
<PAGE>
 
                                                                      Exhibit 13

            Condensed Comparative Consolidated Financial Information
                           Baker Hughes Incorporated

<TABLE>
<CAPTION>
(In thousands, except per share amounts)                   1994          1993          1992          1991          1990
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>           <C>           <C>           <C>
Total revenues                                          $2,504,758    $2,701,697    $2,538,515    $2,828,357     $2,614,257
                                                        -------------------------------------------------------------------
Costs and expenses:
 Costs and expenses applicable to revenues               2,082,745     2,262,545     2,132,928     2,283,064      2,138,481
 General and administrative                                214,788       238,238       232,407       249,833        232,303
 Unusual charges - net                                      31,829        42,000        79,190        62,946         66,846
 Operating income of business sold                         (10,488)
                                                        -------------------------------------------------------------------
  Total                                                  2,318,874     2,542,783     2,444,525     2,595,843      2,437,630
                                                        -------------------------------------------------------------------
 
Operating income                                           185,884       158,914        93,990       232,514        176,627
Gain on sale of Pumpsystems                                101,000
Gain on sale of subsidiary stock                                                                      56,103         65,721
Interest expense                                           (63,835)      (64,703)      (68,112)      (83,561)       (77,465)
Interest income                                              3,067         5,840         6,078         7,295         15,132
                                                        -------------------------------------------------------------------
Income before income taxes, extraordinary
   loss and cumulative effect of accounting changes        226,116       100,051        31,956       212,351        180,015
Income taxes                                               (94,974)      (41,195)      (26,925)      (38,893)       (37,838)
                                                        -------------------------------------------------------------------
Income before extraordinary loss and
 cumulative effect of accounting changes                   131,142        58,856         5,031       173,458        142,177
Extraordinary loss                                         (44,320)
Cumulative effect of accounting changes                    (44,165)
                                                        -------------------------------------------------------------------
Net income                                              $   42,657    $   58,856    $    5,031    $  173,458     $  142,177
                                                        ===================================================================
Per share of common stock:
 Income before extraordinary loss
  and cumulative effect of accounting changes                 $.85          $.34          $.00         $1.26     $     1.06
                                                        -------------------------------------------------------------------
 Net income                                                    .22           .34           .00          1.26           1.06
                                                        -------------------------------------------------------------------
 Dividends                                                     .46           .46           .46           .46            .46
                                                        -------------------------------------------------------------------
 
Financial position:
Cash and cash equivalents                               $   69,179    $    6,992    $    6,692    $   51,709     $  124,585
Working capital                                            855,421       920,969       715,472       652,404        676,383
Total assets                                             2,999,682     3,143,340     3,212,938     2,905,602      2,783,944
Long-term debt                                             637,972       935,846       812,465       545,242        611,501
Stockholders' equity                                     1,638,472     1,610,648     1,645,522     1,545,361      1,424,285

</TABLE>

   See Note 1 of Notes to Consolidated Financial Statements for a discussion of
the adoption of new accounting standards in 1994.

   In addition to the significant acquisitions and dispositions discussed in
Note 2 of Notes to Consolidated Financial Statements, the Company acquired
ChemLink Group, Inc. in 1991, Eastman Christensen Company and the Instrument
Group in 1990. The Company also sold 71% of BJ Services Company ("BJ") in 1990
and the TOTCO division of Exlog, Inc. and the remaining 29% of BJ in 1991.

   See Note 3 of Notes to Consolidated Financial Statements for a description of
the unusual charges - net in 1994, 1993 and 1992. The unusual charges-net in
1991 consisted primarily of the restructuring of Hughes Christensen Company and
litigation and insurance claims offset by the gain on the disposition of TOTCO.
The unusual charges-net in 1990 consisted primarily of litigation and product
liability claims and geographic and product line restructurings.

  See Note 4 of Notes to Consolidated Financial Statements for a description of
the extraordinary loss in 1994.

                                       1
<PAGE>
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                           Baker Hughes Incorporated

                              Business Environment

  Oilfield Operations companies manufacture, sell and provide services used in
the drilling, completion and maintenance of oil and gas wells. The business
environment of the Company is significantly affected by worldwide expenditures
of the petroleum industry. Important factors establishing the levels of these
expenditures include world economic conditions, crude oil and natural gas supply
and demand balances, the legislative environment in the United States and other
major countries and developments in the Middle East and other major petroleum
producing regions.

                              Activity Indicators

  Crude oil and natural gas prices are a major determinant of exploration and
development expenditures. (The amounts in the table below are annual averages.)
<TABLE>
<CAPTION>
Fiscal Year                      1994   1993   1992
- ----------------------------------------------------
<S>                              <C>    <C>    <C>
WTI ($/Bbl)                      16.87  19.49  20.88
U.S. Spot Natural Gas ($/mcf)     1.88   2.04   1.53
</TABLE>

  Oil prices weakened in 1994 and 1993 falling $2.62/Bbl or 13.4% and $1.39/Bbl
or 6.7%, respectively. The Company expects prices to trend upwards in 1995 and
1996 while remaining susceptable to short-term price fluctuations. U.S. natural
gas prices weakened in 1994, decreasing 7.8%. Prices in 1993 were up 33.3% from
1992 prices. Prices are expected to be soft in 1995 and strengthen in 1996 with
demand for natural gas expected to grow 2% to 3% per year. The Company believes
that higher natural gas prices and a tightening market would stimulate
exploration and development drilling directed towards natural gas.

  A more direct indicator of expenditures and drilling activity is the Baker
Hughes rotary rig count. Workover activity, as measured by the U.S. workover rig
count, is also an indicator of expenditure activity. (The amounts in the
following table are annual averages.)
<TABLE>
<CAPTION>
Fiscal Year                1994   1993   1992
- ----------------------------------------------
<S>                        <C>    <C>    <C>
North American             1,030    918    788
Non-North American           747    781    885
                           -------------------
Total Rig Count            1,777  1,699  1,673
                           ===================
U.S. Workover Rig Count    1,336  1,379  1,260
                           ===================
</TABLE>

North American Activity

  The North American rig count was up 12.2% from 1993 and 1993 was up 16.5% from
1992. Activity increases in the Gulf of Mexico drove an increase in the average
offshore rig count from 71 to 101 rigs - up 42.3% from 1993 and from 51 to 71
rigs - up 39.2% from 1992. The Company benefits from offshore drilling, more so
than land drilling, as this type of activity requires the premium products and
services offered by the Company. The Canadian operations were also favorably
impacted by the increase in natural gas drilling as Canadian rig activity was up
53.5% and 82.8% in 1994 and 1993, respectively. U.S. workover activity was down
3.1% from 1993 levels and 1993 activity was up 9.4% from 1992.

  The Company is cautiously optimistic that drilling activity will remain strong
in North America in 1995. The Company anticipates that reduced gas prices and
high pipeline utilization will take the edge off Canada's drilling boom. In the
U.S., the Company is expecting a modest decrease in gas-directed drilling to be
offset by a modest increase in oil-directed drilling. The average U.S. workover
rig count is expected to remain flat over the next year.

Non-North American Activity

  Outside North America, activity continued to fall. The average rig count was
down 4.4% from 1993 and 1993 was 11.8% lower than 1992. The fall was widespread
throughout the Eastern Hemisphere as most regions showed a decrease in activity.
The 1994 decline was offset somewhat by Latin America activity which was up
9.0%. Two areas of particular importance to the Company that were down
significantly were Italy and Nigeria where political and social issues affected
drilling activity. The Company expects little change in activity  in the Eastern
Hemisphere over the near term as political issues and volatility in crude oil
prices will continue to create uncertainty. In Latin America, the Company
expects to see continued growth in drilling activity in 1995 led by Venezuela,
Argentina and Colombia.

                                       2
<PAGE>
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                           Baker Hughes Incorporated

                         Acquisitions and Dispositions

1994

  The Company sold the EnviroTech Pumpsystems ("Pumpsystems") group of companies
and the EnviroTech Measurements & Controls ("EM&C") group of companies in
September and March 1994, respectively. The decision to divest Pumpsystems and
EM&C was part of a continuing review of the Company's core product and service
competencies. The Pumpsystems sale provided approximately $210.0 million in
proceeds and resulted in a gain of $101.0 million while the EM&C sale provided
$134.0 million in proceeds and resulted in a gain of $8.6 million.

1992

  In October 1991, the Company sold the Eastern Hemisphere operations of its
Baker Hughes Tubular Services ("BHTS") subsidiary to Tuboscope Corporation, now
known as Tuboscope Vetco International Corporation, for total consideration of
$75.7 million. In September 1992, the Company sold the Western Hemisphere
operations of BHTS to ICO, Inc. for total consideration of $11.3 million.

  In April 1992, the Company acquired Teleco Oilfield Services Inc. ("Teleco")
from Sonat Inc. for $349.4 million. Teleco is a leading provider of both
directional and formation evaluation measurement-while-drilling services.

  In August 1992, the Company purchased from Borg-Warner Corporation ("B-W") a
subsidiary of B-W, whose only asset was 8.3 million shares of the Company's
common stock. Total consideration paid to B-W was $168.8 million. All of the
funds for the purchase were raised through a public offering by the Company of
7.6 million shares of its common stock at a price of $22.25 per share. Net
proceeds from the offering were $168.9 million. The Company does not intend to
reissue any of the shares purchased in this transaction and accordingly, the 8.3
million shares have been treated as having been constructively retired for
financial reporting purposes.

                             Results of Operations

  The following table summarizes the impact of the 1994 dispositions mentioned
above on consolidated revenues.

<TABLE> 
<CAPTION> 
(In millions)                  1994               1993              1992
- ----------------------------------------------------------------------------
<S>                            <C>               <C>                <C>
Consolidated Revenues:                                     
  Sales                        $1,727.7           $1,945.8          $1,839.8
  Services and rentals            777.0              755.9             698.7
                               ---------------------------------------------
    Total                       2,504.7            2,701.7           2,538.5
                               ---------------------------------------------
Less Pumpsystems and EM&C                                  
  Operations:                                              
  Sales                            96.5              334.5             347.3
  Services and rentals                                15.7              21.3
                               ---------------------------------------------
     Total                         96.5              350.2             368.6
                               ---------------------------------------------
Revenues from Ongoing                                      
  Operations:                                              
  Sales                         1,631.2            1,611.3           1,492.5
  Services and rentals            777.0              740.2             677.4
                               ---------------------------------------------
    Total                      $2,408.2           $2,351.5          $2,169.9
                               =============================================
</TABLE>

  Consolidated revenues for 1994 decreased 7.3% from 1993. Consolidated revenues
for 1993 increased 6.4% from 1992. Consolidated revenues were impacted in 1994
and 1993 by the revenues of disposed businesses. EM&C was sold in March 1994 and
Pumpsystems was sold in September 1994. The results of Pumpsystems and EM&C have
been reported in a manner similar to discontinued operations since March 1994
and June 1993, respectively, which represents the date at which the decisions to
divest the businesses were made. As such, consolidated results of operations for
1994 include six months of Pumpsystems' revenues and expenses. The last six
months of Pumpsystems' net operating results are reflected as a separate line in
the Company's consolidated statement of operations. Nine months of EM&C revenues
and expenses are included in the consolidated results for 1993. There are no
EM&C revenues and expenses included in the consolidated results for 1994. EM&C
operated near break even levels from July 1993 to March 1994 with a small net
operating loss offsetting the gain on the sale.

  Revenues from ongoing operations were up 2.4% from 1993 and 8.4% from 1992.
Oilfield Operations currently 

                                       3
<PAGE>
 
represent approximately 88% of consolidated revenues ($2.1 billion) with the
remaining 12% represented by the Process Equipment Operations (formerly
EnviroTech Process Equipment).

  Oilfield Operations' sales revenue was up 2.6% and services and rentals
revenue was up 4.7% in 1994. Much of the improvement in Oilfield Operations
sales, services and rentals revenue is attributable to increased drilling
activity in the Western Hemisphere, fueled in large part by natural gas
drilling. Offsetting this trend was a decline in the average number of workover
rigs running in the U.S. However, much of the improvement in the Western
Hemisphere was offset by declines in the European and West Africa markets, most
notably in geographic areas where Oilfield Operations enjoys significant revenue
on a per rig basis.

  Oilfield Operations reported revenues of $2.0 billion in 1993, up 8.1% from
1992. Sales revenue was up 7.6% and services and rentals revenue was up 9.1%.
The acquisition of Teleco in April 1992 provided approximately $75.0 million of
additional revenue for 1993 when compared to the prior year. A significant
increase in gas related drilling in the Gulf of Mexico, fueled by increased
natural gas prices, increases in Canadian activity and export sales to the
former Soviet Union also contributed to the sales, services and rentals revenue
improvement. The improvement in the North American market was offset by a
decline in drilling rig activity outside of North America, most notably, the
North Sea and West Africa regions.

  Process Equipment Operations sales, services and rentals revenue reported a
decline of 3.4% from 1993. General weakness in the worldwide economy and project
deferrals due to financing delays resulted in the revenue decline. In 1993,
sales, services and rentals revenue increased 10.3% from 1992. Improved order
bookings resulting from improved economic activity drove the revenue
favorability.

Operating Income

  The following table summarizes the effect of the dispositions and the net
unusual charges on consolidated operating income.

<TABLE>
<CAPTION>
(In millions)                               1994     1993     1992
- -------------------------------------------------------------------
<S>                                        <C>      <C>      <C>
Consolidated Operating Income              $185.9   $158.9   $ 94.0
Plus Unusual Charges-net                     31.8     42.0     79.2
Less Operating Income of
 Pumpsystems and EM&C                       (17.9)   (23.1)   (25.2)
                                           ------------------------
Operating Income from Ongoing
    Operations                             $199.8   $177.8   $148.0
                                           ========================
</TABLE>

  Consolidated operating income in 1994 increased 17.0% from 1993 levels and in
1993 increased 69.0% from 1992 levels. Operating income from ongoing operations,
which excludes the net unusual charges and operating income of Pumpsystems and
EM&C, increased 12.4% in 1994 and 20.1% in 1993 from the respective prior year.
The increases year over year result from improved revenues and cost containment
measures, including the benefits from the consolidation of several divisions.

Costs and Expenses

  Operating expenses, excluding unusual charges, typically fluctuate within a
narrow band as a percentage of consolidated revenues as the Company manages
expenses both in absolute terms and as a function of revenues.

  Cost of sales, cost of services and rentals, research and engineering expenses
and marketing and field service expenses decreased in 1994 in line with the
revenue decreases associated with the dispositions of EM&C and Pumpsystems in
1994, and increased in 1993 in line with the increase in revenues associated
with the acquisition of Teleco in 1992. General and administrative expenses,
which are less sensitive to changes in revenue, decreased $17.3 million or 8.6%
in 1994 and remained virtually unchanged when comparing 1993 to 1992. The
decrease in 1994 is reflective of the impact of the disposed businesses.
Amortization of goodwill and other intangibles has decreased in 1994 because of
the sale of EM&C and Pumpsystems. In 1993, amortization increased over 1992
because of the Teleco acquisition in April 1992.

                                       4
<PAGE>
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                           Baker Hughes Incorporated

Unusual Charges-net

1994

  During the fourth quarter of 1994, the Company recorded a $32.4 million
unusual charge related to the restructuring and reorganization of certain
divisions, primarily Baker Hughes INTEQ, in Oilfield Operations as part of a
continuing effort to maintain a cost structure appropriate for current and
future market conditions. Noncash provisions of the charge totalled $16.3
million and consist primarily of the write-down of excess facilities to net
realizable value. The remaining $16.1 million of the charge represents future
cash expenditures related to severance under existing benefit arrangements, the
relocation of people, equipment and inventory and abandoned leases. The Company
spent $3.1 million of the cash in 1994 and expects to spend substantially all of
the remaining $13.0 million in 1995. Such expenditures relate to specific plans
with clearly defined actions and will be funded from operations and available
credit facilities. The actions taken will favorably impact future operating
results and liquidity as the reduction of headcount and the consolidation of
facilities will reduce future operating costs without significantly impacting
the pricing of products and services and market share. Annual cost savings are
expected to be between $10.0 million and $15.0 million. In addition, an MWD
(measurement-while-drilling) product line was discontinued when it was decided
to market and support more viable MWD products resulting in the write-off of
property and inventory of $15.0 million. Offsetting these charges was an unusual
gain of $19.3 million related to the May 1994 cash settlement of a suit against
certain insurance carriers in the Parker & Parsley litigation discussed below.

1993

  During the first quarter of 1993, the Company recognized a charge of $17.5
million relating to an agreement for the settlement of the civil antitrust
litigation involving the marketing of tricone rockbits. During the second
quarter of 1993, the Company, along with Dresser Industries and Parker & Parsley
Petroleum Development Incorporated, entered into a Memorandum of Understanding
covering the settlement of all outstanding litigation among the parties. In
recognition of the settlement, the Company recorded an unusual charge of $24.5
million. Cash payments totalling $75.0 million were made during the third
quarter of 1993.

1992

  During the first quarter of 1992, the Company sold the Eastern Hemisphere
operations of BHTS and recognized a gain of $31.9 million. In addition, noncash
unusual charges totalling $31.8 million for the restructuring of the Western
Hemisphere operations of BHTS and the discontinuance of the Hughes Christensen
Company Argentina operations were recorded. During the third quarter of 1992, in
response to the structural changes in the U.S. oilfield and as a result of the
Teleco acquisition, the Company recognized an unusual charge totalling $79.3
million. Costs associated with the integration of the Teleco operations account
for $25.3 million of the charge. This charge included future cash outlays of
$7.3 million of which approximately one-third was spent in 1992 and the
remaining amount in 1993. Changes in market conditions led the Company to
implement several operational restructurings and combinations representing $30.1
million of the charge. This charge included future cash outlays of $12.3
million, the majority of such amounts were spent in 1993. In addition, the
Company accrued charges for the TRW Inc. litigation and certain other asset
impairments.

                                       5
<PAGE>
 
Interest Expense

  Offsetting interest expense in 1993 and 1992 is $3.6 million and $8.8 million,
respectively, of the reversal of accrued interest expense on certain Internal
Revenue Service issues. Excluding these reversals, interest expense decreased
$4.5 million in 1994 and $8.6 million in 1993. The decrease in 1994 is
attributable to lower total debt outstanding offset by a slightly higher overall
effective interest rate. The decrease in 1993 is attributable to significantly
lower effective interest rates offset by increases in total debt outstanding.

Interest Income

  Interest income decreased $2.8 million in 1994 and $0.2 million in 1993. The
decreases are due to the repayment of notes receivables and a decrease in short-
term investments.

Income Taxes

  The effective income tax rate for 1994 was 42.0% as compared to 41.2% in 1993
and 84.3% in 1992. The effective rates differ from the federal statutory rates
due primarily to the utilization of loss and credit carryforwards (1994, 1993
and 1992), increases in taxes on foreign operations (1994, 1993 and 1992),
nondeductible goodwill amortization (1994, 1993 and 1992), the impact of unusual
charges in jurisdictions where virtually no tax benefit was available (1992) and
the settlement with the IRS to resolve all pending tax issues for the 1978
through 1986 tax years (1992).

Extraordinary Loss

  During 1994, the Company recorded an extraordinary loss of $44.3 million, net
of a tax benefit of $23.9 million, in connection with the repurchase or
defeasance of $225.0 million face amount of its outstanding 6% debentures due
March 2002. At September 30, 1994, $43.7 million of the debentures have been
considered extinguished through defeasance.

Net Income Per Share of Common Stock

  Net income is adjusted for dividends on preferred stock of $12.0 million in
1994 and 1993 and $5.3 million in 1992.

                        Capital Resources and Liquidity

Financing Activities

  Net cash outflows from financing activities were $429.8 million in 1994
compared to cash inflows of $56.0 million and $127.0 million in 1993 and 1992,
respectively.

  Total debt outstanding at September 30, 1994 was $653.3 million, compared to
$944.3 million at September 30, 1993 and $838.9 million at September 30, 1992.
The debt to equity ratio was .399 at September 30, 1994, compared to .586 at
September 30, 1993 and .510 at September 30, 1992.

  In 1994 the Company used cash to reduce overall debt levels. A total of $368.1
million was used to reduce borrowings under short-term facilities and repurchase
or defease all of the outstanding 6% discount debentures which had an effective
interest rate of 14.66%. During 1994, the Company also issued debenture purchase
warrants under favorable terms for $7.0 million which entitle the holders to
purchase $93.0 million of the Company's debentures. Subsequent to September 30,
1994, certain holders exercised warrants and purchased $78.0 million of
debentures. The Company expects the remaining warrants to be exercised prior to
their expiration in January 1995.

  In 1993 and 1992, the Company had increased total debt to fund acquisitions
and other operating needs, while at the same time taking advantage of lower
interest rates. During 1993, the Company sold $385.3 million principal amount at
maturity of Liquid Yield Option Notes ("LYONS") due May 2008. The net proceeds
of $223.9 million were used to repay borrowings from short-term facilities
incurred to fund the 1992 Teleco acquisition, retire debentures and fund 

                                       6
<PAGE>
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                           Baker Hughes Incorporated

working capital needs. During 1992, the Company raised $168.9 million through
the sale of 7.6 million shares of common stock. The proceeds were used to
effectively retire 8.3 million shares of common stock held by Borg-Warner
Corporation. Also in 1992, the Company issued fixed rate notes due in 1999 and
2004 with net proceeds of $246.6 million which were used to retire debt maturing
in 1992 and redeem convertible subordinated debentures. Borrowings under short-
term facilities increased to fund the Teleco acquisition.

  Cash dividends increased in 1993 due primarily to the $12.0 million annual
dividend requirement associated with the preferred stock issued as part of the
Teleco acquisition in April 1992.

  At September 30, 1994, the Company had $800.8 million of credit facilities
with commercial banks, of which $511.6 million is committed. These facilities
are subject to normal banking terms and conditions and do not materially
restrict the Company's activities.

  During 1994, the U.S. dollar weakened against most European currencies where
the Company has a significant net asset position. As a result of this and the
sale of EM&C and Pumpsystems, the cumulative foreign currency translation
adjustment account decreased $34.7 million. During 1993, the U.S. dollar
strengthened against most European currencies resulting in an increase of $45.1
million in the cumulative foreign currency translation adjustment account.

Investing Activities

  Net cash inflows from investing activities were $258.4 million in 1994
compared to cash outflows of $76.7 million in 1993 and $251.9 million in 1992.

  Proceeds from the disposal of noncore businesses generated $328.4 million in
1994, $9.3 million in 1993 and $50.7 million in 1992. The acquisition of Teleco
in 1992 required the use of $197.0 million. Property additions have decreased
from $137.9 million in 1992 to $126.9 million in 1993 and to $108.6 million in
1994. Part of the decrease in 1994 is due to the sale of EM&C and Pumpsystems.
Likewise, the ratio of capital expenditures to depreciation has decreased over
the same period from 110.8% to 89.6% and to 88.5%. The majority of the capital
expenditures have been in Oilfield Operations where the largest single item is
the expenditure for rental tools and equipment to supplement the rental fleet.
Funds provided from operations and outstanding lines of credit are expected to
be more than adequate to meet future capital expenditure requirements. The
Company expects 1995 capital expenditures to be between $120.0 million and
$140.0 million as it focuses on replacing capital in amounts comparable to
annual depreciation.

Operating Activities

  Net cash inflows from operating activities were $230.8 million, $23.0 million
and $85.6 million in 1994, 1993 and 1992, respectively.

  The increase of $207.8 million in 1994 was due primarily to an increase in net
income adjusted for noncash items, litigation settlements totalling $75.0
million that were paid in 1993 and a decrease in the buildup of working capital.

  The decrease of $62.6 million in 1993 was due primarily to the buildup of
working capital in Oilfield Operations due to increased domestic activity in the
fourth quarter of 1993 compared to the same period in 1992 and the litigation
settlements mentioned above. These uses of cash were offset by an increase in
net income adjusted for noncash items.

                                       7
<PAGE>
 
                              Accounting Standards

Postretirement Benefits Other Than Pensions

  The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective October 1, 1993. The Company elected to immediately recognize the
cumulative effect of the change in accounting and recorded a charge of $69.6
million, net of a tax benefit of $37.5, in the first quarter of 1994. Expense
under SFAS No. 106 for 1994 was not significantly different from the prior
method of cash basis accounting.

Accounting for Income Taxes

  The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
October 1, 1993, without restatement of prior years and recorded a credit to
income of $25.5 million in the first quarter of 1994. An additional benefit of
$21.9 million was allocated to capital in excess of par value, which reflects
the cumulative tax effect of exercised employee stock options for which the
Company has taken tax deductions in its federal tax return.

  The Company establishes valuation reserves for certain of its deferred tax
assets which management deems the realization is not likely to occur. In the
U.S. jurisdiction, the Company has fully reserved the credit portion of all its
foreign tax credit carryforwards based on a recent historical pattern of
expiring foreign tax credits and the lack of taxable income in amounts
sufficient to utilize the foreign tax credit carryforwards. The Company has also
reserved the operating loss carryforwards in certain non-U.S. jurisdictions
where its operations have decreased, currently ceased or the Company has
withdrawn entirely.

  The Company has not established valuation reserves on its remaining deferred
tax assets, primarily temporary differences between the book and tax basis of
assets and liabilities. Management believes that sufficient sources of taxable
income will occur in future periods so that these tax assets will be realized.
This judgement is based on recent profitable operations in the appropriate
jurisdictions.

  The adoption of SFAS No. 109 had the practical effect of allowing the Company
to report its tax assets, net of valuation reserves, on the consolidated
statement of financial position. Additionally, the statement allows the netting
of the noncurrent deferred tax assets and liabilities within the same taxing
jurisdiction. The Company has used this approach in reporting its tax accounts
in the consolidated statement of financial position at September 30, 1994. Such
an approach was not allowed under the prior accounting method.

Investments in Debt and Equity Securities

  The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," effective September 30, 1994, and recorded a charge to a
separate component of stockholders' equity for unrealized losses on securities
available for sale of $2.8 million, net of a tax benefit of $1.5 million. A gain
or loss will be recognized in the consolidated statement of operations when a
security is sold.

Postemployment Benefits

  In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." The statement requires accrual basis accounting for
such benefits as opposed to cash basis accounting. The Company will adopt this
statement effective October 1, 1994. The Company will recognize a charge to
income of $14.6 million, net of a $7.9 million tax benefit, in the first quarter
of 1995 as the cumulative effect of the change in accounting. Expense under SFAS
No. 112 for 1995 related to these benefits is not expected to be significantly
different from actual cash payments.

                                       8
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
                           Baker Hughes Incorporated

                  STOCKHOLDERS OF BAKER HUGHES INCORPORATED:

  We have audited the consolidated statements of financial position of Baker
Hughes Incorporated and its subsidiaries as of September 30, 1994 and 1993, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. 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 Baker Hughes Incorporated and its
subsidiaries at September 30, 1994 and 1993, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1994 in conformity with generally accepted accounting principles.

  As discussed in Note 1, the Company changed its method of accounting for
postretirement benefits other than pensions and for income taxes effective
October 1, 1993 to conform with Statement of Financial Accounting Standards No.
106 and Statement of Financial Accounting Standards No. 109, respectively. Also
as discussed in Note 1, the Company changed its method of accounting for certain
investments in debt and equity securities effective September 30, 1994 to
conform with Statement of Financial Accounting Standards No. 115.


                                     Deloitte & Touche LLP


                                     November 16, 1994
                                     Houston, Texas

                                       9
<PAGE>
 
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                          Baker Hughes Incorporated
 

<TABLE>
<CAPTION>
Years ended September 30,
(In thousands, except per share amounts)                     1994         1993         1992
- ----------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>          <C>
Revenues:
  Sales                                                   $1,727,734   $1,945,793   $1,839,771
  Services and rentals                                       777,024      755,904      698,744
                                                          ------------------------------------
    Total                                                  2,504,758    2,701,697    2,538,515
                                                          ------------------------------------
Costs and Expenses:
  Cost of sales                                            1,015,458    1,154,865    1,076,378
  Cost of services and rentals                               389,605      395,286      347,020
  Research and engineering                                    91,011      102,057      107,188
  Marketing and field service                                586,671      610,337      602,342
  General and administrative                                 184,013      201,322      200,758
  Amortization of goodwill and other intangibles              30,775       36,916       31,649
  Unusual charges - net                                       31,829       42,000       79,190
  Operating income of business sold                          (10,488)
                                                          ------------------------------------
    Total                                                  2,318,874    2,542,783    2,444,525
                                                          ------------------------------------
Operating income                                             185,884      158,914       93,990
Gain on sale of Pumpsystems                                  101,000
Interest expense                                             (63,835)     (64,703)     (68,112)
Interest income                                                3,067        5,840        6,078
                                                          ------------------------------------
Income before income taxes, extraordinary loss
 and cumulative effect of accounting changes                 226,116      100,051       31,956
Income taxes                                                 (94,974)     (41,195)     (26,925)
                                                          ------------------------------------
Income before extraordinary loss
 and cumulative effect of accounting changes                 131,142       58,856        5,031
                                                          ----------
Extraordinary loss (net of $23,865 income tax benefit)       (44,320)
                                                          ----------
Cumulative effect of accounting changes:
  Income taxes                                                25,455
  Postretirement benefits other
   than pensions (net of $37,488 income tax benefit)         (69,620)
                                                          ----------
  Accounting changes - net                                   (44,165)
                                                          ------------------------------------
Net income                                                $   42,657   $   58,856   $    5,031
                                                          ====================================
Per share of Common Stock:
  Income before extraordinary loss
   and cumulative effect of accounting changes            $      .85   $      .34   $      .00
  Extraordinary loss                                            (.31)
  Cumulative effect of accounting changes                       (.32)
                                                          ------------------------------------
  Net income                                              $      .22   $      .34   $      .00
                                                          ====================================
</TABLE>
See Notes to Consolidated Financial Statements

                                       10
<PAGE>

                CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                          Baker Hughes Incorporated
 
<TABLE>
<CAPTION>
September 30,
(In thousands)                                                               1994         1993
- -------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>
Current Assets:
Cash and cash equivalents                                                 $   69,179   $    6,992
                                                                          -----------------------
Receivables-less allowance for doubtful accounts:
 1994, $21,405; 1993, $21,607                                                612,414      619,953
                                                                          -----------------------
Inventories:
 Finished goods                                                              508,198      467,806
 Work in process                                                              53,644       68,408
 Raw materials                                                                81,204      102,926
                                                                          -----------------------
   Total inventories                                                         643,046      639,140
                                                                          -----------------------
Net assets of business held for sale                                                      126,430
                                                                                          -------
Deferred income taxes                                                         45,959        2,990
                                                                          -----------------------
Other current assets                                                          29,394       21,301
                                                                          -----------------------
   Total current assets                                                    1,399,992    1,416,806
                                                                          -----------------------
Property:
 Land                                                                         35,174       40,902
 Buildings                                                                   294,104      305,952
 Machinery and equipment                                                     586,863      662,078
 Rental tools and equipment                                                  530,814      521,958
                                                                          -----------------------
  Total property                                                           1,446,955    1,530,890
 Accumulated depreciation                                                   (886,871)    (869,427)
                                                                          -----------------------
  Property-net                                                               560,084      661,463
                                                                          -----------------------
Other assets:
 Investments                                                                  89,601       98,864
 Property held for disposal                                                   73,496       72,717
 Other assets                                                                 80,054       79,420
 Excess costs arising from acquisitions-less accumulated amortization:
   1994, $112,008; 1993, $90,001                                             796,455      814,070
                                                                          -----------------------
   Total other assets                                                      1,039,606    1,065,071
                                                                          -----------------------
Total                                                                     $2,999,682   $3,143,340
                                                                          =======================
</TABLE>
See Notes to Consolidated Financial Statements

                                       11
<PAGE>
 
                 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                          Baker Hughes Incorporated 

<TABLE>
<CAPTION>
(In thousands)                                                   1994         1993
- -------------------------------------------------------------------------------------
<S>                                                           <C>          <C>
Current Liabilities:
Accounts payable-trade                                        $  253,616   $  249,781
Short-term borrowings                                                863        5,381
Current portion of long-term debt                                 14,436        3,067
Accrued employee compensation and benefits                       113,304       95,303
Income taxes payable                                              29,729       15,322
Taxes other than income                                           20,608       22,552
Accrued insurance                                                 26,492       20,554
Accrued interest                                                  10,676       11,529
Other accrued liabilities                                         74,847       72,348
                                                              -----------------------
  Total current liabilities                                      544,571      495,837
                                                              -----------------------
Long-term debt                                                   637,972      935,846
                                                              -----------------------
Deferred income taxes                                             53,841       78,306
                                                              -----------------------
Postretirement benefits other than pensions                       95,951
                                                              ----------
Other long-term liabilities                                       25,494       19,021
                                                              -----------------------
Minority interest                                                  3,381        3,682
                                                              -----------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $1 par value (authorized and outstanding
 4,000,000 shares of $3.00 convertible preferred stock;
 $50 liquidation preference per share)                             4,000        4,000
Common stock, $1 par value (authorized 400,000,000 shares;
 outstanding 140,889,000 shares in 1994 and 140,437,000
 shares in 1993)                                                 140,889      140,437
Capital in excess of par value                                 1,474,013    1,444,549
Retained earnings                                                125,276      159,277
Cumulative foreign currency translation adjustment              (102,915)    (137,615)
Unrealized loss on securities available for sale                  (2,791)
                                                              -----------------------
  Total stockholders' equity                                   1,638,472    1,610,648
                                                              -----------------------
Total                                                         $2,999,682   $3,143,340
                                                              =======================
</TABLE>
See Notes to Consolidated Financial Statements

                                       12
<PAGE>
 
               CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                          Baker Hughes Incorporated 

<TABLE>
<CAPTION>
                                                                                          Cumulative    Unrealized
                                                      Common      Capital                   Foreign      Loss on
For the three years ended               Preferred     Stock      In Excess                 Currency     Securities
September 30, 1994                        Stock      ($1 Par        of        Retained    Translation    Available
(In thousands)                      ($1 Par Value)    Value)     Par Value    Earnings    Adjustment     For Sale       Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>              <C>         <C>          <C>         <C>           <C>             <C>
Balance, September 30, 1991                          $138,396    $1,256,325   $ 239,610   $ (88,970)                    $1,545,361
    Net income                                                                    5,031                                      5,031
    Issuance of $3.00 convertible
     preferred stock                $ 4,000                         145,400                                                149,400
    Cash and accrued dividends
     on $3.00 convertible pre-
     ferred stock ($3.00 per share)                                              (5,267)                                    (5,267)
    Cash dividends on common
     stock ($.46 per share)                                                     (62,857)                                   (62,857)
    Foreign currency translation
     adjustment                                                                              (3,506)                        (3,506)
    Stock issued pursuant to
     employee stock plans                                 705        11,203                                                 11,908
    Issuance of common stock                            7,600       161,313                                                168,913
    Purchase of shares                                 (8,300)     (160,525)                                              (168,825)
    Other                                                 223         5,141                                                  5,364
                                    ----------------------------------------------------------------------------------------------
Balance, September 30, 1992           4,000           138,624     1,418,857     176,517     (92,476)                     1,645,522
    Net income                                                                   58,856                                     58,856
    Cash and accrued dividends
     on $3.00 convertible pre-
     ferred stock ($3.00 per share)                                             (12,000)                                   (12,000)
    Cash dividends on common
     stock ($.46 per share)                                                     (64,096)                                   (64,096)
    Foreign currency translation
     adjustment                                                                             (45,139)                       (45,139)
    Stock issued pursuant to
     employee stock plans                               1,813        25,692                                                 27,505
                                    ----------------------------------------------------------------------------------------------
Balance, September 30, 1993           4,000           140,437     1,444,549     159,277    (137,615)                     1,610,648
    Net income                                                                   42,657                                     42,657
    Cash and accrued dividends
     on $3.00 convertible pre-
     ferred stock ($3.00 per share)                                             (12,000)                                   (12,000)
    
    Cash dividends on common
     stock ($.46 per share)                                                     (64,658)                                   (64,658)
    
    Foreign currency translation
     adjustment                                                                              17,825                         17,825
    Disposition of businesses                                                                16,875                         16,875
    Income tax accounting change                                     21,896                                                 21,896
    Investment accounting change                                                                           $  (2,791)       (2,791)
    Stock issued pursuant to
     employee stock plans                                 452         7,568                                                  8,020
                                    ----------------------------------------------------------------------------------------------
Balance, September 30, 1994         $  4,000        $ 140,889    $1,474,013  $  125,276   $(102,915)       $  (2,791)   $1,638,472
                                    ==============================================================================================
</TABLE> 
See Notes to Consolidated Financial
 Statements


                                       13
<PAGE>
 
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                          Baker Hughes Incorporated

<TABLE> 
<CAPTION>
<S>                                               <C>         <C>         <C> 
Years ended September 30,                   
(In thousands)                                       1994         1993       1992
- ------------------------------------------------------------------------------------
Cash flows from operating activities:       
Net income                                        $  42,657   $  58,856   $    5,031
Adjustments to reconcile net income         
  to net cash flows from                     
  operating activities:                      
  Depreciation and amortization of:           
     Property                                       122,812     141,699      124,394
     Other assets and debt discount                  46,526      47,371       41,608
  Deferred tax provision (credit)                    47,366      19,349       (5,497)
  Noncash portion of unusual charges-net             47,988                   79,190
  Gain on disposal of assets                        (18,034)    (14,594)     (15,670)
  Gain on disposition of businesses                (109,550)
  Foreign currency translation loss-net               1,892         441          960
  Cumulative effect of accounting             
     changes                                         44,165
  Extraordinary loss                                 44,320
  Change in receivables                             (22,740)    (74,828)       6,359
  Change in inventories                             (58,035)    (50,506)     (26,296)
  Change in accounts payable-trade                   24,890      (2,962)      12,968
  Changes in other assets                  
     and liabilities                                 16,520    (101,859)    (137,423)
                                                  ----------------------------------
Net cash flows from operating               
 activities                                         230,777      22,967       85,624
                                                  ----------------------------------
Cash flows from investing activities:       
  Property additions                               (108,639)   (126,901)    (137,875)
  Proceeds from disposal of assets                   38,664      40,928       32,240
  Proceeds from disposition of                
     businesses                                     328,389       9,299       50,722
  Acquisitions of businesses, net of          
     cash acquired                                                          (197,006)
                                                  ----------------------------------
Net cash flows from investing               
 activities                                         258,414     (76,674)    (251,919)
                                                  ----------------------------------
Cash flows from financing activities:       
  Net borrowings (payments) from              
     commercial paper and revolving
     credit facilities                             (162,590)    (95,010)     112,166
  Retirement of debentures                         (205,497)    (18,197)     (98,842)
  Net proceeds from issuance of               
     debenture purchase warrants                      7,026
  Net proceeds from issuance of notes                           223,911      246,595
  Net proceeds from issuance of common        
     stock                                                                   168,913
  Purchase of common stock                                                  (168,825)
  Repayment of matured indebtedness                                          (77,835)
  Proceeds from exercise of stock             
     options and stock purchase grants                7,900      21,358       11,908
  Dividends                                         (76,658)    (76,096)     (67,124)
                                                  ----------------------------------                                       
Net cash flows from financing               
 activities                                        (429,819)     55,966      126,956
                                                  ----------------------------------
Effect of exchange rate changes on          
 cash                                                 2,815      (1,959)      (5,678)
                                                  ----------------------------------
Increase (decrease) in cash                 
  and cash equivalents                               62,187         300      (45,017)
                                            
Cash and cash equivalents,                  
  beginning of year                                   6,992       6,692       51,709
                                                  ----------------------------------
Cash and cash equivalents, end of year            $  69,179   $   6,992   $    6,692
                                                  ==================================
</TABLE>
See Notes to Consolidated Financial Statements

                                       14
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           Baker Hughes Incorporated
 
                                    Note 1
                   Summary of Significant Accounting Policies

Principles of consolidation: The consolidated financial statements include the
accounts of Baker Hughes Incorporated and all majority-owned subsidiaries (the
"Company"). Investments in which ownership interest ranges from 20 to 50 percent
and the Company exercises significant influence over operating and financial
policies are accounted for on the equity method. Prior to 1994, other
investments were accounted for under the cost method. In 1994 the Company
changed its accounting for other investments as explained below. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain minor reclassifications have been made to the 1993 balances to conform
to the 1994 presentation.

Revenue recognition: Revenue from product sales are recognized upon delivery of
products to the customer. Revenues from services and rentals are recorded when
such services are rendered.

Inventories: Inventories are stated primarily at the lower of average cost or
market.

Property: Property is stated principally at cost less accumulated depreciation,
which is generally provided by using the straight-line method over the estimated
useful lives of individual items. The Company manufactures a substantial portion
of its rental tools and equipment, and the cost of these items includes direct
and indirect manufacturing costs.

Property held for disposal: Property held for disposal is stated at the lower of
cost or estimated net realizable value.

Investments: The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective September 30, 1994. Investments in debt and equity
securities, other than those accounted for by the equity method, are reported at
fair value with unrealized gains or losses, net of tax, recorded as a separate
component of stockholders' equity.

Excess costs arising from acquisitions: Excess costs arising from acquisitions
of businesses ("Goodwill") are amortized on the straight-line method over the
lesser of expected useful life or forty years. Management of the Company
periodically reviews the carrying value of Goodwill in relation to the current
and expected operating results of the segments of business which benefit
therefrom in order to assess whether there has been a permanent impairment of
Goodwill.

Income taxes: The Company adopted SFAS No. 109, "Accounting for Income Taxes,"
effective October 1, 1993. Previously, the Company used SFAS No. 96, "Accounting
for Income Taxes." The cumulative effect of adopting SFAS No. 109 was a credit
to income of $25.5 million ($.18 per share). An additional benefit of $21.9
million was allocated to capital in excess of par value, which reflects the
cumulative tax effect of exercised employee stock options for which the Company
has taken tax deductions in its federal tax return.

  Deferred income taxes are determined utilizing an asset and liability
approach. This method gives consideration to the future tax consequences
associated with differences between the financial accounting and tax basis of
assets and liabilities.

Environmental matters: Remediation costs are accrued based on estimates of known
environmental remediation exposure. Such accruals are recorded even if
significant uncertainties exist over the ultimate cost of the remediation.
Ongoing environmental compliance costs, including maintenance and monitoring
costs, are expensed as incurred.

Postretirement benefits other than pensions: The Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective October 1, 1993. The statement requires that the estimated cost of
postretirement benefits other than pensions be accrued over the period earned
rather than expensed as incurred. The cumulative effect of adopting SFAS No. 106
on the immediate recognition basis was a charge to income of $69.6 million ($.50
per share), net of a tax benefit of $37.5 million.

Foreign currency translation: Gains and losses resulting from balance sheet
translation of foreign operations where a foreign currency is the functional
currency are included as a separate component of stockholders' equity. Gains and
losses resulting from balance sheet translation of foreign operations where the
U.S. dollar is the functional currency are included in the consolidated
statements of operations.

                                       15
<PAGE>
 
Income per share: Income per share amounts are based on the weighted average
number of shares outstanding during the respective years (140,532,000 in 1994,
139,321,000 in 1993 and 138,599,000 in 1992) and exclude the negligible dilutive
effect of shares issuable in connection with employee stock plans. Net income is
adjusted for dividends on preferred stock.

Statements of cash flows: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.

                                     Note 2
                         Acquisitions and Dispositions

1994
 In September 1994, the Company sold the EnviroTech Pumpsystems ("Pumpsystems")
group of companies. The decision to divest Pumpsystems was part of a continuing
review of the Company's core product and service competencies. The sale provided
approximately $210.0 million in proceeds and resulted in a gain of $101.0
million. Pumpsystems' operating revenues and expenses have been reported in a
manner similar to discontinued operations since March 1994. As such, the first
six months of Pumpsystems' revenues and expenses are included in the
consolidated results for 1994 and the last six months net operating results are
reflected as a separate line in the Company's consolidated statement of
operations.

  In July 1993, the Company announced that the EnviroTech Measurements &
Controls ("EM&C") group of companies would no longer be considered part of its
core business. Accordingly, the net assets of the EM&C operations were
classified as a current asset at September 30, 1993. EM&C operating revenues and
expenses have been reported in a manner similar to discontinued operations since
June 1993. As such, there are no EM&C revenues and expenses included in the
consolidated results for 1994 and nine months of EM&C revenues and expenses are
included in the consolidated results for 1993. EM&C operated near break even
levels from July 1993 to March 1994 with a small net operating loss offsetting
the gain on the sale. In March 1994, the Company completed the sale of EM&C
which provided $134.0 million in proceeds and resulted in a gain of $8.6
million.

1992
  In October 1991, the Company sold the Eastern Hemisphere operations of Baker
Hughes Tubular Services ("BHTS") to Tuboscope Corporation, now known as
Tuboscope Vetco International Corporation ("Tuboscope"), for total consideration
of $75.7 million. The consideration consisted of $50.7 million in cash, 1.7
million shares of Tuboscope common stock and $10.0 million of Tuboscope
convertible preferred stock. The Company recognized a gain on the sale of $31.9
million.

  In April 1992, the Company acquired Teleco Oilfield Services Inc. ("Teleco")
from Sonat, Inc. for $349.4 million. The purchase price was funded with $17.7
million in available cash, $182.3 million of proceeds from commercial paper
borrowings, four million shares of 6.0% convertible preferred stock with a face
value of $200.0 million (estimated fair market value at date of acquisition of
approximately $149.4 million) and a five percent royalty payment for five years
on certain technology revenues. The acquisition has been accounted for using the
purchase method of accounting and accordingly, the cost of the acquisition has
been allocated to assets acquired and liabilities assumed based on their
estimated fair market values at the date of acquisition. The operating results
of Teleco are included in the consolidated statements of operations from the
acquisition date.

  In August 1992, the Company purchased from Borg-Warner Corporation ("B-W") a
subsidiary of B-W, whose only asset was 8.3 million shares of the Company's
common stock. Total consideration paid to B-W was $168.8 million. All of the
funds for the purchase were raised through a public offering by the Company of
7.6 million shares of its common stock at a price of $22.25 per share. Net
proceeds from the offering were $168.9 million. The Company does not intend to
reissue any of the shares purchased in this transaction and accordingly, the 8.3
million shares have been treated as having been constructively retired for
financial reporting purposes.

                                       16
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          Baker Hughes Incorporated
 
  In September 1992, the Company sold the Western Hemisphere operations of
BHTS to ICO, Inc. ("ICO") for $11.3 million in promissory notes varying in
maturities from one to seven years and a warrant entitling the Company to
purchase 800,000 shares of ICO common stock at $3.75 per share (reflects a one-
for-five reverse stock split). The net proceeds from the sale approximated the
carrying value of the Western Hemisphere operations after recognition of a 1992
unusual charge related to these operations.

- --------------------------------------------------------------------------------
                                     Note 3
                              Unusual Charges-Net

1994

  During 1994, the Company recognized $31.8 million of net unusual charges
consisting of the following items:

<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
<S>                                                      <C>
Insurance recovery in the Parker & Parsley litigation    $(19,281)
Discontinued product line                                  15,005
Oilfield restructurings:
 Severance under existing benefit arrangements              5,869
 Relocation of property, inventory and people               5,773
 Writedown of assets to net realizable value               18,650
 Abandoned leases                                           2,082
Other                                                       3,731
                                                         --------
Unusual charges-net                                      $ 31,829
                                                         ========
</TABLE>

  In May 1994, the Company realized a gain of $19.3 million from the cash
settlement of a suit against certain insurance carriers in the Parker & Parsley
litigation. See Note 12.

  During the fourth quarter of 1994, the Company discontinued an MWD
(measurement-while-drilling) product line when it decided to market and support
other more viable MWD products resulting in the write-off of property and
inventory of $15.0 million. In addition, the Company recorded a $32.4 million
charge related to the restructuring and reorganization of certain divisions,
primarily Baker Hughes INTEQ, in Oilfield Operations.

1993

  During the first quarter of 1993, the Company recognized an unusual charge of
$17.5 million in connection with reaching an agreement with representatives of
the class plaintiffs for the settlement of a class action civil antitrust
lawsuit concerning the marketing of tricone rock bits. A cash payment of $17.5
million was made in April 1993. See Note 12.

  During the second quarter of 1993, the Company, along with Dresser Industries
and Parker & Parsley Petroleum Development Incorporated ("Parker & Parsley"),
settled all outstanding litigation among the parties over alleged intentional
product delivery or service variance on a number of well stimulation projects.
In recognition of settlement, the Company recorded an unusual charge of $24.5
million. A cash payment of $57.5 million was made for the Company's portion in
May 1993. See Note 12.

1992

  During 1992, the Company recognized $79.2 million of net unusual charges
consisting of the following items:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
<S>                                              <C>
Gain on sale of the Eastern Hemisphere
 operations of BHTS                              $(31,882)
Restructuring costs and impairment of
 value of the Western Hemisphere
 operations of BHTS                                16,272
Loss on discontinuance of Hughes Christensen
 Company Argentina operations                      22,500
Costs related to the integration of Teleco         25,300
Operational restructurings                         30,100
Litigation                                          8,700
Other                                               8,200
                                                 --------
Unusual charges-net                              $ 79,190
                                                 ========
</TABLE>

                                       17
<PAGE>
 
  As discussed in Note 2, in October 1991, the Company recognized a gain on the
sale of the Eastern Hemisphere operations of BHTS. The Company recognized
charges to operations for the estimated costs and losses to be incurred in
connection with the restructuring of the Western Hemisphere operations of BHTS
and the discontinuance of the Hughes Christensen Company ("HCC") Argentina
operations, in the first quarter of 1992. In response to further structural
changes in the U.S. oilfield, the Company recognized a $7.0 million impairment
of value of the BHTS Western Hemisphere operations in the third quarter of 1992.

  During the third quarter of 1992, the Company recognized unusual charges
totalling $79.3 million in response to the structural changes in the U.S.
oilfield and as a result of the Teleco acquisition. The costs associated with
the integration of the Teleco operations accounted for $25.3 million of these
charges.

  Changes in market conditions, as evidenced by the decline in the worldwide
active rig count which reported record lows in drilling activity, caused the
Company to implement several operational restructurings and combinations. Of the
$30.1 million recognized for these restructurings, the most significant charge
relates to the merger of the Baker Oil Tools and Baker Service Tools divisions.

  As a result of a lawsuit filed by TRW Inc. against the Company, a charge was
recorded to accrue the Company's estimate of the total costs of disposing of
this suit through appeal or settlement. In addition, the Company accrued charges
related to a Department of Justice investigation and imposed fine concerning the
marketing of tricone rock bits by HCC. See Note 12.

- --------------------------------------------------------------------------------
                                     Note 4
                                  Indebtedness

  Long-term debt at September 30, 1994 and 1993 consisted of the following:
<TABLE>
<CAPTION>
(In thousands)                                                                          1994              1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>              <C>
Commercial Paper                                                                                        $127,060
Revolving Credit Facilities due through 1999 with an
  average interest rate of 5.92% at September 30, 1994                                 $ 47,693           77,192
4.125% Swiss Franc 200 million Bonds due June 1996
  with an effective interest rate of 7.82%                                              107,222          106,547
7.625% Notes due February 1999 with an effective interest rate of 7.73%,
  net of unamortized discount of $1,198 ($1,449 in 1993)                                148,802          148,551
6% Debentures with an effective interest rate of 14.66% due March 2002,
  net of unamortized discount of $93,236 in 1993                                                         131,764
8% Notes due May 2004 with an effective interest rate of 8.08%,
  net of unamortized discount of $1,292 ($1,406 in 1993)                                 98,708           98,594
Liquid Yield Option Notes due May 2008 with a yield to maturity of 3.5% per annum,
  net of unamortized discount of $149,329 ($157,884 in 1993)                            235,921          227,366
Convertible Subordinated Debentures due through October 2000 with
  an average interest rate of 6.30% at September 30, 1994                                10,197           10,197
Other indebtedness with an average interest rate of 5.99% at September 30, 1994           3,865           11,642
                                                                                       -------------------------
Total debt                                                                              652,408          938,913
Less current maturities                                                                  14,436            3,067
                                                                                       -------------------------
Long-term debt                                                                         $637,972         $935,846
                                                                                       =========================
</TABLE>

                                       18
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           Baker Hughes Incorporated
 
  At September 30, 1994, the Company had $800.8 million of credit facilities
with commercial banks, of which $511.6 million is committed. The majority of
these facilities expire in 1999. The Company's policy is to classify commercial
paper and borrowings under revolving credit facilities as long-term debt since
the Company has the ability under certain credit agreements, and the intent, to
maintain these obligations for longer than one year. These facilities are
subject to normal banking terms and conditions and do not materially restrict
the Company's activities.

  In May through September 1994, the Company repurchased or defeased all of its
outstanding 6% discount debentures for $205.5 million and generated an
extraordinary loss of $44.3 million ($.31 per share), net of a tax benefit of
$23.9 million. At September 30, 1994, $43.7 million of the debentures have been
considered extinguished through defeasance.

  In April 1994, the Company issued debenture purchase warrants for $7.0 million
which entitled the holders to purchase $93.0 million of the Company's
debentures. Subsequent to September 30, 1994, certain holders exercised warrants
and purchased $78.0 million of debentures. The option to exercise the remaining
$15.0 million of debentures will expire in January 1995.

  Maturities of long-term debt for the next five years are as follows: 1995-
$14.4 million; 1996-$110.6 million; 1997-$3.4 million; 1998-$0.1 million and
1999-$184.6 million.

- --------------------------------------------------------------------------------
                                     Note 5
                             Financial Instruments

  The Company has entered into arrangements to manage its exposure to interest
rate and foreign currency fluctuations. The market value gains or losses arising
from interest rate or foreign exchange hedging contracts offset gains or losses
on the underlying hedged assets and liabilities. The differential paid or
received on interest rate swap agreements is recognized as an adjustment to
interest expense.

  In the unlikely event that the counterparties fail to meet the terms of an
interest rate swap agreement, the Company's exposure is limited to the interest
rate differential.

  At September 30, 1994, the Company had a $204.5 million aggregate notional
amount interest rate swap agreement outstanding maturing in 1998. This swap
effectively exchanges fixed interest rates for variable interest rates on the
notional amount. Additionally, the Company has an interest rate swap agreement
in conjunction with the $93.0 million debentures described in Note 4. The swap
expires in January 2000 and effectively exchanges fixed interest rates for
variable interest rates on a notional principal amount of $93.0 million.

  The 4.125% Swiss Franc 200.0 million Bonds ("SFrBonds") are hedged through a
foreign currency swap agreement and a foreign currency option. These instruments
convert the Company's Swiss Franc denominated principal and interest obligations
under the SFrBonds into U.S. dollar denominated obligations. In the unlikely
event of nonperformance by the counterparty, the Company's economic exposure is
limited to the difference, in U.S. dollar terms, of its obligations under the
foreign currency hedging instruments described above and its Swiss Franc
denominated obligations pursuant to the terms of the SFrBonds.

  Except as described below, the estimated fair values of the Company's
financial instruments at September 30, 1994 and 1993, approximate their carrying
value as reflected in

                                       19
<PAGE>
 
the consolidated statements of financial position. The Company's financial
instruments include cash and short-term investments, receivables, investments,
payables, debt and interest rate and foreign currency contracts. The fair value
of such financial instruments has been estimated based on quoted market prices
and the Black-Scholes pricing model.

  The estimated fair value of the Company's debt, including the related interest
rate and foreign currency contracts at September 30, 1994 and 1993 were $645.6
million and $1,075.1 million, respectively, which differs from the carrying
amounts of $653.3 million and $944.3 million, respectively, included in the
consolidated statements of financial position.

- --------------------------------------------------------------------------------
                                     Note 6
                                Preferred Stock

  In April 1992, the Company issued four million shares of $3.00 convertible
preferred stock ($1 par value per share and $50 liquidation preference per
share) to Sonat, Inc. in connection with the Teleco acquisition. The preferred
stock is convertible at the option of the holder at any time into the Company's
common stock at a conversion price of $32.50 per share.

  The preferred stock is redeemable at any time, in whole or in part, at the
option of the Company on at least thirty and not more than sixty days notice at
$50 per share, plus accrued dividends. Dividends on the preferred stock are
cumulative at the rate of $3.00 per share per annum. Such dividends are payable
quarterly as declared by the Board of Directors.

- --------------------------------------------------------------------------------
                                     Note 7
                              Employee Stock Plans

  The Company has stock option plans which provide for granting of options for
the purchase of common stock to directors, officers and other key employees.
Such stock options may be granted subject to terms ranging from one to ten years
at a price equal to the fair market value of the stock at the date of grant.

  Stock option activity for the Company during 1994, 1993 and 1992 was as
follows:

<TABLE>
<CAPTION>
Number of Shares (In thousands)                                                              1994       1993       1992
- --------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>       <C>        <C>
Stock options outstanding, beginning of year                                                  2,890     2,726      2,121
  Granted (per share):
    1994 $20.13 to $21.88                                                                     2,291
    1993 $23.00                                                                                         1,001 
    1992 $19.17 to $25.00                                                                                          1,022
  Exercised (per share):
    1994 $10.25 to $15.38                                                                       (31)
    1993 $10.25 to $28.50                                                                                (721)
    1992 $10.25 to $21.95                                                                                           (264)
  Expired                                                                                      (271)     (116)      (153)
                                                                                              ---------------------------
Stock options outstanding, end of year (per share: $13.38 to $28.50 at September 30, 1994)    4,879     2,890      2,726
                                                                                              ===========================
</TABLE>

                                       20
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           Baker Hughes Incorporated
 
  At September 30, 1994, options were exercisable for 1.9 million shares, and
6.2 million shares were available for future option grants.

  The Company has a plan which provides for the sale of convertible debentures
to certain officers and key employees. An aggregate of $30.0 million principal
amount of debentures may be issued under the plan, which are convertible into
shares of common stock after one year. At September 30, 1994, a total of $10.2
million principal amount of debentures are outstanding and convertible into
472,000 shares of common stock at $13.38 to $28.50 per share.

  The Company has an Employee Stock Purchase Plan (the "Plan") under which there
remain authorized and available for sale to employees an aggregate of 482,000
shares of the Company's common stock. Based on the market price of common stock
on the date of grant, the Company estimates that approximately 476,000 shares
will be purchased in July 1995. Under the Plan, 421,000, 521,000 and 439,000
shares were issued at $17.96, $19.02 and $19.34 per share during 1994, 1993 and
1992, respectively.

- --------------------------------------------------------------------------------
                                    Note 8
                                  Income Taxes

  The geographical sources of income before income taxes, extraordinary loss and
cumulative effect of accounting changes for the three years ended September 30,
1994 are as follows:

<TABLE>
<CAPTION>
(In thousands)                                                                                      1994       1993       1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>        <C>        <C>
United States                                                                                        $139,940   $ 41,024   $(49,185)
Foreign                                                                                                86,176     59,027     81,141
                                                                                                     ------------------------------ 
   Income before income taxes, extraordinary loss and cumulative effect of accounting changes        $226,116   $100,051   $ 31,956
                                                                                                     ==============================
 </TABLE>

   The provision (credit) for income taxes for the three years ended September
30, 1994 are as follows:

<TABLE>
<CAPTION> 
(In thousands)                                                                                           1994      1993       1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>        <C>        <C>
Currently payable:
  United States                                                                                      $ 10,875   $  2,552   $  3,124
  Foreign                                                                                              36,733     19,294     29,298
                                                                                                     ------------------------------
    Total currently payable                                                                            47,608     21,846     32,422
                                                                                                     ==============================
Deferred:
   United States                                                                                       46,433     (1,053)    (8,248)
   Foreign                                                                                                933     20,402      2,751
                                                                                                     ------------------------------
    Total deferred                                                                                     47,366     19,349     (5,497)
                                                                                                     ------------------------------
    Total provision for income taxes                                                                 $ 94,974   $ 41,195   $ 26,925
                                                                                                     ==============================
</TABLE> 
                                       21
<PAGE>
 
  The provision for income taxes differs from the amount computed by applying
the U. S. statutory income tax rates to income before taxes, extraordinary loss
and cumulative effect of accounting changes for the reasons set forth below:

<TABLE>
<CAPTION>
(In thousands)                                                      1994       1993        1992      
- ---------------------------------------------------------------------------------------------------
<S>                                                                 <C>        <C>         <C>      
Statutory income tax                                                $ 79,141   $ 34,818    $ 10,865 
Goodwill amortization                                                  5,653      6,903       5,976 
Foreign operations                                                    11,984     22,812       3,132 
State income taxes - net of U. S. tax benefit                          2,940      1,701       2,045 
Utilization of loss and credit carryforwards                         (12,662)   (26,714)     (3,707)
Internal Revenue Service settlement                                                          (8,245) 
Unusual charges for which benefit is not currently recognizable                              14,828
Other-net                                                              7,918      1,675       2,031
                                                                    -------------------------------
  Provision for income taxes                                        $ 94,974   $ 41,195    $ 26,925
                                                                    ===============================
</TABLE>

  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and operating loss and
tax credit carryforwards. The tax effects of the Company's temporary differences
and carryforwards at September 30, 1994 are as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                  <C>
Deferred tax liabilities:
   Property                                          $ 56,100
   Investments                                         33,900
   Excess costs arising from acquisitions              44,400
   Undistributed earnings of foreign subsidiaries      29,600
   Other                                               15,700
                                                     --------
      Total                                          $179,700
                                                     --------
Deferred tax assets:
   Receivables                                       $  4,900
   Inventory                                           48,600
   Postretirement benefits other than pensions         36,750
   Other accrued expenses                              28,300
   Operating loss carryforwards                        27,400
   Tax credit carryforwards                            46,960
   Other                                                7,750
                                                     -------- 
     Subtotal                                         200,660
Valuation allowance                                   (28,840)
                                                     --------
       Total                                         $171,820
                                                     --------
</TABLE>

  A valuation allowance is recorded when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets depends on the ability to generate
sufficient taxable income of the appropriate character in the future. The
valuation allowance relates to the realization of operating loss carryforwards
in certain non-U.S. jurisdictions and foreign tax credit carryforwards in the
U.S.

  Deferred income tax assets and liabilities at September 30, 1993 relate
primarily to basis differences in property, inventory, accruals for unusual
charges and accrued liabilities.

  Provision has been made for U.S. and additional foreign taxes for the
anticipated repatriation of certain earnings of foreign subsidiaries of the
Company. The Company considers the undistributed earnings of its foreign
subsidiaries above the amount already provided to be permanently reinvested.
These additional foreign earnings could become subject to additional tax if
remitted as a dividend, lent by the foreign subsidiary to the Company or if the
Company should sell its stock in the subsidiary. The additional amount of taxes
payable are not practicable to estimate but the Company believes they would not
be material due to offsetting foreign tax credits generated by the repatriation
of such earnings.

                                       22
<PAGE>
 
  During 1992, the Company reached a settlement with the IRS to resolve all
pending federal income tax issues for the 1978 through 1986 tax years. As a
result of the settlement, the Company revised its estimates of deferred income
taxes and related interest expense. Accordingly, the reversal of deferred income
taxes had the effect of increasing net income by $8.2 million, while the
reversal of the related interest reduced interest expense by $8.8 million. The
Company has reached agreement with the IRS on all federal income tax issues
through and including the 1991 tax year.

  At September 30, 1994, the Company had approximately $46.9 million of general
business, alternative minimum tax and foreign tax credit carryforwards available
to offset future payments of federal income taxes expiring in varying amounts
between 1995 and 2009.

- --------------------------------------------------------------------------------
                                     Note 9
                  Industry Segment and Geographic Information

The Company operates principally in two industry segments - oilfield and
process.

Oilfield Industry: Manufacture and sale of equipment and provision of services
used during and subsequent to the drilling of oil and gas wells to achieve
safety and long-term productivity, to provide structural integrity to protect
against pressure and corrosion damage and to stimulate or rework wells during
their productive lives by chemical, mechanical or other stimulation means.

Process Industry: Manufacture and sale of process equipment for separating and
treating liquids, solids and slurries for environmental and other process
industries.

Disposed Businesses: The disposed businesses segment information includes the
results of significant operations that were sold during the three years
presented as discussed in Note 2. Prior years segment information has been
restated to reflect the 1994 dispositions.

Other: The Company maintains worldwide manufacturing plants and service
locations to serve these industry segments.

  Intersegment sales and transfers between geographic areas are priced at the
estimated fair value of the products or services negotiated between the selling
and receiving units. Operating profit is total revenues less costs and expenses
(including unusual charges-net) but before deduction of general corporate
expenses totalling $32.8 million, $35.6 million and $25.7 million in 1994, 1993
and 1992, respectively. Identifiable assets are those assets that are used by
the Company's operations in each industry segment or are identified with the
Company's operations in each geographic area. Corporate assets consist
principally of cash, assets held for disposal, investments and notes receivable
which amount to $281.3 million, $231.2 million and $199.4 million at September
30, 1994, 1993 and 1992, respectively.

  Summarized financial information concerning the industry segments and
geographic areas in which the Company operated at September 30, 1994, 1993 and
1992 and for each of the years then ended is shown in the following tables:

                                       23
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           Baker Hughes Incorporated

<TABLE>
<CAPTION>
                                                                            Disposed
(In thousands)                           Oilfield          Process          Businesses   Eliminations      Total
- -------------------------------------------------------------------------------------------------------------------
<S>                                      <C>               <C>              <C>          <C>             <C>
Operations by Industry Segment:
1994
Revenues from unaffiliated customers:
  Sales                                  $1,366,555        $264,725           $ 96,454                   $1,727,734
  Services and rentals                      744,086          32,938                                         777,024
Intersegment sales                              297             589              4,678       $ (5,564)
                                         --------------------------------------------------------------------------  
Total revenues                            2,110,938         298,252            101,132         (5,564)    2,504,758
Operating profit                            157,906          21,628             39,116                      218,650
Identifiable assets                       2,504,512         188,265             30,594         (4,939)    2,718,432
Capital expenditures                        100,514           4,188              2,713          1,224       108,639
Depreciation and amortization               141,369           7,260              4,053          1,513       154,195
1993
Revenues from unaffiliated customers:
  Sales                                  $1,332,407        $278,849           $334,537                   $1,945,793
  Services and rentals                      710,725          29,479             15,700                      755,904
Intersegment sales                              359             522              5,154       $ (6,035)
                                         --------------------------------------------------------------------------
Total revenues                            2,043,491         308,850            355,391         (6,035)    2,701,697
Operating profit (loss)                     178,776          21,820             (6,130)                     194,466
Identifiable assets                       2,461,070         167,891            285,465         (2,330)    2,912,096
Capital expenditures                        106,562           6,059             13,548            732       126,901
Depreciation and amortization               154,304           7,786             15,071          1,457       178,618
1992
Revenues from unaffiliated customers:
  Sales                                  $1,238,743        $253,719           $347,309                   $1,839,771
  Services and rentals                      651,157          26,272             21,315                      698,744 
Intersegment sales                              931              44              4,576       $ (5,551)
                                         --------------------------------------------------------------------------
Total revenues                            1,890,831         280,035            373,200         (5,551)    2,538,515
Operating profit                            100,321           5,471             13,882                      119,674
Identifiable assets                       2,519,863         171,809            325,911         (4,031)    3,013,552
Capital expenditures                        121,321           3,594             12,511            449       137,875
Depreciation and amortization               131,139           7,270             16,615          1,019       156,043
</TABLE>

                                       24
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           Baker Hughes Incorporated
 
<TABLE>
<CAPTION>
                                      Western Hemisphere                Eastern Hemisphere
                                  -------------------------          -------------------------                           
(In thousands)                    United States       Other          Europe              Other         Eliminations     Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                 <C>            <C>                 <C>           <C>              <C>
Operations by Geographic Area:
1994
Revenues from unaffiliated
 customers:
  Sales                            $  963,413         $253,834        $269,604            $240,883                      $1,727,734
  Services and rental s               308,106          108,282         209,875             150,761                         777,024
Transfers between geographic
 areas                                180,345           23,177          36,588              23,433      $(263,543)
                                  -------------------------------------------------------------------------------------------------
Total revenues                      1,451,864          385,293         516,067             415,077       (263,543)       2,504,758
Operating profit                       60,391           59,688          38,125              60,446                         218,650
Identifiable assets                 1,631,374          278,109         552,104             411,317       (154,472)       2,718,432
Export sales of U.S. companies                          77,219          24,837             142,524                         244,580
 
1993
Revenues from unaffiliated
 customers:
  Sales                            $  929,943         $254,678        $371,346            $389,826                     $1,945,793
  Services and rentals                281,844           95,325         195,224             183,511                        755,904
Transfers between geographic
 areas                                175,411           23,039          48,252              28,183      $(274,885)
                                   -----------------------------------------------------------------------------------------------
Total revenues                      1,387,198          373,042         614,822             601,520       (274,885)      2,701,697
Operating profit (loss)               (20,640)          43,077          65,606             106,423                        194,466
Identifiable assets                 1,689,377          298,381         663,132             402,428       (141,222)      2,912,096
Export sales of U.S. companies                          79,236          14,503             197,607                        291,346
 
1992
Revenues from unaffiliated
 customers:
  Sales                            $  893,953         $210,119        $418,041            $317,658                     $1,839,771
  Services and rentals                231,327           75,764         276,546             115,107                        698,744
Transfers between geographic
 areas                                194,531           13,388          42,496               9,250      $(259,665)
                                   -----------------------------------------------------------------------------------------------
Total revenues                      1,319,811          299,271         737,083             442,015       (259,665)      2,538,515
Operating profit (loss)               (87,312)          13,476         139,749              53,761                        119,674
Identifiable assets                 1,795,343          269,994         793,440             326,990       (172,215)      3,013,552
Export sales of U.S. companies                          79,320          24,431             146,036                        249,787
</TABLE>

                                       25
<PAGE>

- ------------------------------------------------------------------------------- 
                                    Note 10
                             Employee Benefit Plans

Postretirement Benefits Other Than Pensions

The Company provides postretirement health care and life insurance benefits for
substantially all U.S. employees. In 1993 and 1992, the Company recognized $9.5
million and $8.4 million, respectively, as expense for postretirement health
care and life insurance benefits. Expense recognized in 1994 under SFAS No. 106
was $8.8 million. The Company's postretirement plan is not funded.

  The following table sets forth the funded status at September 30, 1994:

<TABLE> 
<CAPTION> 

(In thousands)
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation ("APBO"):
<S>                                           <C>
   Retirees                                   $ (83,449)
   Fully eligible active plan participants       (9,856)
   Other active plan participants               (19,920)
                                              ---------
     Total                                     (113,225)
Unrecognized net loss                             7,595
                                              ---------
Accrued postretirement benefit cost           $(105,630)
                                              =========
 
</TABLE>

  Net periodic postretirement benefit cost for 1994 consists of the following:

<TABLE>
<CAPTION>

(In thousands)
- --------------------------------------------------------------------------------
<S>                                           <C>
Service cost of benefits earned               $1,300
Interest cost on APBO                          7,500
                                              ------    
Net periodic postretirement benefit cost      $8,800
                                              ======
 
</TABLE>

  The assumed health care cost trend rate used in measuring the APBO as of
September 30, 1994 was 9.0% for 1995 declining gradually each successive year
until it reaches 5% in 2002, after which it remains constant. A 1% increase in
the trend rate for health care costs would have increased the APBO by
approximately 9% and the aggregate of the service and interest cost components
of the net periodic postretirement benefit cost by approximately 11%. The
assumed discount rate used in determining the APBO was 7.5%.

 Defined Benefit Pension Plans

The Company has several noncontributory defined benefit pension plans covering
various domestic and foreign employees. Pension expense for these plans was $1.4
million, $1.3 million and $3.0 million in 1994, 1993 and 1992, respectively.
Generally, the Company makes annual contributions to the plans in amounts
necessary to meet minimum governmental funding requirements.

  Net pension expense includes the following components:

<TABLE>
<CAPTION>

(In thousands)                                     1994      1993      1992
- -------------------------------------------------------------------------------
<S>                                                <C>       <C>       <C>
Service cost - benefits earned during the period   $   954   $ 1,413   $ 4,345
Interest cost on projected benefit obligation        2,329     3,348     6,582
Actual return on assets                             (1,710)   (3,545)   (3,019)
Net amortization and deferral                         (216)      126    (4,954)
                                                   ---------------------------
  Net pension expense                              $ 1,357   $ 1,342   $ 2,954
                                                   ===========================

</TABLE>

                                       26
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           Baker Hughes Incorporated
 
  The weighted average assumptions used in the accounting for the defined
benefit plans were:

<TABLE>
<CAPTION>
                                                     1994   1993   1992
- --------------------------------------------------------------------------------
<S>                                                  <C>    <C>    <C>
Discount rate                                        7.7%   7.3%   9.5%
Rates of increase in compensation levels             3.5%   4.5%   5.5%
Expected long-term rate of return on assets          8.6%   8.8%   9.5%

</TABLE>

  The following table sets forth the funded status and amounts recognized in the
Company's consolidated statements of financial position at September 30, 1994
and 1993:

<TABLE>
<CAPTION>
                                                                               1994                       1993
                                                                     Overfunded    Underfunded   Overfunded   Underfunded
(In thousands)                                                          Plans         Plans        Plans        Plans
- -------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>           <C>          <C>
Actuarial present value of benefit obligations:
  Vested benefit obligation                                          $(15,309)     $(12,922)     $(16,800)    $(12,654)
                                                                     =================================================
  Accumulated benefit obligation                                     $(15,518)     $(13,848)     $(17,013)    $(13,509)
                                                                     =================================================
  Projected benefit obligation                                       $(16,812)     $(16,185)     $(17,509)    $(15,631)
Plan assets at fair value                                              22,159         7,387        20,368        6,178
                                                                     -------------------------------------------------
Projected benefit obligation (in excess of) less than plan assets       5,347        (8,798)        2,859       (9,453)
Unrecognized prior service cost                                           259            98           351          942
Unrecognized net (gain) loss                                           (2,024)          239            79          760
Unrecognized net liability at transition                                  320            97           314          822
                                                                     -------------------------------------------------
Prepaid pension cost (pension liability)                             $  3,902      $ (8,364)     $  3,603     $ (6,929)
                                                                     =================================================

</TABLE>


  

  During 1993, the Company terminated certain defined benefit pension plans. A
net gain of $3.3 million was recorded in connection with the terminations.
Pension plan assets are primarily mortgages, private placements, bonds and
common stocks.

Thrift Plan

Virtually all employees not covered under one of the Company's pension plans are
eligible to participate in the Company sponsored Thrift Plan. The Thrift Plan
allows eligible employees to elect to contribute from 2% to 15% of their
salaries to an investment trust. Employee contributions are matched by the
Company at the rate of $.50 per $1.00 up to 6% of the employee's salary.
Beginning January 1, 1995, the Company matching will change to $1.00 per $1.00
employee contribution for the first 2% and $.50 per $1.00 employee contribution
for the next 4% of the employee's salary. In addition, the Company contributes
for all eligible employees between 2% and 5% of their salary depending on the
employee's age as of January 1 each year. Company contributions become fully
vested to the

                                       27
<PAGE>
 
employee after five years of employment. The Company's contributions to the
Thrift Plan and other defined contribution plans amounted to $26.3 million,
$23.6 million and $21.0 million in 1994, 1993 and 1992, respectively.

  SFAS No. 112 "Employers' Accounting for Postemployment Benefits," was issued
by the Financial Accounting Standards Board in November 1992. The statement
requires accrual basis accounting for such benefits as opposed to the Company's
current method of cash basis accounting. The Company will adopt this statement
effective October 1, 1994. The cumulative effect due to the change in accounting
will be a charge to income of $14.6 million, net of a $7.9 million tax benefit.
Expense under SFAS No. 112 for 1995 related to these benefits is not expected to
be significantly different from actual cash payments.

- --------------------------------------------------------------------------------
                                    Note 11
                 Stockholder Rights Agreement and Other Matters

The Company has a Stockholder Rights Agreement to protect against coercive
takeover tactics. Pursuant to the agreement, the Company distributed to its
stockholders one Right for each outstanding share of common stock. Each Right
entitles the holder to purchase from the Company .01 of a share of the Series
One Junior Participating Preferred Stock and, under certain circumstances,
securities of the Company or an acquiring entity at 1/2 market value. The Rights
are exercisable only if a person or group either acquires 20% or more of the
Company's outstanding common stock or makes a tender offer for 30% or more of
the Company's common stock. The Rights may be redeemed by the Company at a price
of $.03 per Right at any time prior to a person or group acquiring 20% or more
of the Company's common stock. The Rights will expire on March 23, 1998.

  Supplemental consolidated statement of operations information is as follows:

<TABLE>
<CAPTION>
(In thousands)                                                                    1994     1993      1992
- ------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>      <C>      <C>
Maintenance and repairs                                                           $89,734  $92,801  $100,481
Operating leases (generally transportation equipment and warehouse facilities)     30,089   36,500    39,218
Research and development                                                           37,393   41,067    44,615
Taxes other than payroll and income tax                                            24,755   25,094    21,906
Income taxes paid                                                                  39,397   43,112    27,976
Interest paid                                                                      55,488   65,673    66,794
Net foreign exchange translation losses                                             1,892      441       960
</TABLE>

                                       28
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           Baker Hughes Incorporated

- ------------------------------------------------------------------------------- 
                                    Note 12
                                   Litigation
Parker & Parsley

In May 1994, a settlement of litigation against its insurance carriers
provided the Company a recovery of $19.3 million, net of expenses, which was
recognized as an unusual credit in the third quarter of 1994. The Company had
previously recorded a charge to earnings of $24.5 million in the second quarter
of 1993 as a result of a litigation settlement for $57.5 million in May 1993
paid on behalf of a former affiliate, BJ Services Company USA, Inc. ("BJ") to
Parker & Parsley over alleged intentional product delivery or service variance
on a number of well stimulation projects. In connection with the initial public
offering by BJ in 1990, the Company had previously agreed to indemnify BJ for
damages and costs of litigation arising out of said allegations or similar
claims from any other customers prior to the date of the initial public
offering.

Glyn Snell

In August 1994, the Company made a payment of $7.5 million to settle a class
action suit on behalf of Glyn Snell and other royalty interest owners
implicating Dresser Industries, BJ, the Company and affiliates in damages to the
same wells included in the Parker & Parsley litigation.

Mission Resources

In September 1994, the Company and its insurers settled litigation requiring the
Company to pay $.8 million to Mission Resources, Inc.- II in connection with
product delivery or service variances on approximately 53 well stimulation
projects performed by its former subsidiary, BJ-Hughes in Kern County,
California. Although the suit did not name the Company as a defendant, the
allegations may have fallen within the Company's agreement, in connection with
the initial public offering by BJ, to indemnify it for damages, if any, and
costs of litigation arising out of any such claims.

Department of Justice Investigation

In July 1992, pursuant to an agreement with the Justice Department, HCC
pleaded guilty to a one count criminal information alleging that it had
conspired to fix the price of tricone rock bits for a period of nine weeks in
1989 in violation of Section 1 of the Sherman Act. A fine of $1.0 million was
imposed by the Court upon acceptance of the plea.

  As a consequence of the Justice Department action, the Company and three other
major producers of tricone rock bits were sued civilly in a class action by
several litigants alleging damages as a consequence of the Sherman Act
violation. In April 1993, a $17.5 million settlement was approved by the Court
and a judgement dismissing claims against the Company on behalf of the class was
entered. A charge to earnings of $17.5 million was recorded in the first quarter
of 1993. In September 1993, the Court notified the Class that an Additional
Settlement Agreement had been entered into on behalf of the Class with two other
defendants. Because the prior settlement with the Company contained a most
favored nations clause requiring a refund to the Company if a later settlement
with any other defendants was more favorable, the Company received a refund of
$2.1 million in the first quarter of 1994. One antitrust action by a customer
who opted out of the class was settled for $1.0 million for which payment was
made by the Company in July 1994.

TRW Inc.

In January 1994, the Company paid $10.4 million to TRW Inc. ("TRW") to satisfy
a judgement TRW had obtained in connection with a damage suit filed against the
Company and affiliates in connection with the sale of certain disc and decanter
machines by the affiliates prior to the Company's acquisition of the affiliates
in 1989.

                                       29
<PAGE>
 
Other

The Company is sometimes named as a defendant in litigation relating to the
products and services it provides. The Company insures against these risks to
the extent deemed prudent by its management, but no assurance can be given
that the nature and amount of such insurance will in every case fully
indemnify the Company against liabilities arising out of pending and future
legal proceedings relating to its ordinary business activities.

- --------------------------------------------------------------------------------
                                    Note 13
                             Environmental Matters

The Company's past and present operations include activities which are subject
to extensive federal and state environmental regulations.

  The Company has been identified as a potentially responsible party ("PRP") in
remedial activities related to various "Superfund" sites. Applicable federal law
imposes joint and several liability on each PRP for the cleanup of these sites
leaving the Company with the uncertainty that it may be responsible for the
remediation cost attributable to other PRPs who are unable to pay their share of
the remediation costs. Generally, the Company has determined its share of such
total cost based on the ratio that the number of gallons of waste estimated to
be contributed to the site by the Company bears to the total number of gallons
of waste estimated to have been disposed at the site. The Company has accrued
what it believes to be its share of the total cost of remediation of these
Superfund sites. No accrual has been made under the joint and several liability
concept since the Company believes that the probability that it will have to pay
material costs above its share is remote due to the fact that the other PRPs
have substantial assets available to satisfy their obligation.

  At September 30, 1994 and 1993, the Company had accrued approximately $18.8
million and $18.2 million, respectively, for remediation costs, including the
Superfund sites referred to above. The measurement of the accruals for
remediation costs is subject to uncertainties, including the evolving nature of
environmental regulations and the difficulty in estimating the extent and remedy
of environmental contamination. While recoveries from insurance coverage or
indemnification agreements may be available to the Company to mitigate the
remediation costs, such amounts have not been considered in measuring the
remediation accrual. The Company believes that the likelihood of material losses
in excess of those amounts recorded is remote.

- --------------------------------------------------------------------------------
                                    Note 14
                         Commitments and Contingencies

At September 30, 1994, the Company had long-term operating leases covering
certain facilities and equipment on which minimum annual rental commitments for
each of the five years in the period ending September 30, 1999 are $24.9
million, $17.6 million, $12.9 million, $8.5 million and $6.8 million,
respectively, and $32.9 million in the aggregate thereafter. The Company has not
entered into any significant capital leases.

                                       30
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           Baker Hughes Incorporated

- --------------------------------------------------------------------------------

                                    Note 15
                          Quarterly Data (Unaudited):

Summarized quarterly financial data for the years ended September 30, 1994 and
1993 are shown in the table below:
<TABLE>
<CAPTION>
                                              First      Second      Third      Fourth     Fiscal Year
(In thousands, except per share amounts)     Quarter     Quarter    Quarter     Quarter       Total
- ------------------------------------------------------------------------------------------------------
<S>                                         <C>         <C>        <C>        <C>          <C>
Fiscal Year 1994:*
Revenues                                     $624,562    $650,016   $590,532     $639,648   $2,504,758
Gross Profit**                                104,882     114,747    100,293      102,091      422,013
Income before extraordinary loss and
  cumulative effect of accounting changes      16,879      23,288     34,439       56,536      131,142
Net income (loss)                             (27,286)     23,288     22,651       24,004       42,657
Per share of common stock:
  Income before extraordinary loss and
    cumulative effect of accounting changes       .10         .14        .22          .39          .85
  Net income (loss)                              (.22)        .14        .14          .16          .22
Dividends per share                              .115        .115       .115         .115          .46
 
Fiscal Year 1993:*
Revenues                                     $684,073    $692,449   $670,416     $654,759   $2,701,697
Gross Profit**                                107,942     116,107    104,130      110,973      439,152
Net income                                      4,210       2,799     23,831       28,016       58,856
Net income per share                              .01         .00        .15          .18          .34
Dividends per share                              .115        .115       .115         .115          .46
</TABLE>
- --------------
*   See Notes 1, 2, 3 and 4 for information regarding accounting changes,
    dispositions, unusual charges-net and the extraordinary loss, respectively.
**  Represents revenues less (i) cost of sales, (ii) cost of services and
    rentals (iii) research and engineering expense and (iv) marketing and field
    service expense


Stock Prices by Quarter. The following graph sets forth the quarterly high and
low sales price per share of the Company's common stock on the New York Stock
Exchange Composite Tape:


                     [GRAPH OF BAKER HUGHES APPEARS HERE]


             Quarter                          High              Low
             -----------                     ------           ------
1993         1st Quarter                     $24.50           $17.88
             2nd Quarter                      24.25            18.50
             3rd Quarter                      29.63            22.13
             4th Quarter                      28.25            21.25

1994         1st Quarter                     $24.75           $18.88
             2nd Quarter                      22.13            17.00
             3rd Quarter                      22.00            17.25
             4th Quarter                      22.13            18.38




                                       31
