I am in US on L1 visa, I came here by 10th sep 2008, I filled income tax return for 2008, now in May-2009 my wife and a kid(2 years old) joined me here, both are non-working and dependent on me. What should be my tax exemption code... Currently my tax is deducting on the basis of exemption code 3... is that correct or it should be something different

Because you are a foreign national, you are limited by IRS regulation to filing your W-4 as MARRIED with TWO allowances.

This is done to ensure that enough money is withheld from your salary to cover your income tax liability should you decide NOT to file an annual tax return when you return to your home country.

However, it is NOT universally enforced by the employers.