Exhibit 99.1



CONSOLIDATED FINANCIAL STATEMENTS



Numatics, Incorporated



Years ended December 31, 2003, 2002 and 2001

with Report of Independent
Auditors



---

Numatics, Incorporated



Consolidated Financial Statements



Years ended December 31, 2003, 2002 and 2001



Contents



|                                                    |  |  
|--------------------------------------------------- |  | -
|Report of Independent Auditors                      |  | 1
|                                                    | 
|Audited Consolidated Financial Statements           |  |  
|                                                    | 
|Consolidated Balance Sheets                         |  | 2
|Consolidated Statements of Operations               |  | 4
|Consolidated Statements of Stockholders Deficiency |  | 5
|Consolidated Statements of Cash Flows               |  | 6
|Notes to Consolidated Financial Statements          |  | 7



---

Report of Independent Auditors



Board of Directors

Numatics, Incorporated



We have audited the accompanying consolidated balance sheets of Numatics, Incorporated and subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders deficiency, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule included as Item 15(a) (2). These financial
statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



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



In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Numatics, Incorporated and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill resulting from its adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.



/s/ Ernst & Young LLP



Troy, Michigan

March 15, 2004



1



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Numatics, Incorporated



Consolidated Balance Sheets



|                                                                            |  |             |             |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ----------- | ----------- | - | ---- | - | ----------- | -
|                                                                            |  | December 31 |            
|                                                                            |  | 2003        |             |   | 2002 |  
|Assets                                                                      |  |             |             |   |      |   |             |  
|Current assets:                                                             |  |             |             |   |      |   |             |  
|Cash                                                                        |  | $           | 1,054,409   |   |      | $ | 1,316,250   |  
|Trade receivables, less allowances of $333,000 in 2003 and $445,000 in 2002 |  |             | 17,766,383  |   |      |   | 18,537,257  |  
|Inventories                                                                 |  |             | 33,057,910  |   |      |   | 32,714,582  |  
|Deferred income taxes                                                       |  |             |            |   |      |   | 126,485     |  
|Other current assets                                                        |  |             | 2,792,714   |   |      |   | 2,953,825   |  
|                                                                            |  |             |             |   |      |   |             |  
|Total current assets                                                        |  |             | 54,671,416  |   |      |   | 55,648,399  |  
|                                                                            |  |            
|Other assets:                                                               |  |             |             |   |      |   |             |  
|Goodwill                                                                    |  |             | 5,652,149   |   |      |   | 5,098,954   |  
|Debt issuance costs, net of accumulated amortization                        |  |             | 4,375,534   |   |      |   | 5,745,140   |  
|Deferred income taxes                                                       |  |             |            |   |      |   | 177,400     |  
|Investment in unconsolidated affiliates                                     |  |             | 2,289,749   |   |      |   | 2,231,664   |  
|Other                                                                       |  |             | 564,106     |   |      |   | 689,333     |  
|                                                                            |  |             |             |   |      |   |             |  
|                                                                            |  |             | 12,881,538  |   |      |   | 13,942,491  |  
|                                                                            |  |             |             |   |      |   |             |  
|Properties:                                                                 |  |             |             |   |      |   |             |  
|Land                                                                        |  |             | 1,387,590   |   |      |   | 1,321,309   |  
|Buildings and improvements                                                  |  |             | 16,204,713  |   |      |   | 15,497,297  |  
|Machinery and equipment                                                     |  |             | 58,270,820  |   |      |   | 55,607,088  |  
|                                                                            |  |             |             |   |      |   |             |  
|                                                                            |  |             | 75,863,123  |   |      |   | 72,425,694  |  
|Less accumulated depreciation                                               |  |             | (49,864,739 | ) |      |   | (44,559,695 | )
|                                                                            |  |             |             |   |      |   |             |  
|                                                                            |  |             | 25,998,384  |   |      |   | 27,865,999  |  
|                                                                            |  |             |             |   |      |   |             |  
|                                                                            |  | $           | 93,551,338  |   |      | $ | 97,456,889  |  
|                                                                            |  |             |             |   |      |   |             |  



2



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|                                                                                                                                                                |  |             |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                |  | December 31 |            
|                                                                                                                                                                |  | 2003        |             |   | 2002 |  
|Liabilities and stockholders deficiency                                                                                                                        |  |             |             |   |      |   |             |  
|Current liabilities:                                                                                                                                            |  |             |             |   |      |   |             |  
|Accounts payable trade                                                                                                                                          |  | $           | 5,610,582   |   |      | $ | 5,981,993   |  
|Accrued interest                                                                                                                                                |  |             | 2,886,604   |   |      |   | 3,293,571   |  
|Other accrued expenses                                                                                                                                          |  |             | 1,554,305   |   |      |   | 1,325,700   |  
|Compensation and employee benefits                                                                                                                              |  |             | 4,036,240   |   |      |   | 3,452,685   |  
|Income and single business tax                                                                                                                                  |  |             | 819,892     |   |      |   | 880,168     |  
|Deferred income taxes                                                                                                                                           |  |             | 180,677     |   |      |   |            |  
|Current portion of long-term debt                                                                                                                               |  |             | 4,042,855   |   |      |   | 2,083,842   |  
|                                                                                                                                                                |  |             |             |   |      |   |             |  
|Total current liabilities                                                                                                                                       |  |             | 19,131,155  |   |      |   | 17,017,959  |  
|                                                                                                                                                                |  |            
|Long-term debt, less current portion                                                                                                                            |  |             | 147,812,316 |   |      |   | 156,561,001 |  
|Deferred retirement benefits                                                                                                                                    |  |             | 12,742,817  |   |      |   | 11,358,111  |  
|Deferred income taxes                                                                                                                                           |  |             | 1,277,861   |   |      |   | 743,294     |  
|                                                                                                                                                                |  |            
|Minority interest in subsidiaries (redeemable at $849,624 in 2003 and $692,993 in 2002 upon the happening of certain events outside the
control of the Company) |  |             | 624,388     |   |      |   | 487,668     |  
|                                                                                                                                                                |  |            
|Stockholders deficiency:                                                                                                                                       |  |             |             |   |      |   |             |  
|Common stock $0.01 par value, 9,950,000 shares authorized; 2,397,235 shares outstanding and related additional paid-in capital                                  |  |             | 4,602,151   |   |      |   | 4,602,151   |  
|Treasury stock                                                                                                                                                  |  |             | (3,347,280  | ) |      |   | (3,347,280  | )
|Accumulated deficiency                                                                                                                                          |  |             | (86,711,044 | ) |      |   | (86,752,500 | )
|Accumulated other comprehensive loss                                                                                                                            |  |             | (2,581,026  | ) |      |   | (3,213,515  | )
|                                                                                                                                                                |  |             |             |   |      |   |             |  
|                                                                                                                                                                |  |             | (88,037,199 | ) |      |   | (88,711,144 | )
|                                                                                                                                                                |  |             |             |   |      |   |             |  
|                                                                                                                                                                |  | $           | 93,551,338  |   |      | $ | 97,456,889  |  
|                                                                                                                                                                |  |             |             |   |      |   |             |  



See accompanying notes.



3



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Numatics, Incorporated



Consolidated Statements of Operations



|                                                                         |  |                         |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------ |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                         |  | Years ended December 31 |            
|                                                                         |  | 2003                    |             |   | 2002 |   |             | 2001 | 
|Net sales                                                                |  | $                       | 116,958,351 |   |      | $ | 112,239,529 |      |  | $ | 113,563,076 |  
|                                                                         |  |                         |            
|Costs and expenses                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|Cost of products sold                                                    |  |                         | 72,413,950  |   |      |   | 69,558,113  |      |  |   | 70,527,947  |  
|Marketing, engineering, general and administrative                       |  |                         | 29,185,483  |   |      |   | 26,229,978  |      |  |   | 27,427,506  |  
|Single business tax                                                      |  |                         | 219,683     |   |      |   | 237,744     |      |  |   | (61,531     | )
|                                                                         |  |                         |             |   |      |   |             |      |  |   |             |  
|                                                                         |  |                         | 15,139,235  |   |      |   | 16,213,694  |      |  |   | 15,669,154  |  
|                                                                         |  |                         |            
|Other expenses                                                           |  |                         |             |   |      |   |             |      |  |   |             |  
|Interest and other financing expenses                                    |  |                         | 16,713,601  |   |      |   | 18,264,800  |      |  |   | 16,345,183  |  
|(Gain) loss on early extinguishment of debt and repurchase of notes, net |  |                         | (2,153,049  | ) |      |   |            |      |  |   | 451,818     |  
|Other, net                                                               |  |                         | (1,645,455  | ) |      |   | (748,542    | )    |  |   | 1,176,201   |  
|                                                                         |  |                         |             |   |      |   |             |      |  |   |             |  
|Income (loss) before income taxes                                        |  |                         | 2,224,138   |   |      |   | (1,302,564  | )    |  |   | (2,304,048  | )
|Income taxes                                                             |  |                         | 2,182,682   |   |      |   | 4,793,749   |      |  |   | (520,359    | )
|                                                                         |  |                         |             |   |      |   |             |      |  |   |             |  
|Net income (loss)                                                        |  | $                       | 41,456      |   |      | $ | (6,096,313  | )    |  | $ | (1,783,689  | )
|                                                                         |  |                         |             |   |      |   |             |      |  |   |             |  



See accompanying notes.



4



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Numatics, Incorporated



Consolidated Statements of Stockholders Deficiency



|                                                    |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   |             |  
|--------------------------------------------------- |  | --------------------------------------------------------------------------------------------- | - | ----------------------------------- | ------ | --------- | ------------------------------------------------ | - | ---------- | ----------------------------------- |  | - | ------------ | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                    |  | Class A Common Stockand Related AdditionalPaid in Capital $0.01 par9,950,000 SharesAuthorized |   | TreasuryStock                       |        |           | AccumulatedDeficiency                            |   |            | Accumulated OtherComprehensive Loss |  |   | Total Amount |  
|                                                    |  |                                                                                               |   | MinimumPensionLiability, net of tax |        |           | EquityAdjustmentfrom ForeignCurrency Translation |   |           
|                                                    |  | Shares                                                                                        |   |                                     | Amount |           |                                                  |   |            |                                    
|Balance at January 1, 2001                          |  | 2,659,575                                                                                     |   |                                     | $      | 4,602,151 |                                                  | $ |           |                                     |  | $ | (78,872,498  | ) |  | $ |           |   |  | $ | (579,979   | ) |  | $ | (74,850,326 | )
|Net loss for 2001                                   |  |                                                                                              |   |                                     |        |          |                                                  |   |           |                                     |  |   | (1,783,689   | ) |  |   |           |   |  |   |           |   |  |   | (1,783,689  | )
|Equity adjustment from foreign currency translation |  |                                                                                              |   |                                     |        |          |                                                  |   |           |                                     |  |   |             |   |  |   |           |   |  |   | (460,692   | ) |  |   | (460,692    | )
|Minimum pension liability, net of tax               |  |                                                                                              |   |                                     |        |          |                                                  |   |           |                                     |  |   |             |   |  |   | (552,708   | ) |  |   |           |   |  |   | (552,708    | )
|                                                    |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   |             |  
|Comprehensive loss for 2001                         |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |             |   |  |   |            |   |  |   |            |   |  |   | (2,797,089  | )
|Purchase of treasury stock                          |  | (52,257                                                                                       | ) |                                     |        |          |                                                  |   | (1,089,996 | )                                   |  |   |             |   |  |   |           |   |  |   |           |   |  |   | (1,089,996  | )
|                                                    |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2001                        |  | 2,607,318                                                                                     |   |                                     |        | 4,602,151 |                                                  |   | (1,089,996 | )                                   |  |   | (80,656,187  | ) |  |   | (552,708   | ) |  |   | (1,040,671 | ) |  |   | (78,737,411 | )
|Net loss for 2002                                   |  |                                                                                              |   |                                     |        |          |                                                  |   |            |                                     |  |   | (6,096,313   | ) |  |   |            |   |  |   |            |   |  |   | (6,096,313  | )
|Equity adjustment from foreign currency translation |  |                                                                                              |   |                                     |        |          |                                                  |   |           |                                     |  |   |              |   |  |   |           |   |  |   | (11,857    | ) |  |   | (11,857     | )
|Minimum pension liability, net of tax               |  |                                                                                              |   |                                     |        |          |                                                  |   |           |                                     |  |   |             |   |  |   | (1,608,279 | ) |  |   |           |   |  |   | (1,608,279  | )
|                                                    |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   |             |  
|Comprehensive loss for 2002                         |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   | (7,716,449  | )
|Purchase of treasury stock                          |  | (210,083                                                                                      | ) |                                     |        |          |                                                  |   | (2,257,284 | )                                   |  |   |             |   |  |   |           |   |  |   |           |   |  |   | (2,257,284  | )
|                                                    |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2002                        |  | 2,397,235                                                                                     |   |                                     |        | 4,602,151 |                                                  |   | (3,347,280 | )                                   |  |   | (86,752,500  | ) |  |   | (2,160,987 | ) |  |   | (1,052,528 | ) |  |   | (88,711,144 | )
|Net income for 2003                                 |  |                                                                                              |   |                                     |        |          |                                                  |   |           |                                     |  |   | 41,456       |   |  |   |           |   |  |   |           |   |  |   | 41,456      |  
|Equity adjustment from foreign currency translation |  |                                                                                              |   |                                     |        |          |                                                  |   |           |                                     |  |   |             |   |  |   |           |   |  |   | 1,135,463  |   |  |   | 1,135,463   |  
|Minimum pension liability                           |  |                                                                                              |   |                                     |        |          |                                                  |   |           |                                     |  |   |             |   |  |   | (502,974   | ) |  |   |           |   |  |   | (502,974    | )
|                                                    |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   |             |  
|Comprehensive income for 2003                       |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   | 673,945     |  
|                                                    |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2003                        |  | 2,397,235                                                                                     |   |                                     | $      | 4,602,151 |                                                  | $ | (3,347,280 | )                                   |  | $ | (86,711,044  | ) |  | $ | (2,663,961 | ) |  | $ | 82,935     |   |  | $ | (88,037,199 | )
|                                                    |  |                                                                                               |   |                                     |        |           |                                                  |   |            |                                     |  |   |              |   |  |   |            |   |  |   |            |   |  |   |             |  



See accompanying notes.



5



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Numatics, Incorporated



Consolidated Statements of Cash Flows



|                                                                                         |  |                         |             |   |      |   |            |      |  |   |             |  
|---------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ---------- | ---- |  | - | ----------- | -
|                                                                                         |  | Years ended December 31 |            
|                                                                                         |  | 2003                    |             |   | 2002 |   |            | 2001 | 
|Operating activities                                                                     |  |                         |             |   |      |   |            |      |  |   |             |  
|Net income (loss)                                                                        |  | $                       | 41,456      |   |      | $ | (6,096,313 | )    |  | $ | (1,783,689  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                         |             |   |      |   |            |      |  |   |             |  
|Depreciation                                                                             |  |                         | 4,259,270   |   |      |   | 4,157,302  |      |  |   | 4,171,263   |  
|Amortization                                                                             |  |                         | 1,643,959   |   |      |   | 1,295,100  |      |  |   | 1,316,476   |  
|Loss on early extinguishment of debt                                                     |  |                         | 2,843,619   |   |      |   |           |      |  |   | 303,818     |  
|Gain on repurchase of senior subordinated notes                                          |  |                         | (5,636,668  | ) |      |   |           |      |  |   |            |  
|Minority interest in subsidiary earnings                                                 |  |                         | 136,720     |   |      |   | 90,092     |      |  |   | (345,106    | )
|Deferred taxes                                                                           |  |                         | 1,085,873   |   |      |   | 4,682,004  |      |  |   | (838,405    | )
|Deferred retirement benefits                                                             |  |                         | 944,169     |   |      |   | 959,260    |      |  |   | 834,350     |  
|Unrealized foreign currency (gain) loss                                                  |  |                         | (1,517,224  | ) |      |   | (1,343,540 | )    |  |   | 396,079     |  
|Changes in operating assets and liabilities:                                             |  |                         |             |   |      |   |            |      |  |   |             |  
|Trade receivables                                                                        |  |                         | 1,989,165   |   |      |   | 749,068    |      |  |   | 4,253,845   |  
|Inventories                                                                              |  |                         | 1,285,794   |   |      |   | 1,332,036  |      |  |   | 5,111,469   |  
|Other current accounts                                                                   |  |                         | (185,330    | ) |      |   | (305,864   | )    |  |   | 856,479     |  
|Accounts payable and accrued expenses                                                    |  |                         | (789,854    | ) |      |   | 630,425    |      |  |   | (3,107,204  | )
|Compensation and employee benefits                                                       |  |                         | 477,963     |   |      |   | 1,133,777  |      |  |   | (2,035,584  | )
|Income and single business taxes                                                         |  |                         | (119,112    | ) |      |   | 529,282    |      |  |   | 276,310     |  
|                                                                                         |  |                         |             |   |      |   |            |      |  |   |             |  
|Net cash provided by operating activities                                                |  |                         | 6,459,800   |   |      |   | 7,812,629  |      |  |   | 9,410,101   |  
|                                                                                         |  |                         |            
|Investing activities                                                                     |  |                         |             |   |      |   |            |      |  |   |             |  
|Capital expenditures                                                                     |  |                         | (1,587,908  | ) |      |   | (451,731   | )    |  |   | (1,971,524  | )
|Other investments                                                                        |  |                         | 22,165      |   |      |   | 11,679     |      |  |   | (41,264     | )
|                                                                                         |  |                         |             |   |      |   |            |      |  |   |             |  
|Net cash used in investing activities                                                    |  |                         | (1,565,743  | ) |      |   | (440,052   | )    |  |   | (2,012,788  | )
|                                                                                         |  |                         |            
|Financing activities                                                                     |  |                         |             |   |      |   |            |      |  |   |             |  
|Debt proceeds (repayments)                                                               |  |                         | 44,650,467  |   |      |   | (6,921,193 | )    |  |   | 39,062,494  |  
|Prior debt repayments                                                                    |  |                         | (38,135,595 | ) |      |   |           |      |  |   | (42,820,418 | )
|Repurchase of senior subordinated notes                                                  |  |                         | (8,870,225  | ) |      |   |           |      |  |   |            |  
|Debt issuance costs                                                                      |  |                         | (3,276,754  | ) |      |   | (753,048   | )    |  |   | (3,027,017  | )
|                                                                                         |  |                         |             |   |      |   |            |      |  |   |             |  
|Net cash used in financing activities                                                    |  |                         | (5,632,107  | ) |      |   | (7,674,241 | )    |  |   | (6,784,941  | )
|Effect of exchange rate changes on cash                                                  |  |                         | 476,209     |   |      |   | (277,113   | )    |  |   | 307,388     |  
|                                                                                         |  |                         |             |   |      |   |            |      |  |   |             |  
|Net increase (decrease) in cash                                                          |  |                         | (261,841    | ) |      |   | (578,777   | )    |  |   | 919,760     |  
|Cash at beginning of year                                                                |  |                         | 1,316,250   |   |      |   | 1,895,027  |      |  |   | 975,267     |  
|                                                                                         |  |                         |             |   |      |   |            |      |  |   |             |  
|Cash at end of year                                                                      |  | $                       | 1,054,409   |   |      | $ | 1,316,250  |      |  | $ | 1,895,027   |  
|                                                                                         |  |                         |             |   |      |   |            |      |  |   |             |  



See accompanying notes.



6



---

Numatics, Incorporated



Notes to Consolidated Financial Statements



December 31, 2003



1. Significant Accounting Policies



Nature of the Business



The Company develops and manufactures pneumatic components for automated machinery used in various industries.



Principles of Consolidation



The consolidated financial statements include the accounts of Numatics, Incorporated, its wholly owned subsidiaries and its majority owned subsidiaries (the Company)
after elimination of intercompany accounts, transactions and profits.



Use
of Estimates



The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those
estimates.



Concentration of Credit Risk



The Company sells its products principally to domestic and international distributors.
Management performs ongoing evaluations of its accounts receivable, and credit losses have been minimal and within managements expectations.



Allowance for Doubtful Accounts



Allowance for doubtful accounts reduces trade accounts receivable to its net realizable amount. The Company determines the allowance for doubtful accounts based on known
collectibility issues, as such issues relate to specific transactions or customer balances.



Inventories



Inventories are stated at
the lower of cost or market, with cost determined by use of the first-in, first-out method.



7



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



1. Significant Accounting Policies (continued)



Properties and Depreciation



Properties are stated on the basis of cost and are depreciated over their estimated useful lives ranging from three to forty years for buildings and improvements, and
from four to twenty years for machinery and equipment, principally by the straight-line method. Expenditures for repairs and maintenance, which do not extend the life of the asset, are expensed as incurred. The Company evaluates its properties for
impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. The recoverability estimates are based on the projected undiscounted future cash flows expected to result from the use
of the assets at various facilities. An impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value.



Income Taxes



The Company utilizes the liability method of accounting for income taxes. Deferred taxes are provided for the temporary differences between financial statement and income tax accounting. Realization of the net
deferred tax asset is primarily dependent on tax planning strategies and future taxable income. Based on an analysis of both positive and negative evidence, including a three-year cumulative tax loss from its U.S. operations, the Company recorded a
valuation allowance against the total U.S. net deferred tax asset as of December 31, 2003 and 2002.



Environmental Liabilities



The Company
recognizes estimated environmental liabilities when a loss is probable and reasonably estimable. Such liabilities are generally not subject to insurance coverage. The Companys environmental liabilities were not material as of December 31, 2003
and 2002.



Revenue Recognition



The Company recognizes revenue when goods are shipped to the customer, which is when legal
title is transferred.



Fair Value of Financial Instruments



At December 31, 2003, the carrying amounts reported in the consolidated balance sheets
for cash, accounts receivable, accounts payable, debt, and investments approximate fair value.



8



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



1. Significant Accounting Policies (continued)



Currency Translation



Exchange adjustments related to international currency transactions are presented in the consolidated statements of operations. Translation adjustments of international
subsidiaries are presented in the consolidated financial statements as a component of accumulated other comprehensive income.



Stock-Based Compensation



The Company grants stock options for a fixed number of shares to directors, executives and key employees with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants.



New Accounting Pronouncements



In April 2002, Statement of Financial Accounting Standards (SFAS) No. 145,
Rescission of FASB Statement 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections, was issued. Under the provisions of SFAS 145 gains and losses associated with the extinguishment of debt are no longer classified as
extraordinary. The Company adopted SFAS 145 effective January 1, 2003. Accordingly, the Company reclassified on that date the $303,818 (net of income taxes of $148,000) that was previously recorded in the consolidated statement of operations for the
year ended December 31, 2001 as an extraordinary item  early extinguishment of debt.



In May 2003, The Financial Accounting Standards Board issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which provides standards for how
an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. For pre-existing instruments, the statement is effective as of January 1, 2004. The adoption of SFAS No. 150 in 2004 will not have a
material effect on the Companys financial statements.



9



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



2. Long-Term Debt



The Companys long-term debt consisted of the following:



|                                                                                                                                                                                  |  |             |             |      |   |            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---- | - | -----------
|                                                                                                                                                                                  |  | December 31
|                                                                                                                                                                                  |  | 2003        |             | 2002
|Senior subordinated notes bearing interest at 9.625%, due in 2008                                                                                                                 |  | $           | 100,020,000 |      | $ | 115,000,000
|Term loans payable in minimum monthly installments of $114,583 beginning April 1, 2003 plus interest at the greater of prime plus 4% or 9% (9%
at December 31, 2003), due in 2006 |  |             | 4,468,753   |      |   |           
|Term loans payable with no principal installments and interest at the greater of prime plus 6% or 11%, plus 2% payment in kind (13% at
December 31, 2003), due in 2006            |  |             | 18,000,000  |      |   |           
|Term loans payable with no principal installments and interest at the greater of prime plus 7% or 13% (13% at December 31, 2003), due in
2006                                     |  |             | 9,970,225   |      |   |           
|Term loans bearing interest at the greater of prime plus 6.5% or 12% (12% at December 31, 2002)                                                                                   |  |             |            |      |   | 12,202,479 
|Term loans bearing interest at 19%                                                                                                                                                |  |             |            |      |   | 17,000,000 
|Revolving notes payable, bearing interest at prime plus 1% (5.25% at December 31, 2003), due in 2006                                                                              |  |             | 8,003,628   |      |   |           
|Revolving notes payable, subject to monthly reductions of $125,000, bearing interest at prime plus 1.25% (5.5% at December 31, 2003), due in
2006                                 |  |             | 6,375,000   |      |   |           
|Revolving notes payable, bearing interest at prime (4.25% at December 31, 2002)                                                                                                   |  |             |            |      |   | 8,757,747  
|Williamston County Tennessee Industrial Revenue Bond, bearing interest at prevailing market rates, not to exceed 12% (1.4% at December 31,
2003), due in 2011                     |  |             | 2,100,000   |      |   | 2,300,000  
|Other                                                                                                                                                                             |  |             | 2,917,565   |      |   | 3,384,617  
|                                                                                                                                                                                  |  |             |             |      |   |            
|                                                                                                                                                                                  |  |             | 151,855,171 |      |   | 158,644,843
|Less current maturities                                                                                                                                                           |  |             | 4,042,855   |      |   | 2,083,842  
|                                                                                                                                                                                  |  |             |             |      |   |            
|                                                                                                                                                                                  |  | $           | 147,812,316 |      | $ | 156,561,001
|                                                                                                                                                                                  |  |             |             |      |   |            



10



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



2. Long-Term Debt (continued)



In 1998, Numatics, Inc. issued $115,000,000 of senior subordinated notes. In 2003, the Company repurchased $14,980,000 face amount of its
senior subordinated notes for a total purchase price of $8,870,225. The Company recognized a gain of $5,636,668, net of costs and write-off of deferred financing fees of $473,107.



Effective January 6, 2003, the Company entered into a senior loan agreement with a group of lenders for which Wells Fargo Foothill (f/k/a
Foothill Capital Corporation) acts as agent. The loan agreement provides for: (a) $25,000,000 of three-year revolving credit facilities, subject to borrowing base requirements; (b) an additional $7,500,000 of three-year revolving credit facilities,
subject to borrowing base requirements; (c) an initial $23,500,000 of three-year term loans; and (d) an additional $10,000,000 of term loans. The Company used the proceeds from the senior loan agreement to repay all of its indebtedness outstanding
under its former senior credit facilities with LaSalle Business Credit, Inc. and its Canadian affiliate and all of its indebtedness to American Capital Strategies, Ltd. As a result, the Company wrote off deferred financing costs and early
termination fees related to the former senior credit facilities of $3,483,619.



The Companys revolving credit facilities and term loans are secured by liens on substantially all of the assets of Numatics, Incorporated and its U.S., Canadian, and German subsidiaries. The revolving credit facilities bear interest
at variable rates based on prime or LIBOR, at the Companys election. The weighted average of the rates for the revolving credit facility during 2003 was approximately 5.18% per annum. The Company estimates that borrowing base limitations would
have limited the Companys revolving credit availability to approximately $21.9 million as of December 31, 2003.



On December 31, 2003, the Company and its lenders agreed to an amendment to the terms of the senior loan agreement which permits the Company to sell its Franklin,
Tennessee property and replace it with a new facility in Mt. Pleasant, Tennessee, and revised certain financial covenants to include lower thresholds on EBITDA, fixed charge coverage and senior interest coverage.



Minimum contractual maturities of long-term liabilities based on the terms of the credit
agreements in existence at December 31, 2003 for the years following 2003 are as follows: 2004$4,042,855; 2005$3,818,283; 2006$41,151,964; thereafter$102,842,069. In addition, the Company is required to make an annual payment
on the term loans in an amount equal to 75% of excess cash flow, as defined in the agreements, which for the year ended December 31, 2003 approximated $856,000. Interest paid approximated $15,590,000 in 2003, $17,060,000 in 2002, and $15,640,000 in
2001.



11



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



2. Long-Term Debt (continued)



Capitalized debt issuance costs in the accompanying balance sheet were $4,375,534, net of accumulated amortization of $3,415,153 and
$5,745,140, net of accumulated amortization of $2,594,799 at December 31, 2003 and 2002, respectively. The Company amortizes debt issuance costs over the life of the associated long-term debt.



Future minimum rental payments relating to operating leases for premises and equipment as of
December 31, 2003 for the years following 2003 are approximately: 2004$1,273,000; 2005$650,000; 2006$285,000; thereafter$101,000.



3. Goodwill and Other Intangible Assets



Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets was adopted as of January 1, 2002. Under this statement, goodwill
is no longer amortized and is evaluated for impairment annually, whereby the fair value of the Companys reporting units are compared to their carrying amount, including goodwill. The annual impairment test of the goodwill was performed as
required and it was determined that no impairment of the goodwill existed at January 1, 2003.



The following table reflects the pro-forma effect of SFAS No. 142 on net income (loss) for the years ended December 31:



|                                             |  |      |        |      |   |            |      |  |   |            |  
|-------------------------------------------- |  | ---- | ------ | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                             |  | 2003 |        | 2002 |   |            | 2001 | 
|Net income (loss), as reported               |  | $    | 41,456 |      | $ | (6,096,313 | )    |  | $ | (1,783,689 | )
|Add back goodwill amortization, net of taxes |  |      |       |      |   |           |      |  |   | 398,654    |  
|                                             |  |      |        |      |   |            |      |  |   |            |  
|Adjusted net income (loss)                   |  | $    | 41,456 |      | $ | (6,096,313 | )    |  | $ | (1,385,035 | )
|                                             |  |      |        |      |   |            |      |  |   |            |  



The change in the carrying amount of
goodwill from $5,099,000 at December 31, 2002 to $5,652,000 at December 31, 2003 is entirely due to changes in foreign currency exchange rates.



12



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



3. Goodwill and Other Intangible Assets (continued)



Intangible assets that are subject to amortization at December 31 were comprised of the
following:



|                              |  |      |           |      |   |                           |  |   
|----------------------------- |  | ---- | --------- | ---- | - | ------------------------- |  | --
|                              |  | 2003 |           | 2002 |   | AmortizationPeriod(years)
|Other intangible assets       |  | $    | 1,090,000 |      | $ | 1,090,000                 |  | 15
|Less accumulated amortization |  |      | 936,886   |      |   | 864,214                   |  |   
|                              |  |      |           |      |   |                           |  |   
|Net other intangible assets   |  | $    | 153,114   |      | $ | 225,786                   |  |   
|                              |  |      |           |      |   |                           |  |   



The estimated amortization expense
related to other intangible assets is approximately $72,667 for 2004 and 2005, and $7,780 in 2006 at which time they become fully amortized. The Company periodically evaluates its other intangible assets for indicators of impairment in value. If
impairment is indicated, the Company evaluates its related undiscounted cash flows and, if appropriate, revalues the asset based on its fair value.



4. Income Taxes



The components of income before income taxes for the years ended December 31 consisted of the following:



|              |  |      |            |   |      |   |            |      |  |   |            |  
|------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|              |  | 2003 |            |   | 2002 |   |            | 2001 | 
|Domestic      |  | $    | (1,122,000 | ) |      | $ | (3,718,000 | )    |  | $ | (3,393,000 | )
|International |  |      | 3,346,000  |   |      |   | 2,415,000  |      |  |   | 1,089,000  |  
|              |  |      |            |   |      |   |            |      |  |   |            |  
|              |  | $    | 2,224,000  |   |      | $ | (1,303,000 | )    |  | $ | (2,304,000 | )
|              |  |      |            |   |      |   |            |      |  |   |            |  



13



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



4. Income Taxes (continued)



Significant components of the provision for income taxes for the years ended December 31 are as follows:



|                                      |  |      |           |   |      |   |            |      |  |   |            |  
|------------------------------------- |  | ---- | --------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                      |  | 2003 |           |   | 2002 |   |            | 2001 | 
|Current:                              |  |      |           |   |      |   |            |      |  |   |            |  
|Federal                               |  | $    | 157,000   |   |      | $ |           |      |  | $ | (286,000   | )
|State and local                       |  |      | 198,000   |   |      |   |           |      |  |   |           |  
|Foreign                               |  |      | 1,229,000 |   |      |   | 304,000    |      |  |   | 919,000    |  
|                                      |  |      |           |   |      |   |            |      |  |   |            |  
|                                      |  |      | 1,584,000 |   |      |   | 304,000    |      |  |   | 633,000    |  
|Deferred (credit):                    |  |      |           |   |      |   |            |      |  |   |            |  
|Federal                               |  |      | 977,000   |   |      |   | (1,176,000 | )    |  |   | (1,130,000 | )
|Foreign                               |  |      | 599,000   |   |      |   | 367,000    |      |  |   | (23,000    | )
|                                      |  |      |           |   |      |   |            |      |  |   |            |  
|                                      |  |      | 1,576,000 |   |      |   | (809,000   | )    |  |   | (1,153,000 | )
|Change in federal valuation allowance |  |      | (977,000  | ) |      |   | 5,299,000  |      |  |   |           |  
|                                      |  |      |           |   |      |   |            |      |  |   |            |  
|                                      |  | $    | 2,183,000 |   |      | $ | 4,794,000  |      |  | $ | (520,000   | )
|                                      |  |      |           |   |      |   |            |      |  |   |            |  



The reconciliation of income taxes
computed at the United States federal statutory tax rate to income tax expense for the years ended December 31 is:



|                                                         |  |      |           |   |      |   |           |      |  |   |          |  
|-------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | -------- | -
|                                                         |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Income taxes at U.S. statutory rate                      |  | $    | 756,000   |   |      | $ | (443,000  | )    |  | $ | (783,000 | )
|Tax on distributed earnings of subsidiary                |  |      | 991,000   |   |      |   |          |      |  |   |         |  
|International rate differences                           |  |      | 581,000   |   |      |   | (171,000  | )    |  |   | 236,000  |  
|Valuation allowance change on federal deferred tax asset |  |      | (977,000  | ) |      |   | 5,299,000 |      |  |   |         |  
|State and local taxes                                    |  |      | 198,000   |   |      |   |          |      |  |   |         |  
|Other                                                    |  |      | 634,000   |   |      |   | 109,000   |      |  |   | 27,000   |  
|                                                         |  |      |           |   |      |   |           |      |  |   |          |  
|                                                         |  | $    | 2,183,000 |   |      | $ | 4,794,000 |      |  | $ | (520,000 | )
|                                                         |  |      |           |   |      |   |           |      |  |   |          |  



14



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



4. Income Taxes (continued)



During 2003, the Canadian subsidiary issued dividends to the parent of $2,915,000, which were used to pay down revolving debt. No provision
for U.S. federal income taxes has been made on the remaining undistributed earnings of the Canadian subsidiary for which earnings are considered permanently invested ($5,214,000 at December 31, 2003, $7,340,000 at December 31, 2002, and $7,000,000
at December 31, 2001).



Significant components of the Companys deferred
tax assets and liabilities as of December 31 were as follows:



|                                |  |      |            |   |      |   |            |  
|------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                |  | 2003 |            |   | 2002 |  
|Deferred tax assets:            |  |      |            |   |      |   |            |  
|Intangible amortization         |  | $    | 761,000    |   |      | $ | 1,022,000  |  
|Deferred compensation           |  |      | 3,856,000  |   |      |   | 3,707,000  |  
|Inventory                       |  |      | 165,000    |   |      |   | 160,000    |  
|Other assets                    |  |      | 267,000    |   |      |   | 217,000    |  
|Net operating loss carryforward |  |      | 893,000    |   |      |   | 2,297,000  |  
|                                |  |      |            |   |      |   |            |  
|Gross deferred tax assets       |  |      | 5,942,000  |   |      |   | 7,403,000  |  
|                                |  |     
|Deferred tax liabilities:       |  |      |            |   |      |   |            |  
|Depreciation                    |  |      | (1,895,000 | ) |      |   | (2,165,000 | )
|Inventory                       |  |      | (565,000   | ) |      |   | (98,000    | )
|Other liabilities               |  |      | (619,000   | ) |      |   | (280,000   | )
|                                |  |      |            |   |      |   |            |  
|Gross deferred tax liabilities  |  |      | (3,079,000 | ) |      |   | (2,543,000 | )
|Valuation allowance             |  |      | (4,322,000 | ) |      |   | (5,299,000 | )
|                                |  |      |            |   |      |   |            |  
|Net deferred tax liabilities    |  | $    | (1,459,000 | ) |      | $ | (439,000   | )
|                                |  |      |            |   |      |   |            |  



The Companys net operating loss
carryforwards at December 31, 2003 exist in the United States, and expire in 2023.



Based on an analysis of both positive and negative evidence, including a three-year cumulative tax loss from its U.S. operations, the Company recorded a valuation allowance against the total U.S. net deferred tax asset as of December 31,
2003 and 2002.



15



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



5. Employee Benefit Plans



The Company has noncontributory defined benefit pension plans covering substantially all United States hourly employees and substantially
all Canadian employees. Benefits of the plans are based on years of service. The Companys funding policy is consistent with the funding requirements of laws and regulations.



The Company also provides postretirement benefits for certain domestic employees covered under Company-sponsored benefit plans. Participants
in these plans may become eligible for these benefits if they reach normal retirement age while working for the Company. The Companys policy is to fund postretirement benefit costs as they are provided, with retirees paying a portion of the
costs. The measurement date for all plans is December 31.



Components of net
periodic benefit cost for the years ended December 31 are:



|                                      |  |                  |          |   |                         |   |          |      |  |   |          |   |      |   |           |  |   |           |  |   |          
|------------------------------------- |  | ---------------- | -------- | - | ----------------------- | - | -------- | ---- |  | - | -------- | - | ---- | - | --------- |  | - | --------- |  | - | ---------
|                                      |  | Pension Benefits |          |   | Postretirement Benefits
|                                      |  | 2003             |          |   | 2002                    |   |          | 2001 |  |   | 2003     |   | 2002 |   | 2001     
|Service cost                          |  | $                | 320,760  |   |                         | $ | 298,380  |      |  | $ | 290,980  |   |      | $ | 212,317   |  | $ | 191,008   |  | $ | 185,712  
|Interest cost                         |  |                  | 766,416  |   |                         |   | 701,032  |      |  |   | 677,023  |   |      |   | 705,212   |  |   | 687,913   |  |   | 657,310  
|Expected return on assets             |  |                  | (551,182 | ) |                         |   | (736,444 | )    |  |   | (732,820 | ) |      |   |          |  |   |          |  |   |         
|Amortization of actuarial loss        |  |                  | 240,880  |   |                         |   |         |      |  |   |         |   |      |   |          |  |   |          |  |   |         
|Amortization of transition obligation |  |                  | 8,179    |   |                         |   | 6,744    |      |  |   | 6,090    |   |      |   | 265,789   |  |   | 265,789   |  |   | 265,789  
|Amortization of prior service cost    |  |                  | 62,437   |   |                         |   | 62,437   |      |  |   | 62,437   |   |      |   | 72,456    |  |   | 72,456    |  |   | 72,456   
|                                      |  |                  |          |   |                         |   |          |      |  |   |          |   |      |   |           |  |   |           |  |   |          
|Net periodic benefit cost             |  | $                | 847,490  |   |                         | $ | 332,149  |      |  | $ | 303,710  |   |      | $ | 1,255,774 |  | $ | 1,217,166 |  | $ | 1,181,267
|                                      |  |                  |          |   |                         |   |          |      |  |   |          |   |      |   |           |  |   |           |  |   |          



16



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



5. Employee Benefit Plans (continued)



Changes in benefit obligation as of December 31 are:



|                                        |  |                  |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------- |  | ---------------- | ---------- | - | ----------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                        |  | Pension Benefits |            |   | Postretirement Benefits |  
|                                        |  | 2003             |            |   | 2002                    |   |            | 2003 |  |   | 2002       |  
|Benefit obligation at beginning of year |  | $                | 10,583,975 |   |                         | $ | 9,229,581  |      |  | $ | 10,159,236 |   |  | $ | 8,660,696  |  
|Service cost                            |  |                  | 320,760    |   |                         |   | 298,380    |      |  |   | 212,317    |   |  |   | 191,008    |  
|Interest cost                           |  |                  | 766,416    |   |                         |   | 701,032    |      |  |   | 705,212    |   |  |   | 687,913    |  
|Actuarial loss                          |  |                  | 1,267,559  |   |                         |   | 818,238    |      |  |   | 723,475    |   |  |   | 1,077,979  |  
|Foreign currency                        |  |                  | 218,087    |   |                         |   | 10,824     |      |  |   |           |   |  |   |           |  
|Benefits paid                           |  |                  | (503,591   | ) |                         |   | (474,080   | )    |  |   | (509,622   | ) |  |   | (458,360   | )
|                                        |  |                  |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Benefit obligation at end of year       |  | $                | 12,653,206 |   |                         | $ | 10,583,975 |      |  | $ | 11,290,618 |   |  | $ | 10,159,236 |  
|                                        |  |                  |            |   |                         |   |            |      |  |   |            |   |  |   |            |  



Changes in plan assets as of December
31 are:



|                                          |  |                  |           |   |                        |   |           |      |  |      |   |  |   |  
|----------------------------------------- |  | ---------------- | --------- | - | ---------------------- | - | --------- | ---- |  | ---- | - |  | - | -
|                                          |  | Pension Benefits |           |   | PostretirementBenefits
|                                          |  | 2003             |           |   | 2002                   |   |           | 2003 |  | 2002
|Fair value of assets at beginning of year |  | $                | 7,367,055 |   |                        | $ | 8,266,359 |      |  | $    |  |  | $ | 
|Actual return on assets                   |  |                  | 1,106,436 |   |                        |   | (906,775  | )    |  |      |  |  |   | 
|Foreign currency                          |  |                  | 108,607   |   |                        |   | 6,176     |      |  |      |  |  |   | 
|Contributions                             |  |                  | 204,124   |   |                        |   | 475,375   |      |  |      |  |  |   | 
|Benefits paid                             |  |                  | (503,591  | ) |                        |   | (474,080  | )    |  |      |  |  |   | 
|                                          |  |                  |           |   |                        |   |           |      |  |      |   |  |   |  
|Fair value of assets at end of year       |  | $                | 8,282,631 |   |                        | $ | 7,367,055 |      |  | $    |  |  | $ | 
|                                          |  |                  |           |   |                        |   |           |      |  |      |   |  |   |  



Funded status of the plans as of
December 31 is:



|                                    |  |                  |            |   |                         |   |            |      |  |   |             |   |  |   |             |  
|----------------------------------- |  | ---------------- | ---------- | - | ----------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                    |  | Pension Benefits |            |   | Postretirement Benefits |  
|                                    |  | 2003             |            |   | 2002                    |   |            | 2003 |  |   | 2002        |  
|Funded status as of end of year     |  | $                | (4,370,575 | ) |                         | $ | (3,216,920 | )    |  | $ | (11,290,618 | ) |  | $ | (10,159,236 | )
|Unrecognized transition obligation  |  |                  | 122,974    |   |                         |   | 108,133    |      |  |   | 2,923,685   |   |  |   | 3,189,474   |  
|Unrecognized prior service cost     |  |                  | 205,185    |   |                         |   | 267,622    |      |  |   | 502,851     |   |  |   | 575,307     |  
|Unrecognized actuarial loss         |  |                  | 3,632,266  |   |                         |   | 3,139,883  |      |  |   | 1,216,941   |   |  |   | 493,466     |  
|                                    |  |                  |            |   |                         |   |            |      |  |   |             |   |  |   |             |  
|Prepaid (accrued) benefit cost, net |  | $                | (410,150   | ) |                         | $ | 298,718    |      |  | $ | (6,647,141  | ) |  | $ | (5,900,989  | )
|                                    |  |                  |            |   |                         |   |            |      |  |   |             |   |  |   |             |  



17



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



5. Employee Benefit Plans (continued)



Amounts recognized for pension benefits in the consolidated balance sheets as of December 31 consist of:



|                                             |  |                  |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | ---------------- | ---------- | - | ----------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                             |  | Pension Benefits |            |   | Postretirement Benefits |  
|                                             |  | 2003             |            |   | 2002                    |   |            | 2003 |  |   | 2002       |  
|Accrued benefit liability                    |  | $                | (4,159,747 | ) |                         | $ | (3,010,342 | )    |  | $ | (6,647,141 | ) |  | $ | (5,900,989 | )
|Intangible asset                             |  |                  | 205,185    |   |                         |   | 267,622    |      |  |   |           |   |  |   |           |  
|Accumulated other comprehensive loss, pretax |  |                  | 3,544,412  |   |                         |   | 3,041,438  |      |  |   |           |   |  |   |           |  
|                                             |  |                  |            |   |                         |   |            |      |  |   |            |   |  |   |            |  
|Net amount recognized                        |  | $                | (410,150   | ) |                         | $ | 298,718    |      |  | $ | (6,647,141 | ) |  | $ | (5,900,989 | )
|                                             |  |                  |            |   |                         |   |            |      |  |   |            |   |  |   |            |  



|                               |  |                  |             |   |      |   |             |  
|------------------------------ |  | ---------------- | ----------- | - | ---- | - | ----------- | -
|                               |  | Pension Benefits |            
|                               |  | 2003             |             |   | 2002 |  
|Projected benefit obligation   |  | $                | (12,653,206 | ) |      | $ | (10,583,975 | )
|Accumulated benefit obligation |  |                  | (12,086,381 | ) |      |   | (10,128,607 | )
|Fair value of assets           |  |                  | 8,282,631   |   |      |   | 7,367,055   |  



The following weighted average
assumptions were used for pension benefits and postretirement benefits to determine the projected benefit obligation at the measurement date and the net period pension cost for the fiscal year:



|                                                 |  |                 |   |  |                        |   |  |      |   |  |      |  
|------------------------------------------------ |  | --------------- | - |  | ---------------------- | - |  | ---- | - |  | ---- | -
|                                                 |  | PensionBenefits |   |  | PostretirementBenefits |  
|                                                 |  | 2003            |   |  | 2002                   |   |  | 2003 |   |  | 2002 |  
|Projected Benefit Obligation                     |  |                 |   |  |                        |   |  |      |   |  |      |  
|Discount rate                                    |  | 6.3             | % |  | 7.0                    | % |  | 6.3  | % |  | 7.0  | %
|Compensation increase rate for applicable plan   |  | 4.0             | % |  | 5.0                    | % |  |     |   |  |     |  
|Net Periodic Pension Cost                        |  |                 |   |  |                        |   |  |      |   |  |      |  
|Discount rate                                    |  | 7.0             | % |  | 7.6                    | % |  | 7.0  | % |  | 8.0  | %
|Expected long-term rate of return on plan assets |  | 7.6             | % |  | 8.6                    | % |  |     |   |  |     |  
|Compensation increase rate for applicable plan   |  | 5.0             | % |  | 5.0                    | % |  |     |   |  |     |  



18



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



5. Employee Benefit Plans (continued)



The Companys expected long-term rate of return on plan assets is based on actuarial surveys of equivalent plans combined with
historical performance.



The assumed health care cost trend rates used to
determine the projected postretirement benefit obligation are:



|                                                                                  |  |                        |   |  |      |  
|--------------------------------------------------------------------------------- |  | ---------------------- | - |  | ---- | -
|                                                                                  |  | PostretirementBenefits |  
|                                                                                  |  | 2003                   |   |  | 2002 |  
|Prescription drug cost trend rate assumed for next year                           |  | 10.7                   | % |  | 12.0 | %
|Health care cost trend rate assumed for next year                                 |  | 6.7                    | % |  | 7.0  | %
|Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  | 5.5                    | % |  | 5.5  | %
|Year that the rate reaches the ultimate trend rate                                |  | 2008                   |   |  | 2008 |  



Assumed health care cost trend rates
have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:



|                                             |  |                                |         |                              |   |          |  
|-------------------------------------------- |  | ------------------------------ | ------- | ---------------------------- | - | -------- | -
|                                             |  | One-percentage- point increase |         | One-percentagepoint decrease |  
|Effect on total of service and interest cost |  | $                              | 66,429  |                              | $ | (56,979  | )
|Effect on postretirement benefit obligation  |  |                                | 817,441 |                              |   | (704,535 | )



The Companys weighted-average
asset allocations at December 31 by asset category are:



|                  |  |                 |   |  |      |  
|----------------- |  | --------------- | - |  | ---- | -
|                  |  | PensionBenefits |  
|                  |  | 2003            |   |  | 2002 |  
|Asset category    |  |                 |   |  |      |  
|Equity securities |  | 65              | % |  | 57   | %
|Debt securities   |  | 30              | % |  | 35   | %
|Real estate       |  | 1               | % |  |     |  
|Other             |  | 4               | % |  | 8    | %
|                  |  |                 |   |  |      |  
|Total             |  | 100             | % |  | 100  | %



19



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



5. Employee Benefit Plans (continued)



The Companys investment strategy for its pension plans is to maximize the long-term rate of return on plan assets within an acceptable
level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class. Target allocations for domestic plans are 65% equity securities and 35% debt securities. Target
allocations for the Canadian plan are 57% equity securities, 39% debt securities, 3% real estate and 1% other.



During 2004, the Company expects to contribute $1,354,000 to its defined benefit pension plans, and $500,000 for the payment of benefits for retiree medical and life plans.



The Company has a noncontributory defined contribution pension plan covering all United
States salaried employees. The Company also has a contributory 401(k) Plan, whereby the Company matches certain employee contributions. Contributions to the defined contribution plan are based on compensation. Total defined contribution expense was
$613,000, $600,000, and $450,000 for 2003, 2002, and 2001, respectively.



On
December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. Because of
various uncertainties related to this legislation and the appropriate accounting methodology for this event, Numatics, Incorporated has elected to defer financial recognition of this legislation until the Financial Accounting Standards Board issues
final accounting guidance. When issued, that final guidance could require the Company to change previously reported information. This deferral election is permitted under FSP FAS 106-1.



6. Shareholders Equity



During 2002, the Company purchased 210,083 shares of treasury stock for $2,257,284 through the issuance of notes payable to former shareholders. During 2001, the Company
purchased 52,257 shares of treasury stock for $1,089,996 through the issuance of notes payable to a former shareholder.



20



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



6. Shareholders Equity (continued)



The Numatics, Incorporated Stock Incentive Plan (the Plan) is intended to provide incentive compensation to certain key managers and
employees and directors of the Company or any Affiliated Entity. The Company adopted its Plan, which permits the grant of options to purchase up to 200,000 shares of common stock, on June 29, 2000. Options granted under the Plan vest over a
five-year period. During the year ended December 31, 2003, no options were granted. At December 31, 2003 options for 52,800 shares were exercisable at $17.50, while 134,000 shares were available for future grant.



The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for the stock option plan. Accordingly, no compensation expense has been recognized for the stock option plan. The following table reflects pro-forma financial results, had compensation expense been determined based on the fair value at
the grant dates for awards under the plan consistent with the method of SFAS No. 123.



|                                                                                                                            |  |                         |         |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                                            |  | Years ended December 31 |        
|                                                                                                                            |  | 2003                    |         |   | 2002 |   |            | 2001 | 
|Net income (loss), as reported                                                                                              |  | $                       | 41,456  |   |      | $ | (6,096,313 | )    |  | $ | (1,783,689 | )
|Deduct: Total stock-based employee compensation expense determined under the fair-value based method accounting, net of tax |  |                         | (36,000 | ) |      |   | (36,000    | )    |  |   | (36,000    | )
|                                                                                                                            |  |                         |         |   |      |   |            |      |  |   |            |  
|Pro-forma net income (loss)                                                                                                 |  | $                       | 5,456   |   |      | $ | (6,132,313 | )    |  | $ | (1,819,689 | )
|                                                                                                                            |  |                         |         |   |      |   |            |      |  |   |            |  



The fair values of stock options, as
disclosed above, were estimated as of the date of grant using a Black-Scholes option pricing model, and amortized over the options vesting period. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have
characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its stock options.



There were
no options issued during 2003, 2002 or 2001.



21



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



7. Segment and Geographic Information



Operating segments are defined as components of an enterprise with separate financial information available that is evaluated regularly by
the chief operating decision-makers. The Company reports it segments based on geographic area. The operating segments accounting policies are consistent with those described in Note 1.



Financial information by geographic segment for the years ended December 31, is as follows:



|                               |  |      |             |      |   |             |  |   |            
|------------------------------ |  | ---- | ----------- | ---- | - | ----------- |  | - | -----------
|                               |  | 2003 |             | 2002 |   | 2001       
|Net sales:                     |  |      |             |      |   |             |  |   |            
|North America                  |  | $    | 95,233,557  |      | $ | 92,608,375  |  | $ | 93,993,279 
|International                  |  |      | 21,724,794  |      |   | 19,631,154  |  |   | 19,569,797 
|                               |  |      |             |      |   |             |  |   |            
|                               |  | $    | 116,958,351 |      | $ | 112,239,529 |  | $ | 113,563,076
|                               |  |      |             |      |   |             |  |   |            
|                               |  |      |            
|                               |  | 2003 |             | 2002 |   | 2001       
|Depreciation and amortization: |  |      |             |      |   |             |  |   |            
|North America                  |  | $    | 5,130,878   |      | $ | 5,000,829   |  | $ | 4,930,270  
|International                  |  |      | 772,351     |      |   | 451,573     |  |   | 557,469    
|                               |  |      |             |      |   |             |  |   |            
|                               |  | $    | 5,903,229   |      | $ | 5,452,402   |  | $ | 5,487,739  
|                               |  |      |             |      |   |             |  |   |            
|                               |  |      |            
|                               |  | 2003 |             | 2002 |   | 2001       
|Operating income:              |  |      |             |      |   |             |  |   |            
|North America                  |  | $    | 13,970,380  |      | $ | 14,979,642  |  | $ | 14,537,406 
|International                  |  |      | 1,168,855   |      |   | 1,234,052   |  |   | 1,131,748  
|                               |  |      |             |      |   |             |  |   |            
|                               |  | $    | 15,139,235  |      | $ | 16,213,694  |  | $ | 15,669,154 
|                               |  |      |             |      |   |             |  |   |            
|                               |  |      |            
|                               |  | 2003 |             | 2002 |   | 2001       
|Capital expenditures:          |  |      |             |      |   |             |  |   |            
|North America                  |  | $    | 1,500,934   |      | $ | 451,731     |  | $ | 1,842,212  
|International                  |  |      | 86,974      |      |   |            |  |   | 129,312    
|                               |  |      |             |      |   |             |  |   |            
|                               |  | $    | 1,587,908   |      | $ | 451,731     |  | $ | 1,971,524  
|                               |  |      |             |      |   |             |  |   |            



22



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



7. Segment and Geographic Information (continued)



Financial information by geographic segment as of December 31, is as follows:



|              |  |      |            |      |   |           
|------------- |  | ---- | ---------- | ---- | - | ----------
|              |  | 2003 |            | 2002
|Goodwill:     |  |      |            |      |   |           
|North America |  | $    | 3,184,690  |      | $ | 2,987,762 
|International |  |      | 2,467,459  |      |   | 2,111,192 
|              |  |      |            |      |   |           
|              |  | $    | 5,652,149  |      | $ | 5,098,954 
|              |  |      |            |      |   |           
|              |  |     
|              |  | 2003 |            | 2002
|Total assets: |  |      |            |      |   |           
|North America |  | $    | 75,661,620 |      | $ | 81,383,823
|International |  |      | 17,889,718 |      |   | 16,073,066
|              |  |      |            |      |   |           
|              |  | $    | 93,551,338 |      | $ | 97,456,889
|              |  |      |            |      |   |           



23



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



8. Guarantor and Non-Guarantor Subsidiaries



The $115 million of 9.625% senior subordinated notes issued by Numatics, Inc. in 1998 are guaranteed by the Companys United States
subsidiaries in which it owns 100% of the voting stock. Each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal, premium, if any, and interest and Liquidated Damages,
if any, on the Notes.



The following supplemental consolidating condensed
financial statements present:



| | 1. | Consolidating condensed balance sheets as of December 31, 2003 and 2002, and consolidating condensed statements of operations and cash flows for the years ended December 31, 2003,
2002 and 2001.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Numatics, Incorporated (the Parent), combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries (consisting of the Parents foreign subsidiaries).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Elimination entries necessary to consolidate the parent and all of its subsidiaries.
| | -- | ------------------------------------------------------------------------------------



Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.



24



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



8. Guarantor and Non-Guarantor Subsidiaries (continued)



Consolidating Condensed Balance Sheet



December 31, 2003



|                                                               |  |        |             |   |                       |   |            |                           |  |              |            |  |              |             |   |  |   |             |  
|-------------------------------------------------------------- |  | ------ | ----------- | - | --------------------- | - | ---------- | ------------------------- |  | ------------ | ---------- |  | ------------ | ----------- | - |  | - | ----------- | -
|                                                               |  | Parent |             |   | GuarantorSubsidiaries |   |            | Non-GuarantorSubsidiaries |  | Eliminations |            |  | Consolidated |            
|Trade receivables                                              |  | $      | 8,153,030   |   |                       | $ | 2,031,929  |                           |  | $            | 7,581,424  |  | $            |            |   |  | $ | 17,766,383  |  
|Inventories                                                    |  |        | 17,463,617  |   |                       |   | 4,924,216  |                           |  |              | 11,658,077 |  |              | (988,000    | ) |  |   | 33,057,910  |  
|Other                                                          |  |        | 1,687,109   |   |                       |   | 129,498    |                           |  |              | 2,030,516  |  |              |            |   |  |   | 3,847,123   |  
|                                                               |  |        |             |   |                       |   |            |                           |  |              |            |  |              |             |   |  |   |             |  
|Total current assets                                           |  |        | 27,303,756  |   |                       |   | 7,085,643  |                           |  |              | 21,270,017 |  |              | (988,000    | ) |  |   | 54,671,416  |  
|                                                               |  |        |             |   |                      
|Goodwill                                                       |  |        | 1,248,777   |   |                       |   |           |                           |  |              | 3,277,527  |  |              | 1,125,845   |   |  |   | 5,652,149   |  
|                                                               |  |        |             |   |                      
|Other                                                          |  |        | 16,462,898  |   |                       |   | 40,572     |                           |  |              | 805,855    |  |              | (10,079,936 | ) |  |   | 7,229,389   |  
|                                                               |  |        |             |   |                      
|Intercompany amounts                                           |  |        | 15,096,583  |   |                       |   | 2,636,349  |                           |  |              | 6,310,383  |  |              | (24,043,315 | ) |  |   |            |  
|                                                               |  |        |             |   |                      
|Property, plant and equipment, net of accumulated depreciation |  |        | 20,174,695  |   |                       |   | 806,090    |                           |  |              | 5,017,599  |  |              |            |   |  |   | 25,998,384  |  
|                                                               |  |        |             |   |                       |   |            |                           |  |              |            |  |              |             |   |  |   |             |  
|                                                               |  | $      | 80,286,709  |   |                       | $ | 10,568,654 |                           |  | $            | 36,681,381 |  | $            | (33,985,406 | ) |  | $ | 93,551,338  |  
|                                                               |  |        |             |   |                       |   |            |                           |  |              |            |  |              |             |   |  |   |             |  
|Accounts payable and accrued expenses                          |  | $      | 6,365,054   |   |                       | $ | 823,281    |                           |  | $            | 2,863,156  |  | $            |            |   |  | $ | 10,051,491  |  
|Compensation and employee benefits                             |  |        | 2,296,922   |   |                       |   | 301,630    |                           |  |              | 1,437,688  |  |              |            |   |  |   | 4,036,240   |  
|Current portion of long-term debt                              |  |        | 3,992,866   |   |                       |   | 39,402     |                           |  |              | 10,587     |  |              |            |   |  |   | 4,042,855   |  
|Other                                                          |  |        | 159,214     |   |                       |   | (28,300    | )                         |  |              | 869,655    |  |              |            |   |  |   | 1,000,569   |  
|                                                               |  |        |             |   |                       |   |            |                           |  |              |            |  |              |             |   |  |   |             |  
|Total current liabilities                                      |  |        | 12,814,056  |   |                       |   | 1,136,013  |                           |  |              | 5,181,086  |  |              |            |   |  |   | 19,131,155  |  
|                                                               |  |        |             |   |                      
|Long-term debt less current portion                            |  |        | 139,806,041 |   |                       |   |           |                           |  |              | 8,006,275  |  |              |            |   |  |   | 147,812,316 |  
|                                                               |  |        |             |   |                      
|Other                                                          |  |        | 12,742,817  |   |                       |   |           |                           |  |              | 1,277,861  |  |              | 624,388     |   |  |   | 14,645,066  |  
|                                                               |  |        |             |   |                      
|Intercompany amounts                                           |  |        | 6,273,458   |   |                       |   | 4,453,825  |                           |  |              | 13,316,032 |  |              | (24,043,315 | ) |  |   |            |  
|                                                               |  |        |             |   |                      
|Accumulated deficiency                                         |  |        | (91,349,663 | ) |                       |   | 4,978,816  |                           |  |              | 8,900,127  |  |              | (10,566,479 | ) |  |   | (88,037,199 | )
|                                                               |  |        |             |   |                       |   |            |                           |  |              |            |  |              |             |   |  |   |             |  
|                                                               |  | $      | 80,286,709  |   |                       | $ | 10,568,654 |                           |  | $            | 36,681,381 |  | $            | (33,985,406 | ) |  | $ | 93,551,338  |  
|                                                               |  |        |             |   |                       |   |            |                           |  |              |            |  |              |             |   |  |   |             |  



25



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



8. Guarantor and Non-Guarantor Subsidiaries (continued)



Consolidating Condensed Balance Sheet



December 31, 2002



|                                                               |  |        |             |   |                       |   |           |                           |  |              |            |  |              |             |   |  |   |             |  
|-------------------------------------------------------------- |  | ------ | ----------- | - | --------------------- | - | --------- | ------------------------- |  | ------------ | ---------- |  | ------------ | ----------- | - |  | - | ----------- | -
|                                                               |  | Parent |             |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  | Eliminations |            |  | Consolidated |            
|Trade receivables                                              |  | $      | 8,930,549   |   |                       | $ | 1,660,527 |                           |  | $            | 7,946,181  |  | $            |            |   |  | $ | 18,537,257  |  
|Inventories                                                    |  |        | 18,222,807  |   |                       |   | 4,834,926 |                           |  |              | 10,623,849 |  |              | (967,000    | ) |  |   | 32,714,582  |  
|Other                                                          |  |        | 2,091,702   |   |                       |   | 171,344   |                           |  |              | 2,133,514  |  |              |            |   |  |   | 4,396,560   |  
|                                                               |  |        |             |   |                       |   |           |                           |  |              |            |  |              |             |   |  |   |             |  
|Total current assets                                           |  |        | 29,245,058  |   |                       |   | 6,666,797 |                           |  |              | 20,703,544 |  |              | (967,000    | ) |  |   | 55,648,399  |  
|                                                               |  |        |             |   |                      
|Goodwill                                                       |  |        | 1,248,777   |   |                       |   |          |                           |  |              | 2,724,332  |  |              | 1,125,845   |   |  |   | 5,098,954   |  
|                                                               |  |        |             |   |                      
|Other                                                          |  |        | 20,270,566  |   |                       |   | 40,572    |                           |  |              | 611,475    |  |              | (12,079,076 | ) |  |   | 8,843,537   |  
|                                                               |  |        |             |   |                      
|Intercompany amounts                                           |  |        | 18,841,713  |   |                       |   | 1,770,711 |                           |  |              | 8,010,748  |  |              | (28,623,172 | ) |  |   |            |  
|                                                               |  |        |             |   |                      
|Property, plant and equipment, net of accumulated depreciation |  |        | 22,442,827  |   |                       |   | 914,736   |                           |  |              | 4,508,436  |  |              |            |   |  |   | 27,865,999  |  
|                                                               |  |        |             |   |                       |   |           |                           |  |              |            |  |              |             |   |  |   |             |  
|                                                               |  | $      | 92,048,941  |   |                       | $ | 9,392,816 |                           |  | $            | 36,558,535 |  | $            | (40,543,403 | ) |  | $ | 97,456,889  |  
|                                                               |  |        |             |   |                       |   |           |                           |  |              |            |  |              |             |   |  |   |             |  
|Accounts payable and accrued expenses                          |  | $      | 6,824,958   |   |                       | $ | 653,508   |                           |  | $            | 3,122,798  |  | $            |            |   |  | $ | 10,601,264  |  
|Compensation and employee benefits                             |  |        | 1,903,535   |   |                       |   | 208,786   |                           |  |              | 1,340,364  |  |              |            |   |  |   | 3,452,685   |  
|Current portion of long-term debt                              |  |        | 1,711,249   |   |                       |   | 103,420   |                           |  |              | 269,173    |  |              |            |   |  |   | 2,083,842   |  
|Other                                                          |  |        | 384,955     |   |                       |   | (76,310   | )                         |  |              | 571,523    |  |              |            |   |  |   | 880,168     |  
|                                                               |  |        |             |   |                       |   |           |                           |  |              |            |  |              |             |   |  |   |             |  
|Total current liabilities                                      |  |        | 10,824,697  |   |                       |   | 889,404   |                           |  |              | 5,303,858  |  |              |            |   |  |   | 17,017,959  |  
|                                                               |  |        |             |   |                      
|Long-term debt less current portion                            |  |        | 153,547,742 |   |                       |   | 14,785    |                           |  |              | 2,998,474  |  |              |            |   |  |   | 156,561,001 |  
|                                                               |  |        |             |   |                      
|Other                                                          |  |        | 11,358,111  |   |                       |   |          |                           |  |              | 743,294    |  |              | 487,668     |   |  |   | 12,589,073  |  
|                                                               |  |        |             |   |                      
|Intercompany amounts                                           |  |        | 7,256,719   |   |                       |   | 4,344,375 |                           |  |              | 17,022,078 |  |              | (28,623,172 | ) |  |   |            |  
|                                                               |  |        |             |   |                      
|Accumulated deficiency                                         |  |        | (90,938,328 | ) |                       |   | 4,144,252 |                           |  |              | 10,490,831 |  |              | (12,407,899 | ) |  |   | (88,711,144 | )
|                                                               |  |        |             |   |                       |   |           |                           |  |              |            |  |              |             |   |  |   |             |  
|                                                               |  | $      | 92,048,941  |   |                       | $ | 9,392,816 |                           |  | $            | 36,558,535 |  | $            | (40,543,403 | ) |  | $ | 97,456,889  |  
|                                                               |  |        |             |   |                       |   |           |                           |  |              |            |  |              |             |   |  |   |             |  



26



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



8. Guarantor and Non-Guarantor Subsidiaries (continued)



Consolidating Condensed Statement of Operations



Year ended December 31, 2003



|                   |  |        |            |                       |   |                           |  |              |            |  |              |             |   |  |   |            
|------------------ |  | ------ | ---------- | --------------------- | - | ------------------------- |  | ------------ | ---------- |  | ------------ | ----------- | - |  | - | -----------
|                   |  | Parent |            | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  | Eliminations |            |  | Consolidated
|Net sales          |  | $      | 76,140,088 |                       | $ | 15,118,246                |  | $            | 48,642,017 |  | $            | (22,942,000 | ) |  | $ | 116,958,351
|Costs and expenses |  |        | 64,585,351 |                       |   | 14,231,369                |  |              | 45,923,396 |  |              | (22,921,000 | ) |  |   | 101,819,116
|                   |  |        |            |                       |   |                           |  |              |            |  |              |             |   |  |   |            
|Operating income   |  |        | 11,554,737 |                       |   | 886,877                   |  |              | 2,718,621  |  |              | (21,000     | ) |  |   | 15,139,235 
|Interest and other |  |        | 11,216,517 |                       |   | 52,310                    |  |              | 1,211,044  |  |              | 2,617,908   |   |  |   | 15,097,779 
|                   |  |        |            |                       |   |                           |  |              |            |  |              |             |   |  |   |            
|Net income         |  | $      | 338,220    |                       | $ | 834,567                   |  | $            | 1,507,577  |  | $            | (2,638,908  | ) |  | $ | 41,456     
|                   |  |        |            |                       |   |                           |  |              |            |  |              |             |   |  |   |            



Consolidating Condensed
Statement of Operations



Year ended December 31, 2002



|                   |  |        |            |   |                       |   |                           |  |              |            |  |              |             |   |  |   |             |  
|------------------ |  | ------ | ---------- | - | --------------------- | - | ------------------------- |  | ------------ | ---------- |  | ------------ | ----------- | - |  | - | ----------- | -
|                   |  | Parent |            |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  | Eliminations |            |  | Consolidated |            
|Net sales          |  | $      | 75,871,736 |   |                       | $ | 14,325,064                |  | $            | 45,691,729 |  | $            | (23,649,000 | ) |  | $ | 112,239,529 |  
|Costs and expenses |  |        | 63,177,146 |   |                       |   | 13,286,812                |  |              | 43,235,877 |  |              | (23,674,000 | ) |  |   | 96,025,835  |  
|                   |  |        |            |   |                       |   |                           |  |              |            |  |              |             |   |  |   |             |  
|Operating income   |  |        | 12,694,590 |   |                       |   | 1,038,252                 |  |              | 2,455,852  |  |              | 25,000      |   |  |   | 16,213,694  |  
|Interest and other |  |        | 20,881,838 |   |                       |   | 379,709                   |  |              | 958,368    |  |              | 90,092      |   |  |   | 22,310,007  |  
|                   |  |        |            |   |                       |   |                           |  |              |            |  |              |             |   |  |   |             |  
|Net (loss) income  |  | $      | (8,187,248 | ) |                       | $ | 658,543                   |  | $            | 1,497,484  |  | $            | (65,092     | ) |  | $ | (6,096,313  | )
|                   |  |        |            |   |                       |   |                           |  |              |            |  |              |             |   |  |   |             |  



Consolidating Condensed
Statement of Operations



Year ended December 31, 2001



|                   |  |        |            |   |                       |   |                           |  |   |              |   |  |              |             |   |  |   |             |  
|------------------ |  | ------ | ---------- | - | --------------------- | - | ------------------------- |  | - | ------------ | - |  | ------------ | ----------- | - |  | - | ----------- | -
|                   |  | Parent |            |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |            
|Net sales          |  | $      | 76,871,429 |   |                       | $ | 13,204,578                |  | $ | 43,422,069   |   |  | $            | (19,935,000 | ) |  | $ | 113,563,076 |  
|Costs and expenses |  |        | 64,177,962 |   |                       |   | 12,787,738                |  |   | 40,938,958   |   |  |              | (20,010,736 | ) |  |   | 97,893,922  |  
|                   |  |        |            |   |                       |   |                           |  |   |              |   |  |              |             |   |  |   |             |  
|Operating income   |  |        | 12,693,467 |   |                       |   | 416,840                   |  |   | 2,483,111    |   |  |              | 75,736      |   |  |   | 15,669,154  |  
|Interest and other |  |        | 15,362,331 |   |                       |   | 161,192                   |  |   | 2,557,888    |   |  |              | (628,568    | ) |  |   | 17,452,843  |  
|                   |  |        |            |   |                       |   |                           |  |   |              |   |  |              |             |   |  |   |             |  
|Net (loss) income  |  | $      | (2,668,864 | ) |                       | $ | 255,648                   |  | $ | (74,777      | ) |  | $            | 704,304     |   |  | $ | (1,783,689  | )
|                   |  |        |            |   |                       |   |                           |  |   |              |   |  |              |             |   |  |   |             |  



27



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



8. Guarantor and Non-Guarantor Subsidiaries (continued)



Consolidating Condensed Statement of Cash Flows



Year ended December 31, 2003



|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |            |   |  |   |            |  
|--------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------ | - |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                    |  | Parent |            |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |           
|Net cash provided by operating activities           |  | $      | 4,587,205  |   |                       | $ | 902,331  |                           |  | $ | 3,413,849    |   |  | $            | (2,443,585 | ) |  | $ | 6,459,800  |  
|                                                    |  |        |            |   |                      
|Cash flows from investing activities:               |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |            |   |  |   |            |  
|Capital expenditures                                |  |        | (1,227,647 | ) |                       |   | (111,077 | )                         |  |   | (249,184     | ) |  |              |           |   |  |   | (1,587,908 | )
|Other investments                                   |  |        | 1,999,140  |   |                       |   |         |                           |  |   | (4,420,560   | ) |  |              | 2,443,585  |   |  |   | 22,165     |  
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |            |   |  |   |            |  
|Net cash provided by (used in) investing activities |  |        | 771,493    |   |                       |   | (111,077 | )                         |  |   | (4,669,744   | ) |  |              | 2,443,585  |   |  |   | (1,565,743 | )
|                                                    |  |        |            |   |                      
|Cash flows from financing activities:               |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |            |   |  |   |            |  
|Debt repayments                                     |  |        | (5,515,309 | ) |                       |   | (78,803  | )                         |  |   | 3,238,759    |   |  |              |           |   |  |   | (2,355,353 | )
|Debt issuance costs                                 |  |        | (2,906,518 | ) |                       |   |         |                           |  |   | (370,236     | ) |  |              |           |   |  |   | (3,276,754 | )
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |            |   |  |   |            |  
|Net cash (used in) provided by financing activities |  |        | (8,421,827 | ) |                       |   | (78,803  | )                         |  |   | 2,868,523    |   |  |              |           |   |  |   | (5,632,107 | )
|Other                                               |  |        |           |   |                       |   |         |                           |  |   | 106,046      |   |  |              | 370,163    |   |  |   | 476,209    |  
|Intercompany accounts                               |  |        | 3,085,689  |   |                       |   | (756,188 | )                         |  |   | (1,959,338   | ) |  |              | (370,163   | ) |  |   |           |  
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |            |   |  |   |            |  
|Net increase (decrease) in cash                     |  |        | 22,560     |   |                       |   | (43,737  | )                         |  |   | (240,664     | ) |  |              |           |   |  |   | (261,841   | )
|Cash at beginning of year                           |  |        | 325,266    |   |                       |   | 104,001  |                           |  |   | 886,983      |   |  |              |           |   |  |   | 1,316,250  |  
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |            |   |  |   |            |  
|Cash at end of year                                 |  | $      | 347,826    |   |                       | $ | 60,264   |                           |  | $ | 646,319      |   |  | $            |           |   |  | $ | 1,054,409  |  
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |            |   |  |   |            |  



28



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



8. Guarantor and Non-Guarantor Subsidiaries (continued)



Consolidating Condensed Statement of Cash Flows



Year ended December 31, 2002



|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |          |   |  |   |            |  
|--------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ---------- | -
|                                                    |  | Parent |            |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|Net cash provided by operating activities           |  | $      | 5,440,687  |   |                       | $ | 654,408  |                           |  | $ | 1,717,534    |   |  | $            |         |   |  | $ | 7,812,629  |  
|                                                    |  |        |            |   |                      
|Cash flows from investing activities:               |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Capital expenditures                                |  |        | (410,459   | ) |                       |   | (68,649  | )                         |  |   | 27,377       |   |  |              |         |   |  |   | (451,731   | )
|Other investments                                   |  |        | 11,679     |   |                       |   |         |                           |  |   |             |   |  |              |         |   |  |   | 11,679     |  
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Net cash (used in) provided by investing activities |  |        | (398,780   | ) |                       |   | (68,649  | )                         |  |   | 27,377       |   |  |              |         |   |  |   | (440,052   | )
|                                                    |  |        |            |   |                      
|Cash flows from financing activities:               |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Debt repayments                                     |  |        | (4,909,964 | ) |                       |   | (80,016  | )                         |  |   | (1,931,213   | ) |  |              |         |   |  |   | (6,921,193 | )
|Debt issuance costs                                 |  |        | (753,586   | ) |                       |   |         |                           |  |   | 538          |   |  |              |         |   |  |   | (753,048   | )
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Net cash used in financing activities               |  |        | (5,663,550 | ) |                       |   | (80,016  | )                         |  |   | (1,930,675   | ) |  |              |         |   |  |   | (7,674,241 | )
|Other                                               |  |        |            |   |                       |   |          |                           |  |   | 56,068       |   |  |              | (333,181 | ) |  |   | (277,113   | )
|Intercompany accounts                               |  |        | 545,847    |   |                       |   | (608,999 | )                         |  |   | (270,029     | ) |  |              | 333,181  |   |  |   |           |  
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Net decrease in cash                                |  |        | (75,796    | ) |                       |   | (103,256 | )                         |  |   | (399,725     | ) |  |              |         |   |  |   | (578,777   | )
|Cash at beginning of year                           |  |        | 401,062    |   |                       |   | 207,257  |                           |  |   | 1,286,708    |   |  |              |         |   |  |   | 1,895,027  |  
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Cash at end of year                                 |  | $      | 325,266    |   |                       | $ | 104,001  |                           |  | $ | 886,983      |   |  | $            |         |   |  | $ | 1,316,250  |  
|                                                    |  |        |            |   |                       |   |          |                           |  |   |              |   |  |              |          |   |  |   |            |  



29



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



8. Guarantor and Non-Guarantor Subsidiaries (continued)



Consolidating Condensed Statement of Cash Flows



Year ended December 31, 2001



|                                          |  |        |            |   |                       |   |           |                           |  |   |              |   |  |              |          |   |  |   |            |  
|----------------------------------------- |  | ------ | ---------- | - | --------------------- | - | --------- | ------------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ---------- | -
|                                          |  | Parent |            |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|Net cash provided by operating activities |  | $      | 4,957,529  |   |                       | $ | 1,018,969 |                           |  | $ | 3,447,063    |   |  | $            | (13,460  | ) |  | $ | 9,410,101  |  
|                                          |  |        |            |   |                      
|Cash flows from investing activities:     |  |        |            |   |                       |   |           |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Capital expenditures                      |  |        | (1,571,046 | ) |                       |   | (56,723   | )                         |  |   | (343,755     | ) |  |              |         |   |  |   | (1,971,524 | )
|Other investments                         |  |        | (279,959   | ) |                       |   |          |                           |  |   | 238,695      |   |  |              |         |   |  |   | (41,264    | )
|                                          |  |        |            |   |                       |   |           |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Net cash used in investing activities     |  |        | (1,851,005 | ) |                       |   | (56,723   | )                         |  |   | (105,060     | ) |  |              |         |   |  |   | (2,012,788 | )
|                                          |  |        |            |   |                      
|Cash flows from financing activities:     |  |        |            |   |                       |   |           |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Debt repayments                           |  |        | (1,786,518 | ) |                       |   | (78,803   | )                         |  |   | (1,588,785   | ) |  |              |         |   |  |   | (3,454,106 | )
|Debt issuance costs                       |  |        | (2,555,524 | ) |                       |   |          |                           |  |   | (471,493     | ) |  |              |         |   |  |   | (3,027,017 | )
|Extinguishment of debt                    |  |        | (286,722   | ) |                       |   |          |                           |  |   | (17,096      | ) |  |              |         |   |  |   | (303,818   | )
|                                          |  |        |            |   |                       |   |           |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Net cash used in financing activities     |  |        | (4,628,764 | ) |                       |   | (78,803   | )                         |  |   | (2,077,374   | ) |  |              |         |   |  |   | (6,784,941 | )
|Other                                     |  |        |           |   |                       |   |          |                           |  |   | (44,872      | ) |  |              | 352,260  |   |  |   | 307,388    |  
|Intercompany accounts                     |  |        | 1,779,008  |   |                       |   | (994,316  | )                         |  |   | (432,432     | ) |  |              | (352,260 | ) |  |   |           |  
|                                          |  |        |            |   |                       |   |           |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Net increase (decrease) in cash           |  |        | 256,768    |   |                       |   | (110,873  | )                         |  |   | 787,325      |   |  |              | (13,460  | ) |  |   | 919,760    |  
|Cash at beginning of year                 |  |        | 144,294    |   |                       |   | 318,130   |                           |  |   | 499,383      |   |  |              | 13,460   |   |  |   | 975,267    |  
|                                          |  |        |            |   |                       |   |           |                           |  |   |              |   |  |              |          |   |  |   |            |  
|Cash at end of year                       |  | $      | 401,062    |   |                       | $ | 207,257   |                           |  | $ | 1,286,708    |   |  | $            |         |   |  | $ | 1,895,027  |  
|                                          |  |        |            |   |                       |   |           |                           |  |   |              |   |  |              |          |   |  |   |            |  



30



---

Numatics, Incorporated



Notes to Consolidated Financial Statements (continued)



9. Quarterly Financial Data (Unaudited)



|                      |  |          |            |          |   |            |  |   |            |   |  |       |            |   |  |   |            
|--------------------- |  | -------- | ---------- | -------- | - | ---------- |  | - | ---------- | - |  | ----- | ---------- | - |  | - | -----------
|2003                  |  | 1st Qtr. |            | 2nd Qtr. |   | 3rd Qtr.   |  |   | 4th Qtr.   |   |  | Total
|Net sales             |  | $        | 29,531,254 |          | $ | 29,755,774 |  | $ | 29,291,549 |   |  | $     | 28,379,774 |   |  | $ | 116,958,351
|Gross profit          |  |          | 11,046,319 |          |   | 11,609,848 |  |   | 11,294,915 |   |  |       | 10,593,319 |   |  |   | 44,544,401 
|Net income (loss) (1) |  |          | 1,758,915  |          |   | 99,408     |  |   | (545,979   | ) |  |       | (1,270,888 | ) |  |   | 41,456     



|                      |  |          |            |   |          |   |            |  |   |            |   |  |       |            |   |  |   |             |  
|--------------------- |  | -------- | ---------- | - | -------- | - | ---------- |  | - | ---------- | - |  | ----- | ---------- | - |  | - | ----------- | -
|2002                  |  | 1st Qtr. |            |   | 2nd Qtr. |   | 3rd Qtr.   |  |   | 4th Qtr.   |   |  | Total |           
|Net sales             |  | $        | 26,815,162 |   |          | $ | 28,024,085 |  | $ | 28,496,350 |   |  | $     | 28,903,932 |   |  | $ | 112,239,529 |  
|Gross profit          |  |          | 10,451,701 |   |          |   | 10,559,541 |  |   | 10,829,495 |   |  |       | 10,840,679 |   |  |   | 42,681,416  |  
|Net (loss) income (2) |  |          | (814,548   | ) |          |   | 483,243    |  |   | (355,128   | ) |  |       | (5,409,880 | ) |  |   | (6,096,313  | )

---

|(1) | As referenced in Note 2 to the consolidated financial statements, in the first quarter of 2003, the Company recognized a net gain on the early extinguishment of debt and repurchase
of notes of $2.2 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As referenced in Note 4 to the consolidated financial statements, in the fourth quarter of 2002, income tax expense included a valuation allowance on the Companys deferred tax
assets of $5.3 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10. Subsequent Events



On February 13, 2004 the Company sold its Franklin, Tennessee building for $5,150,000
before costs, for a gain on the sale of $719,000. Proceeds of this sale will be used to pay off the $2.1 million industrial revenue bond and to fund the construction of a new building in Mt. Pleasant, Tennessee. The Company has entered into a lease
agreement with the purchaser of the Franklin building through July 15, 2004, at which time the Mt. Pleasant building is expected to be complete and the facilities moved.



31