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                                                                    EXHIBIT 10.3

                               SEVERANCE AGREEMENT

         THIS AGREEMENT, dated as of July 23, 1997, is made by and between BAKER
HUGHES INCORPORATED, a Delaware corporation (the "Company"), and G. STEPHEN
FINLEY (the "Executive").

         WHEREAS, the Company considers it essential to the best interests of
its stockholders to foster the continued employment of key management personnel;
and

         WHEREAS the Board recognizes that, as is the case with many publicly
held corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders; and

         WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:

1. Defined Terms. The definitions of capitalized terms used in this Agreement
are provided in the last Section hereof.

2. Term of Agreement. Subject to the provisions of Section 12.2 hereof, the Term
of this Agreement shall commence on the date hereof and shall continue in effect
through December 31, 1999; provided, however, that commencing on January 1, 1998
and each January 1 thereafter (an "Extension Date"), the Term shall
automatically be extended for one additional year (i.e., resulting in a two-year
Term on the Extension Date) unless, not later than September 30 of the year
preceding the Extension Date, the Company or the Executive shall have given
notice not to extend the Term; and further provide, however, if a Change in that
Control shall have occurred during the Term, the Term shall expire no earlier
than twenty-four (24) months beyond the month in which such Change in Control
occurred.

3. Company's Covenants Summarized. In order to induce the Executive to remain in
the employ of the Company and in consideration of the Executive's covenants set
forth in Section 4 hereof, the Company agrees, under the conditions described
herein, to pay the Executive the Severance Payments and the other payments and
benefits described herein. Except as provided in Section 9.1 hereof, no
Severance Payments shall be payable under this Agreement unless there shall have
been (or, under the terms of the second sentence of Section 6.1 hereof, there
shall be deemed to have been) a termination of the Executive's employment with
the Company following a Change in Control and during the Term. This Agreement
shall not be construed as creating an express or implied contract of employment
and, except as otherwise agreed in writing between the Executive and the
Company, the Executive shall not have any right to be retained in the employ of
the Company.

4. The Executive's Covenants. The Executive agrees that, subject to the terms
and conditions of this Agreement, in the event of a Potential Change in Control
during the Term, the Executive will remain in the employ of the Company until
the earliest of (i) a date which, is six (6) months from the date of such
Potential Change of Control, (ii) the date of a Change in Control, (iii) the
date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.

5. Compensation Other Than Severance Payments.

         5.1 Following a Change in Control and during the Term, during any
period that the Executive fails to perform the Executive's full-time duties with
the Company as a result of incapacity due to physical or mental illness, the
Company shall pay the Executive's full salary to the Executive at the rate in
effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or
benefit plan, program or arrangement maintained by the Company during such
period, until the Executive's employment is terminated by the Company for
Disability.

         5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay the
Executive's full salary to the Executive through the Date of Termination at the
rate in

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effect immediately prior to the Date of Termination or, if higher, the rate in
effect immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, together with all compensation and benefits payable to
the Executive through the Date of Termination under the terms of the Company's
compensation and benefit plans, programs or arrangements as in effect
immediately prior to the Date of Termination or, if more favorable to the
Executive, as in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason.

         5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay to the
Executive the Executive's normal post-termination compensation and benefits as
such payments become due. Such post-termination compensation and benefits shall
be determined under, and paid in accordance with, the Company's retirement,
insurance and other compensation or benefit plans, programs and arrangements as
in effect immediately prior to the Date of Termination or, if more favorable to
the Executive, as in effect immediately prior to the occurrence of the first
event or circumstance constituting Good Reason.

         5.4 Upon the occurrence of a Change in Control all options to acquire
shares of Company stock, all shares of restricted Company stock and all other
equity or phantom equity incentives held by the Executive under any plan of the
Company (including, but not limited to, the Company's 1995 Stock Award Plan (and
the Stock Matching Programs thereunder), 1993 Stock Option Plan, 1993 Stock
Bonus Plan and 1991 Stock Bonus Plan) shall become immediately vested,
exercisable and nonforfeitable and all conditions thereof (including, but not
limited to, any required holding periods) shall be deemed to have been
satisfied.

6. Severance Payments

         6.1 If (i) the Executive's employment is terminated following a Change
in Control and during the Term, other than (A) by the Company for Cause, (B) by
reason of death or Disability, or (C) by the Executive without Good Reason, or
(ii) the Executive voluntarily terminates his employment for any reason during
the one-month period commencing on the first anniversary of the Change in
Control, then, the Company shall pay the Executive the amounts, and provide the
Executive the benefits, described in this Section 6.1 ("Severance Payments") and
Section 6.2, in addition to any payments and benefits to which the Executive is
entitled under Section 5 hereof. For purposes of this Agreement, the Executive's
employment shall be deemed to have been terminated following a Change in Control
by the Company without Cause or by the Executive with Good Reason, if (i) the
Executive's employment is terminated by the Company without Cause prior to a
Change in Control (whether or not a Change in Control ever occurs) and such
termination was at the request or direction of a Person who has entered into an
agreement with the Company the consummation of which would constitute a Change
in Control, (ii) the Executive terminates his employment for Good Reason prior
to a Change in Control (whether or not a Change in Control ever occurs) and the
circumstance or event which constitutes Good Reason occurs at the request or
direction of such Person described in clause (i), or (iii) the Executive's
employment is terminated by the Company without Cause or by the Executive for
Good Reason and such termination or the circumstance or event which constitutes
Good Reason is otherwise in connection with or in anticipation of a Change in
Control (whether or not a Change in Control ever occurs). For purposes of any
determination regarding the applicability of the immediately preceding sentence,
any position taken by the Executive shall be presumed to be correct unless the
Company establishes to the Committee by clear and convincing evidence that such
position is not correct.

                  (A) In lieu of any further salary payments to the Executive
         for periods subsequent to the Date of Termination and in lieu of any
         severance benefit otherwise payable to the Executive, the Company shall
         pay to the Executive a lump sum severance payment, in cash, equal to
         three times the sum of (i) the Executive's base salary as in effect
         immediately prior to the Date of Termination or, if higher, in effect
         immediately prior to the first occurrence of an event or circumstance
         constituting Good Reason, and (ii) the average annual bonus earned by
         the Executive pursuant to any annual bonus or incentive plan maintained
         by the Company in respect of the three fiscal years ending immediately
         prior to the fiscal year in which occurs the Date of Termination or, if
         higher, immediately prior to the fiscal year in which occurs the first
         event or circumstance constituting Good Reason; provided, that if the
         Executive has not participated in an annual bonus or incentive plan
         maintained by the Company for the entirety of such three-year period,
         the amount referred to in this clause (ii) shall be calculated using
         such lesser number of bonuses as have been actually earned by the
         Executive in respect of such lesser period.

                  (B) For the thirty-six (36) month period immediately following
         the Date of Termination, the Company shall arrange to provide the
         Executive and his dependents life, disability, accident and health
         insurance benefits and perquisites (including, but not limited to,
         executive life insurance, club memberships, financial planning and tax
         preparation, annual physical examination and charitable contributions),
         in each case, substantially similar to those

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         provided to the Executive and his dependents immediately prior to the
         Date of Termination or, if more favorable to the Executive, those
         provided to the Executive and his dependents immediately prior to the
         first occurrence of an event or circumstance constituting Good Reason,
         at no greater cost to the Executive than the cost to the Executive
         immediately prior to such date or occurrence; provided, however, that,
         unless the Executive consents to a different method (after taking into
         account the effect of such method on the calculation of "parachute
         payments" pursuant to Section 6.2 hereof, such health insurance
         benefits shall be provided through a third-party insurer. Benefits
         otherwise receivable by the Executive pursuant to this Section 6.1(B)
         shall be reduced to the extent benefits of the same type are received
         by or made available to the Executive during the thirty-six (36) month
         period following the Executive's termination of employment (and any
         such benefits received by or made available to the Executive shall be
         reported to the Company by the Executive); provided, however, that the
         Company shall reimburse the Executive for the excess, if any, of the
         cost of such benefits to the Executive over such cost immediately prior
         to the Date of Termination or, if more favorable to the Executive, the
         first occurrence of an event or circumstance constituting Good Reason.

                  (C) Notwithstanding any provision of the Baker Hughes
         Incorporated 1995 Employee Annual Incentive Compensation Plan (the
         "Annual Incentive Plan"), the Company shall pay to the Executive a lump
         sum amount, in cash, equal to the sum of (i) any unpaid incentive
         compensation which has been allocated or awarded to the Executive for a
         completed fiscal year or other measuring period preceding the Date of
         Termination under the Annual Incentive Plan and which, as of the Date
         of Termination, is contingent only upon the continued employment of the
         Executive to a subsequent date, and (ii) a pro rata portion to the Date
         of Termination of the aggregate value of all contingent incentive
         compensation awards to the Executive for all then uncompleted periods
         under the Annual Incentive Plan, calculated as to each such award by
         multiplying the award that the Executive would have earned on the last
         day of the performance award period, assuming he achievement, at the
         expected value target level, of the individual and corporate
         performance goals established with respect to such award, y the
         fraction obtained by dividing the number of full months and any
         fractional portion of a month during such performance award period
         through the Date of Termination by the total number of months contained
         in such performance award period; provided, however, that if such
         termination of employment occurs during the same year in which the
         Change in Control occurs, the pro-rata bonus payment referred to in
         clause (ii) above shall be offset by any payments received under the
         Annual Incentive Plan in connection with such Change in Control.

                  (D) In addition to the retirement benefits to which the
         Executive is entitled under the Company's Thrift Plan (the "Thrift
         Plan") and the Company's Supplemental Retirement Plan ( the "SRP"), the
         Company shall pay the Executive a lump sum amount, in cash, equal to
         the present value of the employer-provided contributions, deferrals and
         allocations the Executive would have received had he continued to
         participate, after the Date of Termination, in the Thrift Plan and the
         SRP for three (3) additional years, assuming for this purpose that (i)
         the Executive earned compensation for purposes of the Thrift Plan and
         SRP during such three-year period the amount used to calculate the
         Executive's severance payment under subparagraph (A) of this Section
         6.1, and (ii) the percentages of contributions, deferrals and
         allocations made under the Thrift Plan and the SRP by or on behalf of
         the Executive during such three-year period are the same percentages of
         contributions, deferrals and allocations in effect on the date of the
         Change in Control or the Date of Termination, whichever is more
         favorable to the Executive,

                  (E) If the Executive would have become entitled to benefits
         under the Company's post-retirement health care or life insurance
         plans, as in effect immediately prior to the Date of Termination or, if
         more favorable to the Executive, as in effect immediately prior to the
         first occurrence of an event or circumstance constituting Good Reason,
         had the Executive's employment terminated at any time during the period
         of thirty-six (36) months after the Date of Termination, the Company
         shall provide such post-retirement health care or life insurance
         benefits to the Executive and the Executive's dependents commencing on
         the later of (i) the date on which such coverage would have first
         become available and (ii) the date on which benefits described in
         subsection (B) of this Section 6.1 terminate.

                  (F) The Company shall provide the Executive with outplacement
         services suitable to the Executive's position for a period of three
         years or, if earlier, until the first acceptance by the Executive of an
         offer of employment.

         6.2 (A) Whether or not the Executive becomes entitled to the Severance
         Payments, if any of the payments or benefits received or to be received
         by the Executive in connection with a Change in Control or the
         Executive's termination of employment (whether pursuant to the terms of
         this Agreement or any other plan, arrangement or

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         agreement with the Company, any Person whose actions result in a Change
         in Control or any Person affiliated with the Company or such Person)
         (such payments or benefits, excluding the Gross-Up Payment, being
         hereinafter referred to as the "Total Payments") will be subject to the
         Excise Tax, the Company shall pay to the Executive an additional amount
         (the "Gross-Up Payment") such that the net amount retained by the
         Executive, after deduction of any Excise Tax on the Total Payments and
         any federal, state and local income and employment taxes and Excise Tax
         upon the Gross-Up Payment, shall be equal to the Total Payments.

                  (B) For purposes of determining whether any of the Total
         Payments will be subject to the Excise Tax and the amount of such
         Excise Tax, (i) all of the Total Payments shall be treated as
         "parachute payments" (within the meaning of section 28OG(b)(2) of the
         Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably
         acceptable to the Executive and selected by the accounting firm which
         was, immediately prior to the Change in Control, the Company's
         independent auditor (the "Auditor"), such payments or benefits (in
         whole or in part) do not constitute parachute payments, including by
         reason of section 28OG(b)(4)(A) of the Code, (ii) all "excess parachute
         payments" within the meaning of section 28OG(b)(1) of the Code shall be
         treated as subject to the Excise Tax unless, in the opinion of Tax
         Counsel, such excess parachute payments (in whole or in part) represent
         reasonable compensation for services actually rendered (within the
         meaning of section 280G(b)(4)(B) of the Code) in excess of the Base
         Amount allocable to such reasonable compensation, or are otherwise not
         subject to the Excise Tax, and (iii) the value of any noncash benefits
         or any deferred payment or benefit shall be determined by the Auditor
         in accordance with the principles of sections 28OG(d)(3) and (4) of the
         Code. For purposes of determining the amount of the Gross-Up Payment,
         the Executive shall be deemed to pay federal income tax at the highest
         marginal rate of federal income taxation in the calendar year in which
         the Gross-Up Payment is to be made and state and local income taxes at
         the highest marginal rate of taxation in the state and locality of the
         Executive's residence on the Date of Termination (or if there is no
         Date of Termination, then the date on which the Gross-Up Payment is
         calculated for purposes of this Section 6.2), net of the maximum
         reduction in federal income taxes which could be obtained from
         deduction of such state and local taxes.

                  (C) In the event that the Excise Tax is finally determined to
         be less than the amount taken into account hereunder in calculating the
         Gross-Up Payment, the Executive shall repay to the Company, within five
         (5) business days following the time that the amount of such reduction
         in the Excise Tax is finally determined, the portion of the Gross-Up
         Payment attributable to such reduction (plus that portion of the
         Gross-Up Payment attributable to the Excise Tax and federal, state and
         local income and employment taxes imposed on the Gross-Up Payment being
         repaid by the Executive, to the extent that such repayment results in a
         reduction in the Excise Tax and a dollar-for-dollar reduction in the
         Executive's taxable income and wages for purposes of federal, state and
         local income and employment taxes, plus interest on the amount of such
         repayment at 120% of the rate provided in section 1274(b)(2)(B) of the
         Code. In the event that the Excise Tax is determined to exceed the
         amount taken into account hereunder in calculating the Gross-Up Payment
         (including by reason of any payment the existence or amount of which
         cannot be determined at the time of the Gross-Up Payment), the Company
         shall make an additional Gross-Up Payment in respect of such excess
         (plus any interest, penalties or additions payable by the Executive
         with respect to such excess) within five (5) business days following
         the time that the amount of such excess is finally determined. The
         Executive and the Company shall each reasonably cooperate with the
         other in connection with any administrative or judicial proceedings
         concerning the existence or amount of liability for Excise Tax with
         respect to the Total Payments.

         6.3 The payments provided in subsections (A), (C) and (D) of Section
6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day
following the Date of Termination; provided however that if the amounts of such
payments cannot be finally determined on or before such day, the Company shall
pay to the Executive on such day an estimate, as determined in good faith by the
Executive or, in the case of payments under Section 6.2 hereof, in accordance
with Section 6.2 hereof, of the minimum amount of such payments to which the
Executive is clearly entitled and shall pay the remainder of such payments
(together with interest on the unpaid remainder (or on all such payments to the
extent the Company fails to make such payments when due) at 120% of the rate
provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the thirtieth (30th) day after the Date
of Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth (5th)
business day after demand by the Company (together with interest at 120% of the
rate provided in section 1274(b)(2)(B) of the Code), but only to the extent such
amount has not been paid by the Executive pursuant to Section 6.2(C) above. At
the time that payments are made under this Agreement, the Company shall provide
the Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including, without
limitation, any opinions or other

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advice the Company has received from Tax Counsel, the Auditor or other advisors
or consultants (and any such opinions or advice which are in writing shall be
attached to the statement).

         6.4 The Company also shall pay to the Executive all legal fees and
expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5) business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require,

7. Termination Procedures and Compensation During Dispute.

         7.1 Notice of Termination. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 10 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. Further, a Notice of Termination for Cause is required
to include a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.

         7.2 Date of Termination "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which. in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).

         7.3 Dispute Concerning Termination. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the Term ends or (ii) the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however , that the Date of Termination shall be extended by a notice
of dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.

         7.4 Compensation During Dispute. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3 hereof, the Company shall continue to
pay the Executive the full compensation in effect when the notice giving rise to
the dispute was given (including but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given or those plans in which the Executive was participating immediately
prior to the first occurrence of an event or circumstance giving rise to the
Notice of Termination, if more favorable to the Executive, until the Date of
Termination, as determined in accordance with Section 7.3 hereof. Amounts paid
under this Section 7.4 are in addition to all other amounts due under this
Agreement (other than those due under Section 5.2 hereof) and shall not be
offset against or reduce any other amounts due under this Agreement.

8. No Mitigation. The Company agrees that, if the Executive's employment with
the Company terminates during the Term, the Executive is not required to seek
other employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to Sections 5, 6 or 7.4 hereof. Further, the
amount of any payment or benefit provided for in this Agreement (other than
Section 6.1(B) hereof but including (but not limited to) Section 7.4 hereof)
shall not be reduced

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by any compensation earned by the Executive as the result of employment by
another employer, by retirement benefits, by offset against any amount claimed
to be owed by the Executive to the, Company, or otherwise.

9. Successors; Binding Agreement.

         9.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason after a
Change in Control, except that, for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the Date of
Termination.

         9.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive),
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.

10. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page hereof and, if to the Company, to the address set forth below, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:

                  To the Company:

                  3900 Essex Lane
                  Suite 1200
                  Houston, Texas  77027

                  Attention:  General Counsel

11. Miscellaneous. Except as otherwise specifically provided in Section 12.2
below, no provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by the Executive and such officer as may be specifically designated by the
Board. No waiver by either party hereto at any time of any breach by the other
party hereto of, or of any lack of compliance with, any condition or provision
of this Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. This Agreement supersedes any other agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof which have been made by either party; provided, however,
that this Agreement shall supersede any agreement setting forth the terms and
conditions of the Executive's employment with the Company only in the event that
the Executive's employment with the Company is terminated on or following a
Change in Control, by the Company other than for Cause or by the Executive other
than for Good Reason; and provided further that all agreements otherwise
superseded by this Agreement shall be automatically reinstated with full force
and effect to the extent this Agreement is terminated or otherwise rendered
inapplicable or amended in accordance with Section 12.2 hereof The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Texas. All references to sections of the Exchange
Act or the Code shall be deemed also to refer to any successor provisions to
such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The obligations of the
Company and the Executive under this Agreement which by their nature may require
either partial or total performance after the expiration of the Term (including,
without limitation, those under Sections 6 and 7 hereof) shall survive such
expiration.


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12. Validity Pooling.

         12.1 Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement which shall remain in full force and effect.

         12.2 Pooling. In the event that (A) the Company is party to a
transaction which is otherwise intended to qualify for "pooling of interests"
accounting treatment, (B) such transaction constitutes a Change in Control
within the meaning of Section 15(G)(III) and (C) individuals who satisfy the
requirements in clauses (i) and (ii) below constitute more than two-thirds (2/3)
of the number of directors of the entity surviving such transaction and the
parent thereof, if any: individuals who (i) immediately prior to such
transaction constitute the Board and (ii) on the date hereof constitute the
Board and any new director (other than a director whose initial assumption of
office is in connection with an actual or threatened election contest relating
to the election of directors of the Company) whose appointment or election by
the Board or nomination for election by the Company's stockholders was approved
or recommended, by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended then (a) this Agreement shall, to the extent practicable, be
interpreted so as to permit such accounting treatment, and (b) to the extent
that the application of clause (a) of this Section 12.2 does not preserve the
availability of such accounting treatment then, to the extent that any provision
or combination of provisions of the Agreement disqualifies the transaction as a
"pooling" transaction (including, if applicable, the entire Agreement), the
Board shall have the right, by sending written notice to the Executive prior to
the Change in Control, to unilaterally amend (without the consent of the
Executive) such provision or provisions if and to the extent necessary
(including declaring such provision or provisions to be null and void as of the
date hereof) so that such transaction may be accounted for as a "pooling of
interests." All determinations under this Section 12.2 shall be made by the
Board prior to the Change in Control, based upon the advice of the accounting
firm whose opinion with respect to "pooling of interests" is required as a
condition to the consummation of such transaction.

13. Counterparts. This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.

14. Settlement of Disputes; Arbitration.

         14.1 All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Committee and shall be in writing.
Any denial by the Committee of a claim for benefits under this Agreement shall
be delivered to the Executive in writing within thirty (30) days after written
notice of the claim is provided to the Company in accordance with Section 10 and
shall set forth the specific reasons for the denial and the specific provisions
of this Agreement relied upon. The Committee shall afford a reasonable
opportunity to the Executive for a review of the decision denying a claim and
shall further allow the Executive to appeal to the Committee a decision of the
Committee within sixty (60) days after notification by the Committee that the
Executive's claim has been denied.

         14.2 Any further dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Houston,
Texas in accordance with the rules of the American Arbitration Association then
in effect; provided, however that the evidentiary standards set forth in this
Agreement shall apply. Judgment may be entered on the arbitrator's award in any
court having jurisdiction. Notwithstanding any provision of this Agreement to
the contrary, the Executive shall be entitled to seek specific performance of
the Executive's right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.

15. Definitions. For purposes of this Agreement, the following terms shall have
the meanings indicated below:

         (A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.

         (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.

         (C) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.

         (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.

         (E) "Board" shall mean the Board of Directors of the Company.

                                                                               7
<PAGE>

         (F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that Cause
exists shall be given effect unless the Company establishes to the Committee by
clear and convincing evidence that Cause exists.

         (G) A "Change in Control" shall be deemed to have occurred if the event
set forth in any one of the following paragraphs shall have occurred:

                  (I) any Person is or becomes the Beneficial Owner, directly or
         indirectly, of securities of the Company (not including in the
         securities beneficially owned by such Person any securities acquired
         directly from the Company or its affiliates) representing 20% or more
         of the combined voting power of the Company's then outstanding
         securities, excluding any Person who becomes such a Beneficial Owner in
         connection with a transaction described in clause (i) of paragraph
         (III) below; or

                  (II) the following individuals cease for any reason to
         constitute a majority of the number of directors then serving:
         individuals who, on the date hereof, constitute the Board and any new
         director (other than a director whose initial assumption of office is
         in connection with an actual or threatened election contest relating to
         the election of directors of the Company) whose appointment or election
         by the Board or nomination for election by the Company's stockholders
         was approved or recommended by a vote of at least two-thirds (2/3) of
         the directors then still in office who either were directors on the
         date hereof or whose appointment, election or nomination for election
         was previously so approved or recommended; or

                  (III) there is consummated a merger or consolidation of the
         Company or any direct or indirect subsidiary of the Company with any
         other corporation, other than (i) a merger or consolidation which would
         result in the voting securities of the Company outstanding immediately
         prior to such merger or consolidation continuing to represent (either
         by remaining outstanding or by being converted into voting securities
         of the surviving entity or any parent thereof), in combination with the
         ownership of any trustee or other fiduciary holding securities under an
         employee benefit plan of the Company or any subsidiary of the Company,
         at least 65% of the combined voting power of the securities of the
         Company or such surviving entity or any parent thereof outstanding
         immediately after such merger or consolidation, or (ii) a merger or
         consolidation effected to implement a recapitalization of the Company
         (or similar transaction) in which no Person is or becomes the
         Beneficial Owner, directly or indirectly, of securities of the Company
         (not including in the securities Beneficially Owned by such Person any
         securities acquired directly from the Company or its Affiliates other
         than in connection with the acquisition by the Company or its
         Affiliates of a business) representing 20% or more of the combined
         voting power of the Company's then outstanding securities; or

                  (IV) the stockholders of the Company approve a plan of
         complete liquidation or dissolution of the Company or there is
         consummated an agreement for the sale or disposition by the Company of
         all or substantially all of the Company's assets, other than a sale or
         disposition by the Company of all or substantially all of the Company's
         assets to an entity, at least 65% of the combined voting power of the
         voting securities of which are owned by stockholders of the Company in
         substantially the same proportions as their ownership of the Company
         immediately prior to such sale.

         Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record holders
of the common stock of the Company immediately prior to such transaction or
series of transactions continue to have substantially the same proportionate
ownership in an entity which owns all or substantially all of the assets of the
Company immediately following such transaction or series of transactions.

         (H) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.

                                                                               8
<PAGE>

         (I) "Committee" shall mean (i) the individuals (not fewer than three in
number) who, on the date six months before a Change in Control, constitute the
Compensation Committee of the Board, plus (ii) in the event that fewer than
three individuals are available from the group specified in clause (i) above for
any reason, such individuals as may be appointed by the individual or
individuals so available (including for this purpose any individual or
individuals previously so appointed under this clause (ii)); provided, however,
that the maximum number of individuals constituting the Committee shall not
exceed six (6).

         (J) "Company" shall mean Baker Hughes Incorporated and, except in
determining under Section 15(G) hereof whether or not any Change in Control of
the Company has occurred, shall include any successor to its business and/or
assets which assumes and agrees to perform this Agreement by operation of law,
or otherwise.

         (K) "Date of Termination" shall have the meaning set forth in Section
7.2 hereof,

         (L) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.

         (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

         (N) "Excise Tax" shall mean any excise tax imposed under Section 4999
of the Code.

         (O) "Executive" shall mean the individual named in the first paragraph
of this Agreement.

         (P) "Extension Date" shall have the meaning set forth in Section 2
hereof.

         (Q) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent) after any Change in Control, or prior to a Change in Control under the
circumstances described in clauses (ii) and (iii) of the second sentence of
Section 6.1 hereof (treating all references in paragraphs (I) through (VII)
below to a "Change in Control" as references to a "Potential Change in
Control"), of any one of the following acts by the Company, or failures by the
Company to act, unless in the case of any act or failure to act described in
paragraph (I), (V), (VI) or (VIII) below, such act or failure to act is
corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:

                  (I) the assignment to the Executive of any duties inconsistent
         with the Executive's status as a senior executive officer of the
         Company or a substantial adverse alteration in the nature or status of
         the Executive's responsibilities from those in effect immediately prior
         to the Change in Control;

                  (II) a reduction by the Company in the Executive's annual base
         salary as in effect on the date hereof or as he same may be increased
         from time to time except for across-the-board salary reductions
         similarly affecting all senior executives of the Company and all senior
         executives of any Person in control of the Company;

                  (III) the relocation of the Executive's principal place of
         employment to a location more than 50 miles from the Executive's
         principal place of employment immediately prior to the Change in
         Control or the Company's requiring the Executive to be based anywhere
         other than such principal place of employment (or permitted relocation
         thereof) except for required travel on the Company's business to an
         extent substantially consistent with the Executive's present business
         travel obligations;

                  (IV) the failure by the Company to pay to the Executive any
         portion of the Executive's current compensation except pursuant to an
         across-the-board compensation deferral similarly affecting all senior
         executives of the Company and all senior executives of any Person in
         control of the Company, or to pay to the Executive any portion of an
         installment of deferred compensation under any deferred compensation
         program of the Company, within seven (7) days of the date such
         compensation is due;

                                                                               9

<PAGE>

                  (V) the failure by the Company to continue in effect any
         compensation plan in which the Executive participates immediately prior
         to the Change in Control which is material to the Executive's total
         compensation, including but not limited to the Company's 1993 Stock
         Option Plan, 1993 Employee Stock Bonus Plan, 1991 Employee Stock Bonus
         Plan, 1995 Stock Award Plan (and the 1995, 1996 and 1997 Stock Matching
         Programs thereunder and any subsequent Stock Matching Programs in which
         the Executive participates), 1987 Convertible Debenture Plan and 1995
         Employee Annual Incentive Compensation Plan or any substitute plans
         adopted prior to the Change in Control, unless an equitable arrangement
         (embodied in an ongoing substitute or alternative plan) has been made
         with respect to such plan, or the failure by the Company to continue
         the Executive's participation therein (or in such substitute or
         alternative plan) on a basis not materially less favorable, both in
         terms of the amount or timing of payment of benefits provided and the
         level of the Executive's participation relative to other participants,
         as existed immediately prior to the Change in Control;

                  (VI) the failure by the Company to continue to provide the
         Executive with benefits substantially similar to those enjoyed by the
         Executive under any of the Company's pension, savings, life insurance,
         medical, health and accident, or disability plans in which the
         Executive was participating immediately prior to the Change in Control
         (except for across the board changes similarly affecting all senior
         executives of the Company and all senior executives of any Person in
         control of the Company), the taking of any other action by the Company
         which would directly or indirectly materially reduce any of such
         benefits or deprive the Executive of any material fringe benefit or
         perquisite enjoyed by the Executive at the time of the Change in
         Control, or the failure by the Company to provide the Executive with
         the number of paid vacation days to which the Executive is entitled on
         the basis of years of service with the Company in accordance with
         Company's normal vacation policy in effect at the time of the Change
         in Control; or

                  (VII) any purported termination of the Executive's employment
         which is not effected pursuant to a Notice of Termination satisfying
         the requirements of Section 7.1 hereof, for purposes of this Agreement
         no such purported termination shall be effective. The Executive's right
         to terminate the Executive's employment for Good Reason shall not be
         affected by the Executive's incapacity due to physical or mental
         illness. The Executive's continued employment shall not constitute
         consent to, or a waiver of rights with respect to, any act or failure
         to act constituting Good Reason hereunder.

         For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless the Company establishes to the Committee by clear and
convincing evidence that Good Reason does not exist.

         (R) "Gross-Up Payment" shall have the meaning set forth in Section 6.2
hereof.

         (S) "Notice of Termination" shall have the meaning set forth in Section
7.1 hereof.

         (T) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Art, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.

         (U) "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:

                  (I) the Company enters into an agreement, the consummation of
         which would result in the occurrence of a Change in Control;

                  (II) the Company or any Person publicly announces an intention
         to take or to consider taking actions which, if consummated, would
         constitute a Change in Control;

                  (III ) any Person becomes the Beneficial Owner, directly or
         indirectly, of securities of the Company representing 15% or more of
         either the then outstanding shares of common stock of the Company or
         the combined voting power of the Company's then outstanding securities
         (not including in the securities beneficially owned by such Person any
         securities acquired directly from the Company or its affiliates); or

                                                                              10
<PAGE>

                  (IV) the Board adopts a resolution to the effect that, for
         purposes of this Agreement, a Potential Change in Control has occurred.

         (V) "Retirement" shall, for purposes of Section 4 hereof be deemed the
reason for the termination by the Executive of the Executive's employment if
such employment is terminated after completion of ten (10) years of service with
the Company and attainment of age fifty-five (55).

         (W) "Severance Payments" shall have the meaning set forth in Section
6.1 hereof.

         (X) "SRP" shall have the meaning set forth in Section 6.1 hereof.

         (Y) "Tax Counsel" shall have the meaning set forth in Section 6.2
hereof.

         (Z) "Term" shall mean the period of time described in Section 2 hereof
(including any extension continuation or termination described therein).

         (AA) "Thrift Plan" shall have the meaning set forth in Section 6.1
hereof.

         (BB) "Total Payments" shall mean those payments so described in Section
6.2 hereof.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date above first written.

                                         BAKER HUGHES INCORPORATED

                                         By:  /s/ JOHN MAHER
                                            ------------------------------------
                                         John Maher
                                         Chairman-Compensation Committee of the
                                         Board of Directors

                                         EXECUTIVE:

                                         /s/ G. STEPHEN FINLEY
                                         ---------------------------------------
                                         G. STEPHEN FINLEY
                                         Address:
                                         (Please print carefully)


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