $750 million in October 2001).
Repurchases are made at the discretion of the Companys management and the program will remain in effect until terminated by the Companys Board of Directors. Under this program, the Company has repurchased a total of 24,183,000 shares at
a cost of $499.0 million through fiscal 2002. There were no such repurchases in fiscal 2004 or fiscal 2003.



On April 24, 2002 the Company sold convertible senior notes with a face value at maturity of $516.4 million (gross proceeds of $408.4 million). The notes
are unsecured senior obligations that rank equally in right of payment with all of the Companys existing and future senior unsecured indebtedness. The Company used the aggregate net proceeds of $400.1 million to fund a substantial portion of
the purchase price of its acquisition of OSCA, which closed on May 31, 2002, and for general corporate purposes. There were $419.6 million and $414.9 million outstanding under the convertible senior notes at September 30, 2004 and September 30,
2003, respectively.



The notes will mature in 2022 and cannot
be called by the Company for three years after issuance. If the Company exercises its right to call the notes, the redemption price must be paid in cash. Holders of the notes can



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##### Table of Contents

require the Company to repurchase the notes in April 2005 and again on the fifth, tenth and fifteenth anniversaries of the issuance. The Company has the
option to pay the repurchase price in cash or stock. The issue price of the notes was $790.76 for each $1,000 in face value, which represents an annual yield to maturity of 1.625%. Of this 1.625% yield to maturity, 0.50% per year on the issue price
will be paid semi-annually in cash for the life of the security.



The notes are convertible into common stock of the Company at an initial rate of 14.9616 shares for each $1,000 face amount note. This rate results in an initial conversion price of $52.85 per share (based on the purchasers original
issue discount) and represents a premium of 45% over the April 18, 2002 closing sale price of the Companys common stock on the New York Stock Exchange of $36.45 per share. The Company has the option and currently has the ability and the intent
to settle notes that are surrendered for conversion using cash. Generally, except upon the occurrence of specified events, including a credit rating downgrade to below investment grade, holders of the notes are not entitled to exercise their
conversion rights until the Companys stock price is greater than a specified percentage (beginning at 120% and declining to 110% at the maturity of the notes) of the accreted conversion price per share. At September 30, 2004, the accreted
conversion price per share would have been $54.17.



The Company
has a Stockholder Rights Plan (the Rights Plan) designed to deter coercive takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Companys stockholders. The
Rights Plan was amended September 26, 2002, to extend the expiration date of the Rights to September 26, 2012 and increase the purchase price of the Rights. Under this plan, as amended, each outstanding share of common stock includes one-quarter of
a preferred share purchase right (Right) that becomes exercisable under certain circumstances, including when beneficial ownership of common stock by any person, or group, equals or exceeds 15% of the Companys outstanding common
stock. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock at a price of $520, subject to adjustment under certain circumstances. As a result of stock
splits effected in the form of stock dividends in 1998 and 2001, one Right is associated with four outstanding shares of common stock. The purchase price for the one-fourth of a Right associated with one share of common stock is effectively $130.
Upon the occurrence of certain events specified in the Rights Plan, each holder of a Right (other than an Acquiring Person, as defined under the Rights Plan) will have the right, upon exercise of such Right, to receive that number of
shares of common stock of the Company (or the surviving corporation) that, at the time of such transaction, would have a market price of two times the purchase price of the Right. No shares of Series A Junior Participating Preferred Stock have been
issued by the Company.



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##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA



The following table sets forth certain selected historical financial data of the Company. The selected operating and financial position data as of and for each of the five years in the period ended September 30, 2004 have been derived from
the audited consolidated financial statements of the Company, some of which appear elsewhere in this Annual Report on Form 10-K. This information should be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto which are included elsewhere herein.



|                                                    |  |                                            |           |   |      |   |           |            |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------------------- |  | ------------------------------------------ | --------- | - | ---- | - | --------- | ---------- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                    |  | As of and For the Year Ended September 30, |          
|                                                    |  | 2004                                       |           |   | 2003 |   |           | 2002(1)(2) |  |   | 2001      |   |  | 2000 |          
|                                                    |  | (in thousands, except per share amounts)   |          
|Operating Data:                                     |  |                                            |           |   |      |   |           |            |  |   |           |   |  |      |           |   |  |   |           |  
|                                                    |  |                                            |           |   |     
|Revenue                                             |  | $                                          | 2,600,986 |   |      | $ | 2,142,877 |            |  | $ | 1,865,796 |   |  | $    | 2,233,520 |   |  | $ | 1,555,389 |  
|Operating expenses, excluding goodwill amortization |  |                                            | 2,162,601 |   |      |   | 1,849,636 |            |  |   | 1,602,906 |   |  |      | 1,683,602 |   |  |   | 1,348,118 |  
|Goodwill amortization                               |  |                                            |          |   |      |   |          |            |  |   |          |   |  |      | 13,739    |   |  |   | 13,497    |  
|Operating income                                    |  |                                            | 438,385   |   |      |   | 293,241   |            |  |   | 262,890   |   |  |      | 536,179   |   |  |   | 193,774   |  
|Interest expense                                    |  |                                            | (16,389   | ) |      |   | (15,948   | )          |  |   | (8,979    | ) |  |      | (13,282   | ) |  |   | (19,968   | )
|Interest income                                     |  |                                            | 6,073     |   |      |   | 2,141     |            |  |   | 2,008     |   |  |      | 2,567     |   |  |   | 1,576     |  
|Other income (expense), net(5)                      |  |                                            | 92,668    |   |      |   | (3,762    | )          |  |   | (3,225    | ) |  |      | 3,717     |   |  |   | (99       | )
|Income tax expense                                  |  |                                            | (159,696  | ) |      |   | (87,495   | )          |  |   | (86,199   | ) |  |      | (179,922  | ) |  |   | (57,307   | )
|Net income                                          |  |                                            | 361,041   |   |      |   | 188,177   |            |  |   | 166,495   |   |  |      | 349,259   |   |  |   | 117,976   |  
|Earnings per share(3):                              |  |                                            |           |   |      |   |           |            |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                               |  |                                            | 2.25      |   |      |   | 1.19      |            |  |   | 1.06      |   |  |      | 2.13      |   |  |   | .74       |  
|Diluted                                             |  |                                            | 2.21      |   |      |   | 1.17      |            |  |   | 1.04      |   |  |      | 2.09      |   |  |   | .70       |  
|Depreciation and amortization                       |  |                                            | 125,668   |   |      |   | 120,213   |            |  |   | 104,915   |   |  |      | 104,969   |   |  |   | 102,018   |  
|Capital expenditures(4)                             |  |                                            | 200,577   |   |      |   | 167,183   |            |  |   | 179,007   |   |  |      | 183,414   |   |  |   | 80,518    |  
|                                                    |  |                                            |           |   |     
|Financial Position Data (at end of period):         |  |                                            |           |   |      |   |           |            |  |   |           |   |  |      |           |   |  |   |           |  
|Property, net                                       |  | $                                          | 913,713   |   |      | $ | 850,340   |            |  | $ | 798,956   |   |  | $    | 676,445   |   |  | $ | 585,394   |  
|Total assets                                        |  |                                            | 3,330,674 |   |      |   | 2,785,957 |            |  |   | 2,442,370 |   |  |      | 1,985,367 |   |  |   | 1,785,233 |  
|Long-term debt, excluding current maturities        |  |                                            | 78,936    |   |      |   | 493,754   |            |  |   | 489,062   |   |  |      | 79,393    |   |  |   | 141,981   |  
|Stockholders equity                                |  |                                            | 2,094,136 |   |      |   | 1,650,632 |            |  |   | 1,418,628 |   |  |      | 1,370,081 |   |  |   | 1,169,771 |  
|Cash dividends declared                             |  |                                            | 12,935    |   |      |   |          |            |  |   |          |   |  |      |          |   |  |   |          |  

---

|(1) | Includes the effect of the acquisition of OSCA, Inc. in May 2002 from the date of acquisition. For further details, see Note 3 of the Notes to the Consolidated
Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Company ceased amortizing goodwill on October 1, 2001 in accordance with its adoption of Financial Accounting Standards Board Statement No. 142, Goodwill
and Other Intangible Assets.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Earnings per share amounts have been restated for all periods presented to reflect the increased number of common shares outstanding resulting from the 2-for-1 stock
split effective May 31, 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Excluding acquisitions of businesses.
|--- | -------------------------------------

|(5) | Includes Halliburton patent infringement award of $86.4 million (net of legal expenses) in fiscal 2004 (see Note 10 of the Notes to the Consolidated Financial
Statements) and $12.2 million for the reversal of excess liabilities in the Asia-Pacific region (see Note 16 of the Notes to the Consolidated Financial Statements).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



Business



The Company is engaged in providing pressure pumping services and other oilfield services to the oil and natural gas industry worldwide. Services are
provided through three segments: U.S./Mexico Pressure Pumping, International Pressure Pumping, and Other Oilfield Services.



The U.S./Mexico and International Pressure Pumping segments provide stimulation and cementing services to the petroleum industry throughout the world.
Stimulation services are designed to improve the flow of oil and natural gas from producing formations. Cementing services consists of pumping a cement slurry into a well between the casing and the wellbore to isolate fluids that might otherwise
damage the casing and/or affect productivity, or that could migrate to different zones, primarily during the drilling and completion phase of a well. See Business included elsewhere in this Annual Report on Form 10-K for more
information on these operations.



The Other Oilfield Services
segment consists of production chemical services, casing and tubular services, process and pipeline services, and completion tools and completion fluids services in the U.S. and select markets internationally.



Recent Developments



In October 2004 the Company received a report from a whistleblower alleging that its Asia Pacific Region Controller had
misappropriated Company funds in fiscal 2001. The Company began an internal investigation into the misappropriation and whether other inappropriate actions occurred in the Region. The Region Controller admitted to multiple misappropriations during a
30-month period ended April 2002, and his employment was terminated. The misappropriations identified to date total approximately $9.0 million and have been repaid to the Company. The misappropriated funds were recorded as an expense in the
Consolidated Statement of Operations in prior periods; therefore, no restatement for the misappropriation is required. As a result, the Company expects to record $9.0 million as Other Income in the Consolidated Condensed Statement of Operations for
the quarter ending December 31, 2004.



The Company has
conducted a comprehensive review of the Asia Pacific Regions balance sheet and we have determined that excess liabilities had accumulated over a period of years which still existed at September 30, 2004 in the amount of $12.2 million. The
following adjustments have been recorded in accordance with GAAP and Company policy:



|                                                               |  |   |      |  
|-------------------------------------------------------------- |  | - | ---- | -
|Gross reduction of other accrued liabilities                   |  | $ | 10.6 |  
|Adjustments of and reclassifications to balance sheet accounts |  |   | (7.8 | )
|                                                               |  |   |      |  
|Net reduction of excess accruals                               |  |   | 2.8  |  
|Reduction of minority interest liability                       |  |   | 9.4  |  
|                                                               |  |   |      |  
|Net increase to income before tax                              |  |   | 12.2 |  
|Income tax provision                                           |  |   | (.9  | )
|                                                               |  |   |      |  
|Total increase to net income                                   |  | $ | 11.3 |  
|                                                               |  |   |      |  



The net effect of
these adjustments has been reported in Other Income in the Consolidated Statement of Operations for the year ended September 30, 2004.



Based on our review of the facts and circumstances surrounding these accounting adjustments, we believe the amounts identified were not quantitatively or
qualitatively material to the financial statements presented in this annual report on Form 10-K. As such, we have recorded the correction of these amounts in fiscal 2004 since they are not individually or in the aggregate, material to the prior
periods or the current year.



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Based on results of the investigation to date, the misappropriations and accounting adjustments depicted
above were possible because of internal control operating deficiencies, including approval procedures that were not being followed, as required by Company policy, with respect to cash disbursements and proper support for accounting entries. The
Asia-Pacific region followed an unauthorized practice of maintaining a supply of blank checks that were pre-signed by managers otherwise responsible for reviewing appropriate documentation in support of approved disbursements.



In addition, certain employees responsible for ensuring that payment
disbursements were properly documented and approved prior to authorizing the initiation of a check or an electronic funds transfer did not comply with company policies in performance of this function. The operating effectiveness of our controls was
further compromised in the Asia-Pacific region as personnel responsible for ensuring compliance with Company policies were aware of unapproved payments that lacked proper support and did not take appropriate action to report the practice.



The Company believes that these operating control deficiencies
constitute a significant control deficiency and has discussed these operating deficiencies, as well as our corrective actions and plans, with the Audit Committee.



During fiscal 2002, the Company implemented policy changes worldwide for disbursements. Corporate officer authorization was
required for disbursements over specified thresholds, and agreements have been established with our banks specifying the signing limits of regional managers. Transactions in excess of designated limits of authority require the approval of a
corporate officer prior to the banks processing of transactions.



In October 2004, the Companys management conducted discussions with senior accounting personnel on a world-wide basis on how the misappropriation occurred and reminding them of the Companys policies and procedures for disbursing
funds. The Companys management also required positive written affirmation that the practice of maintaining signed blank checks, in contravention of Company policy, was not being conducted elsewhere. The Company has assigned an acting
Controller to the Asia Pacific region and is taking necessary action to ensure the review and approval processes are being followed as contemplated by the documented policies and procedures.



The Company is reviewing its control policies and procedures and is
considering enhancements to its internal control system.



The
Company is continuing to investigate whether additional funds were misappropriated beyond the $9 million identified to date and investigate other possible inappropriate actions. As the Company continues its investigation, further adjustments may be
recorded in the Consolidated Statements of Operations, but no material adjustments are known at this time.



In October 2004, the Company also received whistleblower allegations that illegal payments to foreign officials were made in the Asia Pacific Region. The
Audit Committee of the Board of Directors engaged independent counsel to conduct a separate investigation to determine whether any such illegal payments were made. That investigation, which is continuing, has found information indicating that
illegal payments to government officials in the Asia Pacific Region aggregating in excess of $1.5 million may have been made over several years.



Market Conditions



The Companys worldwide operations are primarily driven by the number of oil and natural gas wells being drilled, the depth and drilling conditions
of such wells, the number of well completions and the level of workover activity. Drilling activity, in turn, is largely dependent on the price of crude oil and natural gas. These market



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##### Table of Contents

factors often lead to volatility in the Companys revenue and profitability, especially in the United States and Canada, where the Company historically
has generated in excess of 50% of its revenue. Historical market conditions are reflected in the table below for the twelve months ended September 30:



|                                    |  |      |       |          |    |   |      |   |          |  |    |      |  |   |      
|----------------------------------- |  | ---- | ----- | -------- | -- | - | ---- | - | -------- |  | -- | ---- |  | - | -----
|                                    |  | 2004 |       | % Change |    |   | 2003 |   | % Change |  |    | 2002
|Rig Count:(1)                       |  |      |       |          |    |   |      |   |          |  |    |      |  |   |      
|U.S.                                |  |      | 1,155 |          | 20 | % |      |   | 966      |  | 11 | %    |  |   | 870  
|International(2)                    |  |      | 1,184 |          | 7  | % |      |   | 1,102    |  | 11 | %    |  |   | 995  
|Commodity Prices (average):         |  |      |       |          |    |   |      |   |          |  |    |      |  |   |      
|Crude Oil (West Texas Intermediate) |  | $    | 37.16 |          | 22 | % |      | $ | 30.36    |  | 26 | %    |  | $ | 24.14
|Natural Gas (Henry Hub)             |  | $    | 5.59  |          | 5  | % |      | $ | 5.31     |  | 84 | %    |  | $ | 2.89 

---

|(1) | Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Incorporated rig count information.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes Mexico average rig count of 110, 87 and 65 for the fiscal years ended September 30, 2004, 2003 and 2002, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------



U.S. Rig Count



Demand for the Companys pressure pumping services in the U.S. is primarily driven by oil and natural gas drilling
activity, which tends to be extremely volatile, depending on the current and anticipated prices of oil and natural gas. During the last 10 years, the lowest U.S. rig count averaged 601 in fiscal 1999 and the highest U.S. rig count averaged 1,172 in
fiscal 2001. The Companys management estimates that the average U.S. rig count for fiscal 2005 will be approximately 6% higher than the average rig count in fiscal 2004.



International Rig Count



Many countries in which we operate are subject to political, social and economic risks which may cause volatility within any given country. However, the
Companys revenue is less volatile because we operate in approximately 49 countries, which provides somewhat of a balance. Due to the significant investment and complexity of international projects, management believes drilling decisions
relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing. Additionally, the international market is dominated by major oil companies and national oil companies which tend
to have different objectives and more operating stability than the typical independent producer in North America. During the last 10 years, the lowest international rig count (including Canada) averaged 828 in fiscal 1999 and the highest
international rig count averaged 1,184 in fiscal 2004. During fiscal 2004, active international drilling rigs (excluding Canada) drilling activity averaged 818, compared to 761 rigs in fiscal 2003 and 730 rigs in fiscal 2002. The Company expects
international drilling activity outside of Canada to remain relatively flat for fiscal 2005 compared to fiscal 2004.



Canadian drilling activity averaged 366 active drilling rigs in fiscal 2004, compared to 341 rigs in fiscal 2003 and 265 rigs in fiscal 2002. The Company
anticipates Canadian revenue to increase based on an expected 5% increase in average rig count during fiscal 2005, over fiscal 2004.



Acquisitions



On November 26, 2003, the Company completed the acquisition of Cajun Tubular Services, Inc. (Cajun) for a total purchase price of $8.3 million
(net of cash). Cajun, located in Lafayette, Louisiana, provides tubular running, testing and torque monitoring services to the Gulf of Mexico market. This business complements the Companys casing and tubular services business in the Other
Oilfield Services segment.



On December 2, 2003, the Company
acquired the assets and business of Petro-Drive, a division of Grant Prideco, Inc., for a total purchase price of $7 million. Petro-Drive, located in Lafayette, Louisiana, is a leading



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provider of hydraulic and diesel hammer services to the Gulf of Mexico market and select markets internationally. This business complements the
Companys casing and tubular services business in the Other Oilfield Services segment.



The Company is in the process of completing its review and determination of the fair values of the assets acquired. Accordingly, allocation of the purchase price is subject to revision based on final determination of
the asset values. The pro forma financial information for these acquisitions is not included in this Annual Report on Form 10-K as they were not material to the Company.



On May 31, 2002, the Company completed the acquisition of OSCA, a completion services (pressure pumping), completion tools
and completion fluids company based in Lafayette, Louisiana, with operations primarily in the U.S. Gulf of Mexico, Brazil and Venezuela, for a total purchase price of $470.6 million. On June 24, 2002, the Company completed a $9.1 million acquisition
of the coiled tubing assets and business of Maritima Petroleo E Engenharia, LTDA (Maritima), a leading provider of coiled tubing services in Brazil.



See Note 3 of the Notes to the Consolidated Financial Statements for additional information regarding these acquisitions.



Results of Operations



The following table sets forth selected key operating statistics reflecting the Companys financial results for the
twelve months ended September 30 (in millions):



|                                             |  |      |         |   |          |    |   |      |   |         |          |  |    |      |  |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | -------- | -- | - | ---- | - | ------- | -------- |  | -- | ---- |  | - | ------- | -
|                                             |  | 2004 |         |   | % Change |    |   | 2003 |   |         | % Change |  |    | 2002 | 
|Consolidated revenue                         |  | $    | 2,601.0 |   |          | 21 | % |      | $ | 2,142.9 |          |  | 15 | %    |  | $ | 1,865.8 |  
|Revenue by business segment:                 |  |      |         |   |          |    |   |      |   |         |          |  |    |      |  |   |         |  
|U.S./Mexico Pressure Pumping                 |  |      | 1,269.8 |   |          | 29 | % |      |   | 982.6   |          |  | 9  | %    |  |   | 898.7   |  
|International Pressure Pumping               |  |      | 891.4   |   |          | 11 | % |      |   | 801.8   |          |  | 13 | %    |  |   | 712.6   |  
|Other Oilfield Services                      |  |      | 438.8   |   |          | 22 | % |      |   | 358.5   |          |  | 41 | %    |  |   | 253.7   |  
|Corporate                                    |  |      | 1.0     |   |          |    |   |      |   |        |          |  |    |      |  |   | .8      |  
|                                             |  |      |         |   |         
|Consolidated operating income                |  |      | 438.4   |   |          | 50 | % |      |   | 293.2   |          |  | 12 | %    |  |   | 262.9   |  
|Operating income/(loss) by business segment: |  |      |         |   |          |    |   |      |   |         |          |  |    |      |  |   |         |  
|U.S./Mexico Pressure Pumping                 |  |      | 337.0   |   |          | 77 | % |      |   | 190.3   |          |  | 1  | %    |  |   | 189.1   |  
|International Pressure Pumping               |  |      | 91.4    |   |          | 1  | % |      |   | 90.7    |          |  | 26 | %    |  |   | 72.1    |  
|Other Oilfield Services                      |  |      | 54.0    |   |          | 8  | % |      |   | 49.9    |          |  | 65 | %    |  |   | 30.2    |  
|Corporate                                    |  |      | (44.1   | ) |          |    |   |      |   | (37.7   | )        |  |    |      |  |   | (28.5   | )



Consolidated
Revenue and Operating Income: Increased drilling activity for the U.S. and Canada, pricing improvement in the U.S. and improved revenue from all service lines in the Other Oilfield Services segment are the primary reasons for the increase in
revenue for fiscal 2004, compared to fiscal 2003. Increased activity, international geographic expansion and acquisitions are the primary reasons for the increase in the Other Oilfield Services segment. These revenue increases were partially offset
by activity decreases in some international locations.



Fiscal
2004 operating income also benefited from the increased revenue described above, but was hindered by activity declines in higher margin locations, decreased pricing and a change in product mix in certain international markets. For fiscal 2004,
consolidated operating income margins improved to 16.9% from 13.7% reported in fiscal 2003.



For fiscal 2003, the increase in consolidated revenue was primarily from increased drilling activity in the U.S. and Canada. Revenue from Other Oilfield Services was up 41% due primarily to the addition of the
completion fluids and completion tools service lines acquired with OSCA in May 2002.



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For fiscal 2003, operating income margins decreased to 13.7% from 14.1% reported for fiscal 2002, due
primarily to lower U.S. pricing, which was partially offset by increased Canadian activity.



See discussion below on individual segments for further revenue and operating income variance details.



U.S./Mexico Pressure Pumping Segment



Results for fiscal 2004 compared to fiscal 2003



The increase in revenue is primarily a result of an increase in the combined U.S. and Mexico drilling activity of 20% over fiscal 2003 and improved
pricing in the U.S. As of September 30, 2004, approximately 62% of our customers were on the new U.S. price book, which became effective on May 1, 2004.



The increase in operating income was primarily due to the increases in revenue described above, coupled with labor efficiency gains. Labor efficiencies
were achieved through an increase in activity without a proportional increase in headcount, thereby increasing employee utilization per job. The headcount for fiscal 2004 increased 6% compared to fiscal 2003, with revenue increasing 29%. Labor
efficiencies are also being obtained through utilization of newer, more efficient and more modern equipment (see the Business section for information on the U.S. fleet recapitalization initiative). In addition, the pricing increase
described above directly increases operating income without any associated cost.



Results for fiscal 2003 compared to fiscal 2002



Revenue increased primarily due to an 11% increase in U.S. drilling activity, partially offset by lower U.S. prices in fiscal 2003 compared to fiscal 2002.



Operating income increased as a result of activity increases and labor efficiencies noted previously. The headcount for
fiscal 2003 decreased 2% compared to fiscal 2002, with revenue increasing 9%. These increases were mostly offset by a deterioration in prices the Company received for its pressure pumping services compared to fiscal 2002. The deterioration in prices
occurred primarily in the first quarter of fiscal 2003.



Outlook



During fiscal 2005, the Company estimates the average
U.S. rig count will be approximately 6% higher than the average rig count in fiscal 2004. In determining forecasted rig activity, management reviews proprietary projected rig count data provided by a third party and has discussions with customers
regarding their expectations for upcoming service requirements. Management analyzes the data obtained and an internal rig count projection is determined. Under normal circumstances and depending on the geographic mix and types of services provided,
an increase in rig count will usually result in an increase in the Companys revenue. The Company also anticipates increasing headcount 10-15% in the U.S. during fiscal 2005.



We expect market disruption in Mexico compared to activity levels experienced in 2004 as our customer in Mexico resolves
budget management issues. In addition, there has been much price competition in Mexico recently. As a result, we anticipate Mexico revenue to decline 25-30% in fiscal 2005, compared to revenue in fiscal 2004.



The Company issued a price book increase for its U.S. pressure pumping
operations. The increase averages 7% above the former price book in the U.S. and was effective May 1, 2004. The degree of customer acceptance of the price book increase will depend on activity levels and competitive pressures.



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International Pressure Pumping Segment



Results for fiscal 2004 compared to fiscal 2003



Canadian operations were the primary reason for the increase in revenue. Canadian revenue increased 31% compared to the same
period in the prior year, with drilling activity up 7%. The Canadian increase in revenue is attributed to activity related gains of 16%, price improvement of 3% and favorable foreign exchange translation of 12%. Other countries contributing to the
revenue increase include Russia, India, and the Companys stimulation vessel in the North Sea. Russia revenue increased 25% from increased stimulation activity, while activity increases in India resulted in a 49% increase in revenue. These
increases in revenue were partially offset by decreased revenue in Saudi Arabia, Norway, Nigeria and Colombia. Fracturing activity was suspended in Saudi Arabia during the first four months of fiscal 2004, in addition to pricing pressure. Norway
revenue declined 29% as a result of a decrease in coiled tubing activity and a change in the services required by customers. Activity declines in Nigeria resulted in a 31% decrease in revenue. In Colombia, major customers have curtailed their
drilling programs and, primarily as a result, revenue decreased 27%.



Operating income increased as a result of the improved revenues in Russia, India and Canada described above. While the weakening U.S. dollar increased Canadian revenue, it had minimal impact on operating income as most of our expenses are
denominated in Canadian dollars. The increase in operating income from Canada is primarily due to the activity increases, which also resulted in improved labor utilization efficiencies. Labor efficiencies were achieved by increasing revenue
generated per employee by 14%, compared to the same period in fiscal 2003. These operating income increases were mostly offset by the impact of activity declines in Saudi Arabia, Norway, and Colombia where the Company has historically enjoyed higher
margins. In addition, operating income in Africa was negatively impacted, primarily as a result of activity reductions in Nigeria from our major customers. Cost reductions in Africa and Norway and Latin America have been initiated to accommodate
current activity levels, resulting in restructuring costs incurred in fiscal 2004 which did not occur in fiscal 2003. This segment also had a decline in operating profit margins due to events causing the stimulation vessel in the North Sea to be
temporarily idle. In addition to emergency maintenance experienced during the fourth fiscal quarter of 2004, the customer that contracted for the vessel shut down its operations in the North Sea for two months during the quarter ended June 30, 2004.
Since there are significant fixed costs associated with operating the stimulation vessel, there was a decline in operating profit as a result of these two events in the latter half of fiscal 2004.



Results for fiscal 2003 compared to fiscal 2002



Fiscal 2003 revenue in Canada, Russia, Europe and Africa, Asia Pacific and
the Middle East improved when compared to fiscal 2002, with the Canadian operations being the primary contributor to the increase in revenue. In Canada, revenues increased 29% compared to fiscal 2002 with a corresponding 29% increase in the average
active drilling rigs in Canada from fiscal 2002. During the first quarter of fiscal 2003, the activity increase was primarily in shallow drilling areas of Southern Canada as warm weather delayed rig movement into the North, an area with historically
higher revenue per job. In addition, Canada had a favorable exchange rate effect as the U.S. dollar weakened against the Canadian dollar compared to fiscal 2002. Revenues in Russia increased 24% from fiscal 2002 due to revenues associated with
service rigs acquired in the third quarter of fiscal 2002, partially offset by activity delays as a result of extremely cold weather during the first quarter of fiscal 2003. Asia Pacific revenue increased 8% from the prior fiscal year as a result of
activity and market share increases in Malaysia and New Zealand. Europe and Africa revenue increased 12% from fiscal 2002 due to strong coiled tubing and cementing activity in Norway and Africa. Revenue in Latin America increased 2% over fiscal 2002
primarily as a result of increased market share in Brazil with the acquisition of a coiled tubing company (Maritima) in June 2002 and the commissioning of the Blue Shark stimulation vessel in April 2002. These increases in Latin America were
mostly offset by declines in Venezuela as a result of the national labor strike. In addition, revenue was lower in India resulting from activity declines.



Although favorable foreign exchange rates in Canada increased revenue, they had minimal impact on operating income as most of our expenses are also
denominated in Canadian dollars. The increase in operating income was primarily due to activity increases and improved labor utilization efficiencies. The headcount for fiscal 2003 decreased 1% compared to fiscal 2002, with revenue increasing 13%.



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Outlook



Compared to levels experienced during fiscal 2004, the Company expects international revenue outside of Canada to remain relatively constant for fiscal
2005. The Company anticipates Canadian revenue to increase based on an expected 5% increase in average rig count during fiscal 2005, over fiscal 2004.



The Company has issued a price book increase for its Canadian pressure pumping operations. The increase averages 5% above the former price book in Canada
and was effective August 1, 2004. The degree of customer acceptance of the price book increase will depend on activity levels and competitive pressures.



Other Oilfield Services Segment



Results for fiscal 2004 compared to fiscal 2003



Excluding the impact of the Cajun and Petro-Drive acquisitions, revenue would have increased 19% in fiscal 2004. Revenue from each service line within
Other Oilfield Services increased during fiscal 2004. Due to the high oil prices experienced in fiscal 2003, many refineries deferred their maintenance shut-downs last year until fiscal 2004, even though oil prices remained high. As a result,
process and pipeline services did not perform as many process services in fiscal 2003 as in fiscal 2004. The increase in the completion tools business line was primarily achieved through an increase in customer activity in the Gulf of Mexico.
International expansion is the reason for the increase in our revenue for the completion fluids and casing and tubular service business lines.



Excluding the impact of the Cajun and Petro-Drive acquisitions, operating income would have increased 7% in fiscal 2004. The increase is primarily
attributable to completion tools and tubular business lines for the reasons described above. This increase was partially offset by decreased margins in the process and pipeline service business and the completion fluids business. The process and
pipeline service business had higher margin projects in fiscal 2003, when compared to fiscal 2004. While revenue increased in Norway from our completion fluids business, this increased activity was in lower margin product sales compared to the prior
year.



Results for fiscal 2003 compared to fiscal 2002



The increase in revenue was due primarily to the addition of completion
fluids and completion tools service lines acquired with OSCA on May 31, 2002. Other Oilfield Services revenue (excluding completion fluids and completion tools) increased 9%, primarily as a result of geographic expansion of our casing and tubular
services and the process and pipeline services.



The increase
in operating income was due primarily to the addition of completion fluids and completion tools service lines acquired with OSCA on May 31, 2002. Other Oilfield Services operating income (excluding completion fluids and completion tools) increased
13%, primarily as a result of geographic expansion of our casing and tubular services and the process and pipeline services, which is consistent with the increase in revenue mentioned above.



Outlook



We expect revenue from completion tools and completion fluids to increase 10-15% in fiscal 2005, and tubular services to
increase 5-10%. This estimate is primarily attributable to expansion of completion tools to new international markets and expansion of casing and tubular services in the U.S. and internationally. Process and pipeline services revenue is expected to
decline by 10% as the Company will focus its efforts on obtaining projects with better margins.



Other Expenses



Depreciation Expense: Depreciation expense is included in Cost of Sales and Services on the Consolidated Statement of Operations. For fiscal 2004, depreciation expense increased by $5.5 million, compared to fiscal



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2003. For fiscal 2003, depreciation expense increased by $15.3 million, compared to fiscal 2002. These increases in depreciation expense are primarily a
result of the Companys increased capital spending levels and additional depreciation expense on certain capital improvements on leased equipment.



Research and engineering, marketing and general and administrative expenses:The aggregate of these expenses increased 13% for fiscal 2004,
compared to fiscal 2003. As a percent of revenue, each of these expenses was consistent with the same periods of the prior year. The following table sets forth the Companys other operating expenses as a percentage of revenue:



|                                   |  |      |   |  |      |   |  |      |  
|---------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                   |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Research and engineering           |  | 1.8  | % |  | 1.9  | % |  | 2.0  | %
|Marketing expense                  |  | 3.2  | % |  | 3.4  | % |  | 3.4  | %
|General and administrative expense |  | 3.0  | % |  | 3.2  | % |  | 3.6  | %



Interest Expense
and Interest Income: Interest expense increased $7.0 million for fiscal 2003, compared to fiscal 2002. This is a result of the issuance of convertible debt in April 2002, used to finance a portion of the OSCA acquisition.



Interest income increased $3.9 million for fiscal 2004, compared to fiscal
2003. This increase resulted from an increased cash and cash equivalents balance.



Other (Expense) Income, net:For fiscal 2004, the Company recorded a gain of $86.4 million for the Halliburton award (see Note 10 of the Notes to the Consolidated Financial Statements). In addition, $12.2
million was recorded for the reversal of excess liabilities in the Asia-Pacific region (see Recent Developments and Note 16 of the Notes to the Consolidated Financial Statements). For fiscal 2003, compared to fiscal 2002, other expense, net
increased $0.5 million. This increase is a result of gains from insurance recoveries in 2002. For additional details of this account, see Note 12 of the Notes to the Consolidated Financial Statements.



Income Taxes: The effective tax rate was 30.7% for fiscal 2004, down
from 31.7% experienced in fiscal 2003. This is primarily due to business tax credits that were realized during the third quarter of fiscal 2004. Primarily as a result of higher profitability in certain international jurisdictions where the statutory
tax rate is less than the U.S. tax rate, the effective tax rate was 31.7% for fiscal 2003, compared with 34.1% for fiscal 2002.



Liquidity and Capital Resources



Historical Cash Flow



The following table sets forth the historical cash flows for the twelve months ended September 30 (in millions):



|                                        |  |      |        |   |      |   |        |      |  |   |        |  
|--------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                        |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Cash flow from operations               |  | $    | 528.6  |   |      | $ | 320.0  |      |  | $ | 349.7  |  
|Cash flow used in investing             |  |      | (443.6 | ) |      |   | (162.0 | )    |  |   | (647.6 | )
|Cash flow provided by financing         |  |      | 58.2   |   |      |   | 28.0   |      |  |   | 304.3  |  
|Effect of exchange rate changes on cash |  |      | 3.9    |   |      |   | 6.9    |      |  |   | (5.8   | )
|                                        |  |      |        |   |      |   |        |      |  |   |        |  
|Change in cash and cash equivalents     |  | $    | 147.1  |   |      | $ | 192.9  |      |  | $ | 0.6    |  



Fiscal
2004



The Companys working capital increased
$42.8 million at September 30, 2004 compared to September 30, 2003, primarily as a result of the increase in cash and cash equivalents, short-term investments and accounts receivable, partially offset by an increase in accounts payable and the
reclassification of the convertible senior



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notes to short-term (see Note 5 of the Notes to the Consolidated Financial Statements). Cash and cash equivalents, plus short-term investments, increased
$377.0 million since September 30, 2003 as a result of increased activity which resulted in positive cash flow from operations, proceeds from the exercise of stock options and $86.4 million in connection with the Halliburton award (see Note 10 of
the Notes to the Consolidated Financial Statements). Accounts receivable increased $78.0 million and accounts payable increased $31.5 million primarily as a result of an increase in U.S. revenue.



The decrease in cash flow from investing was primarily attributable to the
purchase of U.S. treasury bills and notes for $229.9 million in May 2004, which have maturities between six and ten months.



During fiscal 2004, due to the poor market performance of the pension plan investments in fiscal 2001 and 2002, the Company made required pension
contributions of $10.4 million, and made a discretionary contribution of an additional $9 million.



On July 22, 2004, the Company announced the initiation of a regular quarterly cash dividend and declared a dividend of $.08 per common share, paid on
October 15, 2004 to stockholders of record at the close of business on September 15, 2004 in the aggregate amount of $12.9 million.



Fiscal 2003



The Companys working capital increased $178.7 million at September 30, 2003 compared to September 30, 2002. Cash and cash equivalents increased
$192.9 million, driven primarily by positive cash flow from operations. Accounts receivable increased $110.8 million and accounts payable increased $56.4 million as a result of increased activity. As a result of higher taxable income in fiscal 2003
and utilizing most of our net operating loss carryforwards, our current tax liability increased $49.8 million.



The decreases in cash flow used in investing and cash flow provided from financing in fiscal 2003 compared to fiscal 2002 was primarily from the issuance
of the senior convertible notes to fund the acquisition of OSCA, Inc. in fiscal 2002. In addition, the Company repurchased treasury stock in fiscal 2002 (see Note 14 of the Notes to the Consolidated Financial Statements).



Liquidity and Capital Resources



Cash flow from operations is expected to be our primary source of liquidity
in fiscal 2005. Our sources of liquidity also include cash and cash equivalents of $424.7 million at September 30, 2004, short-term investments in U.S. treasury securities of $229.9 million, and the available financing facilities listed below (in
millions):



|                          |  |                                        |  |                                  |  |                                 |      
|------------------------- |  | -------------------------------------- |  | -------------------------------- |  | ------------------------------- | -----
|Financing Facility        |  | Expiration                             |  | Borrowings at September 30, 2004 |  | Available at September 30, 2004
|Revolving Credit Facility |  | June 2009                              |  | None                             |  | $                               | 400.0
|Discretionary             |  | Various times within thenext 12 months |  | $3.8                             |  |                                 | 90.4 



In June 2004, the
Company replaced its then existing credit facility with a revolving credit facility (the Revolving Credit Facility) that permits borrowings up to $400 million in principal amount. The Revolving Credit Facility includes a $50 million
sublimit for the issuance of standby letters of credit and a $20 million sublimit for swingline loans. Swingline loans have short-term maturities and the remaining amounts outstanding under the Revolving Credit Facility become due and payable in
June 2009. Interest on outstanding borrowings is charged based on prevailing market rates. The Company is charged various fees in connection with the Revolving Credit Facility, including a commitment fee based on the average daily unused portion of
the commitment, totalling $0.5 million in fiscal 2004. In addition, the Revolving Credit Facility charges a utilization



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fee on all outstanding loans and letters of credit when usage of the Revolving Credit Facility exceeds 33%, though there were no such charges in fiscal 2004.
There were no outstanding borrowings under the Revolving Credit Facility at September 30, 2004.



The Revolving Credit Facility includes various customary covenants and other provisions, including the maintenance of certain profitability and solvency
ratios, none of which materially restrict the Companys activities.



On December 29, 2004, the Company gave notice of default to the lenders under its Revolving Credit Facility for its failure to comply with its covenants to timely provide to the lenders its annual, audited financial
statements and certain other reports. Similar default notices were given to the entities to whom obligations are owed under the equipment financing partnerships referenced below on January 13, 2005. However, under all of these debt instruments, the
earliest date on which an Event of Default permitting acceleration of indebtedness or termination of the credit facilities by the lenders could occur as a result of the delay in furnishing such financial statements and reports is January 29, 2005.
Since the Company expects to furnish such financial statements and other reports before that date, the defaults will be cured such that no Event of Default will occur under such debt instruments as a result of this delay.



As of January 26, 2005, the Company is in compliance with all of the
financial covenants, and has no borrowings under, under its Revolving Credit Facility and has cash and cash equivalents and short-term investments in excess of its other indebtedness.



In addition to the Revolving Credit Facility, the Company had $94.2 million in various unsecured, discretionary lines of
credit at September 30, 2004, which expire at various dates within the next 12 months. There are no requirements for commitment fees or compensating balances in connection with these lines of credit, and interest on borrowings is based on prevailing
market rates. There was $3.8 million and $5.9 million in outstanding borrowings under these lines of credit at September 30, 2004 and September 30, 2003, respectively.



Management believes that cash flow from operations combined with cash and cash equivalents, short-term investments, the
Revolving Credit Facility, and other discretionary credit facilities provide the Company with sufficient capital resources and liquidity to manage its routine operations, meet debt service obligations, fund projected capital expenditures, repurchase
common stock, pay a regular quarterly dividend and support the development of our short-term and long-term operating strategies. If the discretionary lines of credit are not renewed, or if borrowings under these lines of credit otherwise become
unavailable, the Company expects to refinance this debt by arranging additional committed bank facilities or through other long-term borrowing alternatives.



At September 30, 2004 and September 30, 2003, the Company had issued and outstanding $78.9 million of unsecured 7% Series B Notes due February 1, 2006,
net of discount.



On April 24, 2002 the Company sold
convertible senior notes with a face value at maturity of $516.4 million (gross proceeds of $408.4 million). The notes are unsecured senior obligations that rank equally in right of payment with all of the Companys existing and future senior
unsecured indebtedness. The Company used the aggregate net proceeds of $400.1 million to fund a substantial portion of the purchase price of its acquisition of OSCA, which closed on May 31, 2002, and for general corporate purposes. There were $419.6
million and $414.9 million outstanding under the convertible senior notes at September 30, 2004 and September 30, 2003, respectively.



The notes will mature in 2022 and cannot be called by the Company for three years after issuance. If the Company exercises its right to call the notes,
the redemption price must be paid in cash. Holders of the notes can require the Company to repurchase the notes in April 2005 and again on the fifth, tenth and fifteenth anniversaries of the issuance. The Company has the option to pay the repurchase
price in cash or stock. The issue price of the notes was $790.76 for each $1,000 in face value, which represents an annual yield to maturity of 1.625%. Of this 1.625% yield to maturity, 0.50% per year on the issue price will be paid semi-annually in
cash for the life of the security.



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The notes are convertible into BJ Services common stock at an initial rate of 14.9616 shares for each
$1,000 face amount note. This rate results in an initial conversion price of $52.85 per share (based on the purchasers original issue discount) and represents a premium of 45% over the April 18, 2002 closing sale price of the Companys
common stock on the New York Stock Exchange of $36.45 per share. The Company has the option and currently has the ability and the intent to settle notes that are surrendered for conversion using cash. Generally, except upon the occurrence of
specified events, including a credit rating downgrade to below investment grade, holders of the notes are not entitled to exercise their conversion rights until the Companys stock price is greater than a specified percentage (beginning at 120%
and declining to 110% at the maturity of the notes) of the accreted conversion price per share. At September 30, 2004, the accreted conversion price per share would have been $54.17.



Cash Requirements



As described earlier, holders of the convertible senior notes can require the Company to repurchase the notes in April 2005. The Company has the option to
settle the repurchase price in cash or stock. Should the holders call the notes, the Company has the ability and intent to satisfy the obligation using cash.



The Company anticipates capital expenditures to be between $270 and $290 million in fiscal 2005, compared to $201 million in 2004, $167 million in 2003
and $179 million in 2002. The 2005 capital expenditure program is expected to consist primarily of spending for the enhancement of the Companys existing pressure pumping equipment, continued investment in the U.S. fracturing fleet
recapitalization initiative and stimulation expansion internationally. In 1998, the Company embarked on a program to replace its aging U.S. fracturing pump fleet with new, more efficient and higher horsepower pressure pumping equipment. The Company
has made significant progress with this program, which is now approximately 83% complete. During fiscal 2004, the Company expanded this U.S. fleet recapitalization initiative to include additional equipment, such as cementing, nitrogen and acidizing
and will begin recapitalizing the pressure pumping equipment in Canada in fiscal 2005. The actual amount of 2005 capital expenditures will depend primarily on maintenance requirements and expansion opportunities.



In fiscal 2005, the Companys minimum pension and postretirement funding
requirements are anticipated to be approximately $9.0 million.



Due to the expiration of favorable tax provisions on depreciation and the useage of tax credits and other tax attributes in fiscal 2004, we expect an incremental increase to cash paid for income taxes of at least $45 million in fiscal 2005.



The Company anticipates paying cash dividends in the amount of
$.08 per common share on a quarterly basis in fiscal 2005. Based on the shares outstanding on September 30, 2004, the aggregate annual amount would be $52.0 million. However, our Board of Directors must approve the dividend each quarter and has the
ability to change the dividend policy at any time.



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The following table summarizes the Companys contractual cash obligations as of September 30, 2004
(in thousands):



|                                                   |  |       |         |                        |   |           |  |          |         |              |   |        |  |   |        
|-------------------------------------------------- |  | ----- | ------- | ---------------------- | - | --------- |  | -------- | ------- | ------------ | - | ------ |  | - | -------
|                                                   |  |       |         | Payments Due by Period
|Contractual Cash Obligations                       |  | Total |         | Less than1 year        |   | 1-3 Years |  | 4-5Years |         | After 5Years
|Long term and short term debt(1)                   |  | $     | 502,274 |                        | $ | 423,339   |  | $        | 78,935  |              | $ |       |  | $ |       
|Capital lease obligations                          |  |       |        |                        |   |          |  |          |        |              |   |       |  |   |       
|Operating leases                                   |  |       | 137,269 |                        |   | 40,129    |  |          | 58,320  |              |   | 21,815 |  |   | 17,005 
|Obligations under equipment financing arrangements |  |       | 142,992 |                        |   | 23,792    |  |          | 47,722  |              |   | 39,368 |  |   | 32,110 
|Purchase obligations(2)                            |  |       | 91,079  |                        |   | 90,362    |  |          | 717     |              |   |       |  |   |       
|Other long-term liabilities(3)                     |  |       | 72,505  |                        |   | 11,162    |  |          | 4,437   |              |   | 5,995  |  |   | 50,911 
|                                                   |  |       |         |                        |   |           |  |          |         |              |   |        |  |   |        
|Total contractual cash obligations                 |  | $     | 946,119 |                        | $ | 588,784   |  | $        | 190,131 |              | $ | 67,178 |  | $ | 100,026
|                                                   |  |       |         |                        |   |           |  |          |         |              |   |        |  |   |        

---

|(1) | Net of original issue discounts.
|--- | --------------------------------

|(2) | Includes agreements to purchase goods or services that have been approved and that specify
all significant terms (pricing, quantity and timing). Company policy does not require a purchase order to be completed for items that are under $200 and are for miscellaneous items, such as office supplies.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes expected cash payments for long-term liabilities reflected in the consolidated
balance sheet where the amounts and timing of the payment are known. Amounts include: Asset retirement obligations, known pension funding requirements, postretirement benefit obligation, management compensation agreements, environmental accruals and
other miscellaneous long-term obligations. Amounts exclude: Deferred gains (see Off Balance Sheet Transactions below), pension obligations in which funding requirements are uncertain and long-term contingent liabilities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company expects that cash and cash
equivalents, short-term investments (maturing in fiscal 2005), and cash flow from operations will generate sufficient cash flow to fund all of the cash requirements described above.



Off Balance Sheet Transactions



In December 1999, the Company contributed certain pumping service equipment to a limited partnership. The Company owns a 1% interest in the limited
partnership. The equipment is used to provide services to the Companys customers for which the Company pays a service fee over a period of at least six years, but not more than 13 years, at approximately $12 million annually. This is accounted
for as an operating lease and is included in Obligations under equipment financing arrangements in the Contractual Cash Obligations table above. The Company assessed the terms of this agreement and determined it was a variable interest
entity as defined in FIN 46, Consolidation of Variable Interest Entities. However, the Company was not deemed to be the primary beneficiary, and therefore, consolidation was not required. The transaction resulted in a gain that is being
deferred and amortized over 13 years. The balance of the deferred gain was $26.6 million and $33.9 million as of September 30, 2004 and September 30, 2003, respectively. The agreement permits substitution of equipment within the partnership as long
as the implied fair value of the new property transferred in at the date of substitution equals or exceeds the implied fair value, as defined, of the current property in the partnership that is being replaced. The Company received partnership
approval in July 2004 to substitute certain pumping service equipment and has accounted for it as an exchange of like-kind assets with no earnings impact since the earnings process has not yet culminated. As a result of the substitutions, the
deferred gain was reduced by $3.3 million. In September 2010, the Company has the option, but not the obligation, to purchase the pumping service equipment for approximately $32 million.



In 1997, the Company contributed certain pumping service equipment to a limited partnership. The Company owns a 1% interest
in the limited partnership. The equipment is used to provide services to the



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Companys customers for which the Company pays a service fee over a period of at least eight years, but not more than 13 years of approximately $10
million annually. This is accounted for as an operating lease and is included in Obligations under equipment financing arrangements in the Contractual Cash Obligations table above. The Company assessed the terms of this agreement and
determined it was a variable interest entity as defined in FIN 46, Consolidation of Variable Interest Entities. However, the Company was not deemed to be the primary beneficiary, and therefore, consolidation was not required. The transaction
resulted in a gain that is being deferred and amortized over 12 years. The balance of the deferred gain was $0.4 million and $16.0 million as of September 30, 2004 and September 30, 2003, respectively. The agreement permits substitution of equipment
within the partnership as long as the implied fair value of the new property transferred in at the date of substitution equals or exceeds the implied fair value, as defined, of the current property in the partnership that is being replaced. The
Company received partnership approval in October 2003 and again in July 2004 to substitute certain pumping service equipment and has accounted for it as an exchange of like-kind assets with no earnings impact since the earnings process has not yet
culminated. As a result of the substitutions, the deferred gain was reduced by $14.1 million in October 2003 and $1.3 million in July 2004. In June 2009, the Company has the option, but not the obligation, to purchase the pumping service equipment
for approximately $27 million.



Contractual Obligations



The Company routinely issues Parent Company Guarantees
(PCGs) in connection with service contracts entered into by the Companys subsidiaries. The issuance of these PCGs is frequently a condition of the bidding process imposed by the Companys customers for work in
countries outside of North America. The PCGs typically provide that the Company guarantees the performance of the services by the Companys local subsidiary. The term of these PCGs varies with the length of the service contract.



The Company arranges for the issuance of a variety of bank
guarantees, performance bonds and standby letters of credit. The vast majority of these are issued in connection with contracts the Company, or a subsidiary, has entered into with its customers. The customer has the right to call on the bank
guarantee, performance bond or standby letter of credit in the event that the Company, or the subsidiary, defaults in the performance of the services. These instruments are required as a condition to the Company, or the subsidiary, being awarded the
contract, and are typically released upon completion of the contract. The balance of these instruments are predominantly standby letters of credit issued in connection with a variety of the Companys financial obligations, such as in support of
fronted insurance programs, claims administration funding, certain employee benefit plans and temporary importation bonds. The following table summarizes the Companys other commercial commitments as of September 30, 2004 (in thousands):



|                                   |  |                       |         |                                            |   |          |  |          |        |             |   |       |  |   |      
|---------------------------------- |  | --------------------- | ------- | ------------------------------------------ | - | -------- |  | -------- | ------ | ----------- | - | ----- |  | - | -----
|                                   |  |                       |         | Amount of commitment expiration per period
|Other Commercial Commitments       |  | TotalAmountsCommitted |         | Less than1 Year                            |   | 1-3Years |  | 4-5Years |        | Over 5Years
|Standby Letters of Credit          |  | $                     | 32,711  |                                            | $ | 32,707   |  | $        | 4      |             | $ |      |  | $ |     
|Guarantees                         |  |                       | 162,556 |                                            |   | 51,208   |  |          | 99,743 |             |   | 5,934 |  |   | 5,671
|                                   |  |                       |         |                                            |   |          |  |          |        |             |   |       |  |   |      
|Total Other Commercial Commitments |  | $                     | 195,267 |                                            | $ | 83,915   |  | $        | 99,747 |             | $ | 5,934 |  | $ | 5,671
|                                   |  |                       |         |                                            |   |          |  |          |        |             |   |       |  |   |      



Critical Accounting Policies



In May 2002, the SEC issued a proposed rule:
Disclosure in Managements Discussion and Analysis about the Application of Critical Accounting Policies. Although the SEC has not issued a final rule, the following discussion has been prepared on the basis of the guidelines in the
proposal. The proposed rule would require disclosures of critical accounting estimates. For an accounting policy to be deemed critical, the accounting policy must first include an estimate that requires a company to make assumptions about matters
that are highly uncertain at the time the accounting estimate is made. Second, different estimates that the company reasonably



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could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to
period, must have a material impact on the presentation of the companys financial condition or results of operations.



Estimates and assumptions about future events and their effects cannot be perceived with certainty. The Company bases its estimates on historical
experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional
information is obtained and as the Companys operating environment changes. Materially different results can occur as circumstances change and additional information becomes known, including estimates not deemed critical under the
proposed rule by the SEC. The Company believes the following are the most critical accounting policies used in the preparation of the Companys consolidated financial statements and the significant judgments and uncertainties affecting the
application of these policies. The selection of accounting estimates, including those deemed critical, and the associated disclosures in this discussion have been discussed by management with the Audit Committee of the Board of
Directors. The critical accounting policies should be read in conjunction with the disclosures elsewhere in the Notes to the Consolidated Financial Statements. Significant accounting policies are discussed in Note 2 to the Consolidated Financial
Statements.



Goodwill:The Company accounts for goodwill
in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires goodwill to be reviewed for possible impairment using fair value measurement
techniques on an annual basis, or if circumstances indicate that an impairment may exist. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test compares the fair value of a reporting
unit to its net book value, including goodwill. If the fair value of the reporting unit exceeds the net book value, no impairment is required and the second step is unnecessary. If the fair value of the reporting unit is less than the net book
value, the second step is performed to determine the amount of the impairment, if any. Fair value measures include quoted market price, present value technique (estimate of future cash flows), and a valuation technique based on multiples of earnings
or revenue. The second step compares the implied fair value of a reporting unit with the net book value of the reporting unit. If the net book value of a reporting unit exceeds the implied fair value, an impairment loss shall be recognized in the
amount equal to that excess. The implied fair value is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all the assets and liabilities as if
the reporting unit had just been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.



Determining fair value and the implied fair value of a reporting unit is judgmental and often involves the use of
significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of the impairment charge. The Companys estimates of fair value
are primarily determined using discounted cash flows. This approach uses significant assumptions such as a discount rate, growth rate, terminal value multiples, rig count, Company price book increases or decreases, and inflation rate.



No impairment adjustment was necessary to the Companys $885.9 million
goodwill balance at September 30, 2004. See Note 2 of the Notes to the Consolidated Financial Statements for more information on goodwill.



Pension Plans: Pension expense is determined in accordance with the provisions of SFAS No. 87, Employers Accounting for Pensions.
In accordance with SFAS 87, the Company utilizes an estimated long-term rate of return on plan assets and any difference from the actual return is the unrecognized gain/loss which is amortized into earnings in future periods.



The Company determines the annual net periodic pension expense and pension
plan liabilities on an annual basis using a third-party actuary. In determining the annual estimate of net periodic pension cost, the Company is



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required to make an evaluation of critical assumptions such as discount rate, expected long-term rate of return on plan assets and expected increase in
compensation levels. These assumptions may have an effect on the amount and timing of future contributions. Discount rates are based on high quality corporate fixed income investments. Long-term rate of return assumptions are based on actuarial
review of the Companys asset allocation and returns being earned by similar investments. The rate of increase in compensation levels is reviewed with the actuaries based upon our historical salary experience. The effects of actual results
differing from our assumptions are accumulated and amortized over future periods, and, therefore, generally affect our recognized expense in future periods.



In fiscal 2005, the Company will have a minimum pension funding requirement of $9.0 million. We expect to fund this amount with cash flows from operating
activities. See Note 9 to the Consolidated Financial Statements for more information on the Companys pension plans.



Income Taxes: The effective income tax rates were 30.7%, 31.7%, and 34.1% for the years ended September 30, 2004, 2003, and 2002,
respectively. These rates vary primarily due to fluctuations in taxes from the mix of domestic versus foreign income. 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 laws, estimates of future taxable income and available tax planning strategies. This process also involves making forecasts of current and future years United States
taxable income. Unforeseen events and industry conditions may impact these forecasts which in turn can affect the carrying value of deferred tax assets and liabilities and impact our future reported earnings.



Self InsuranceAccruals and Loss Contingencies: The Company is
self-insured for certain losses relating to workers compensation, general liability, property damage and employee medical benefits for claims filed and claims incurred but not reported. Management reviews the liability on a quarterly basis.
The liability is estimated on an undiscounted basis using individual case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the final cost of many of these claims may not be known for five years
or longer. This estimate is subject to trends, such as loss development factors, historical average claim volume, average cost for settled claims and current trends in claim costs. Significant and unanticipated changes in these trends or future
actual payouts could result in additional increases or decreases to the recorded accruals. We have purchased stop-loss coverage in order to limit, to the extent feasible, our aggregate exposure to certain claims. There is no assurance that such
coverage will adequately protect the Company against liability from all potential consequences.



As discussed in Note 10 of the Consolidated Financial Statements, legal proceedings covering a wide range of matters are pending or threatened
against the Company. It is not possible to predict the outcome of the litigation pending against the Company and litigation is subject to many uncertainties. It is possible that there could be adverse developments in these cases. The Company records
provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While we believe that our accruals for these matters are
adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, our results of operations may be over or understated.



Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123-Revised 2004 (SFAS 123(R)), Share-Based Payment. This is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees. As noted in our employee stock-based compensation accounting policy described above, the Company does not record compensation
expense for stock-based compensation. Under SFAS 123(R), the Company will be required to measure the cost of employee services received in exchange for stock based on the grant-date fair value (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123(R), will be
recognized as an addition to paid-in capital. This is effective as of the beginning of the first interim or annual



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reporting period that begins after June 15, 2005. The Company is currently in the process of evaluating the impact of SFAS 123(R) on its financial
statements, including different option-pricing models. The pro forma table in Note 2 of the Notes to the Consolidated Financial Statements illustrates the effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123.



In December 2003, the
Financial Accounting Standards Board (FASB) issued an exposure draft amending FASB Statement No. 128, Earnings per Share(SFAS 128). The exposure draft would amend the computational guidance of SFAS 128. When
applying the treasury stock method for year-to-date diluted earnings per share (EPS), SFAS 128 requires that the number of incremental shares included in the denominator be determined by computing a year-to-date weighted average of the
number of incremental shares included in each quarterly diluted EPS computation. Under this proposed Statement, the number of incremental shares included in year-to-date diluted EPS would be computed using the average market price of common shares
for the year-to-date period. The proposed Statement also would eliminate the provisions of SFAS 128 that allow an entity to rebut the presumption that contracts with the option of settling in either cash or stock will be settled in cash. In
addition, the proposed Statement would require that shares to be issued upon conversion of a mandatorily convertible security be included in the computation of basic EPS from the date that conversion becomes mandatory. Under the current SFAS 128, we
have excluded the convertible senior notes from our diluted EPS calculation as we have the ability and intent to settle the obligation with cash instead of stock. If implemented as proposed, we would be required to include the convertible senior
notes in the diluted EPS calculation, which could have a material effect on our diluted EPS. The provisions of the final Statement could differ from this disclosure; as a result, the actual application of any final Statement could result in effects
that are different than those discussed.



In December 2003, the
FASB issued FASB Statement No. 132-Revised 2003 (SFAS 132R), Employers Disclosures about Pensions and Other Postretirement Benefits. This standard increases the existing disclosure requirements by requiring more details
about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies are required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and
other informational disclosures. SFAS 132R also requires companies to disclose various elements of pension and postretirement benefit costs in interim-period financial statements for quarters beginning after December 15, 2003 (see Note 9 of the
Notes to the Consolidated Financial Statements). We have complied with the disclosure requirements of SFAS 132R.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46
clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued FIN 46(R) which revised certain provisions in the original interpretation and
permitted multiple effective dates based upon the nature and formation date of the variable interest entity. Adoption of the provisions of FIN 46 did not have a material impact on the Companys financial position or results of operations (see
Note 10 of the Notes to the Consolidated Financial Statements).



In October 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law. The Act contains new provisions that may impact the Companys U.S. income tax liability in future years. The FASB has proposed
accounting guidance for certain of the Acts provisions by issuing two draft FASB Staff Positions (FSPs 109-a and 109-b) dealing with the deduction the Act offers to domestic manufacturers, and the temporary lower tax rate on repatriated
foreign earnings. As drafted, the FSPs would be effective immediately upon final issuance. The Company is currently analyzing those provisions and will reflect any tax effect in the period in which the effect becomes probable.



Non-GAAP Financial Measures



A non-GAAP financial measure is a numerical measure of a registrants
historical or future financial performance, financial position or cash flows that 1) excludes amounts, or is subject to adjustments that have the



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effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of
income, balance sheet, or statement of cash flows, or 2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.



From time to time, the Company utilizes non-GAAP financial measures. The
most common non-GAAP financial measure used by the Company is free cash flow.



Free cash flow is computed by starting with net income, adding depreciation and amortization and deducting capital expenditures. The most comparable GAAP measure is cash flow from operating activities. Free cash flow
plus capital expenditures, plus changes in working capital, plus minority interest, plus unearned compensation, plus deferred taxes reconciles to cash flow from operating activities. Management believes free cash flow provides useful information to
investors as it represents the cash, in excess of capital commitments, available to the Company to operate the business and meet non-discretionary expenditures.



Forward Looking Statements



This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934 concerning, among other things, the Companys prospects, expected revenue, expenses and profits, developments and business strategies for its operations, all of which are subject to certain risks, uncertainties
and assumptions. These forward-looking statements are identified by their use of terms and phrases such as expect, estimate, project, believe, achievable, anticipate and similar
terms and phrases. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes
are appropriate under the circumstances. Such statements are subject to:



| |  |  | fluctuating prices of crude oil and natural gas,
| | - |  | ------------------------------------------------



| |  |  | conditions in the oil and natural gas industry, including drilling activity,
| | - |  | ----------------------------------------------------------------------------



| |  |  | reduction in prices or demand for our products and services,
| | - |  | ------------------------------------------------------------



| |  |  | general global economic and business conditions,
| | - |  | ------------------------------------------------



| |  |  | international political instability, security conditions, and hostilities,
| | - |  | --------------------------------------------------------------------------



| |  |  | the Companys ability to expand its products and services (including those it acquires) into new geographic markets,
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to generate technological advances and compete on the basis of advanced technology,
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | risks from operating hazards such as fire, explosion, blowouts and oil spills,
| | - |  | ------------------------------------------------------------------------------



| |  |  | unexpected litigation for which insurance and customer agreements do not provide protection,
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | changes in currency exchange rates,
| | - |  | -----------------------------------



| |  |  | weather conditions that affect conditions in the oil and natural gas industry,
| | - |  | ------------------------------------------------------------------------------



| |  |  | the business opportunities that may be presented to and pursued by the Company,
| | - |  | -------------------------------------------------------------------------------



| |  |  | competition and consolidation in the Companys business, and
| | - |  | ------------------------------------------------------------



| |  |  | changes in law or regulations and other factors, many of which are beyond the control of the Company.
| | - |  | -----------------------------------------------------------------------------------------------------



If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may
vary materially from those expected, estimated or projected. Other than as required under the Securities laws, the Company does not assume a duty to update these forward looking statements. This list of risk factors is not intended to be
comprehensive. See Risk Factors included elsewhere this Annual Report on Form 10-K.



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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The table below provides information about the Companys market sensitive financial instruments and constitutes a forward-looking
statement. The Companys major market risk exposure is to foreign currency fluctuations internationally and changing interest rates, primarily in the United States, Canada and Europe. The Companys policy is to manage interest rates
through use of a combination of fixed and floating rate debt. If the floating rates were to increase by 10% from September 30, 2004 rates, the Companys combined interest expense to third parties would increase by a total of $1,799 each month
in which such increase continued. At September 30, 2004, the Company had issued fixed-rate debt of $498.5 million. These instruments are fixed-rate and, therefore, do not expose the Company to the risk of loss in earnings due to changes in market
interest rates. However, the fair value of these instruments would increase by approximately $18.5 million if interest rates were to decline by 10% from their rates at September 30, 2004.



Periodically, the Company borrows funds which are denominated in foreign currencies, which exposes the Company to market
risk associated with exchange rate movements. There were no such borrowings denominated in foreign currencies at September 30, 2004. When the Company believes prudent, the Company enters into forward foreign exchange contracts to hedge the impact of
foreign currency fluctuations. There were no such forward foreign exchange contracts at September 30, 2004. The expected maturity dates and fair value of our market risk sensitive instruments are stated below (in thousands). All items described are
non-trading and are stated in U.S. dollars.



|                                                           |  |                         |         |      |        |                    |   |      |   |      |   |            |   |       |   |         |  |   |        
|---------------------------------------------------------- |  | ----------------------- | ------- | ---- | ------ | ------------------ | - | ---- | - | ---- | - | ---------- | - | ----- | - | ------- |  | - | -------
|                                                           |  | Expected Maturity Dates |         |      |        | Fair Value 9/30/04
|                                                           |  | 2005                    |         | 2006 |        | 2007               |   | 2008 |   | 2009 |   | Thereafter |   | Total |  
|SHORT-TERM BORROWINGS                                      |  |                         |         |      |        |                    |   |      |   |      |   |            |   |       |   |         |  |   |        
|                                                           |  |                         |         |      |        |                    |   |     
|Bank borrowings; U.S. $ denominated                        |  | $                       | 3,754   |      |        |                    |   |      |   |      |   |            |   |       | $ | 3,754   |  | $ | 3,754  
|Average variable interest rate5.75% at September 30, 2004 |  |                         |         |      |        |                    |   |      |   |      |   |            |   |       |   |         |  |   |        
|                                                           |  |                         |         |      |        |                    |   |     
|LONG-TERM BORROWINGS                                       |  |                         |         |      |        |                    |   |      |   |      |   |            |   |       |   |         |  |   |        
|                                                           |  |                         |         |      |        |                    |   |     
|7% Series B Notes-U.S. $ denominated                       |  |                         |         |      |        |                    |   |      |   |      |   |            |   |       |   |         |  |   |        
|Fixed interest rate7%                                     |  |                         |         |      | 78,936 |                    |   |      |   |      |   |            |   |       |   | 78,936  |  |   | 83,100 
|                                                           |  |                         |         |      |        |                    |   |     
|1.625% Convertible Notes(1)                                |  |                         |         |      |        |                    |   |      |   |      |   |            |   |       |   |         |  |   |        
|U.S. denominated                                           |  |                         |         |      |        |                    |   |      |   |      |   |            |   |       |   |         |  |   |        
|Fixed interest rate1.625%                                 |  |                         | 419,585 |      |        |                    |   |      |   |      |   |            |   |       |   | 419,585 |  |   | 447,004
|                                                           |  |                         |         |      |        |                    |   |     
|Total                                                      |  | $                       | 423,339 |      | 78,936 |                    |  |      |  |      |  |            |  |       | $ | 502,275 |  | $ | 533,858
|                                                           |  |                         |         |      |        |                    |   |      |   |      |   |            |   |       |   |         |  |   |        

---

| | (1) | The holders of the convertible notes can require the Company to repurchase these notes in April 2005, 2007 and 2009. In the event the holders require the Company to
repurchase the convertible notes, the Company expects the obligation to be paid with cash (see Note 5 of the Notes to the Consolidated Financial Statements).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Stockholders of BJ Services Company:



We have audited
the accompanying consolidated statements of financial position of BJ Services Company and subsidiaries (the Company) as of September 30, 2004 and 2003, and the related consolidated statements of operations, stockholders equity and
other comprehensive income, and cash flows for each of the three years in the period ended September 30, 2004. Our audits also included the financial statement schedule listed at Item 15. These financial statements and the financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and the 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 BJ Services Company and subsidiaries at September 30, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended September 30, 2004, 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.



/s/    DELOITTE & TOUCHE LLP



Houston, Texas

January 26, 2005



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BJ SERVICES COMPANY



CONSOLIDATED STATEMENT OF OPERATIONS



|                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|------------------------------------ |  | ---------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                     |  | Year Ended September 30,                 |          
|                                     |  | 2004                                     |           |   | 2003 |   |           | 2002 | 
|                                     |  | (in thousands, except per share amounts) |          
|Revenue                              |  | $                                        | 2,600,986 |   |      | $ | 2,142,877 |      |  | $ | 1,865,796 |  
|Operating Expenses:                  |  |                                          |           |   |      |   |           |      |  |   |           |  
|Cost of sales and services           |  |                                          | 1,951,022 |   |      |   | 1,665,545 |      |  |   | 1,435,540 |  
|Research and engineering             |  |                                          | 47,287    |   |      |   | 40,810    |      |  |   | 36,475    |  
|Marketing                            |  |                                          | 82,105    |   |      |   | 73,665    |      |  |   | 64,095    |  
|General and administrative           |  |                                          | 78,978    |   |      |   | 69,449    |      |  |   | 66,627    |  
|Loss on disposal of assets           |  |                                          | 3,209     |   |      |   | 167       |      |  |   | 169       |  
|                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Total operating expenses             |  |                                          | 2,162,601 |   |      |   | 1,849,636 |      |  |   | 1,602,906 |  
|                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Operating income                     |  |                                          | 438,385   |   |      |   | 293,241   |      |  |   | 262,890   |  
|Interest expense                     |  |                                          | (16,389   | ) |      |   | (15,948   | )    |  |   | (8,979    | )
|Interest income                      |  |                                          | 6,073     |   |      |   | 2,141     |      |  |   | 2,008     |  
|Other (expense) income, net          |  |                                          | 92,668    |   |      |   | (3,762    | )    |  |   | (3,225    | )
|                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Income before income taxes           |  |                                          | 520,737   |   |      |   | 275,672   |      |  |   | 252,694   |  
|Income tax expense                   |  |                                          | 159,696   |   |      |   | 87,495    |      |  |   | 86,199    |  
|                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Net income                           |  | $                                        | 361,041   |   |      | $ | 188,177   |      |  | $ | 166,495   |  
|                                     |  |                                          |           |   |      |   |           |      |  |   |           |  
|Earnings Per Share:                  |  |                                          |           |   |      |   |           |      |  |   |           |  
|Basic                                |  | $                                        | 2.25      |   |      | $ | 1.19      |      |  | $ | 1.06      |  
|Diluted                              |  | $                                        | 2.21      |   |      | $ | 1.17      |      |  | $ | 1.04      |  
|                                     |  |                                          |          
|Weighted-Average Shares Outstanding: |  |                                          |           |   |      |   |           |      |  |   |           |  
|Basic                                |  |                                          | 160,179   |   |      |   | 157,943   |      |  |   | 156,981   |  
|Diluted                              |  |                                          | 163,414   |   |      |   | 161,257   |      |  |   | 160,736   |  





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



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BJ SERVICES COMPANY



CONSOLIDATED STATEMENT OF FINANCIAL POSITION



ASSETS



|                                                                             |  |                |           |      |   |          
|---------------------------------------------------------------------------- |  | -------------- | --------- | ---- | - | ---------
|                                                                             |  | September 30, 
|                                                                             |  | 2004           |           | 2003
|                                                                             |  | (in thousands)
|Current Assets:                                                              |  |                |           |      |   |          
|Cash and cash equivalents                                                    |  | $              | 424,725   |      | $ | 277,666  
|Short-term investments                                                       |  |                | 229,930   |      |   |         
|Receivables, less allowance for doubtful accounts:2004, $9,010; 2003, $8,828 |  |                | 544,946   |      |   | 469,656  
|Inventories:                                                                 |  |                |           |      |   |          
|Products                                                                     |  |                | 125,174   |      |   | 109,383  
|Work-in-process                                                              |  |                | 2,656     |      |   | 2,048    
|Parts                                                                        |  |                | 55,040    |      |   | 51,137   
|                                                                             |  |                |           |      |   |          
|Total inventories                                                            |  |                | 182,870   |      |   | 162,568  
|                                                                             |  |               
|Deferred income taxes                                                        |  |                | 10,768    |      |   | 718      
|Prepaid expenses                                                             |  |                | 20,849    |      |   | 20,606   
|Other current assets                                                         |  |                | 9,635     |      |   | 10,494   
|                                                                             |  |                |           |      |   |          
|Total current assets                                                         |  |                | 1,423,723 |      |   | 941,708  
|                                                                             |  |               
|Property:                                                                    |  |                |           |      |   |          
|Land                                                                         |  |                | 15,605    |      |   | 14,806   
|Buildings and other                                                          |  |                | 250,361   |      |   | 238,835  
|Machinery and equipment                                                      |  |                | 1,490,427 |      |   | 1,327,451
|                                                                             |  |                |           |      |   |          
|Total property                                                               |  |                | 1,756,393 |      |   | 1,581,092
|Less accumulated depreciation                                                |  |                | 842,680   |      |   | 730,752  
|                                                                             |  |                |           |      |   |          
|Property, net                                                                |  |                | 913,713   |      |   | 850,340  
|                                                                             |  |               
|Goodwill                                                                     |  |                | 885,905   |      |   | 879,710  
|Deferred income taxes                                                        |  |                | 64,461    |      |   | 66,877   
|Investments and other assets                                                 |  |                | 42,872    |      |   | 47,322   
|                                                                             |  |                |           |      |   |          
|Total assets                                                                 |  | $              | 3,330,674 |      | $ | 2,785,957
|                                                                             |  |                |           |      |   |          





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



43



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##### Table of Contents

LIABILITIES AND STOCKHOLDERS EQUITY



|                                                                                                                                                                                                         |  |                |           |   |      |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                         |  | September 30,  |          
|                                                                                                                                                                                                         |  | 2004           |           |   | 2003 |  
|                                                                                                                                                                                                         |  | (in thousands) |          
|Current Liabilities:                                                                                                                                                                                     |  |                |           |   |      |   |           |  
|Accounts payable, trade                                                                                                                                                                                  |  | $              | 260,525   |   |      | $ | 230,777   |  
|Short-term borrowings                                                                                                                                                                                    |  |                | 3,754     |   |      |   | 5,888     |  
|Current portion of long-term debt                                                                                                                                                                        |  |                | 419,585   |   |      |   |          |  
|Accrued employee compensation and benefits                                                                                                                                                               |  |                | 78,049    |   |      |   | 69,205    |  
|Income taxes                                                                                                                                                                                             |  |                | 39,037    |   |      |   | 60,496    |  
|Taxes other than income                                                                                                                                                                                  |  |                | 23,766    |   |      |   | 21,696    |  
|Accrued insurance                                                                                                                                                                                        |  |                | 14,797    |   |      |   | 14,772    |  
|Other accrued liabilities                                                                                                                                                                                |  |                | 70,378    |   |      |   | 67,827    |  
|                                                                                                                                                                                                         |  |                |           |   |      |   |           |  
|Total current liabilities                                                                                                                                                                                |  |                | 909,891   |   |      |   | 470,661   |  
|                                                                                                                                                                                                         |  |               
|Long-term debt                                                                                                                                                                                           |  |                | 78,936    |   |      |   | 493,754   |  
|Deferred income taxes                                                                                                                                                                                    |  |                | 89,009    |   |      |   | 7,475     |  
|Accrued postretirement benefits                                                                                                                                                                          |  |                | 43,012    |   |      |   | 38,297    |  
|Other long-term liabilities                                                                                                                                                                              |  |                | 115,690   |   |      |   | 125,138   |  
|Commitments and contingencies (Note 10)                                                                                                                                                                  |  |                |           |   |      |   |           |  
|Stockholders Equity:                                                                                                                                                                                    |  |                |           |   |      |   |           |  
|Preferred stock (authorized 5,000,000 shares, none issued)                                                                                                                                               |  |                |           |   |      |   |           |  
|Common stock, $.10 par value (authorized 380,000,000 shares; 173,755,324 shares issued and 161,868,839 shares outstanding in 2004; 173,755,324
shares issued and 158,306,175 shares outstanding in 2003) |  |                | 17,376    |   |      |   | 17,376    |  
|Capital in excess of par                                                                                                                                                                                 |  |                | 994,724   |   |      |   | 964,348   |  
|Retained earnings                                                                                                                                                                                        |  |                | 1,358,315 |   |      |   | 1,026,832 |  
|Accumulated other comprehensive loss                                                                                                                                                                     |  |                | (908      | ) |      |   | (9,647    | )
|Unearned compensation                                                                                                                                                                                    |  |                | (6,961    | ) |      |   |          |  
|Treasury stock, at cost (2004  11,886,485 shares; 2003  15,449,149 shares)                                                                                                                             |  |                | (268,410  | ) |      |   | (348,277  | )
|                                                                                                                                                                                                         |  |                |           |   |      |   |           |  
|Total stockholders equity                                                                                                                                                                               |  |                | 2,094,136 |   |      |   | 1,650,632 |  
|                                                                                                                                                                                                         |  |                |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                               |  | $              | 3,330,674 |   |      | $ | 2,785,957 |  
|                                                                                                                                                                                                         |  |                |           |   |      |   |           |  





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



44



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##### Table of Contents

BJ SERVICES COMPANY



CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME

(in thousands)



|                                             |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|-------------------------------------------- |  | ------------------ | - |  | ----------- | ------ | ---------------------- | - | ------- | ------------- |  | - | -------------------- | - |  | ---------------- | ------ | - | ----------------------------------- | - | --------- | ----- |  | - | ------- | - |  | - | --------- | -
|                                             |  | CommonStock Shares |   |  | CommonStock |        | CapitalIn Excessof Par |   |         | TreasuryStock |  |   | UnearnedCompensation |   |  | RetainedEarnings |        |   | AccumulatedOtherComprehensiveIncome |   |           | Total | 
|Balance, September 30, 2001                  |  | 160,484            |   |  | $           | 17,376 |                        | $ | 966,550 |               |  | $ | (295,449             | ) |  | $                | (4,891 | ) |                                     | $ | 690,128   |       |  | $ | (3,633  | ) |  | $ | 1,370,081 |  
|Comprehensive income:                        |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Net income                                   |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   | 166,495   |       |  |   |         |   |  |   |           |  
|Other comprehensive income, net of tax:      |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Cumulative translation adjustments           |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   | (4,655  | ) |  |   |           |  
|Minimum pension liability adjustment         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   | (21,585 | ) |  |   |           |  
|Comprehensive income                         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   | 140,255   |  
|Reissuance of treasury stock for:            |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Stock option plan                            |  | 440                |   |  |             |        |                        |   |         |               |  |   | 9,884                |   |  |                  |        |   |                                     |   | (6,062    | )     |  |   |         |   |  |   | 3,822     |  
|Stock purchase plan                          |  | 243                |   |  |             |        |                        |   |         |               |  |   | 5,330                |   |  |                  |        |   |                                     |   | (1,660    | )     |  |   |         |   |  |   | 3,670     |  
|Stock incentive plan                         |  | 5                  |   |  |             |        |                        |   |         |               |  |   | 114                  |   |  |                  |        |   |                                     |   | (114      | )     |  |   |         |   |  |   |          |  
|Cancellation of stock issued for acquisition |  | (1                 | ) |  |             |        |                        |   |         |               |  |   | (25                  | ) |  |                  |        |   |                                     |   | (15       | )     |  |   |         |   |  |   | (40       | )
|Treasury stock purchased                     |  | (4,376             | ) |  |             |        |                        |   |         |               |  |   | (102,125             | ) |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   | (102,125  | )
|Recognition of unearned compensation         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  | 983    |   |                                     |   |           |       |  |   |         |   |  |   | 983       |  
|Revaluation of stock incentive plan awards   |  |                    |   |  |             |        |                        |   | (2,982  | )             |  |   |                      |   |  |                  | 2,982  |   |                                     |   |           |       |  |   |         |   |  |   |          |  
|Tax benefit from exercise of options         |  |                    |   |  |             |        |                        |   | 1,982   |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   | 1,982     |  
|                                             |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Balance, September 30, 2002                  |  | 156,795            |   |  | $           | 17,376 |                        | $ | 965,550 |               |  | $ | (382,271             | ) |  | $                | (926   | ) |                                     | $ | 848,772   |       |  | $ | (29,873 | ) |  | $ | 1,418,628 |  
|Comprehensive income:                        |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Net income                                   |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   | 188,177   |       |  |   |         |   |  |   |           |  
|Other comprehensive income, net of tax:      |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Cumulative translation adjustments           |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   | 21,456  |   |  |   |           |  
|Minimum pension liability adjustment         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   | (1,230  | ) |  |   |           |  
|Comprehensive income                         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   | 208,403   |  
|Reissuance of treasury stock for:            |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Stock option plan                            |  | 705                |   |  |             |        |                        |   |         |               |  |   | 15,828               |   |  |                  |        |   |                                     |   | (5,732    | )     |  |   |         |   |  |   | 10,096    |  
|Stock purchase plan                          |  | 659                |   |  |             |        |                        |   |         |               |  |   | 14,862               |   |  |                  |        |   |                                     |   | (4,892    | )     |  |   |         |   |  |   | 9,970     |  
|Stock incentive plan                         |  | 147                |   |  |             |        |                        |   | (3,812  | )             |  |   | 3,304                |   |  |                  |        |   |                                     |   | 507       |       |  |   |         |   |  |   | (1        | )
|Recognition of unearned compensation         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  | 1,108  |   |                                     |   |           |       |  |   |         |   |  |   | 1,108     |  
|Revaluation of stock incentive plan awards   |  |                    |   |  |             |        |                        |   | 182     |               |  |   |                      |   |  |                  | (182   | ) |                                     |   |           |       |  |   |         |   |  |   |          |  
|Tax benefit from exercise of options         |  |                    |   |  |             |        |                        |   | 2,428   |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   | 2,428     |  
|                                             |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Balance, September 30, 2003                  |  | 158,306            |   |  | $           | 17,376 |                        | $ | 964,348 |               |  | $ | (348,277             | ) |  | $                |       |   |                                     | $ | 1,026,832 |       |  | $ | (9,647  | ) |  | $ | 1,650,632 |  
|Comprehensive income:                        |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Net income                                   |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   | 361,041   |       |  |   |         |   |  |   |           |  
|Other comprehensive income, net of tax:      |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Cumulative translation adjustments           |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   | 10,468  |   |  |   |           |  
|Minimum pension liability adjustment         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   | (1,729  | ) |  |   |           |  
|Comprehensive income                         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   | 369,780   |  
|Dividend declared                            |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   | (12,935   | )     |  |   |         |   |  |   | (12,935   | )
|Reissuance of treasury stock for:            |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Stock option plan                            |  | 2,973              |   |  |             |        |                        |   |         |               |  |   | 66,566               |   |  |                  |        |   |                                     |   | (17,304   | )     |  |   |         |   |  |   | 49,262    |  
|Stock purchase plan                          |  | 495                |   |  |             |        |                        |   |         |               |  |   | 11,157               |   |  |                  |        |   |                                     |   | (217      | )     |  |   |         |   |  |   | 10,940    |  
|Stock incentive plan                         |  | 95                 |   |  |             |        |                        |   | (3,103  | )             |  |   | 2,144                |   |  |                  |        |   |                                     |   | 898       |       |  |   |         |   |  |   | (61       | )
|Stock incentive plan grant                   |  |                    |   |  |             |        |                        |   | 7,273   |               |  |   |                      |   |  |                  | (7,273 | ) |                                     |   |           |       |  |   |         |   |  |   |          |  
|Recognition of unearned compensation         |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  | 3,772  |   |                                     |   |           |       |  |   |         |   |  |   | 3,772     |  
|Revaluation of stock incentive plan awards   |  |                    |   |  |             |        |                        |   | 3,460   |               |  |   |                      |   |  |                  | (3,460 | ) |                                     |   |           |       |  |   |         |   |  |   |          |  
|Tax benefit from exercise of options         |  |                    |   |  |             |        |                        |   | 22,746  |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   | 22,746    |  
|                                             |  |                    |   |  |             |        |                        |   |         |               |  |   |                      |   |  |                  |        |   |                                     |   |           |       |  |   |         |   |  |   |           |  
|Balance, September 30, 2004                  |  | 161,869            |   |  | $           | 17,376 |                        | $ | 994,724 |               |  | $ | (268,410             | ) |  | $                | (6,961 | ) |                                     | $ | 1,358,315 |       |  | $ | (908    | ) |  | $ | 2,094,136 |  



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



45



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##### Table of Contents

BJ SERVICES COMPANY



CONSOLIDATED STATEMENT OF CASH FLOWS



|                                                                                |  |                          |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                |  | Year Ended September 30, |         
|                                                                                |  | 2004                     |          |   | 2003 |   |          | 2002 | 
|                                                                                |  | (in thousands)           |         
|Cash flows from operating activities:                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                      |  | $                        | 361,041  |   |      | $ | 188,177  |      |  | $ | 166,495  |  
|Adjustments to reconcile net income to cash provided from operating activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Depreciation                                                                    |  |                          | 125,668  |   |      |   | 120,213  |      |  |   | 104,915  |  
|Net loss on disposal of assets                                                  |  |                          | 3,209    |   |      |   | 167      |      |  |   | 169      |  
|Recognition of unearned compensation                                            |  |                          | 3,772    |   |      |   | 1,108    |      |  |   | 983      |  
|Deferred income tax expense                                                     |  |                          | 109,775  |   |      |   | 29,508   |      |  |   | 53,234   |  
|Minority interest                                                               |  |                          | 2,286    |   |      |   | 5,080    |      |  |   | 4,916    |  
|Changes in:                                                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Receivables                                                                     |  |                          | (78,042  | ) |      |   | (110,786 | )    |  |   | 136,301  |  
|Accounts payable, trade                                                         |  |                          | 31,509   |   |      |   | 56,415   |      |  |   | (47,614  | )
|Inventories                                                                     |  |                          | (20,975  | ) |      |   | (4,446   | )    |  |   | 1,106    |  
|Current income tax                                                              |  |                          | (31,509  | ) |      |   | 49,849   |      |  |   | 12,269   |  
|Other current assets and liabilities                                            |  |                          | 2,010    |   |      |   | 18,416   |      |  |   | (28,684  | )
|Other, net                                                                      |  |                          | 19,863   |   |      |   | (33,737  | )    |  |   | (54,388  | )
|                                                                                |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash flows provided from operating activities                               |  |                          | 528,607  |   |      |   | 319,964  |      |  |   | 349,702  |  
|                                                                                |  |                          |         
|Cash flows from investing activities:                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Property additions                                                              |  |                          | (200,577 | ) |      |   | (167,183 | )    |  |   | (179,007 | )
|Proceeds from disposal of assets                                                |  |                          | 2,149    |   |      |   | 5,184    |      |  |   | 6,003    |  
|Purchase of U.S. Treasury securities                                            |  |                          | (229,930 | ) |      |   |         |      |  |   |         |  
|Acquisitions of businesses, net of cash acquired                                |  |                          | (15,337  | ) |      |   |         |      |  |   | (474,600 | )
|                                                                                |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used for investing activities                                          |  |                          | (443,695 | ) |      |   | (161,999 | )    |  |   | (647,604 | )
|                                                                                |  |                          |         
|Cash flows from financing activities:                                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Proceeds from exercise of stock options and stock purchase plan                 |  |                          | 61,413   |   |      |   | 21,263   |      |  |   | 7,452    |  
|Purchase of treasury stock                                                      |  |                          |         |   |      |   |         |      |  |   | (102,125 | )
|Proceeds from issuance of convertible debt                                      |  |                          |         |   |      |   |         |      |  |   | 400,142  |  
|(Repayment) proceeds of long-term debt                                          |  |                          |         |   |      |   | 4,692    |      |  |   |         |  
|(Repayment) proceeds of short-term borrowings, net                              |  |                          | (2,134   | ) |      |   | 2,110    |      |  |   | (1,111   | )
|Debt issuance costs                                                             |  |                          | (1,042   | ) |      |   |         |      |  |   |         |  
|                                                                                |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash flows provided from financing activities                               |  |                          | 58,237   |   |      |   | 28,065   |      |  |   | 304,358  |  
|                                                                                |  |                          |         
|Effect of exchange rate changes on cash                                         |  |                          | 3,910    |   |      |   | 6,909    |      |  |   | (5,832   | )
|                                                                                |  |                          |         
|Increase in cash and cash equivalents                                           |  |                          | 147,059  |   |      |   | 192,939  |      |  |   | 624      |  
|Cash and cash equivalents at beginning of year                                  |  |                          | 277,666  |   |      |   | 84,727   |      |  |   | 84,103   |  
|                                                                                |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                        |  | $                        | 424,725  |   |      | $ | 277,666  |      |  | $ | 84,727   |  
|                                                                                |  |                          |          |   |      |   |          |      |  |   |          |  



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



46



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##### Table of Contents

BJ SERVICES COMPANY



Notes to
the Consolidated Financial Statements



1. Business and Basis of
Presentation



BJ Services Company (the
Company), whose operations trace back to the Byron Jackson Company (which was founded in 1872), was organized in 1990 under the corporate laws of the state of Delaware. The Company is a leading provider of pressure pumping and other
oilfield services serving the petroleum industry worldwide. The Companys pressure pumping services consist of cementing and stimulation services used in the completion of new oil and natural gas wells and in remedial work on existing wells,
both onshore and offshore. Other oilfield services include completion tools, completion fluids and casing and tubular services provided to the oil and natural gas exploration and production industry, commissioning and inspection services provided to
refineries, pipelines and offshore platforms, and production chemical services.



The Company consolidates all investments in which we own greater than 50%, or in which we control. All material intercompany balances and transactions are eliminated in consolidation. Investments in companies
in which the Companys ownership interest ranges from 20% to 50% and the Company exercises significant influence over operating and financial policies are accounted for using the equity method. Other investments are accounted for using the cost
method.



The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.



Certain amounts for 2003 and 2002 have been reclassified in the accompanying consolidated financial statements to conform to
the current year presentation.



2. Summary of Significant Accounting
Policies



Cash and cash equivalents:
The Company considers all highly liquid investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents.



Short-term investments:Highly liquid investments with maturities of one year or less at the time of purchase are classified as short-term
investments. The Company accounts for these short-term investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. These short-term investments are being held to maturity and are recorded at
amortized cost. For purposes of the Consolidated Statement of Cash Flow, the Company does not consider short-term investments to be cash and cash equivalents because they generally have original maturities in excess of three months.



Allowance for doubtful accounts: The Company performs ongoing credit
evaluations of our customers and adjusts credit limits based upon payment history and the customers current credit worthiness, as determined by our review of their available credit information. We continuously monitor collections and payments
from our customers and maintain a provision for estimated uncollectible accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot give any assurances that we will continue to experience the same credit loss rates that we have in the past. The cyclical nature of our industry may affect our customers operating
performance and cash flows, which could impact our ability to collect on these obligations. In addition, many of our customers are located in certain international areas that are inherently subject to risks of economic, political and civil
instabilities, which may impact our ability to collect these receivables.



Inventories: Inventories, which consist principally of (i) products which are consumed in the Companys services provided to customers, (ii) spare parts for equipment used in providing these services and
(iii)



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



manufactured components and attachments for equipment used in providing services, are stated primarily at the lower of weighted-average cost or market. Cost
primarily represents invoiced costs. The Company regularly reviews inventory quantities on hand and records provisions for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production
requirements and technological developments. Significant or unanticipated changes to the Companys forecasts could require additional provisions for excess or obsolete inventory.



Property: Property is stated at cost less amounts provided for permanent impairments and includes capitalized
interest of $0.8 million, $0.6 million and $2.7 million for the years ended September 30, 2004, 2003 and 2002, respectively, on funds borrowed to finance the construction of capital additions. Depreciation is generally provided using the
straight-line method over the estimated useful lives of individual items. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease terms. The estimated useful lives are 10 to 30
years for buildings and leasehold improvements and range from 3 to 12 years for machinery and equipment. The Company makes judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives. Additionally, the carrying values of these assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The
determination of recoverability is made based upon estimated undiscounted future cash flows (fair value). An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. The amount of the
impairment, if any, is the amount by which the net book value of the assets exceed fair value. Fair value determination requires the Company to make long-term forecasts of its future revenue and costs related to the assets subject to review. These
forecasts require assumptions about demand for the Companys products and services, future market conditions and technological developments. Significant and unanticipated changes to these assumptions could require a provision for impairment in
a future period.



Intangible assets: Goodwill represents
the excess of cost over the fair value of the net assets of companies acquired in purchase transactions. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets which requires goodwill to be reviewed for possible impairment on an annual basis, or if circumstances indicate that an impairment may exist. An impairment adjustment was not necessary to the Companys $885.9 million
and $879.7 million net goodwill balance at September 30, 2004 and 2003, respectively. The changes in the carrying amount of goodwill by reporting unit for the year ended September 30, 2004, are as follows (in thousands):



|                |  |                                    |         |   |                                      |   |                  |  |                            |        |                          |   |                         |  |                          |        |       |   |         |  |   |        |  |   |        
|--------------- |  | ---------------------------------- | ------- | - | ------------------------------------ | - | ---------------- |  | -------------------------- | ------ | ------------------------ | - | ----------------------- |  | ------------------------ | ------ | ----- | - | ------- |  | - | ------ |  | - | -------
|                |  | U.S./MexicoPressurePumpingServices |         |   | InternationalPressurePumpingServices |   | ChemicalServices |  | ProcessandPipelineServices |        | CasingandTubularServices |   | CompletionToolsServices |  | CompletionFluidsServices |        | Total
|Balance 9/30/02 |  | $                                  | 274,309 |   |                                      | $ | 371,268          |  | $                          | 10,726 |                          | $ | 22,272                  |  | $                        | 8,905  |       | $ | 107,907 |  | $ | 77,572 |  | $ | 872,959
|                |  |                                    |         |   |                                      |   |                  | 
|Acquisitions    |  |                                    | (251    | ) |                                      |   | 56               |  |                            |       |                          |   |                        |  |                          |       |       |   | 4,328   |  |   | 2,618  |  |   | 6,751  
|                |  |                                    |         |   |                                      |   |                  |  |                            |        |                          |   |                         |  |                          |        |       |   |         |  |   |        |  |   |        
|Balance 9/30/03 |  | $                                  | 274,058 |   |                                      | $ | 371,324          |  | $                          | 10,726 |                          | $ | 22,272                  |  | $                        | 8,905  |       | $ | 112,235 |  | $ | 80,190 |  | $ | 879,710
|                |  |                                    |         |   |                                      |   |                  |  |                            |        |                          |   |                         |  |                          |        |       |   |         |  |   |        |  |   |        
|Acquisitions    |  |                                    |        |   |                                      |   |                 |  |                            |       |                          |   |                        |  |                          | 6,195  |       |   |        |  |   |       |  |   | 6,195  
|                |  |                                    |         |   |                                      |   |                  |  |                            |        |                          |   |                         |  |                          |        |       |   |         |  |   |        |  |   |        
|Balance 9/30/04 |  | $                                  | 274,058 |   |                                      | $ | 371,324          |  | $                          | 10,726 |                          | $ | 22,272                  |  | $                        | 15,100 |       | $ | 112,235 |  | $ | 80,190 |  | $ | 885,905
|                |  |                                    |         |   |                                      |   |                  |  |                            |        |                          |   |                         |  |                          |        |       |   |         |  |   |        |  |   |        



Patents are being
amortized on a straight-line basis over their estimated useful lives, not to exceed 17 years. Intangible assets (other than goodwill), net of accumulated amortization were $4.3 million and $3.5 million at September 30, 2004 and 2003, respectively.
The Company utilizes undiscounted estimated cash flows to evaluate any possible impairment of intangible assets. If such cash flows are less than the net carrying value of the



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



intangible assets the Company records an impairment loss equal to the difference in discounted estimated cash flows and the net carrying value. The discount
rate utilized is based on market factors at the time the loss is determined.



Income Taxes: The Company provides for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This standard takes into account the differences between financial statement treatment
and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in
tax rates is recognized as income or expense in the period that includes the enactment date. This calculation requires the Company to make certain estimates about our future operations. Changes in state, federal and foreign tax laws as well as
changes in our financial condition could affect these estimates.



Valuation Allowance for Deferred Tax Assets: The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will expire before
realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future.



Self InsuranceAccruals: The Company is self-insured for
certain losses relating to workers compensation, general liability, property damage and employee medical benefits for claims filed and claims incurred but not reported. The Companys liability is estimated on an actuarial undiscounted
basis using individual case-based valuations and statistical analysis and is based upon judgment and historical experience; however, the final cost of many of these claims may not be known for five years or longer. Management reviews the reserve on
a quarterly basis. Changes in claims experience, health care costs, etc. could affect these estimates.



Contingencies: Contingencies are accounted for in accordance with SFAS No. 5, Accounting for Contingencies. This standard requires that we
record an estimated loss from a loss contingency when information available prior to the issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as environmental, legal, and income tax matters requires the Company to use its judgment. While the Company believes that its accruals for these
matters are adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, our results of operations may be over-or understated. For significant litigation, the Company accrues for its legal costs.



Environmental remediation and compliance: Environmental
remediation costs are accrued based on estimates of known environmental exposures using currently available facts, existing environmental permits and technology and presently enacted laws and regulations. For sites where the Company is primarily
responsible for the remediation, the Companys estimates of costs are developed based on internal evaluations and are not discounted. Such accruals are recorded when environmental assessments and/or remedial efforts are probable and the cost
can be reasonably estimated. The accrual is recorded even if significant uncertainties exist over the ultimate cost of the remediation and is updated as additional information becomes available. Ongoing environmental compliance costs, such as
obtaining environmental permits, installation of pollution control equipment and waste disposal, are expensed as incurred. Where the Company has been identified as a potentially responsible party in a U.S. federal or state Superfund site, the
Company accrues its share of the estimated remediation costs of the site based on the ratio of the estimated volume of waste contributed to the site by the Company to the total volume of waste at the site.



Revenue Recognition: The Companys revenue is composed of product
sales, rental, service and other revenue. Products, rentals, and services are generally sold based on fixed or determinable priced purchase orders



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



or contracts with the customer and do not include the right of return. The Company recognizes revenue from product sales when title passes to the customer,
the customer assumes risks and rewards of ownership, and collectibility is reasonably assured. Rental, service and other revenue is recognized when the services are provided and collectibility is reasonably assured.



Research and development expenditures: Research and development
expenditures are charged to income as incurred.



Maintenance
and repairs:Expenditures for maintenance and repairs are expensed as incurred. Expenditures for renewals and improvements are capitalized if they extend the life, increase the capacity, or improve the efficiency of the asset.



Foreign currency translation: The Companys functional currency
is primarily the U.S. dollar. Gains and losses resulting from financial statement translation of foreign operations where a foreign currency is the functional currency are included as a separate component of stockholders equity. The
Companys operations in Canada and Hungary use their respective local currencies as the functional currency.



Derivative instruments:The Company sometimes enters into forward foreign exchange contracts to hedge the impact of currency fluctuations on
certain transactions and assets and liabilities denominated in foreign currencies. We do not enter into derivative instruments for speculative or trading purposes. SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as
amended, requires that the Company recognize all derivatives on the balance sheet at fair value. The Company designates and documents the derivative instrument as a hedge at its inception. The derivative is assessed to determine if the hedge is
highly effective at inception and on an ongoing basis. Any ineffective portion of a derivatives change in fair value is recognized into earnings.



Employee stock-based compensation: Under SFAS No. 123 Accounting for Stock-Based Compensation, the Company is permitted to either record
expenses for stock options and other stock-based employee compensation plans based on their fair value at the date of grant or to continue to apply Accounting Principles Board Opinion No. 25 (APB 25) and recognize compensation expense,
if any, based on the intrinsic value of the equity instruments at the measurement dates. The Company elected to continue following APB 25; therefore, no compensation expense has been recognized because the exercise prices of employee stock options
equal the market prices of the underlying stock on the dates of grant.



The following pro forma table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to the Stock Option Plan and the Stock Purchase Plan (in thousands,
except per share amounts):



|                                                                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                           |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Net income, as reported                                                                                    |  | $    | 361,041 |   |      | $ | 188,177 |      |  | $ | 166,495 |  
|Add: total stock-based employee compensation expense included in reported net income, net of tax           |  |      | 3,772   |   |      |   | 1,108   |      |  |   | 983     |  
|Less: total stock-based employee compensation expense determined under SFAS 123 for all awards, net of tax |  |      | (17,714 | ) |      |   | (16,475 | )    |  |   | (17,951 | )
|                                                                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Net income, pro forma                                                                                      |  | $    | 347,099 |   |      | $ | 172,810 |      |  | $ | 149,527 |  
|                                                                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings per share:                                                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Basic, as reported                                                                                         |  | $    | 2.25    |   |      | $ | 1.19    |      |  | $ | 1.06    |  
|Basic, pro forma                                                                                           |  | $    | 2.17    |   |      | $ | 1.09    |      |  | $ | 0.95    |  
|Diluted, as reported                                                                                       |  | $    | 2.21    |   |      | $ | 1.17    |      |  | $ | 1.04    |  
|Diluted, pro forma                                                                                         |  | $    | 2.12    |   |      | $ | 1.07    |      |  | $ | 0.93    |  



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



The pro forma compensation expense determined under SFAS 123 was calculated using the Black-Scholes
option pricing model with the following assumptions:



|                                                    |  |      |       |   |      |   |       |      |  |   |      |  
|--------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | -
|                                                    |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Stock Option Plan                                   |  |      |       |   |      |   |       |      |  |   |      |  
|Expected life (years)                               |  |      | 5.0   |   |      |   | 4.9   |      |  |   | 5.0  |  
|Interest rate                                       |  |      | 3.7   | % |      |   | 3.2   | %    |  |   | 3.8  | %
|Volatility                                          |  |      | 36.8  | % |      |   | 44.4  | %    |  |   | 46.2 | %
|Dividend yield                                      |  |      | 0     |   |      |   | 0     |      |  |   | 0    |  
|Weighted-average fair value per share at grant date |  | $    | 12.13 |   |      | $ | 14.08 |      |  | $ | 9.98 |  
|                                                    |  |      |      
|                                                    |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Stock Purchase Plan                                 |  |      |       |   |      |   |       |      |  |   |      |  
|Expected life (years)                               |  |      | 1.0   |   |      |   | 1.0   |      |  |   | 1.0  |  
|Interest rate                                       |  |      | 2.15  | % |      |   | 1.04  | %    |  |   | 1.58 | %
|Volatility                                          |  |      | 15.81 | % |      |   | 19.2  | %    |  |   | 40.0 | %
|Dividend yield                                      |  |      | 0     |   |      |   | 0     |      |  |   | 0    |  
|Weighted-average fair value per share at grant date |  | $    | 6.94  |   |      | $ | 4.82  |      |  | $ | 4.41 |  



The Company calculated
its volatility using historical daily, weekly and monthly price intervals to generate a reasonable range of expected future volatility, and used a factor at the low end of the range in accordance with SFAS 123.



New accounting pronouncements:In December 2004, the FASB issued SFAS
No. 123-Revised 2004 (SFAS 123(R)), Share-Based Payment. This is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees. As noted in
our employee stock-based compensation accounting policy described above, the Company does not record compensation expense for stock-based compensation. Under SFAS 123(R), the Company will be required to measure the cost of employee services received
in exchange for stock based on the grant-date fair value (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair
value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123(R), will be recognized as an addition to paid-in capital. This is effective as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. The Company is currently in the process of evaluating the impact of SFAS 123(R) on its financial statements, including different option-pricing models. The pro forma table above illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition provisions of SFAS 123.



In December 2003, the FASB issued SFAS No. 132-Revised 2003, Employers Disclosures about Pensions and Other Postretirement Benefits. This
standard increases the existing disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category,
such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures (see Note 9). Since SFAS 132R only revises disclosure requirements, it will not have an impact on the Companys financial
position or results of operations.



In January 2003, the FASB
issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued FIN 46(R) which revised certain provisions in the original
interpretation and permitted multiple effective dates based upon the nature and formation date of the variable interest entity. Adoption of the provisions of FIN 46 did not have a material impact on the Companys financial position or results
of operations (see Note 10).



3. Acquisitions of Businesses



OSCA: On May 31, 2002, the Company completed the acquisition of
OSCA, Inc. (OSCA) for a total purchase price of $470.6 million (including transaction costs). This acquisition was accounted for using the purchase method of accounting. Accordingly, the results of OSCAs operations are included in
the consolidated statement of operations beginning June 1, 2002. The assets and liabilities of OSCA have been recorded in the Companys consolidated statement of financial position at estimated fair market value as of May 31, 2002 with the
remaining purchase price reflected as goodwill.



BJs
acquisition strategy is to focus on product and service lines that are complementary to pressure pumping and that add product and service offering strength to the Company. One of the Companys objectives is to increase our presence in the
global completion services business. OSCAs technically advanced offering of completion tools, combined with BJs extensive geographic market presence, provided an attractive opportunity for expansion in this product line. OSCA also brings
to the Company a premium completion fluids business that will broaden the Companys completion services offering around the world. The combination of the Companys pressure pumping capabilities and OSCAs completion tool and fluids
technologies significantly strengthens our ability to meet the increasing customer preference to purchase a greater range of completion products and services from a single company.



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



The following table reflects (in thousands, except per share amounts) the Companys results of
operations on a pro forma basis as if the acquisition had been completed at the beginning of the periods presented utilizing OSCAs historical results. This unaudited pro forma information excludes the effects of cost elimination and reduction
initiatives directly related to the acquisition.



|                    |  |                               |           |    
|------------------- |  | ----------------------------- | --------- | ---
|                    |  | Year Ended September 30, 2002 |          
|Revenue             |  | $                             | 1,965,666 |    
|Net income          |  | $                             | 147,600   | (1)
|Earnings per share: |  |                               |           |    
|Basic               |  | $                             | .94       |    
|Diluted             |  | $                             | .92       |    

---

|(1) | Includes a $13.5 million (before tax) charge recorded in OSCAs March 31, 2002
pre-acquisition financial statements for the Newfield litigation (see Note 10).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.



The
Company has completed its review and determination of the fair values of the assets acquired. The allocation of the purchase price and estimated goodwill are summarized as follows (in thousands):



|                                  |  |   |         |  
|--------------------------------- |  | - | ------- | -
|Consideration paid:               |  |   |         |  
|Cash to OSCA stockholders         |  | $ | 416,252 |  
|Settlement of options             |  |   | 8,197   |  
|Debt assumed                      |  |   | 35,000  |  
|Transaction costs                 |  |   | 11,124  |  
|                                  |  |   |         |  
|Total consideration               |  | $ | 470,573 |  
|Allocation of consideration paid: |  |   |         |  
|Cash and cash equivalents         |  | $ | 5,073   |  
|Accounts receivable               |  |   | 24,588  |  
|Inventory                         |  |   | 26,083  |  
|Prepaid expenses                  |  |   | 879     |  
|Current deferred income taxes     |  |   | 4,031   |  
|Property, plant and equipment     |  |   | 50,564  |  
|Other assets                      |  |   | 8,785   |  
|Short-term debt                   |  |   | (440    | )
|Accounts payable                  |  |   | (25,616 | )
|Other accrued liabilities         |  |   | (23,305 | )
|Accrued income and other taxes    |  |   | 1,272   |  
|                                  |  |   |         |  
|Goodwill                          |  | $ | 398,659 |  
|                                  |  |   |         |  



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Other: On November 26, 2003, the Company completed the acquisition of Cajun Tubular Services,
Inc. (Cajun) for a total purchase price of $8.3 million (net of cash). Cajun, located in Lafayette, Louisiana, provides tubular running, testing and torque monitoring services to the Gulf of Mexico market. This business complements the
Companys casing and tubular services business in the Other Oilfield Services segment.



On December 2, 2003, the Company acquired the assets and business of Petro-Drive, a division of Grant Prideco, Inc., for a total purchase price of $7 million. Petro-Drive, located in Lafayette, Louisiana, is a leading
provider of hydraulic and diesel hammer services to the Gulf of Mexico market and select markets internationally. This business complements the Companys casing and tubular services business in the Other Oilfield Services segment.



The Cajun and Petro-Drive acquisitions resulted in total goodwill of $6.2
million to date. The Company is in the process of completing its review and determination of the fair values of the assets acquired in Cajun and Petro-Drive. Accordingly, allocation of the purchase price is subject to revision based on final
determination of the asset values. The pro forma financial information for these acquisitions is not included as they were not material to the Company.



4. Earnings Per Share



Basic Earnings Per Share (EPS) excludes dilution and is computed by dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted EPS is based on the weighted-average number of shares outstanding during each period and the assumed exercise of dilutive instruments (stock option plans, the stock purchase plan and the stock incentive plan) less
the number of treasury shares assumed to be purchased with the exercise proceeds using the average market price of the Companys common stock for each of the periods presented. No dilutive effect has been included for the convertible senior
notes issued April 24, 2002 (see Note 5) because the Company currently has the ability and intent to settle the potential conversion in cash.



The following table presents information necessary to calculate earnings per share for the three years ended September 30, 2004 (in thousands, except per
share amounts):



|                                                                          |  |      |         |      |   |         |  |   |        
|------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                                          |  | 2004 |         | 2003 |   | 2002   
|Net Income                                                                |  | $    | 361,041 |      | $ | 188,177 |  | $ | 166,495
|Weighted-average common shares outstanding                                |  |      | 160,179 |      |   | 157,943 |  |   | 156,981
|                                                                          |  |      |         |      |   |         |  |   |        
|Basic earnings per share                                                  |  | $    | 2.25    |      | $ | 1.19    |  | $ | 1.06   
|                                                                          |  |      |         |      |   |         |  |   |        
|Weighted-average common and dilutive potential common shares outstanding: |  |      |         |      |   |         |  |   |        
|Weighted-average common shares outstanding                                |  |      | 160,179 |      |   | 157,943 |  |   | 156,981
|Assumed exercise of stock options(1)                                      |  |      | 3,235   |      |   | 3,314   |  |   | 3,755  
|                                                                          |  |      |         |      |   |         |  |   |        
|Weighted-average dilutive shares outstanding                              |  |      | 163,414 |      |   | 161,257 |  |   | 160,736
|                                                                          |  |      |         |      |   |         |  |   |        
|Diluted earnings per share                                                |  | $    | 2.21    |      | $ | 1.17    |  | $ | 1.04   
|                                                                          |  |      |         |      |   |         |  |   |        

---

|(1) | For the years ended September 30, 2004, 2003 and 2002, zero, 67 and 69 stock options, respectively, were excluded from the computation of diluted earnings per share
due to their antidilutive effect.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



5. Debt and Bank Credit Facilities



Long-term debt at September 30, 2004 and 2003 consisted of the following (in thousands):



|                                                        |  |      |         |      |   |        
|------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                        |  | 2004 |         | 2003
|Convertible Senior Notes due 2022, net of discount      |  | $    | 419,585 |      | $ | 414,866
|7% Series B Notes due February 1, 2006, net of discount |  |      | 78,936  |      |   | 78,888 
|                                                        |  |      |         |      |   |        
|                                                        |  |      | 498,521 |      |   | 493,754
|Less current maturities of long-term debt               |  |      | 419,585 |      |   |       
|                                                        |  |      |         |      |   |        
|Long-term debt                                          |  | $    | 78,936  |      | $ | 493,754
|                                                        |  |      |         |      |   |        



In June 2004, the
Company replaced its then existing credit facility with a revolving credit facility (the Revolving Credit Facility) that permits borrowings up to $400 million in principal amount. The Revolving Credit Facility includes a $50 million
sublimit for the issuance of standby letters of credit and a $20 million sublimit for swingline loans. Swingline loans have short-term maturities and the remaining amounts outstanding under the Revolving Credit Facility become due and payable in
June 2009. Interest on outstanding borrowings is charged based on prevailing market rates. The Company is charged various fees in connection with the Revolving Credit Facility, including a commitment fee based on the average daily unused portion of
the commitment, totalling $0.5 million in fiscal 2004. In addition, the Revolving Credit Facility charges a utilization fee on all outstanding loans and letters of credit when usage of the Revolving Credit Facility exceeds 33%, though there were no
such charges in fiscal 2004. There were no outstanding borrowings under the Revolving Credit Facility at September 30, 2004.



On April 24, 2002 the Company sold convertible senior notes with a face value at maturity of $516.4 million (gross proceeds of $408.4 million). The notes
are unsecured senior obligations that rank equally in right of payment with all of the Companys existing and future senior unsecured indebtedness. The Company used the aggregate net proceeds of $400.1 million to fund a substantial portion of
the purchase price of its acquisition of OSCA, which closed on May 31, 2002, and for general corporate purposes. There were $419.6 million and $414.9 million outstanding under the convertible senior notes at September 30, 2004 and September 30,
2003, respectively.



The notes will mature in 2022 and cannot
be called by the Company for three years after issuance. If the Company exercises its right to call the notes, the redemption price must be paid in cash. Holders of the notes can require the Company to repurchase the notes in April 2005 and again on
the fifth, tenth and fifteenth anniversaries of the issuance. The Company has the option to pay the repurchase price in cash or stock. The issue price of the notes was $790.76 for each $1,000 in face value, which represents an annual yield to
maturity of 1.625%. Of this 1.625% yield to maturity, 0.50% per year on the issue price will be paid semi-annually in cash for the life of the security.



The notes are convertible into BJ Services common stock at an initial rate of 14.9616 shares for each $1,000 face amount note. This rate results in an
initial conversion price of $52.85 per share (based on the purchasers original issue discount) and represents a premium of 45% over the April 18, 2002 closing sale price of the Companys common stock on the New York Stock Exchange of
$36.45 per share. The Company has the option and currently has the ability and the intent to settle notes that are surrendered for conversion using cash. Generally, except upon the occurrence of specified events, including a credit rating downgrade
to below investment grade, holders of the notes are not entitled to exercise their conversion rights until the Companys



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



stock price is greater than a specified percentage (beginning at 120% and declining to 110% at the maturity of the notes) of the accreted conversion price
per share. At September 30, 2004, the accreted conversion price per share would have been $54.17.



At September 30, 2004 and September 30, 2003, the Company had issued and outstanding $78.9 million of unsecured 7% Series B Notes due February 1, 2006,
net of discount.



In addition to the Revolving Credit Facility,
the Company had $94.2 million of unsecured, discretionary lines of credit at September 30, 2004, which expire at the banks discretion. There are no requirements for commitment fees or compensating balances in connection with these lines of
credit and interest is at prevailing market rates. There was $3.8 million and $5.9 million in outstanding borrowings under these lines of credit at September 30, 2004 and 2003, respectively. The weighted average interest rates on short-term
borrowings outstanding as of September 30, 2004 and 2003 were 5.75% and 5.00%, respectively.



The Revolving Credit Facility includes various customary covenants and other provisions, including the maintenance of certain profitability and solvency ratios, none of which materially restrict the Companys
activities.



On December 29, 2004, the Company gave notice of
default to the lenders under its Revolving Credit Facility for its failure to comply with its covenants to timely provide to the lenders its annual, audited financial statements and certain other reports. Similar default notices were given to the
entities to whom obligations are owed under the equipment financing partnerships referenced in Note 10 on January 13, 2005. However, under all of these debt instruments, the earliest date on which an Event of Default permitting acceleration of
indebtedness or termination of the credit facilities by the lenders could occur as a result of the delay in furnishing such financial statements and reports is January 29, 2005. Since the Company expects to furnish such financial statements and
other reports before that date, the defaults will be cured such that no Event of Default will occur under such debt instruments as a result of this delay.



As of January 26, 2005, the Company is in compliance with all of the financial covenants, and has no borrowings under, under its Revolving Credit Facility
and has cash and cash equivalents and short-term investments in excess of its other indebtedness.



6. Financial Instruments



The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable.



Cash and Cash Equivalents, Short-term Investments, Trade Receivables, Trade Payables, Short-Term Borrowings and Foreign Exchange Contracts: The
carrying amount approximates fair value because of the short maturity of those instruments.



Long-term Debt:Fair value is based on the rates currently available to the Company for debt with similar terms and average maturities.



Foreign Exchange Contracts: Periodically, the Company borrows funds which are denominated in foreign currencies,
which exposes the Company to market risk associated with exchange rate movements. There were no such borrowings denominated in foreign currencies at September 30, 2004. When necessary, the Company enters into forward foreign exchange contracts to
hedge the impact of foreign currency fluctuations. There were four forward foreign exchange contracts as of September 30, 2003, each in the amount of $2.3 million, all of which had settled by August 31, 2004. These contracts were being accounted for
as cash flow hedges of future foreign currency denominated obligations. The effect of these cash flow hedges as of September 30, 2003 on Accumulated Other Comprehensive Income was not material. All items described are non-trading.



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Notes to the Consolidated Financial Statements(Continued)



The fair value of financial instruments that differed from their carrying value at September 30, 2004
and 2003 was as follows (in thousands):



|                                   |  |                |         |            |   |                |  |            |         |  |   |        
|---------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                   |  | 2004           |         | 2003      
|                                   |  | CarryingAmount |         | Fair Value |   | CarryingAmount |  | Fair Value
|7% Series B Notes                  |  | $              | 78,936  |            | $ | 83,100         |  | $          | 78,888  |  | $ | 86,537 
|Convertible Senior Notes due 2022  |  |                | 419,585 |            |   | 447,004        |  |            | 414,866 |  |   | 421,961
|Forward Foreign Exchange Contracts |  |                |        |            |   |               |  |            | 42      |  |   | 42     



7. Income Taxes



The geographical sources of income before income taxes for the three years
ended September 30, 2004 were as follows (in thousands):



|                           |  |      |         |      |   |         |  |   |        
|-------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                           |  | 2004 |         | 2003 |   | 2002   
|United States              |  | $    | 342,983 |      | $ | 123,337 |  | $ | 142,070
|Foreign                    |  |      | 177,754 |      |   | 152,335 |  |   | 110,624
|                           |  |      |         |      |   |         |  |   |        
|Income before income taxes |  | $    | 520,737 |      | $ | 275,672 |  | $ | 252,694
|                           |  |      |         |      |   |         |  |   |        



The provision for
income taxes for the three years ended September 30, 2004 is summarized below (in thousands):



|                   |  |      |         |      |   |        |      |  |   |       
|------------------ |  | ---- | ------- | ---- | - | ------ | ---- |  | - | ------
|                   |  | 2004 |         | 2003 |   |        | 2002
|Current:           |  |      |         |      |   |        |      |  |   |       
|United States      |  | $    | 29,387  |      | $ | 3,154  |      |  | $ | 5,011 
|Foreign            |  |      | 20,534  |      |   | 54,833 |      |  |   | 27,954
|                   |  |      |         |      |   |        |      |  |   |       
|Total current      |  |      | 49,921  |      |   | 57,987 |      |  |   | 32,965
|Deferred:          |  |      |         |      |   |        |      |  |   |       
|United States      |  |      | 81,368  |      |   | 36,141 |      |  |   | 51,491
|Foreign            |  |      | 28,407  |      |   | (6,633 | )    |  |   | 1,743 
|                   |  |      |         |      |   |        |      |  |   |       
|Total deferred     |  |      | 109,775 |      |   | 29,508 |      |  |   | 53,234
|                   |  |      |         |      |   |        |      |  |   |       
|Income tax expense |  | $    | 159,696 |      | $ | 87,495 |      |  | $ | 86,199
|                   |  |      |         |      |   |        |      |  |   |       



The consolidated
effective income tax rates (as a percent of income (loss) before income taxes) for the three years ended September 30, 2004 varied from the United States statutory income tax rate for the reasons set forth below:



|                                           |  |       |   |  |      |   |  |      |  
|------------------------------------------ |  | ----- | - |  | ---- | - |  | ---- | -
|                                           |  | 2004  |   |  | 2003 |   |  | 2002 |  
|Statutory rate                             |  | 35.0  | % |  | 35.0 | % |  | 35.0 | %
|Foreign earnings at varying rates          |  | (3.2  | ) |  | (3.5 | ) |  | (4.1 | )
|State income taxes, net of federal benefit |  | .3    |   |  | .3   |   |  | 1.3  |  
|Foreign income recognized domestically     |  | .1    |   |  | (.4  | ) |  | 1.3  |  
|Foreign and other tax credits              |  | (2.1  | ) |  |     |   |  |     |  
|Nondeductible expenses                     |  | .1    |   |  | .3   |   |  | .6   |  
|Other, net                                 |  | .5    |   |  |     |   |  |     |  
|                                           |  |       |   |  |      |   |  |      |  
|                                           |  | 30.7% |   |  | 31.7 | % |  | 34.1 | %
|                                           |  |       |   |  |      |   |  |      |  



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary
differences between the tax basis of assets or liabilities and its reported amount in the financial statements. The measurement of deferred tax assets and liabilities is based on enacted tax laws and rules currently in effect in each of the taxing
jurisdictions in which the Company has operations. Generally, deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related asset or liability for financial reporting. The estimated
deferred tax effect of temporary differences and carryforwards as of September 30, 2004 and 2003 were as follows (in thousands):



|                                                                          |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                          |  | 2004 |         |   | 2003 |  
|Assets:                                                                   |  |      |         |   |      |   |         |  
|Accrued compensation expense                                              |  | $    | 25,356  |   |      | $ | 35,374  |  
|Deferred gain(1)                                                          |  |      | 10,781  |   |      |   | 18,970  |  
|Accrued insurance expense                                                 |  |      | 5,039   |   |      |   | 5,093   |  
|Other accrued expenses                                                    |  |      | 18,613  |   |      |   | 14,813  |  
|Alternative minimum tax credit carryforward                               |  |      |        |   |      |   | 14,498  |  
|Foreign tax credit carryforwards                                          |  |      | 18,243  |   |      |   |        |  
|Other tax credit carryforwards                                            |  |      | 5,393   |   |      |   |        |  
|Net operating and capital loss carryforwards                              |  |      | 15,790  |   |      |   | 10,144  |  
|Valuation allowance                                                       |  |      | (23,986 | ) |      |   | (10,144 | )
|                                                                          |  |      |         |   |      |   |         |  
|Total deferred tax asset                                                  |  | $    | 75,229  |   |      | $ | 88,748  |  
|                                                                          |  |      |         |   |      |   |         |  
|Liabilities:                                                              |  |      |         |   |      |   |         |  
|Differences in depreciable basis of property                              |  | $    | (85,854 | ) |      | $ | (26,032 | )
|Income accrued for financial reporting purposes, not yet reported for tax |  |      | (3,155  | ) |      |   | (2,596  | )
|                                                                          |  |      |         |   |      |   |         |  
|Total deferred tax liability                                              |  |      | (89,009 | ) |      |   | (28,628 | )
|                                                                          |  |      |         |   |      |   |         |  
|Net deferred tax asset (liability)                                        |  | $    | (13,780 | ) |      | $ | 60,120  |  
|                                                                          |  |      |         |   |      |   |         |  

---

|(1) | Deferred gain on the contribution of pumping service equipment to the partnerships referred to in Note 10.
|--- | ----------------------------------------------------------------------------------------------------------



At September 30, 2004, the Company had approximately $37.1 million of foreign
tax net operating loss carryforwards and $16.2 million of foreign capital loss carryforwards. The Company also had $1.3 million of foreign tax credit carryforwards. The potential impact of the foreign net operating loss carryforwards subject to
expiration has been reflected in the asset valuation allowance balance as of September 30, 2004. The foreign net operating loss carryforwards expire as follows: $4.8 million in fiscal 2005, $2.2 million in fiscal 2006, $2.2 million in fiscal 2008,
$1.2 million in fiscal 2009, and the remaining $26.7 million does not expire. The foreign capital losses and foreign tax credits do not expire. The Companys valuation allowance, as it relates to foreign net operating losses, was recorded as a
part of the respective allocations of purchase price for various business acquisitions. Reversal of this valuation allowance will not effect the Companys effective tax rate but instead would be recorded as a reduction of the goodwill
attributable to the respective acquisition.



The Company also
had $18.2 million and $4.4 million of U.S. foreign tax credit and other tax credit carryforwards. The Company records a valuation allowance against these assets until their usage becomes probable. The U.S. foreign tax credit carryforward expires in
fiscal 2012. The other U.S. tax credits expire as follows: $0.9 million in fiscal 2020, $2.4 million in fiscal 2021, and $1.1 million in fiscal 2022.



No deferred U.S. income tax liability has been recognized on undistributed earnings of foreign subsidiaries as they have been deemed permanently invested
outside the U.S. If these earnings were to be remitted to the Company, any U.S. income taxes payable would be substantially reduced by foreign tax credits generated by repatriation of the earnings.



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



In October 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law.
The Act contains new provisions that may impact the Companys U.S. income tax liability in future years. The Company is currently analyzing those provisions and will reflect any tax effect in the period in which the effect becomes probable.



8. Segment Information



The Company currently has thirteen operating segments for which separate
financial information is available and that have separate management teams that are engaged in oilfield services. The results for these operating segments are evaluated regularly by the chief operating decision maker in deciding how to allocate
resources and assessing performance. The operating segments have been aggregated into three reportable segments: U.S./Mexico Pressure Pumping, International Pressure Pumping and Other Oilfield Services.



The U.S./Mexico Pressure Pumping has two operating segments and includes
cementing services and stimulation services (consisting of fracturing, acidizing, sand control, nitrogen, coiled tubing and service tool services) provided throughout the United States and Mexico. These two operating segments have been aggregated
into one reportable segment because they offer the same type of services, have similar economic characteristics, have similar production processes and use the same methods to provide their services.



The International Pressure Pumping segment has six operating segments.
Similar to U.S./Mexico Pressure Pumping, it includes cementing and stimulation services (consisting of fracturing, acidizing, sand control, nitrogen, coiled tubing and service tool services). These services are provided to customers in more than 49
countries in the major international oil and natural gas producing areas of Canada, Latin America, Europe, Africa, Southeast Asia, the Middle East, Russia and China. The operating segments have been aggregated into one reportable segment because
they have similar economic characteristics, offer the same type of services, have similar production processes and use the same methods to provide their services. They also serve the same or similar customers, which include major multi-national,
independent and national or state-owned oil companies.



The
Other Oilfield Services segment has five operating segments. These operating segments provide other oilfield services such as production chemicals, casing and tubular services and process and pipeline services and, with the acquisition of OSCA on
May 31, 2002, completion tools and completion fluids services in the U.S. and in select markets internationally. The operating segments have been aggregated into one reportable segment as they all provide other oilfield services, serve same or
similar customers and some of the operating segments share resources.



The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of its segments based on operating income. Intersegment sales and transfers are
not material.



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Summarized financial information concerning the Companys segments for each of the three years
ended September 30, 2004 is shown in the following tables (in thousands). The Corporate column includes corporate expenses not allocated to the operating segments. For the years ended September 30, 2004, 2003 and 2002, the Company
provided services to several thousand customers, none of which accounted for more than 5% of consolidated revenue.



Business Segments



|                        |  |                            |           |                                |   |                       |  |           |         |  |       |         |   |  |   |          
|----------------------- |  | -------------------------- | --------- | ------------------------------ | - | --------------------- |  | --------- | ------- |  | ----- | ------- | - |  | - | ---------
|                        |  | U.S./MexicoPressurePumping |           | International Pressure Pumping |   | OtherOilfieldServices |  | Corporate |         |  | Total
|2004                    |  |                            |           |                                |   |                       |  |           |         |  |       |         |   |  |   |          
|Revenue                 |  | $                          | 1,269,786 |                                | $ | 891,427               |  | $         | 438,788 |  | $     | 985     |   |  | $ | 2,600,986
|Operating income (loss) |  |                            | 337,030   |                                |   | 91,409                |  |           | 54,030  |  |       | (44,084 | ) |  |   | 438,385  
|Total assets            |  |                            | 901,272   |                                |   | 1,056,728             |  |           | 549,051 |  |       | 823,623 |   |  |   | 3,330,674
|Capital expenditures    |  |                            | 92,080    |                                |   | 62,688                |  |           | 31,704  |  |       | 14,105  |   |  |   | 200,577  
|Depreciation            |  |                            | 45,699    |                                |   | 56,414                |  |           | 19,492  |  |       | 4,063   |   |  |   | 125,668  
|                        |  |                            |           |                                |  
|2003                    |  |                            |           |                                |   |                       |  |           |         |  |       |         |   |  |   |          
|Revenue                 |  | $                          | 982,630   |                                | $ | 801,746               |  | $         | 358,479 |  | $     | 22      |   |  | $ | 2,142,877
|Operating income (loss) |  |                            | 190,301   |                                |   | 90,662                |  |           | 49,950  |  |       | (37,672 | ) |  |   | 293,241  
|Total assets            |  |                            | 832,736   |                                |   | 1,044,811             |  |           | 482,193 |  |       | 426,217 |   |  |   | 2,785,957
|Capital expenditures    |  |                            | 72,827    |                                |   | 60,380                |  |           | 19,557  |  |       | 14,419  |   |  |   | 167,183  
|Depreciation            |  |                            | 44,491    |                                |   | 55,110                |  |           | 16,132  |  |       | 4,480   |   |  |   | 120,213  
|                        |  |                            |           |                                |  
|2002                    |  |                            |           |                                |   |                       |  |           |         |  |       |         |   |  |   |          
|Revenue(1)              |  | $                          | 898,691   |                                | $ | 712,612               |  | $         | 253,665 |  | $     | 828     |   |  | $ | 1,865,796
|Operating income (loss) |  |                            | 189,136   |                                |   | 72,068                |  |           | 30,220  |  |       | (28,534 | ) |  |   | 262,890  
|Total assets            |  |                            | 764,029   |                                |   | 989,174               |  |           | 463,610 |  |       | 225,557 |   |  |   | 2,442,370
|Capital expenditures    |  |                            | 75,141    |                                |   | 77,702                |  |           | 16,713  |  |       | 9,451   |   |  |   | 179,007  
|Depreciation            |  |                            | 36,046    |                                |   | 51,485                |  |           | 13,572  |  |       | 3,812   |   |  |   | 104,915  

---

|(1) | As a result of the acquisition of OSCA, beginning in June 2002, certain products and services, which the Company considers to be completion tools, and completion
fluids are included in the other oilfield services segment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Geographic Information



|                   |  |         |           |                   |   |          
|------------------ |  | ------- | --------- | ----------------- | - | ---------
|                   |  | Revenue |           | Long-Lived Assets
|2004               |  |         |           |                   |   |          
|United States      |  | $       | 1,357,139 |                   | $ | 1,385,343
|Canada             |  |         | 331,521   |                   |   | 114,642  
|Other countries    |  |         | 912,326   |                   |   | 342,505  
|                   |  |         |           |                   |   |          
|Consolidated total |  | $       | 2,600,986 |                   | $ | 1,842,490
|                   |  |         |           |                   |   |          
|2003               |  |         |           |                   |   |          
|United States      |  | $       | 1,068,465 |                   | $ | 1,322,962
|Canada             |  |         | 253,851   |                   |   | 111,618  
|Other countries    |  |         | 820,561   |                   |   | 342,792  
|                   |  |         |           |                   |   |          
|Consolidated total |  | $       | 2,142,877 |                   | $ | 1,777,372
|                   |  |         |           |                   |   |          
|2002               |  |         |           |                   |   |          
|United States      |  | $       | 968,520   |                   | $ | 1,295,639
|Canada             |  |         | 200,020   |                   |   | 99,364   
|Other countries    |  |         | 697,256   |                   |   | 327,633  
|                   |  |         |           |                   |   |          
|Consolidated total |  | $       | 1,865,796 |                   | $ | 1,722,636
|                   |  |         |           |                   |   |          



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Notes to the Consolidated Financial Statements(Continued)



Revenue by Product Line



|              |  |      |           |      |   |           |  |   |          
|------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|              |  | 2004 |           | 2003 |   | 2002     
|Cementing     |  | $    | 745,929   |      | $ | 594,743   |  | $ | 541,975  
|Stimulation   |  |      | 1,361,273 |      |   | 1,139,607 |  |   | 1,017,088
|Other         |  |      | 493,784   |      |   | 408,527   |  |   | 306,733  
|              |  |      |           |      |   |           |  |   |          
|Total revenue |  | $    | 2,600,986 |      | $ | 2,142,877 |  | $ | 1,865,796
|              |  |      |           |      |   |           |  |   |          



A reconciliation from
the segment information to consolidated income before income taxes for each of the three years ended September 30, 2004 is set forth below (in thousands):



|                                               |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                               |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Total operating profit for reportable segments |  | $    | 438,385 |   |      | $ | 293,241 |      |  | $ | 262,890 |  
|Interest expense                               |  |      | (16,389 | ) |      |   | (15,948 | )    |  |   | (8,979  | )
|Interest income                                |  |      | 6,073   |   |      |   | 2,141   |      |  |   | 2,008   |  
|Other (expense) income, net                    |  |      | 92,668  |   |      |   | (3,762  | )    |  |   | (3,225  | )
|                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Income before income taxes                     |  | $    | 520,737 |   |      | $ | 275,672 |      |  | $ | 252,694 |  
|                                               |  |      |         |   |      |   |         |      |  |   |         |  



9. Employee Benefit Plans



The Company administers defined contribution plans for
employees in the U.S., the U.K. and Canada whereby eligible employees elect to contribute from 2% to 20% of their base salaries to an employee benefit trust. Employee contributions are matched by the Company at the rate of $.50 per $1.00 up to 6% of
the employees base salary in the U.S., and an equal matching up to 5.5% of the employees base salary in the U.K. In addition, the Company contributes between 2% and 6% of each employees base salary depending on their age or years of
service in the U.S., the U.K. and Canada. Company matching contributions vest immediately while Company base contributions become fully vested after five years of employment. The Companys employees formerly employed by OSCA (see Note 3) are
covered under a savings plan which was merged into the Companys U.S. plan effective August 1, 2002. The Companys contributions to these defined contribution plans amounted to $14.3 million, $13.2 million, and $12.1 million, in 2004,
2003, and 2002, respectively.



Effective October 1, 2000, the
Company established a non-qualified supplemental executive retirement plan. The unfunded defined benefit plan will provide Company executives with supplemental retirement benefits based on the highest consecutive three years compensation out of the
final ten years and become vested at age 55. The expense associated with this plan was $3.4 million, $3.4 million, and $4.0 million for the years ended September 30, 2004, 2003, and 2002, respectively. The related accrued benefit obligation was
$13.0 million and $10.0 million as of September 30, 2004 and 2003, respectively.



Effective December 7, 2000, the Company established a non-qualified directors benefit plan. The unfunded defined benefit plan will provide the Companys non-employee directors with benefits upon termination
of their service based on the number of years of service and the last annual retainer fee. The expense associated with this plan was $0.1 million, $0.3 million and $0.1 million for the years ended September 30, 2004, 2003, and 2002, respectively.
The related accrued benefit obligation was $1.8 million and $1.7 million as of September 30, 2004 and 2003, respectively.



Defined Benefit Pension Plans



The Company has defined benefit pension plans covering employees in the U.S., the U.K., Norway and Canada. The defined benefit pension plan in the U.S.
was frozen effective December 31, 1995, at which time all



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Notes to the Consolidated Financial Statements(Continued)



earned benefits were vested. During fiscal 2004, the plans were frozen to new entrants in the U.K. and Canada. In addition, many employees in Canada
converted from the defined benefit plan to the defined contribution plan (see settlement benefits on conversion in the defined benefit plan tables below). The Company uses a September 30 measurement date for these plans.



Obligations and Funded Status



|                                             |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------- | ---- | ---- | ------ | ---- | -------- | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|At September 30 (in thousands)               |      | U.S. |        |      | Non-U.S. |  
|                                             | 2004 |      |        | 2003 |          |   | 2004    |   |  | 2003 |        
|Change in benefit obligation                 |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  
|Benefit obligation, beginning of year        |      | $    | 66,834 |      |          | $ | 61,762  |   |  | $    | 98,306  |   |  | $ | 79,437  |  
|Service cost                                 |      |      |       |      |          |   |        |   |  |      | 4,408   |   |  |   | 4,242   |  
|Interest cost                                |      |      | 3,802  |      |          |   | 3,902   |   |  |      | 6,230   |   |  |   | 4,836   |  
|Actuarial loss                               |      |      | 1,115  |      |          |   | 4,445   |   |  |      | 9,418   |   |  |   | 3,391   |  
|Benefits paid from plan assets               |      |      | (3,300 | )    |          |   | (3,275  | ) |  |      | (2,022  | ) |  |   | (2,549  | )
|Contributions by plan participants           |      |      |       |      |          |   |        |   |  |      | 1,825   |   |  |   | 1,639   |  
|Settlement of benefits on conversion         |      |      |       |      |          |   |        |   |  |      | (1,719  | ) |  |   |        |  
|Foreign currency exchange rate change        |      |      |       |      |          |   |        |   |  |      | 8,210   |   |  |   | 7,310   |  
|                                             |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  
|Defined benefit plan obligation, end of year |      | $    | 68,451 |      |          | $ | 66,834  |   |  | $    | 124,656 |   |  | $ | 98,306  |  
|                                             |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  
|Change in plan assets                        |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  
|Fair value of plan assets, beginning of year |      | $    | 48,197 |      |          | $ | 43,984  |   |  | $    | 67,654  |   |  | $ | 50,148  |  
|Actual return on plan assets                 |      |      | 6,002  |      |          |   | 7,488   |   |  |      | 7,735   |   |  |   | 5,209   |  
|Contributions by employer                    |      |      | 13,866 |      |          |   |        |   |  |      | 5,523   |   |  |   | 6,934   |  
|Contributions by plan participants           |      |      |       |      |          |   |        |   |  |      | 1,825   |   |  |   | 1,639   |  
|Benefits paid from plan assets               |      |      | (3,300 | )    |          |   | (3,275  | ) |  |      | (2,022  | ) |  |   | (2,549  | )
|Settlement of benefits on conversion         |      |      |       |      |          |   |        |   |  |      | (1,787  | ) |  |   |        |  
|Net refund from of plan                      |      |      |       |      |          |   |        |   |  |      |        |   |  |   | 1,042   |  
|Foreign currency exchange rate change        |      |      |       |      |          |   |        |   |  |      | 5,668   |   |  |   | 5,231   |  
|                                             |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  
|Fair value of plan assets, end of year       |      | $    | 64,765 |      |          | $ | 48,197  |   |  | $    | 84,596  |   |  | $ | 67,654  |  
|                                             |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  
|Funded status                                |      | $    | (3,686 | )    |          | $ | (18,637 | ) |  | $    | (40,060 | ) |  | $ | (30,652 | )
|Unrecognized net actuarial loss              |      |      | 21,816 |      |          |   | 23,322  |   |  |      | 40,690  |   |  |   | 32,364  |  
|Unrecognized prior service cost              |      |      |       |      |          |   |        |   |  |      | (50     | ) |  |   | 60      |  
|                                             |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  
|Prepaid (accrued) net amount recognized      |      | $    | 18,130 |      |          | $ | 4,685   |   |  | $    | 580     |   |  | $ | 1,772   |  
|                                             |      |      |        |      |          |   |         |   |  |      |         |   |  |   |         |  



Amounts recognized in
the consolidated statement of financial position consist of:



|                                       |  |      |        |   |          |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ---- | ------ | - | -------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                       |  | U.S. |        |   | Non-U.S. |  
|At September 30 (in thousands)         |  | 2004 |        |   | 2003     |   |         | 2004 |  |   | 2003    |  
|Prepaid benefit cost                   |  | $    |       |   |          | $ |        |      |  | $ | 3,317   |   |  | $ | 2,917   |  
|Accrued benefit cost                   |  |      | (3,686 | ) |          |   | (18,637 | )    |  |   | (32,965 | ) |  |   | (24,438 | )
|Intangible assets                      |  |      |       |   |          |   |        |      |  |   | 51      |   |  |   | 71      |  
|Accumulated other comprehensive income |  |      | 21,816 |   |          |   | 23,322  |      |  |   | 30,177  |   |  |   | 23,222  |  
|                                       |  |      |        |   |          |   |         |      |  |   |         |   |  |   |         |  
|Net amount recognized                  |  | $    | 18,130 |   |          | $ | 4,685   |      |  | $ | 580     |   |  | $ | 1,772   |  
|                                       |  |      |        |   |          |   |         |      |  |   |         |   |  |   |         |  



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Notes to the Consolidated Financial Statements(Continued)



Accumulated Benefit Obligations (ABO) in Excess of Plan Assets



The ABO is the actuarial present value of the pension benefits at the
employees current compensation levels. This differs from the projected benefit obligation, in that the ABO does not include any assumptions about future compensation levels. The ABO for all the plans was $181.8 million and $156.6 million at
September 30, 2004 and 2003, respectively.



|                               |  |      |        |          |   |        |  |      |         |  |   |       
|------------------------------ |  | ---- | ------ | -------- | - | ------ |  | ---- | ------- |  | - | ------
|                               |  | U.S. |        | Non-U.S.
|At September 30 (in thousands) |  | 2004 |        | 2003     |   | 2004   |  | 2003
|Projected benefit obligation   |  | $    | 68,451 |          | $ | 66,834 |  | $    | 124,656 |  | $ | 98,306
|Accumulated benefit obligation |  |      | 68,451 |          |   | 66,834 |  |      | 113,372 |  |   | 89,814
|Plan assets at fair value      |  |      | 64,766 |          |   | 48,197 |  |      | 84,596  |  |   | 67,654



Components of Net Periodic Benefit
Cost



|                                         |  |      |        |   |          |   |        |      |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|---------------------------------------- |  | ---- | ------ | - | -------- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                                         |  | U.S. |        |   | Non-U.S. |  
|Years ended September 30 (in thousands)  |  | 2004 |        |   | 2003     |   |        | 2002 |  |   | 2004   |   |  | 2003 |        |   | 2002 |  
|Service cost for benefits earned         |  | $    |       |   |          | $ |       |      |  | $ |       |   |  | $    | 4,408  |   |      | $ | 4,242  |   |  | $ | 2,874  |  
|Interest on projected benefit obligation |  |      | 3,802  |   |          |   | 3,902  |      |  |   | 3,886  |   |  |      | 6,230  |   |      |   | 4,836  |   |  |   | 3,558  |  
|Expected return on plan assets           |  |      | (4,010 | ) |          |   | (3,802 | )    |  |   | (4,458 | ) |  |      | (5,599 | ) |      |   | (4,281 | ) |  |   | (4,129 | )
|Recognized actuarial loss                |  |      |       |   |          |   |       |      |  |   |       |   |  |      | 1,846  |   |      |   | 1,494  |   |  |   | 17     |  
|Net amortization                         |  |      | 628    |   |          |   | 623    |      |  |   | 1,016  |   |  |      | 17     |   |      |   | 19     |   |  |   | (72    | )
|                                         |  |      |        |   |          |   |        |      |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Net pension cost                         |  | $    | 420    |   |          | $ | 723    |      |  | $ | 444    |   |  | $    | 6,902  |   |      | $ | 6,310  |   |  | $ | 2,248  |  
|                                         |  |      |        |   |          |   |        |      |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  



Additional Information



|                                                                                |  |      |        |          |      |   |      |  |      |       |  |   |      
|------------------------------------------------------------------------------- |  | ---- | ------ | -------- | ---- | - | ---- |  | ---- | ----- |  | - | -----
|                                                                                |  | U.S. |        | Non-U.S.
|At September 30 (in thousands)                                                  |  | 2004 |        |          | 2003 |   | 2004 |  | 2003
|Increase (decrease) in minimum liability included in other comprehensive income |  | $    | (1,506 | )        |      | $ | 136  |  | $    | 3,869 |  | $ | 1,624



Assumptions



Assumptions used to determine benefit obligations at September 30, were as
follows:



|                                                             |  |      |   |  |          |   |  |      |   |  |         |   |  |         |   |  |         |  
|------------------------------------------------------------ |  | ---- | - |  | -------- | - |  | ---- | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                                             |  | U.S. |   |  | Non-U.S. |  
|                                                             |  | 2004 |   |  | 2003     |   |  | 2002 |   |  | 2004    |   |  | 2003    |   |  | 2002    |  
|Weighted-average discount rate                               |  | 5.8  | % |  | 5.9      | % |  | 6.5  | % |  | 5.8-6.3 | % |  | 5.6-6.6 | % |  | 5.5-6.9 | %
|Weighted-average expected long-term rate of return on assets |  | 8.5  | % |  | 8.5      | % |  | 9.0  | % |  | 6.3-8.2 | % |  | 6.6-8.0 | % |  | 7.0-8.0 | %



Assumptions used to
determine net periodic benefit cost for the years ended September 30, were as follows:



|                                                             |  |      |   |  |          |   |  |      |   |  |         |   |  |         |   |  |         |  
|------------------------------------------------------------ |  | ---- | - |  | -------- | - |  | ---- | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                                             |  | U.S. |   |  | Non-U.S. |  
|                                                             |  | 2004 |   |  | 2003     |   |  | 2002 |   |  | 2004    |   |  | 2003    |   |  | 2002    |  
|Weighted-average discount rate                               |  | 5.8  | % |  | 5.9      | % |  | 6.5  | % |  | 5.8-6.3 | % |  | 5.6-6.6 | % |  | 5.5-6.9 | %
|Weighted-average expected long-term rate of return on assets |  | 8.5  | % |  | 8.5      | % |  | 9.0  | % |  | 6.3-8.2 | % |  | 6.6-8.0 | % |  | 7.0-8.0 | %
|Weighted-average rate of increase in future compensation     |  | N/A  |   |  | N/A      |   |  | N/A  |   |  | 3.8-4.5 | % |  | 3.0-4.5 | % |  | 3.5-4.5 | %



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



The expected long-term rate of return assumptions represent the rate of return on plan assets
reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates
of return for the portfolio considering the asset distribution target and related historical rates of return. The redemption yield on government fixed interest bonds as well as corporate bonds were used as proxies for the return on debt securities,
weighted by the relative proportion of each within the actual portfolio. The return on equities was based on the historical long-term performance of the equity classes. This rate is reassessed at least on an annual basis.



Plan Assets



The Company objective is to diversify the portfolio among several asset classes to reduce volatility while maintaining an
asset mix that provides the highest rate of return with an acceptable risk. This is primarily through a mix of equity securities (between 60 - 75%) and fixed income funds (between 25 - 40%) to generate asset returns comparable with the general
market.



The Company has an investment committee that meets at
least annually to review the portfolio returns and to determine asset-mix targets based on asset/liability studies. A nationally recognized third-party investment consultant assisted the Company in developing an asset allocation strategy to
determine the Companys expected rate of return and expected risk for various investment portfolios. The investment committee considered these studies in the formal establishment of the current asset-mix targets based on the projected risk and
return levels for each asset class.



|                  |  |        |   |  |          |   |  |      |   |  |        |   |  |      |   |  |      |  
|----------------- |  | ------ | - |  | -------- | - |  | ---- | - |  | ------ | - |  | ---- | - |  | ---- | -
|                  |  | U.S.   |   |  | Non-U.S. |  
|At September 30   |  | Target |   |  | 2004     |   |  | 2003 |   |  | Target |   |  | 2004 |   |  | 2003 |  
|Equity securities |  | 60     | % |  | 60       | % |  | 63   | % |  | 60-75  | % |  | 70   | % |  | 65   | %
|Debt securities   |  | 40     | % |  | 35       | % |  | 37   | % |  | 25-35  | % |  | 29   | % |  | 30   | %
|Other             |  | 0      | % |  | 5        | % |  | 0    | % |  | 0-5    | % |  | 1    | % |  | 5    | %



Contributions and Estimated Benefit
Payments



The pension plans are generally funded with the
amounts necessary to meet the legal or contractual minimum funding requirements which totaled $10.4 million in fiscal 2004. The Company infrequently makes discretionary contributions, and a $9.0 million discretionary contribution was made to the
U.S. plan in fiscal 2004. The Company expects to contribute $7.9 million to the defined benefit plans in fiscal 2005, which represents the legal or contractual minimum funding requirements.



The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:



|                                         |  |   |       
|---------------------------------------- |  | - | ------
|Years ended September 30, (in thousands) |  |  
|2005                                     |  | $ | 5,552 
|2006                                     |  |   | 5,694 
|2007                                     |  |   | 5,985 
|2008                                     |  |   | 6,357 
|2009                                     |  |   | 6,874 
|Years 2010-2014                          |  |   | 41,914



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Postretirement Benefit Plans



The Company sponsors plans that provide certain health care and life insurance benefits for retired employees (primarily
U.S.) who meet specified age and service requirements, and their eligible dependents. These plans are unfunded and the Company retains the right, subject to existing agreements, to modify or eliminate them.



The Companys postretirement medical benefit plan provides credits based
on years of service that can be used to purchase coverage under the retiree plan. This plan effectively caps the Companys health care inflation rate at a 4% increase per year. In 2002, the Company provided additional employer contributions,
above the 4% cap, for covered retirees in order to reduce the level of required retiree contributions. These additional contributions were a deviation from the substantive plan for 2002 only and resulted in an additional $.2 million in net periodic
post retirement benefits and cost for the fiscal year ended September 30, 2002.



Obligations and Funded Status



|                                             |  |      |         |   |      |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|At September 30 (in thousands)               |  | 2004 |         |   | 2003 |  
|Change in benefit obligation                 |  |      |         |   |      |   |         |  
|Benefit obligation, beginning of year        |  | $    | 40,831  |   |      | $ | 33,969  |  
|Service cost                                 |  |      | 2,915   |   |      |   | 2,531   |  
|Interest cost                                |  |      | 2,389   |   |      |   | 2,208   |  
|Actuarial loss                               |  |      | 243     |   |      |   | 2,744   |  
|Benefits paid from plan assets               |  |      | (577    | ) |      |   | (621    | )
|Contributions by plan participants           |  |      |        |   |      |   |        |  
|Settlement of benefits on conversion         |  |      |        |   |      |   |        |  
|Foreign currency exchange rate change        |  |      |        |   |      |   |        |  
|                                             |  |      |         |   |      |   |         |  
|Defined benefit plan obligation, end of year |  | $    | 45,801  |   |      | $ | 40,831  |  
|                                             |  |      |         |   |      |   |         |  
|Change in plan assets                        |  |      |         |   |      |   |         |  
|Fair value of plan assets, beginning of year |  | $    |        |   |      | $ |        |  
|Actual (loss) return on plan assets          |  |      |        |   |      |   |        |  
|Contributions by employer                    |  |      | 577     |   |      |   | 621     |  
|Contributions by plan participants           |  |      |        |   |      |   |        |  
|Benefits paid from plan assets               |  |      | (577    | ) |      |   | (621    | )
|                                             |  |      |         |   |      |   |         |  
|Fair value of plan assets, end of year       |  | $    |        |   |      | $ |        |  
|                                             |  |      |         |   |      |   |         |  
|Funded status                                |  | $    | (45,801 | ) |      | $ | (40,831 | )
|Unrecognized net actuarial loss              |  |      | 2,744   |   |      |   | 2,501   |  
|Unrecognized prior service cost              |  |      |        |   |      |   |        |  
|                                             |  |      |         |   |      |   |         |  
|Prepaid (accrued) net amount recognized      |  | $    | (43,057 | ) |      | $ | (38,330 | )
|                                             |  |      |         |   |      |   |         |  



The ABO is the
actuarial present value of the pension benefits at the employees current compensation levels. This differs from the projected benefit obligation, in that the ABO does not include any assumptions about future compensation levels. The ABO was
$45.8 million and $40.8 million at September 30, 2004 and 2003, respectively.



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Amounts recognized in the consolidated statement of financial position consist of:



|                                       |  |      |         |   |      |   |         |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|At September 30 (in thousands)         |  | 2004 |         |   | 2003 |  
|Prepaid benefit cost                   |  | $    |        |   |      | $ |        |  
|Accrued benefit cost                   |  |      | (43,057 | ) |      |   | (38,330 | )
|Intangible assets                      |  |      |        |   |      |   |        |  
|Accumulated other comprehensive income |  |      |        |   |      |   |        |  
|                                       |  |      |         |   |      |   |         |  
|Net amount recognized                  |  | $    | (43,057 | ) |      | $ | (38,330 | )
|                                       |  |      |         |   |      |   |         |  



The postretirement
benefit obligation at September 30, 2004 and 2003 was determined using a discount rate of 5.75% and 5.85%, respectively, and a health care cost trend rate of 4%, reflecting the cap described above. Increasing the assumed health care cost trend rates
by one percentage point would not have a material impact on the accumulated postretirement benefit obligation or the net periodic postretirement benefit cost because these benefits are effectively capped by the Company.



Components of Net Periodic Benefit Cost



|                                         |  |      |       |      |   |       |  |   |      
|---------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|Years ended September 30 (in thousands)  |  | 2004 |       | 2003 |   | 2002 
|Service cost for benefits earned         |  | $    | 2,915 |      | $ | 2,531 |  | $ | 2,203
|Interest on projected benefit obligation |  |      | 2,389 |      |   | 2,208 |  |   | 1,996
|Expected return on plan assets           |  |      |      |      |   |      |  |   |     
|Recognized actuarial loss (gain)         |  |      |      |      |   | 50    |  |   | 150  
|Net amortization deferral                |  |      |      |      |   |      |  |   |     
|                                         |  |      |       |      |   |       |  |   |      
|Net pension cost (benefit)               |  | $    | 5,304 |      | $ | 4,789 |  | $ | 4,349
|                                         |  |      |       |      |   |       |  |   |      



The postretirement
benefit cost at September 30, 2004, 2003 and 2002 was determined using a discount rate of 5.85%, 6.50% and 6.87%, respectively, and a health care cost trend rate of 4%, reflecting the cap described above.



Contributions and Estimated Benefit Payments



The pension plans are generally funded with the amounts necessary to meet
the legal or contractual minimum funding requirements. The Company expects to contribute $1.1 million to the defined benefit plans in fiscal 2005, which represents the legal or contractual minimum funding requirements.



The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:



|                                         |  |   |       
|---------------------------------------- |  | - | ------
|Years ended September 30, (in thousands) |  |  
|2005                                     |  | $ | 1,087 
|2006                                     |  |   | 1,399 
|2007                                     |  |   | 1,780 
|2008                                     |  |   | 2,208 
|2009                                     |  |   | 2,677 
|Years 2010-2014                          |  |   | 21,339



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



10. Commitments and Contingencies



Litigation



The Company, through performance of its service operations, is sometimes named as a defendant in litigation, usually relating to claims for bodily
injuries or property damage (including claims for well or reservoir damage). The Company maintains insurance coverage against such claims to the extent deemed prudent by management. Further, through a series of acquisitions, the Company assumed
responsibility for certain claims and proceedings made against the Western Company of North America, Nowsco Well Service Ltd., OSCA and other companies whose stock we acquired in connection with their businesses. Some, but not all, of such claims
and proceedings will continue to be covered under insurance policies of the Companys predecessors that were in place at the time of the acquisitions.



Although the outcome of the claims and proceedings against the Company (including Western, Nowsco and OSCA) cannot be predicted with certainty, management
believes that there are no existing claims or proceedings that are likely to have a material adverse effect on the Companys financial position or results of operations for which it has not already provided.



Chevron Phillips Litigation



On July 10, 2002, Chevron Phillips Chemical Company (Chevron
Phillips) filed a lawsuit against the Company for patent infringement in the United States District Court for the Southern District of Texas (Corpus Christi). The lawsuit relates to a patent issued in 1992 to the Phillips Petroleum Company
(Phillips). This patent (the 477 patent) relates to a method for using enzymes to decompose used drilling mud. Although the Company has its own patents for remediating damage resulting from drill-in fluids (as opposed to drilling
muds) in oil and natural gas formations (products and services which are offered under the registered MUDZYMES trademark), the Company approached Phillips for a license of the 477 patent. The Company was advised that Phillips had
licensed this patent on an exclusive basis to Geo-Microbial Technologies, Inc. (GMT), a company co-owned by a former Phillips employee who is one of the inventors on the 477 patent, and that the Company should deal with GMT in
obtaining a sublicense. The Company entered into a five year sublicense agreement with GMT in 1997.



Early in 2000, Phillips advised the Company that Phillips had reportedly terminated the license agreement between Phillips and GMT for GMTs
non-payment of royalties and that the Companys sublicense had also been terminated. Even though the Company believes that its sublicense with GMT was not properly terminated and the Companys MUDZYMES treatments may not be covered by the
477 patent, in 2000, the Company stopped offering its enzyme product for use on drilling mud and drill-in fluids in the U.S. Nevertheless, Chevron Phillips claimed that the use of enzymes in fracturing fluids and other applications in the oil
and natural gas industry falls under the 477 patent. Further, even though its patent is valid only in the United States, Chevron Phillips requested that the court award it damages for the Companys use of enzymes in foreign countries on
the theory that oil produced from wells treated with enzymes is being imported into the United States.



The Company and Chevron Phillips reached a settlement agreement on August 1, 2004 under which the Company purchased the 477 patent from Chevron
Phillips in exchange for cash and certain royalty payments on the Companys use of MUDZYMES in the future.



HalliburtonPython Litigation



On June 27, 2002, Halliburton Energy Services, Inc. filed suit against the Company and Weatherford International, Inc. for patent infringement in
connection with drillable bridge plug tools. These tools are used to isolate portions of a well for stimulation work, after which the plugs are milled out using coiled tubing or a



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



workover rig. Halliburton claims that tools offered by the Company (under the trade name Python) and Weatherford infringe two of its patents for
a tool constructed of composite material. The lawsuit was filed in the United States District Court for the Northern District of Texas (Dallas). Halliburton requested that the District Court issue a temporary restraining order and a preliminary
injunction against both Weatherford and the Company to prevent either company from selling competing tools. On March 4, 2003, the District Court issued its opinion denying Halliburtons requests. The Court denied Halliburtons motion to
reconsider and Halliburton filed an appeal with the Court of Appeals for the Federal Circuit. Oral argument took place on June 10, 2004, and on June 14, 2004, the Court of Appeals issued its ruling affirming the District Courts opinion. On
July 6, 2004, Halliburton submitted both of its patents for re-examination to the U.S. Patent Office, seeking to re-affirm the validity of its patents. The Company has filed its own request for re-examination of the patents. The lawsuit pending in
the Northern District of Texas was dismissed on November 16, 2004, at the request of Halliburton. The dismissal was without prejudice, meaning that Halliburton has the right to re-file this lawsuit and may do so depending on the outcome
of the re-examination process referenced above. The Company has filed a motion with the Court requesting that the Court reinstate the case solely for the purpose of conducting a Markman hearing to construe the construction of the claims in
the Halliburton patent. Irrespective of the outcome of the pending motion or the patent re-examination, the Company does not expect the outcome of this matter to have a material adverse effect on its financial position, results of operations or cash
flows; however, there can be no assurance as to the ultimate outcome of this matter or future lawsuits, if any, that may be filed.



HalliburtonVistar Litigation



On March 17, 2000, the Company filed a lawsuit against Halliburton Energy Services in the United States District Court for the Southern District of Texas
(Houston). In the lawsuit, the Company alleged that a well fracturing fluid system used by Halliburton infringes a patent issued to the Company in January 2000 for a method of well fracturing referred to by the Company as Vistar®. This case was tried in March and April of 2002.
The jury reached a verdict in favor of the Company on April 12, 2002. The jury determined that the Companys patent was valid and that Halliburtons competing fluid system, Phoenix, infringed the Companys patent. The District Court
entered a judgment for $101.1 million and a permanent injunction preventing Halliburton from using its Phoenix system. On August 6, 2003, a three-judge panel of the Court of Appeals for the Federal Circuit in Washington, D.C. unanimously affirmed
the judgment in the Companys favor. On October 17, 2003, the Federal Circuit denied Halliburtons request for a re-hearing. Halliburton filed a Petition for Writ of Certiorari with the U.S. Supreme Court on January 15, 2004. On April 5,
2004 the Supreme Court notified the parties that it would not hear Halliburtons appeal. On April 14, 2004, Halliburton transferred the sum of $106.4 million to the Company, representing full payment of the original judgment, certain court
costs, and interest accrued through that date. During the quarter ended June 30, 2004, the Company recorded a gain of $86.4 million, net of legal fees ($56 million after taxes) in Other income/(expense)net in the Consolidated
Statement of Operations, reflecting receipt of this sum.



Newfield
Litigation



On April 4, 2002, a jury rendered a verdict
adverse to OSCA in connection with litigation pending in the United States District Court for the Southern District of Texas (Houston). The lawsuit, filed by Newfield Exploration on September 8, 2004, arose out of a blowout that occurred in 1999 on
an offshore well owned by Newfield. The jury determined that OSCAs negligence caused or contributed to the blowout and that it was responsible for 86% of the damages suffered by Newfield. The total damage amount awarded to Newfield was $15.5
million (excluding pre- and post-judgment interest). The Court delayed entry of the final judgment in this case pending the completion of the related insurance coverage litigation filed by OSCA against certain of its insurers and its former
insurance broker. The Court elected to conduct the trial of the insurance coverage issues



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



based upon the briefs of the parties. In the interim, the related litigation filed by OSCA against its former insurance brokers for errors and omissions in
connection with the policies at issue in this case has been stayed. On February 28, 2003, the Court issued its Final Judgement in connection with the Newfield claims, based upon the jurys verdict. The total amount of the verdict against OSCA
is $15.6 million, inclusive of interest. At the same time, the Court issued its ruling on the related insurance dispute finding that OSCAs coverage for this loss is limited to $3.8 million. Motions for New Trial have been denied by the Judge
and the case is now on appeal to the U.S. Court of Appeals for the Fifth Circuit, both with regard to the liability case and the insurance coverage issues. Oral argument has been scheduled for April of 2005. Great Lakes Chemical Corporation, which
formerly owned the majority of the outstanding shares of OSCA, has agreed to indemnify the Company for 75% of any uninsured liability in excess of $3 million arising from the Newfield litigation. Taking this indemnity into account, the
Companys share of the uninsured portion of the verdict is approximately $5.7 million. The Company is fully reserved for its share of this liability.



Asbestos Litigation



In August 2004, certain predecessors of the Company were named as defendants in four lawsuits filed in the Circuit Courts of Jones and Smith Counties in
Mississippi. These four lawsuits include 118 individual plaintiffs alleging that they suffer various illnesses from exposure to asbestos. The lawsuits assert claims of unseaworthiness, negligence, and strict liability, all based upon the status of
the Companys predecessors as Jones Act employers. These cases include numerous defendants and, in general, the defendants are all alleged to have manufactured, distributed or utilized products containing asbestos. No discovery has been
conducted to date, and the Company has not been provided with sufficient information to determine the number of plaintiffs who claim to have been exposed to asbestos while employed by the Company, the capacity in which they were employed, nor their
medical condition. Accordingly, the Company is unable to estimate its potential exposure to these lawsuits. The Company and its predecessors in the past maintained insurance which it believes will be available to address any liability arising from
these claims. The Company intends to defend itself vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome of these lawsuits to have a material adverse effect on its financial position,
results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these lawsuits or additional similar lawsuits, if any, that may be filed.



Environmental



Federal, state and local laws and regulations govern the Companys operation of underground fuel storage tanks. Rather than incur additional costs to
restore and upgrade tanks as required by regulations, management has opted to remove the existing tanks. The Company has completed the removal of these tanks and has remedial cleanups in progress related to the tank removals. In addition, the
Company is conducting environmental investigations and remedial actions at current and former company locations and, along with other companies, is currently named as a potentially responsible party at four third-party owned waste disposal sites. An
accrual of approximately $2.7 million has been established for such environmental matters, which is managements best estimate of the Companys portion of future costs to be incurred. Insurance is also maintained for environmental
liabilities.



The Company was notified on May 19, 2003, that
misdemeanor criminal charges had been filed against it in connection with the illegal disposal of allegedly hazardous waste from its facility in Ardmore, Oklahoma. The Companys investigation of this incident concluded that a former employee at
the facility, a product handler, had removed and improperly disposed of drums from the facility in September of 2001, without instructions from, or the knowledge of, the management at this location. The product handler provided a written statement
to the investigating authorities in which he admitted having disposed of the drums without instructions from anyone at



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



the Company and that he knew that his actions were prohibited under law. The criminal proceedings have been dismissed and the Company entered into a Consent
Order (a civil proceeding) regarding this matter on March 24, 2004 with the State of Oklahoma, Department of Environmental Quality. A fine of $50,000 was assessed, $25,000 of which has been paid in cash. The Company expects to receive credit for the
balance of the fine by performing cementing services for the Oklahoma Department of Environmental Quality. The Company is also required to pay drum disposal costs of $5,770.



Lease and Other Long-Term Commitments



In December 1999, the Company contributed certain pumping service equipment to a limited partnership. The Company owns a 1% interest in the limited
partnership. The equipment is used to provide services to the Companys customers for which the Company pays a service fee over a period of at least six years, but not more than 13 years, at approximately $12 million annually. This is accounted
for as an operating lease and is included in Obligations under equipment financing arrangements in the Contractual Obligations section below. The Company assessed the terms of this agreement and determined it was a variable interest
entity as defined in FIN 46, Consolidation of Variable Interest Entities. However, the Company was not deemed to be the primary beneficiary, and therefore, consolidation was not required. The transaction resulted in a gain that is being
deferred and amortized over 13 years. The balance of the deferred gain was $26.6 million and $33.9 million as of September 30, 2004 and September 30, 2003, respectively. The agreement permits substitution of equipment within the partnership as long
as the implied fair value of the new property transferred in at the date of substitution equals or exceeds the implied fair value, as defined, of the current property in the partnership that is being replaced. The Company received partnership
approval in July 2004 to substitute certain pumping service equipment and has accounted for it as an exchange of like-kind assets with no earnings impact since the earnings process has not yet culminated. As a result of the substitutions, the
deferred gain was reduced by $3.3 million. In September 2010, the Company has the option, but not the obligation, to purchase the pumping service equipment for approximately $32 million.



In 1997, the Company contributed certain pumping service equipment to a limited partnership. The Company owns a 1% interest
in the limited partnership. The equipment is used to provide services to the Companys customers for which the Company pays a service fee over a period of at least eight years, but not more than 13 years of approximately $10 million annually.
This is accounted for as an operating lease and is included in Obligations under equipment financing arrangements in the Contractual Obligations section below. The Company assessed the terms of this agreement and determined it was a
variable interest entity as defined in FIN 46, Consolidation of Variable Interest Entities. However, the Company was not deemed to be the primary beneficiary, and therefore, consolidation was not required. The transaction resulted in a gain
that is being deferred and amortized over 12 years. The balance of the deferred gain was $0.4 million and $16.0 million as of September 30, 2004 and September 30, 2003, respectively. The agreement permits substitution of equipment within the
partnership as long as the implied fair value of the new property transferred in at the date of substitution equals or exceeds the implied fair value, as defined, of the current property in the partnership that is being replaced. The Company
received partnership approval in October 2003 and again in July 2004, to substitute certain pumping service equipment and has accounted for it as an exchange of like-kind assets with no earnings impact since the earnings process has not yet
culminated. As a result of the substitutions, the deferred gain was reduced by $14.1 million in October 2003 and $1.3 million in July 2004. In June 2009, the Company has the option, but not the obligation, to purchase the pumping service equipment
for approximately $27 million.



At September 30, 2003, the
Company had long-term operating leases and service fee commitments covering certain facilities and equipment, as well as other long-term commitments, with varying expiration dates. Minimum annual commitments for the years ending September 30, 2005,
2006, 2007, 2008 and 2009 are $63.9 million, $59.6 million, $45.3 million, $36.2 million and $26.0 million, respectively and $49.2 million in the aggregate thereafter.



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Contractual Obligations



The Company routinely issues Parent Company Guarantees (PCGs) in connection with service contracts entered
into by the Companys subsidiaries. The issuance of these PCGs is frequently a condition of the bidding process imposed by the Companys customers for work in countries outside of North America. The PCGs typically provide that
the Company guarantees the performance of the services by the Companys local subsidiary. The term of these PCGs varies with the length of the service contract.



The Company arranges for the issuance of a variety of bank guarantees, performance bonds and standby letters of credit. The
vast majority of these are issued in connection with contracts the Company, or a subsidiary, has entered into with its customers. The customer has the right to call on the bank guarantee, performance bond or standby letter of credit in the event
that the Company, or the subsidiary, defaults in the performance of the services. These instruments are required as a condition to the Company, or the subsidiary, being awarded the contract, and are typically released upon completion of the
contract. The balance of these instruments are predominantly standby letters of credit issued in connection with a variety of the Companys financial obligations, such as in support of fronted insurance programs, claims administration funding,
certain employee benefit plans and temporary importation bonds. The following table summarizes the Companys other commercial commitments as of September 30, 2004 (in thousands):



|                                   |  |                         |         |                                            |   |           |  |           |        |              |   |       |  |   |      
|---------------------------------- |  | ----------------------- | ------- | ------------------------------------------ | - | --------- |  | --------- | ------ | ------------ | - | ----- |  | - | -----
|                                   |  |                         |         | Amount of commitment expiration per period
|Other Commercial Commitments       |  | Total Amounts Committed |         | Less than 1 Year                           |   | 13 Years |  | 45 Years |        | Over 5 Years
|Standby Letters of Credit          |  | $                       | 32,711  |                                            | $ | 32,707    |  | $         | 4      |              | $ |      |  | $ |     
|Guarantees                         |  |                         | 162,556 |                                            |   | 51,208    |  |           | 99,743 |              |   | 5,934 |  |   | 5,671
|                                   |  |                         |         |                                            |   |           |  |           |        |              |   |       |  |   |      
|Total Other Commercial Commitments |  | $                       | 195,267 |                                            | $ | 83,915    |  | $         | 99,747 |              | $ | 5,934 |  | $ | 5,671
|                                   |  |                         |         |                                            |   |           |  |           |        |              |   |       |  |   |      



The following table
summarizes the Companys contractual cash obligations and other commercial commitments as of September 30, 2004 (in thousands):



|                                                   |  |       |         |                        |   |           |  |           |         |               |   |        |  |   |        
|-------------------------------------------------- |  | ----- | ------- | ---------------------- | - | --------- |  | --------- | ------- | ------------- | - | ------ |  | - | -------
|                                                   |  |       |         | Payments Due by Period
|Contractual Cash Obligations                       |  | Total |         | Less than 1 year       |   | 1-3 Years |  | 4-5 Years |         | After 5 Years
|Long term and short term debt(1)                   |  | $     | 502,274 |                        | $ | 423,339   |  | $         | 78,935  |               | $ |       |  | $ |       
|Capital lease obligations                          |  |       |        |                        |   |          |  |           |        |               |   |       |  |   |       
|Operating leases                                   |  |       | 137,269 |                        |   | 40,129    |  |           | 58,320  |               |   | 21,815 |  |   | 17,005 
|Obligations under equipment financing arrangements |  |       | 142,992 |                        |   | 23,792    |  |           | 47,722  |               |   | 39,368 |  |   | 32,110 
|Purchase obligations(2)                            |  |       | 91,079  |                        |   | 90,362    |  |           | 717     |               |   |       |  |   |       
|Other long-term liabilities(3)                     |  |       | 72,505  |                        |   | 11,162    |  |           | 4,437   |               |   | 5,995  |  |   | 50,911 
|                                                   |  |       |         |                        |   |           |  |           |         |               |   |        |  |   |        
|Total contractual cash obligations                 |  | $     | 946,119 |                        | $ | 588,784   |  | $         | 190,131 |               | $ | 67,178 |  | $ | 100,026
|                                                   |  |       |         |                        |   |           |  |           |         |               |   |        |  |   |        

---

|(1) | Net of original issue discounts.
|--- | --------------------------------

|(2) | Includes agreements to purchase goods or services that have been approved and that specify
all significant terms (pricing, quantity and timing). Company policy does not require a purchase order to be completed for items that are under $200 and are for miscellaneous items, such as office supplies.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes expected cash payments for long-term liabilities reflected in the consolidated
balance sheet where the amounts and timing of the payment are known. Amounts include: Asset retirement obligations, known pension funding requirements, postretirement benefit obligation, management compensation agreements, environmental accruals and
other miscellaneous long-term obligations. Amounts exclude: Deferred gains (see Lease and Other Long-Term Commitments above), pension obligations in which funding requirements are uncertain and long-term contingent liabilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



11. Investment in Affiliates



The Company conducts some of its operations through investments in affiliates that are accounted for using the cost or
equity method.



PD Mexicana Sociedad de Responsabilidad
Limitada de Capital Variable (PDM)  PDM was incorporated in January 2001. Its main activity is to provide drilling and integrated services to wells in development stage by means of a contract established with Pemex Exploracions
y Produccion (Pemex). The sole purpose of PDM is to carry out and complete the Pemex contract, which expires in August 2005. BJ Service International, Inc. (a wholly owned subsidiary of the Company) and PD Holdings (a wholly owned
subsidiary of Precision Drilling Corporation) each own 50% of PDM. Funding for PDM expenses is made on a basis consistent with the ownership percentages.



Societe Algerienne de Stimulation de Puits Producteurs dHydroncarbures (BJSP)  the purpose of BJSP is to perform services
such as casing, cementing, stimulation and well testing in Algeria. BJ Service International, Inc. (a wholly owned subsidiary of the Company) owns 49% of BJSP and LEnterprise de Services aux Puits owns the remaining 51%. The current agreement
expires in July 2005 and can be extended by mutual agreement of the stockholders. Profits and losses are shared by the stockholders in proportion to their ownership percentages.



Societe de Services Industriels (SSI)BJ Services International Sarl (a wholly owned subsidiary of
the Company) owns 50% of SSI and LAir Liquide S.A. owns the remaining 50%. The stockholders share the profits and losses of SSI in proportion to their ownership percentages.



At September 30, 2004 and 2003, combined net accounts receivable reflected in our Consolidated Statement of Financial
Position from unconsolidated affiliates totaled $20.6 million and $14.3 million, respectively. At September 30, 2004 and 2003, combined accounts payable reflected in our Consolidated Statement of Financial Position to unconsolidated affiliates
totaled $0.1 million and $0.2 million, respectively. The Companys combined investment on September 30, 2004 and 2003 was $10.2 million and $13.5 million, respectively. The Company recognized revenue of $51.3 million, $35.9 million, and $34.8
million for the years ended September 30, 2004, 2003, and 2002, respectively, primarily for services performed on behalf of its equity affiliates.



12. Supplemental Financial Information



Supplemental financial information for the three years ended September 30, 2004 is as follows (in thousands):



|                                                 |  |      |        |      |   |        |      |  |   |        
|------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | ---- |  | - | -------
|                                                 |  | 2004 |        | 2003 |   |        | 2002
|Consolidated Statement of Operations:            |  |      |        |      |   |        |      |  |   |        
|Research and development expense                 |  | $    | 20,414 |      | $ | 19,103 |      |  | $ | 14,533 
|Rent expense                                     |  |      | 73,072 |      |   | 74,788 |      |  |   | 67,373 
|Net operating foreign exchange loss (gain)       |  |      | 608    |      |   | (1,057 | )    |  |   | 2,600  
|                                                 |  |      |       
|Consolidated Statement of Cash Flows:            |  |      |        |      |   |        |      |  |   |        
|Income taxes paid                                |  | $    | 52,355 |      | $ | 57,460 |      |  | $ | 64,577 
|Interest paid                                    |  |      | 8,073  |      |   | 8,193  |      |  |   | 5,812  
|Details of acquisitions:                         |  |      |        |      |   |        |      |  |   |        
|Fair value of assets acquired                    |  |      | 9,254  |      |   |       |      |  |   | 125,729
|Liabilities assumed                              |  |      | 112    |      |   |       |      |  |   | 47,317 
|Goodwill                                         |  |      | 6,195  |      |   |       |      |  |   | 396,188
|Cash paid for acquisitions, net of cash acquired |  |      | 15,337 |      |   |       |      |  |   | 474,600



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Other (expense) income, net for the three years ended September 30, 2004 is summarized as follows (in
thousands):



|                                                                        |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                        |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Rental income                                                           |  | $    | 214    |   |      | $ | 219    |      |  | $ | 142    |  
|Minority interest                                                       |  |      | (2,286 | ) |      |   | (5,080 | )    |  |   | (4,916 | )
|Non-operating net foreign exchange gain / (loss)                        |  |      | (146   | ) |      |   | 448    |      |  |   | 78     |  
|Gain on insurance recovery                                              |  |      | 272    |   |      |   | 1,694  |      |  |   | 2,147  |  
|Loss from equity method investments                                     |  |      | (6,605 | ) |      |   | (3,393 | )    |  |   | (3,317 | )
|Refund of indirect taxes                                                |  |      | 705    |   |      |   | 1,344  |      |  |   | 978    |  
|Halliburton award (see Note 10)                                         |  |      | 86,413 |   |      |   |       |      |  |   |       |  
|Reversal of excess liabilities in the Asia-Pacific region (see Note 16) |  |      | 12,206 |   |      |   |       |      |  |   |       |  
|Other, net                                                              |  |      | 1,895  |   |      |   | 1,006  |      |  |   | 1,663  |  
|                                                                        |  |      |        |   |      |   |        |      |  |   |        |  
|Other (expense) income, net                                             |  | $    | 92,668 |   |      | $ | (3,762 | )    |  | $ | (3,225 | )
|                                                                        |  |      |        |   |      |   |        |      |  |   |        |  



Accumulated other
comprehensive income (loss) consists of the following (in thousands):



|                            |  |                                    |         |   |                                 |   |        |       |  |   |         |  
|--------------------------- |  | ---------------------------------- | ------- | - | ------------------------------- | - | ------ | ----- |  | - | ------- | -
|                            |  | Minimum PensionLiabilityAdjustment |         |   | CumulativeTranslationAdjustment |   |        | Total | 
|Balance, September 30, 2001 |  | $                                  | (8,375  | ) |                                 | $ | 4,742  |       |  | $ | (3,633  | )
|                            |  |                                    |        
|Changes                     |  |                                    | (21,585 | ) |                                 |   | (4,655 | )     |  |   | (26,240 | )
|                            |  |                                    |         |   |                                 |   |        |       |  |   |         |  
|Balance, September 30, 2002 |  | $                                  | (29,960 | ) |                                 | $ | 87     |       |  | $ | (29,873 | )
|                            |  |                                    |        
|Changes                     |  |                                    | (1,230  | ) |                                 |   | 21,456 |       |  |   | 20,226  |  
|                            |  |                                    |         |   |                                 |   |        |       |  |   |         |  
|Balance, September 30, 2003 |  | $                                  | (31,190 | ) |                                 | $ | 21,543 |       |  | $ | (9,647  | )
|                            |  |                                    |        
|Changes                     |  |                                    | (1,729  | ) |                                 |   | 10,468 |       |  |   | 8,739   |  
|                            |  |                                    |         |   |                                 |   |        |       |  |   |         |  
|Balance, September 30, 2004 |  | $                                  | (32,919 | ) |                                 | $ | 32,011 |       |  | $ | (908    | )
|                            |  |                                    |         |   |                                 |   |        |       |  |   |         |  



The tax effects
allocated to each component of changes in other comprehensive income is summarized as follows (in thousands):



|                                        |  |                   |         |   |             |   |                   |  |   |         |  
|--------------------------------------- |  | ----------------- | ------- | - | ----------- | - | ----------------- |  | - | ------- | -
|                                        |  | Before-tax Amount |         |   | Tax Benefit |   | Net-of-tax Amount | 
|Year Ended September 30, 2002:          |  |                   |         |   |             |   |                   |  |   |         |  
|Foreign currency translation adjustment |  | $                 | (4,655  | ) |             | $ |                  |  | $ | (4,655  | )
|Minimum pension liability adjustment    |  |                   | (31,571 | ) |             |   | 9,986             |  |   | (21,585 | )
|                                        |  |                   |         |   |             |   |                   |  |   |         |  
|Change in other comprehensive income    |  | $                 | (36,226 | ) |             | $ | 9,986             |  | $ | (26,240 | )
|                                        |  |                   |         |   |             |   |                   |  |   |         |  
|Year Ended September 30, 2003:          |  |                   |         |   |             |   |                   |  |   |         |  
|Foreign currency translation adjustment |  | $                 | 21,456  |   |             | $ |                  |  | $ | 21,456  |  
|Minimum pension liability adjustment    |  |                   | (1,767  | ) |             |   | 537               |  |   | (1,230  | )
|                                        |  |                   |         |   |             |   |                   |  |   |         |  
|Change in other comprehensive income    |  | $                 | 19,689  |   |             | $ | 537               |  | $ | 20,226  |  
|                                        |  |                   |         |   |             |   |                   |  |   |         |  
|Year Ended September 30, 2004:          |  |                   |         |   |             |   |                   |  |   |         |  
|Foreign currency translation adjustment |  | $                 | 10,468  |   |             | $ |                  |  | $ | 10,468  |  
|Minimum pension liability adjustment    |  |                   | (2,363  | ) |             |   | 634               |  |   | (1,729  | )
|                                        |  |                   |         |   |             |   |                   |  |   |         |  
|Change in other comprehensive income    |  | $                 | 8,105   |   |             | $ | 634               |  | $ | 8,739   |  
|                                        |  |                   |         |   |             |   |                   |  |   |         |  



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



13. Employee Stock Plans



Stock Option Plans: The Companys 1995 Incentive Plan, 1997 Incentive Plan, 2000 Incentive Plan and 2003
Incentive Plan (the Plans) provide for the granting of stock options to officers, key employees and nonemployee directors at an exercise price equal to the fair market value of the stock at the date of the grant. Options vest over three
or four-year periods and are exercisable for periods ranging from one to ten years. An aggregate of 22,000,000 shares of Common Stock has been authorized for grants, of which 7,482,935 were available for future grants at September 30, 2004.



A summary of the status of the Companys stock option
activity and related information for each of the three years ended September 30, 2004 is presented below (in thousands, except per share prices):



|                                                                          |  |        |   |      |                                  |       |        |       |   |                                  |   |        |  |       |                                  |  |   |      
|------------------------------------------------------------------------- |  | ------ | - | ---- | -------------------------------- | ----- | ------ | ----- | - | -------------------------------- | - | ------ |  | ----- | -------------------------------- |  | - | -----
|                                                                          |  | 2004   |   | 2003 |                                  | 2002 
|                                                                          |  | Shares |   |      | Weighted- Average Exercise Price |       | Shares |       |   | Weighted- Average Exercise Price |   | Shares |  |       | Weighted- Average Exercise Price
|Outstanding at beginning of year                                          |  | 6,794  |   |      | $                                | 19.95 |        | 7,242 |   |                                  | $ | 18.84  |  | 4,423 |                                  |  | $ | 15.16
|Granted                                                                   |  | 1,108  |   |      |                                  | 31.81 |        | 345   |   |                                  |   | 32.92  |  | 4,113 |                                  |  |   | 21.97
|Exercised                                                                 |  | (2,990 | ) |      |                                  | 16.76 |        | (711  | ) |                                  |   | 14.48  |  | (442  | )                                |  |   | 8.75 
|Forfeited                                                                 |  | (62    | ) |      |                                  | 27.16 |        | (82   | ) |                                  |   | 24.15  |  | (852  | )                                |  |   | 20.07
|                                                                          |  |        |   |      |                                  |       |        |       |   |                                  |   |        |  |       |                                  |  |   |      
|Outstanding at end of year                                                |  | 4,850  |   |      | $                                | 24.53 |        | 6,794 |   |                                  | $ | 19.95  |  | 7,242 |                                  |  | $ | 18.84
|                                                                          |  |        |   |      |                                  |       |        |       |   |                                  |   |        |  |       |                                  |  |   |      
|Options exercisable at year-end                                           |  | 2,490  |   |      | $                                | 21.68 |        | 3,911 |   |                                  | $ | 16.69  |  | 2,234 |                                  |  | $ | 14.04
|Weighted-average grant date fair value of options granted during the year |  |        |   |      | $                                | 12.13 |        |       |   |                                  | $ | 14.08  |  |       |                                  |  | $ | 9.98 



The following table
summarizes information about stock options outstanding as of September 30, 2004 (in thousands, except per share prices and remaining life):



|                       |               |                     |       |                                             |     |                                  |   |        |  |                                 |  |   |      
|---------------------- | ------------- | ------------------- | ----- | ------------------------------------------- | --- | -------------------------------- | - | ------ |  | ------------------------------- |  | - | -----
|                       |               | Options Outstanding |       | Options Exercisable                        
|Range ofExercise Price |               | Shares              |       | Weighted-Average Remaining Contractual Life |     | Weighted- Average Exercise Price |   | Shares |  | Weighted-Average Exercise Price
|$                      | 5.40 -   8.10 |                     | 354   |                                             | 4.0 |                                  | $ | 7.04   |  | 354                             |  | $ | 7.04 
|                       | 8.15 - 12.15  |                     | 10    |                                             | 2.2 |                                  |   | 11.78  |  | 10                              |  |   | 11.78
|                       | 12.16 - 18.23 |                     | 228   |                                             | 3.5 |                                  |   | 17.13  |  | 228                             |  |   | 17.13
|                       | 18.24 - 27.34 |                     | 2,231 |                                             | 4.0 |                                  |   | 21.65  |  | 1,214                           |  |   | 21.68
|                       | 27.35 - 37.05 |                     | 2,027 |                                             | 5.1 |                                  |   | 31.65  |  | 684                             |  |   | 30.91
|                       |               |                     |       |                                             |     |                                  |   |        |  |                                 |  |   |      
|                       |               |                     | 4,850 |                                             | 4.4 |                                  | $ | 24.53  |  | 2,490                           |  | $ | 21.68
|                       |               |                     |       |                                             |     |                                  |   |        |  |                                 |  |   |      



Stock Purchase
Plan: The Companys 1999 Employee Stock Purchase Plan (the Purchase Plan) allows all employees to purchase shares of the Companys Common Stock at 85% of market value on the first or last business day of the twelve-month
plan period beginning each October, whichever is lower. Purchases are limited to 10% of an employees regular salary. A maximum aggregate of 6,000,000 shares has been reserved under the Purchase Plan, 3,790,458 of which were available for
future purchase at September 30, 2004. A total of 418,603 shares were purchased at $29.04 per share during fiscal 2004 and 495,014 shares were purchased at $22.10 per share during fiscal 2003. The Company has reserved a total of 327,905 shares for
fiscal 2005.



Stock Incentive Plan:Pursuant to the
terms of the 1997 Stock Incentive Plan and 2000 Stock Incentive Plan, the Company reserved 494,952 Performance Units (Units), representing the maximum number of Units the officers could receive. Each Unit represents the right to receive
from the Company at the end of a stipulated



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



period one unrestricted share of Common Stock, contingent upon achievement of certain financial performance goals over the stipulated period. Should the
Company fail to achieve the specific financial goals as set by the Executive Compensation Committee of the Board of Directors, the Units are canceled and the related shares revert to the Company for reissuance under the plan. The aggregate fair
market value of the underlying shares granted under this plan is considered unearned compensation at the time of grant and is adjusted quarterly based on the current market price for the Common Stock. Compensation expense is determined based on
managements current estimate of the likelihood of meeting the specific financial goals and expensed ratably over the stipulated period. The Executive Compensation Committee of the Board of Directors reviewed the Companys three year
performance and determined that the highest level of performance criteria was achieved for the Unit awards and in November 2002 and 2003, a total of 146,595 Units and 95,126 Units, respectively, were converted into stock and issued to officers. The
remaining balance in the reserve will be assessed for the three-year performance period of the Company ending September 30, 2006.



Director Stock Award: In addition to stock option awards, the nonemployee directors may be granted an award of common stock of the Company with no
exercise price. Options vest over three or four-year periods, if they are still a director for the Company at the end of the period, and are exercisable for periods ranging from one to ten years. At September 30, 2004, the Company had 15,948 grants
outstanding, which were awarded in November 2003, none of which were exercisable. Compensation expense is valued using a Black-Scholes model and is expensed using graded vesting. For the year ended September 30, 2004, the Company recorded an expense
of $0.2 million for this award. In November 2004, the Company awarded an additional 24,000 grants to nonemployee directors.



14. Stockholders Equity



Stockholder Rights Plan: The Company has a Stockholder Rights Plan (the Rights Plan) designed to deter coercive takeover tactics and to
prevent an acquirer from gaining control of the Company without offering a fair price to all of its stockholders. Under this plan, as amended, each outstanding share of Common Stock includes one-quarter of a preferred share purchase right
(Right) that becomes exercisable under certain circumstances, including when beneficial ownership of the Common Stock by any person, or group, equals or exceeds 15% of the Companys outstanding Common Stock. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock at a price of $520, subject to adjustment under certain circumstances. As a result of stock splits effected in the form of
stock dividends in 1998 and 2001, one Right is associated with four outstanding shares of Common Stock. The purchase price for the one-fourth of a Right associated with one share of Common Stock is effectively $130. Upon the occurrence of certain
events specified in the Rights Plan, each holder of a Right (other than an Acquiring Person) will have the right, upon exercise of such Right, to receive that number of shares of Common Stock of the Company (or the surviving corporation) that, at
the time of such transaction, would have a market price of two times the purchase price of the Right. The Rights Plan was amended September 26, 2002, to extend the expiration date of the Rights to September 26, 2012 and increase the purchase price
of the Rights. No shares of Series A Junior Participating Preferred Stock have been issued by the Company at September 30, 2004.



Treasury Stock: In December 1997, the Board of Directors approved a share repurchase program authorizing purchases of up to $150 million of Common
Stock at the discretion of the Companys management. The Board subsequently increased the authorized amount to $300 million in May 1998, to $450 million in September 2000, to $600 million in July 2001 and again to $750 million in October 2001.
Under this program, the Company has repurchased a total of 24,183,000 shares at a cost of $499.0 million through fiscal 2002. No shares were repurchased in fiscal 2004 or 2003.



Convertible Senior Notes: On April 24, 2002, the Company sold convertible senior notes with a face value at maturity
of $516.4 million (gross proceeds of $408.4 million). See Note 5.



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BJ SERVICES COMPANY



Notes to the Consolidated Financial Statements(Continued)



Dividends:Since its initial public offering in 1990, BJ Services has not paid any cash
dividends to its stockholders. On July 22, 2004, the Company announced the initiation of a regular quarterly cash dividend and declared a dividend of $.08 per common share, paid on October 15, 2004 to stockholders of record at the close of business
on September 15, 2004 in the amount of $12.9 million. The Company anticipates paying cash dividends in the amount of $.08 per common share on a quarterly basis in fiscal 2005. However, our Board of Directors must approve the dividend each quarter
and has the ability to change the dividend policy at any time.



15.
Quarterly Financial Data (Unaudited)



|                    |  |                                          |         |                |   |               |  |                |         |                   |   |         |  |   |          
|------------------- |  | ---------------------------------------- | ------- | -------------- | - | ------------- |  | -------------- | ------- | ----------------- | - | ------- |  | - | ---------
|                    |  | First Quarter                            |         | Second Quarter |   | Third Quarter |  | Fourth Quarter |         | Fiscal Year Total
|                    |  | (in thousands, except per share amounts)
|Fiscal Year 2004:   |  |                                          |         |                |   |               |  |                |         |                   |   |         |  |   |          
|Revenue             |  | $                                        | 600,799 |                | $ | 647,060       |  | $              | 658,662 |                   | $ | 694,465 |  | $ | 2,600,986
|Gross profit(1)     |  |                                          | 132,564 |                |   | 151,126       |  |                | 148,255 |                   |   | 170,732 |  |   | 602,677  
|Net income(2)       |  |                                          | 61,513  |                |   | 73,264        |  |                | 129,287 |                   |   | 96,978  |  |   | 361,041  
|Earnings per share: |  |                                          |         |                |   |               |  |                |         |                   |   |         |  |   |          
|Basic               |  |                                          | .39     |                |   | .46           |  |                | .80     |                   |   | .60     |  |   | 2.25     
|Diluted             |  |                                          | .38     |                |   | .45           |  |                | .79     |                   |   | .59     |  |   | 2.21     
|                    |  |                                          |         |                |  
|Fiscal Year 2003:   |  |                                          |         |                |   |               |  |                |         |                   |   |         |  |   |          
|Revenue             |  | $                                        | 473,124 |                | $ | 534,580       |  | $              | 546,576 |                   | $ | 588,597 |  | $ | 2,142,877
|Gross profit(1)     |  |                                          | 88,077  |                |   | 109,184       |  |                | 112,760 |                   |   | 126,501 |  |   | 436,522  
|Net income          |  |                                          | 33,470  |                |   | 44,808        |  |                | 49,544  |                   |   | 60,355  |  |   | 188,177  
|Earnings per share: |  |                                          |         |                |   |               |  |                |         |                   |   |         |  |   |          
|Basic               |  |                                          | .21     |                |   | .28           |  |                | .31     |                   |   | .38     |  |   | 1.19     
|Diluted             |  |                                          | .21     |                |   | .28           |  |                | .31     |                   |   | .37     |  |   | 1.17     

---

|(1) | Represents revenue less cost of sales and services and research and engineering expenses.
|--- | -----------------------------------------------------------------------------------------

|(2) | Includes $86.4 million for the Halliburton award during the third quarter of fiscal 2004 (see
Note 10) and $12.2 million for the reversal of excess liabilities in the Asia-Pacific region in the fourth quarter of fiscal 2004 (see Note 16).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16. Subsequent Event



In October 2004 the Company received a report from a whistleblower alleging that its Asia Pacific Region Controller had misappropriated Company funds in
fiscal 2001. The Company began an internal investigation into the misappropriation and whether other inappropriate actions occurred in the Region. The Region Controller admitted to multiple misappropriations during a 30-month period ended April
2002, and his employment was terminated. The misappropriations identified to date total approximately $9.0 million and have been repaid to the Company. The misappropriated funds were recorded as an expense in the Consolidated Statement of Operations
in prior periods; therefore, no restatement for the misappropriation is required. As a result, the Company expects to record $9.0 million as Other Income in the Consolidated Condensed Statement of Operations for the quarter ending December 31, 2004.



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The Company has conducted a comprehensive review of the Asia Pacific Regions balance sheet and we
have determined that excess liabilities had accumulated over a period of years which still existed at September 30, 2004 in the amount of $12.2 million. The following adjustments have been recorded in accordance with GAAP and Company policy:



|                                                               |  |   |      |  
|-------------------------------------------------------------- |  | - | ---- | -
|Gross reduction of other accrued liabilities                   |  | $ | 10.6 |  
|Adjustments of and reclassifications to balance sheet accounts |  |   | (7.8 | )
|                                                               |  |   |      |  
|Net reduction of excess accruals                               |  |   | 2.8  |  
|Reduction of minority interest liability                       |  |   | 9.4  |  
|                                                               |  |   |      |  
|Net increase to income before tax                              |  |   | 12.2 |  
|Income tax provision                                           |  |   | (.9  | )
|                                                               |  |   |      |  
|Total increase to net income                                   |  | $ | 11.3 |  
|                                                               |  |   |      |  



The net effect of
these adjustments has been reported in Other Income in the Consolidated Statement of Operations for the year ended September 30, 2004.



Based on our review of the facts and circumstances surrounding these accounting adjustments, we believe the amounts identified were not quantitatively or
qualitatively material to the financial statements presented in this annual report on Form 10-K. As such, we have recorded the correction of these amounts in fiscal 2004 since they are not individually or in the aggregate, material to the prior
periods or the current year.



The Company is continuing to
investigate whether additional funds were misappropriated beyond the $9 million identified to date and investigate other possible inappropriate actions. As the Company continues its investigation, further adjustments may be recorded in the
Consolidated Statements of Operations, but no material adjustments are known at this time.



In October 2004, the Company also received whistleblower allegations that illegal payments to foreign officials were made in the Asia Pacific Region. The Audit Committee of the Board of Directors engaged independent
counsel to conduct a separate investigation to determine whether any such illegal payments were made. That investigation, which is continuing, has found information indicating that illegal payments to government officials in the Asia Pacific Region
aggregating in excess of $1.5 million may have been made over several years.



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|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.    Based on their evaluation of the Companys disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive
Officer and Chief Financial Officer of the Company have concluded that the disclosure controls and procedures are effective in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



ITEM 9B. OTHER INFORMATION



None.



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PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Information concerning the directors of the Company is set forth in the section entitled Proposal 1: Election of Directors in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be
held March 24, 2005, which section is incorporated herein by reference. For information regarding executive officers of the Company, see page 14 hereof. Information concerning compliance with Section 16(a) of the Exchange Act is set forth in the
section entitled Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held March 24, 2005, which section is incorporated herein by reference.



Information concerning the Audit Committee of the Company and
the audit committee financial expert is set forth in the section entitled Board of Directors and Committees of the Board in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held March 24, 2005, which
section is incorporated herein by reference. Information concerning the Companys Code of Ethics is set forth in the section entitled Code of Ethics in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be
held March 24, 2005, which section is incorporated herein by reference.



ITEM 11. EXECUTIVE COMPENSATION



Information for this item is set forth in the sections entitled Election of Directors, Executive Compensation and Severance Agreements in the Proxy Statement of the Company for the Annual Meeting of
Stockholders to be held March 24, 2005, which sections are incorporated herein by reference.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Information for this item is set forth in the sections entitled Voting Securities and Election of Directors in the Proxy Statement
of the Company for the Annual Meeting of Stockholders to be held March 24, 2005, which sections are incorporated herein by reference.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Information for this item is set forth in the sections entitled Certain Relationships and Related Party Transactions in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held
March 24, 2005, which sections are incorporated herein by reference.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



Information for this item is set forth in the section entitled Independent Auditors in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held March 24, 2005, which sections
are incorporated herein by reference.



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PART IV



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



(a) List of documents filed as part of this report or incorporated herein by reference:



(1) Financial Statements:



The following financial statements of the Registrant as set forth under Part II, Item 8 of this report on Form 10-K on the pages
indicated.



|                                                                                                     |  |                      
|---------------------------------------------------------------------------------------------------- |  | ---------------------
|                                                                                                     |  | Page in thisForm 10-K
|Report of Independent Auditors                                                                       |  | 41                   
|Consolidated Statement of Operations for the years ended September 30, 2004, 2003 and 2002           |  | 42                   
|Consolidated Statement of Financial Position as of September 30, 2004 and 2003                       |  | 43                   
|Consolidated Statement of Stockholders Equity for the years ended September 30, 2004, 2003 and 2002 |  | 45                   
|Consolidated Statement of Cash Flows for the years ended September 30, 2004, 2003 and 2002           |  | 46                   
|Notes to Consolidated Financial Statements                                                           |  | 47                   



(2)
Financial Statement Schedules:



|                |  |                                   |  |            
|--------------- |  | --------------------------------- |  | -----------
|Schedule Number |  | Description of Schedule           |  | Page Number
|II              |  | Valuation and Qualifying Accounts |  | 87         



All other financial
statement schedules are omitted because of the absence of conditions under which they are required or because all material information required to be reported is included in the consolidated financial statements and notes thereto.



(3) Exhibits:



|               |  |                                                                                                                                                                                                                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                        
|2.1            |  | Agreement and Plan of Merger dated as of November 17, 1994 (Merger Agreement), among BJ Services Company, WCNA Acquisition Corp. and The Western Company of North America (filed as
Exhibit 2.1 to the Companys Annual Report on Form 10-K for the year ended September 30, 1995 (file no. 1-10570), and incorporated herein by reference).
|               | 
|2.2            |  | First Amendment to Agreement and Plan of Merger dated March 7, 1995, among BJ Services Company, WCNA Acquisition Corp. and The Western Company of North America (filed as Exhibit 2.2 to the
Companys Annual Report on Form 10-K for the year ended September 30, 1995 (file no. 1-10570), and incorporated herein by reference).            
|               | 
|2.3            |  | Agreement and Plan of Merger dated as of February 20, 2002, among BJ Services Company, BJTX, Co., and OSCA, Inc. (filed as Exhibit 2.1 to the Companys Current Report on Form 8-K dated
May 31, 2002 and incorporated herein by reference).                                                                                                  
|               | 
|3.1            |  | Certificate of Incorporation, as amended as of October 22, 1996 (filed as Exhibit 3.1 to the Companys Annual Report on Form 10-K for the year ended September 30, 1999 (file no. 1-10570)
and incorporated herein by reference).                                                                                                             
|               | 
|3.2            |  | Certificate of Amendment to Certificate of Incorporation, dated January 22, 1998 (filed as Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year ended September 30, 1999
(file no. 1-10570) and incorporated herein by reference).                                                                                            



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                      
|3.3            |  | Certificate of Amendment to Certificate of Incorporation, dated May 10, 2001 (filed as Exhibit 3.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and
incorporated herein by reference).                                                                                                                                                                               
|               | 
|3.4            |  | Certificate of Designation of Series A Junior Participating Preferred Stock, as amended, dated September 26, 1996 (filed as Exhibit 3.2 to the Companys Annual Report on Form 10-K for
the year ended September 30, 1996 (file no. 1-10570) and incorporated herein by reference).                                                                                                                         
|               | 
|3.6            |  | Amended and Restated Bylaws, as of December 4, 2003 (filed as Exhibit 3.6 to the Companys Annual Report of Form 10-K for the year ended September 30, 2003 and incorporated herein by
reference).                                                                                                                                                                                                          
|               | 
|4.1            |  | Specimen form of certificate for the Common Stock (filed as Exhibit 4.1 to the Companys Registration Statement on Form S-1 (Reg. No. 33-35187) and incorporated herein by
reference).                                                                                                                                                                                                                      
|               | 
|4.2            |  | Amended and Restated Rights Agreement, dated September 26, 1996, between the Company and First Chicago Trust Company of New York, as Rights Agent (filed as Exhibit 4.1 to the Companys
Form 8-K dated October 21, 1996 (file no. 1-10570) and incorporated herein by reference).                                                                                                                          
|               | 
|4.3            |  | First Amendment to Amended and Restated Rights Agreement and Appointment of Rights Agent, dated March 31, 1997, among the Company, First Chicago Trust Company of New York and The Bank of New
York, as successor Rights Agent (filed as Exhibit 4.3 to the Companys Annual Report on Form 10-K for the year ended September 30, 1997 (file no. 1-10570) and incorporated herein by reference).            
|               | 
|4.4            |  | Second Amendment to Amended and Restated Rights Agreement dated as of September 26, 2002, between the Company and The Bank of New York, as Rights Agent (filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K dated September 26, 2002 and incorporated herein by reference).                                                                                                                   
|               | 
|4.5            |  | Indenture among the Company, BJ Services Company, U.S.A., BJ Services Company Middle East, BJ Service International, Inc. and Bank of Montreal Trust Company, Trustee, dated as of
February 1, 1996, which includes the form of 7% Notes due 2006 and Exhibits thereto (filed as Exhibit 4.1 to the Companys Registration Statement on Form S-4 (Reg. No. 333-02287) and incorporated herein by reference).
|               | 
|4.6            |  | First Supplemental Indenture, dated as of July 24, 2001, among the Company, BJ Services Company, U.S.A., BJ Services Company Middle East, BJ Service International, Inc. and The Bank of New
York, as successor Trustee (filed as Exhibit 4.5 to the Companys Form 8-A/A, filed on November 14, 2001, with respect to the Companys preferred share purchase rights and incorporated herein by reference). 
|               | 
|4.7            |  | Amended and Restated Indenture effective as of April 24, 2002, between the Company and The Bank of New York, as Trustee, with respect to the Convertible Senior Notes due 2022 (filed as
Exhibit 4.4 to the Companys Registration Statement on Form S-3/A (Reg. No. 333-96981) and incorporated herein by reference).                                                                                      
|               | 
|10.1           |  | Relationship Agreement dated as of July 20, 1990, between the Company and Baker Hughes Incorporated (filed as Exhibit 10.1 to the Companys Registration Statement on Form S-1 (Reg. No.
33-35187) and incorporated herein by reference).                                                                                                                                                                   
|               | 
|10.2           |  | Tax Allocation Agreement dated as of July 20, 1990, between the Company and Baker Hughes Incorporated (included as Exhibit A to Exhibit 10.1) (filed as Exhibit 10.2 to the Companys
Registration Statement on Form S-1 (Reg. No. 33-35187) and incorporated herein by reference).                                                                                                                         
|               | 
|10.3          |  | 1990 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.1 to the Companys Registration Statement on Form S-8 (Reg. No. 33-62098) and incorporated herein by
reference).                                                                                                                                                                                                                    



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|               |  |                                                                                                                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                      
|10.4          |  | Amendment effective December 12, 1996, to 1990 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.4 to the Companys Annual Report on Form 10-K for the year ended
September 30, 1996 (file no. 1-10570), and incorporated herein by reference).            
|               | 
|10.5          |  | Amendment effective July 22, 1999 to 1990 Stock Incentive Plan (filed as Exhibit 10.24 to the Companys Annual Report on Form 10-K for the year ended September 30, 1999 (file no.
1-10570), and incorporated herein by reference).                                         
|               | 
|10.6          |  | Amendment effective January 27, 2000 to 1990 Stock Incentive Plan (filed as Appendix A to the Companys Proxy Statement dated December 20, 1999 (file no. 1-10570) and incorporated herein
by reference).                                                                   
|               | 
|10.7          |  | BJ Services Company 1995 Incentive Plan (filed as Exhibit 4.5 to the Companys Registration Statement on Form S-8 (Reg. No. 33-58637) and incorporated herein by
reference).                                                                                                
|               | 
|10.8          |  | Amendments effective January 25, 1996, and December 12, 1996, to BJ Services Company 1995 Incentive Plan (filed as Exhibit 10.9 to the Companys Annual Report on Form 10-K for the year
ended September 30, 1996 (file no. 1-10570), and incorporated herein by reference).
|               | 
|10.9          |  | Amendment effective July 22, 1999 to BJ Services Company 1995 Incentive Plan (filed as Exhibit 10.25 to the Companys Annual Report on Form 10-K for the year ended September 30, 1999
(file no. 1-10570), and incorporated herein by reference).                           
|               | 
|10.10         |  | Amendment effective January 27, 2000 to BJ Services Company 1995 Incentive Plan (filed as Appendix B to the Companys Proxy Statement dated December 20, 1999 (file no. 1-10570) and
incorporated herein by reference).                                                     
|               | 
|10.11         |  | Amendment effective May 10, 2001 to BJ Services Company 1995 Incentive Plan (filed as Appendix B to the Companys Proxy Statement dated April 10, 2001 and incorporated herein by
reference).                                                                               
|               | 
|10.12         |  | Eighth Amendment effective October 15, 2001 to BJ Services Company 1995 Incentive Plan (filed as Exhibit 10.12 to the Companys Annual Report on Form 10-K for the year ended September
30, 2001 and incorporated herein by reference).                                     
|               | 
|10.13         |  | 1997 Incentive Plan (filed as Appendix B to the Companys Proxy Statement dated December 22, 1997 (file no. 1-10570) and incorporated herein by reference).                                                                                                                 
|               | 
|10.14         |  | Amendment effective July 22, 1999 to 1997 Incentive Plan (filed as Exhibit 10.26 to the Companys Annual Report on Form 10-K for the year ended September 30, 1999 (file no. 1-10570), and
incorporated herein by reference).                                               
|               | 
|10.15         |  | Amendment effective January 27, 2000 to 1997 Incentive Plan (filed as Appendix C to the Companys Proxy Statement dated December 20, 1999 (file no. 1-10570) and incorporated herein by
reference).                                                                         
|               | 
|10.16         |  | Amendment effective May 10, 2001 to 1997 Incentive Plan (filed as Appendix C to the Companys Proxy Statement dated April 10, 2001 and incorporated herein by reference).                                                                                                   
|               | 
|10.17         |  | Fifth Amendment effective October 15, 2001 to 1997 Incentive Plan (filed as Exhibit 10.17 to the Companys Annual Report on Form 10-K for the year ended September 30, 2001 and
incorporated herein by reference).                                                          
|               | 
|10.18         |  | 1999 Employee Stock Purchase Plan (filed as Appendix A to the Companys Proxy Statement dated December 21, 1998 (file no. 1-10570) and incorporated herein by reference).                                                                                                   
|               | 
|10.19         |  | Amendment effective September 23, 1999 to BJ Services Company 1999 Employee Stock Purchase Plan (filed as Exhibit 10.19 to the Companys Annual Report on Form 10-K for the year ended
September 30, 2001 and incorporated herein by reference).                            



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                        
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                 
|               | 
|10.20         |  | Third Amendment effective September 1, 2001 to BJ Services Company 1999 Employee Stock Purchase Plan. (filed as Exhibit 10.20 to the Companys Annual Report on Form 10-K for the year
ended September 30, 2003 and incorporated herein by reference)                                                                                                                                  
|               | 
|10.21         |  | BJ Services Company 2000 Incentive Plan (filed as Appendix B to the Companys Proxy Statement dated December 20, 2000 and incorporated herein by reference).                                                                                                                                                                                                                           
|               | 
|10.22         |  | First Amendment effective March 22, 2001 to BJ Services Company 2000 Incentive Plan (filed as Exhibit 10.2 to the Companys Registration Statement on Form S-8 (Reg. No. 333-73348) and
incorporated herein by reference).                                                                                                                                                             
|               | 
|10.23         |  | Second Amendment effective May 10, 2001 to BJ Services Company 2000 Incentive Plan (filed as Appendix D to the Companys Proxy Statement dated April 10, 2001 and incorporated herein by
reference).                                                                                                                                                                                   
|               | 
|10.24         |  | Third Amendment effective October 15, 2001 to BJ Services Company 2000 Incentive Plan (filed as Exhibit 10.24 to the Companys Annual Report on Form 10-K for the year ended September 30,
2001 and incorporated herein by reference).                                                                                                                                                 
|               | 
|10.25         |  | BJ Services Supplemental Executive Retirement Plan effective October 1, 2000 (filed as Exhibit 10.15 to the Companys Annual Report on Form 10-K for the year ended September 30, 2000 and
incorporated herein by reference).                                                                                                                                                          
|               | 
|10.26         |  | Key Employee Security Option Plan (filed as Exhibit 10.14 to the Companys Annual Report on Form 10-K for the year ended September 30, 1997 (file no. 1-10570) and incorporated herein by
reference).                                                                                                                                                                                  
|               | 
|10.27         |  | Directors Benefit Plan, effective December 7, 2000 (filed as Exhibit 10.27 to the Companys Annual Report on Form 10-K for the year ended September 30, 2001 and incorporated herein
by reference).                                                                                                                                                                                   
|               | 
|10.28         |  | BJ Services Deferred Compensation Plan, as amended and restated effective October 1, 2000 (filed as Exhibit 10.29 to the Companys Form 10-Q for the quarter ended March 31, 2001 and
incorporated herein by reference).                                                                                                                                                               
|               | 
|10.29         |  | Form of Amended and Restated Executive Severance Agreement between BJ Services Company and certain executive officers (filed as Exhibit 10.28 to the Companys Form 10-Q for the quarter
ended March 31, 2000 and incorporated herein by reference).                                                                                                                                   
|               | 
|10.30          |  | Trust Indenture and Security Agreement dated as of August 7, 1997 among First Security Bank, National Association, BJ Services Equipment, L.P. and State Street Bank and Trust Company, as
Indenture Trustee (filed as Exhibit 10.15 to the Companys Annual Report on Form 10-K for the year ended September 30, 1997 (file no. 1-10570) and incorporated herein by reference).       
|               | 
|10.31          |  | Indenture Supplement No. 1 dated as of August 8, 1997 between First Security Bank, as Nonaffiliated Partner Trustee, and BJ Services Equipment, L.P., and State Street Bank and Trust Company,
as Indenture Trustee (filed as Exhibit 10.17 to the Companys Annual Report on Form 10-K for the year ended September 30, 1997 (file no. 1-10570) and incorporated herein by reference).
|               | 
|10.32          |  | Amended and Restated Agreement of Limited Partnership dated as of August 7, 1997 of BJ Services Equipment, L.P (filed as Exhibit 10.16 to the Companys Annual Report on Form 10-K for the
year ended September 30, 1997 (file no. 1-10570) and incorporated herein by reference).                                                                                                     
|               | 
|10.33          |  | Trust Indenture and Security Agreement dated as of December 15, 1999 among First Security Trust Company of Nevada, BJ Services Equipment II, L.P. and State Street Bank and Trust Company, as
Indenture Trustee (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K dated December 15, 1999 (file no. 1-10570) and incorporated herein by reference).                   



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|               |  |                                                                                                                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                             
|               | 
|10.34          |  | Amended and Restated Agreement of Agreement of Limited Partnership dated as of December 15, 1999 of BJ Services Equipment II, L.P. (filed as Exhibit 10.2 to the Companys Current Report
on Form 8-K dated December 15, 1999 (file no. 1-10570) and incorporated herein by reference).                                                            
|               | 
|10.35         |  | Amendment to Directors Benefit Plan, effected January 1, 2003 (filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and
incorporated herein by reference).                                                                                                                                   
|               | 
|10.36         |  | Second Amendment, effective March 22, 2001, to BJ Services Company 1999 Employee Stock Purchase Plan (filed as Exhibit 10.40 to the Companys Annual Report on Form 10-K for the year
ended September 30, 2003 and incorporated herein by reference).                                                                                              
|               | 
|10.37         |  | Fourth Amendment, effective December 4, 2003, to BJ Services Company 1999 Employee Stock Purchase Plan (filed as Exhibit 10.41 to the Companys Annual Report on Form 10-K for the year
ended September 30, 2003 and incorporated herein by reference).                                                                                            
|               | 
|10.38         |  | First Amendment, effective September 25, 2003, to BJ Services Company Supplemental Executive Retirement Plan (filed as Exhibit 10.42 to the Companys Annual Report on Form 10-K for the
year ended September 30, 2003 and incorporated herein by reference).                                                                                      
|               | 
|10.39         |  | Charter of the Nominating and Governance Committee of the Board of Directors (filed as Exhibit 10.43 to the Companys Annual Report on Form 10-K for the year ended September 30, 2003 and
incorporated herein by reference).                                                                                                                      
|               | 
|10.40         |  | Charter of the Compensation Committee of the Board of Directors (filed as Exhibit 10.44 to the Companys Annual Report on Form 10-K for the year ended September 30, 2003 and incorporated
herein by reference).                                                                                                                                   
|               | 
|10.41         |  | Charter of the Audit Committee of the Board of Directors (filed as Exhibit 10.45 to the Companys Annual Report on Form 10-K for the year ended September 30, 2003 and incorporated herein
by reference).                                                                                                                                          
|               | 
|10.42         |  | Board of Directors Corporate Governance Guidelines (filed as Exhibit 10.46 to the Companys Annual Report on Form 10-K for the year ended September 30, 2003 and incorporated herein by
reference).                                                                                                                                                
|               | 
|10.43         |  | BJ Services Company 2003 Incentive Plan (filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 and incorporated herein by
reference).                                                                                                                                                       
|               | 
|*10.44        |  | Credit Agreement, dated as of June 11, 2004 among the Company, the lenders from time to time party thereto, The Bank of New York and Citibank, N.A., as Co-Syndication Agents, The Royal Bank
of Scotland plc and Bank One, N.A., as Co-Documentation Agents, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer.
|               | 
|10.45         |  | Form of Indemnification Agreement, dated as of December 9, 2004 between the Company and its directors and executive officers. (filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K, filed on December 15, 2004, and incorporated herein by reference).                                                                               
|               | 
|10.46         |  | Form of letter agreement setting forth terms and conditions of shares of phantom stock awarded to non-employee directors of the Company on November 17, 2004 (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K, filed on November 23, 2004, and incorporated herein by reference).                                                
|               | 
|10.47         |  | Form of letter agreement setting forth terms and conditions of performance units awarded to executive officers of the Company for performance in fiscal 2004 (filed as Exhibit 10.2 to the
Companys Current Report on Form 8-K, filed on November 23, 2004, and incorporated herein by reference).                                                



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|               |  |                                                                                                                                                                                                                                                                                                              
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                       
|10.48         |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to non-employee directors on November 17, 2004 (filed as Exhibit 10.3 to the
Companys Current Report on Form 8-K, filed on November 23, 2004, and incorporated herein by reference).      
|10.49         |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to executive officers for performance in fiscal 2004 (filed as Exhibit 10.4
to the Companys Current Report on Form 8-K, filed on November 23, 2004, and incorporated herein by reference).
|*10.50        |  | First Amendment to BJ Services Deferred Compensation Plan effective January 1, 2002.                                                                                                                                                                                                                         
|*10.51        |  | Fifth Amendment to 1999 Employee Stock Purchase Plan, effective October 1, 2004.                                                                                                                                                                                                                             
|*10.52        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to non-employee directors during fiscal 2000.                                                                                                                                              
|*10.53        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to non-employee directors during fiscal 2001 and 2003.                                                                                                                                     
|*10.54        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to non-employee directors during fiscal 2004.                                                                                                                                              
|*10.55        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to executive officers during fiscal 1997.                                                                                                                                                  
|*10.56        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to executive officers during fiscal 1998.                                                                                                                                                  
|*10.57        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to executive officers during fiscal 1999.                                                                                                                                                  
|*10.58        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to executive officers during fiscal 2001.                                                                                                                                                  
|*10.59        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to executive officers during fiscal 2002.                                                                                                                                                  
|*10.60        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to executive officers during fiscal 2003.                                                                                                                                                  
|*10.61        |  | Form of letter agreement setting forth terms and conditions of options to purchase shares of common stock awarded to executive officers during fiscal 2004.                                                                                                                                                  
|*10.62        |  | Form of letter agreement setting forth terms and conditions of performance units awarded to executive officers during fiscal 2004.                                                                                                                                                                           
|*10.63        |  | Form of letter agreement setting forth terms and conditions of phantom stock awarded to non-employee directors during fiscal 2004.                                                                                                                                                                           
|*12.1          |  | Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                          
|14.1           |  | Code of Ethics (filed as Exhibit 14.1 to the Companys Annual Report on Form 10-K for the year ended September 30, 2003 and incorporated herein by reference).                                                                                                                                               
|*21.1          |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                 
|*23.1          |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                            
|*31.1          |  | Section 302 certification for J. W. Stewart.                                                                                                                                                                                                                                                                 
|*31.2          |  | Section 302 certification for T. M. Whichard.                                                                                                                                                                                                                                                                
|*32.1          |  | Section 906 certification furnished for J. W. Stewart.                                                                                                                                                                                                                                                       
|*32.2          |  | Section 906 certification furnished for T. M. Whichard.                                                                                                                                                                                                                                                      

---

|* | Filed herewith.
|- | ---------------

| | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



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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.



BJ SERVICES COMPANYBy

/s/    J.W. STEWARTJ. W. Stewart President and Chief Executive Officer




Date: January 26, 2005



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 and on the dates indicated.



|                                                    |  |                                                                                             |  |                 
|--------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ----------------
|Signature                                           |  | Title                                                                                       |  | Date            
|                                                    |  |                                                                                            
|/s/    J.W. STEWARTJ.W. Stewart                     |  | Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer) |  | January 26, 2005
|                                                    |  |                                                                                            
|/s/    T. M. WHICHARDT. M. Whichard                 |  | Vice PresidentFinance, and Chief Financial Officer (Principal Financial Officer)           |  | January 26, 2005
|                                                    |  |                                                                                            
|/s/    BRIAN T.
MCCOLEBrian T.
McCole               |  | Controller (Principal Accounting Officer)                                                   |  | January 26, 2005
|                                                    |  |                                                                                            
|/s/    L. WILLIAM HEILIGBRODTL. William Heiligbrodt |  | Director                                                                                    |  | January 26, 2005
|                                                    |  |                                                                                            
|/s/    JOHN R. HUFFJohn R. Huff                     |  | Director                                                                                    |  | January 26, 2005
|                                                    |  |                                                                                            
|/s/    DON D. JORDANDon D. Jordan                   |  | Director                                                                                    |  | January 26, 2005
|                                                    |  |                                                                                            
|/s/    WILLIAM H.
WHITEWilliam H.
White             |  | Director                                                                                    |  | January 26, 2005
|                                                    |  |                                                                                            
|/s/    MICHAEL E.
PATRICKMichael E.
Patrick         |  | Director                                                                                    |  | January 26, 2005
|                                                    |  |                                                                                            
|/s/    JAMES L. PAYNEJames L. Payne                 |  | Director                                                                                    |  | January 26, 2005



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BJ SERVICES COMPANY



SCHEDULE
IIVALUATION AND QUALIFYING ACCOUNTS

For the Years Ended September 30, 2002, 2003 and 2004

(in thousands)



|                                                  |  |                                |        |                           |   |       |            |   |       |                          |  |   |       |     |  |   |       
|------------------------------------------------- |  | ------------------------------ | ------ | ------------------------- | - | ----- | ---------- | - | ----- | ------------------------ |  | - | ----- | --- |  | - | ------
|                                                  |  | Balance at Beginning Of Period |        | Additions                 |   |       | Deductions |   |       | Balance at End of Period
|                                                  |  | Charged to Expense             |        | Charged to Other Accounts |   |       |           
|YEAR ENDED SEPTEMBER 30, 2002                     |  |                                |        |                           |   |       |            |   |       |                          |  |   |       |     |  |   |       
|Allowance for doubtful accounts receivable        |  | $                              | 10,376 |                           | $ | 1,773 |            | $ | 2,456 | (3)                      |  | $ | 508   | (1) |  | $ | 14,097
|Reserve for inventory obsolescence and adjustment |  |                                | 8,656  |                           |   | 3,294 |            |   | 1,315 | (3)                      |  |   | 3,485 | (2) |  |   | 9,780 
|                                                  |  |                                |        |                           |  
|YEAR ENDED SEPTEMBER 30, 2003                     |  |                                |        |                           |   |       |            |   |       |                          |  |   |       |     |  |   |       
|Allowance for doubtful accounts receivable        |  | $                              | 14,097 |                           | $ | 139   |            | $ | 63    |                          |  | $ | 5,471 | (1) |  | $ | 8,828 
|Reserve for inventory obsolescence and adjustment |  |                                | 9,780  |                           |   | 2,078 |            |   | 1,208 |                          |  |   | 1,256 | (2) |  |   | 11,810
|                                                  |  |                                |        |                           |  
|YEAR ENDED SEPTEMBER 30, 2004                     |  |                                |        |                           |   |       |            |   |       |                          |  |   |       |     |  |   |       
|Allowance for doubtful accounts receivable        |  | $                              | 8,828  |                           | $ | 5,060 |            | $ | 55    |                          |  | $ | 4,933 | (1) |  | $ | 9,010 
|Reserve for inventory obsolescence and adjustment |  |                                | 11,810 |                           |   | 2,937 |            |   | 4,902 | (4)                      |  |   | 3,505 | (2) |  |   | 16,144

---

|(1) | Deductions in the allowance for doubtful accounts principally reflect the write-off of previously reserved accounts.
|--- | --------------------------------------------------------------------------------------------------------------------

|(2) | Deductions in the reserve for inventory obsolescence and adjustment principally reflect the
sale or disposal of related inventory.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(3) | Additions to the reserve principally resulting from acquisitions of businesses.
|--- | -------------------------------------------------------------------------------

|(4) | Reserve was previously netted against the inventory balance and an adjustment was made to
reflect the gross amount of the reserve during fiscal 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



87