<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000      COMMISSION FILE NUMBER: 1-15603

                                NATCO GROUP INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                    <C>
               DELAWARE                              22-2906892
   (STATE OR OTHER JURISDICTION OF      (I.R.S. EMPLOYER IDENTIFICATION NO.)
    INCORPORATION OR ORGANIZATION)
</TABLE>

               2950 N. LOOP WEST, 7TH FLOOR, HOUSTON, TEXAS 77092
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
       Registrant's telephone number, including area code: (713) 683-9292

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
                         TITLE OF EACH CLASS                    NAME OF EACH EXCHANGE ON WHICH REGISTERED
                         -------------------                    -----------------------------------------
       <S>                                                      <C>
              Common stock A, $0.01 par value per share                  New York Stock Exchange
</TABLE>

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes  X   No  ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant.

As of March 15, 2001                                                 $95,192,496

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

As of March 15, 2001  Common stock A, $0.01 par value per share       15,027,625
                      shares
                           Common stock B, $0.01 par value per share     699,874
                      shares

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the NATCO Group Inc. Notice of Annual Meeting of Stockholders and
Proxy Statement relating to the 2001 Annual Meeting of Shareholders, which the
Registrant intends to file within 120 days of December 31, 2000, are
incorporated by reference in Part III of this form.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                                NATCO GROUP INC.
                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                NO.
                                                                                ----
<S>               <C>                                                           <C>
                                       PART I
Item 1.           Business....................................................    3
Item 2.           Properties..................................................   16
Item 3.           Legal Proceedings...........................................   16
Item 4.           Submission of Matters to a Vote of Security Holders.........   17
                                      PART II
Item 5.           Market for the Registrant's Common Equity and Related
                  Stockholder Matters.........................................   17
Item 6.           Selected Financial Data.....................................   18
Item 7.           Management's Discussion and Analysis of Financial Condition
                  and
                  Results of Operations.......................................   19
Item 7A.          Quantitative and Qualitative Disclosures About Market
                  Risk........................................................   29
Item 8.           Financial Statements and Supplementary Data.................   30
                  Consolidated Financial Statements...........................   32
                  Notes to Consolidated Financial Statements..................   36
Item 9.           Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure....................................   56
                                      PART III
                  Information called for by Part III has been omitted as the
                  Registrant intends to file with the Securities and Exchange
                  Commission not later than 120 days after the close of its
                  fiscal year a definitive Proxy Statement pursuant to
                  Regulation 14A..............................................   56
                                      PART IV
Item 14.          Exhibits, Financial Statements Schedules and Reports on Form
                  8-K.........................................................   57
Signatures....................................................................   60
</TABLE>

                                        2
<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

     We are a leading provider of equipment, systems and services used in the
production of crude oil and natural gas, primarily at or near the wellhead, to
separate oil and gas within a production stream and to remove contaminants. Our
products and services are used in onshore and offshore fields in most major oil
and gas producing regions in the world. Separation and decontamination of a
production stream is needed at almost every producing well in order to meet the
specifications of transporters and end users.

     We design and manufacture a diverse line of production equipment including:

     -  heaters, which prevent solids from forming in gas streams and reduces
        the viscosity of oil;

     -  dehydration and desalting units, which remove water and salt from oil
        and gas;

     -  separators, which separate a wellhead production stream into oil, gas
        and water;

     -  gas conditioning units and membrane separation systems, which remove
        carbon dioxide, CO(2), and other contaminants from a gas stream;

     -  control systems, which monitor and control production equipment; and

     -  water processing systems, which include systems for water reinjection,
        oily water treatment and other treatment applications.

     We offer our products and services as either integrated systems or
individual components primarily through three business lines:

     -  traditional production equipment and services, which provides
        standardized components, replacement parts and used components and
        equipment servicing;

     -  engineered systems, which provides customized, large scale integrated
        oil and gas production systems; and

     -  automation and control systems, which provides and services control
        panels and systems that monitor and control the production of oil and
        gas.

     We have designed, manufactured and marketed production equipment and
systems for 75 years. We operate six manufacturing facilities located in the
U.S. and Canada and 38 sales and service facilities, 37 of which are located in
the U.S. and Canada, and one which is located outside of North America. We
believe that, among our competitors, we have the largest installed base of
production equipment in the industry. We have achieved our position in the
industry by maintaining technological leadership, capitalizing on our strong
brand name recognition and offering a broad range of products and services.

INDUSTRY

     Demand for oil and gas production equipment and services is driven
primarily by the following:

     -  levels of production of oil and gas in response to worldwide demand;

     -  the changing mix of oil, gas and water in the production stream and the
        level of contaminants;

     -  the discovery of new oil and gas fields; and

     -  the quality of new hydrocarbon production.

                                        3
<PAGE>   4

     We believe that the oil and gas production equipment and services market
continues to have significant growth potential due to the following:

     -  Increasing demand for oil and natural gas.  According to the Department
        of Energy, oil and natural gas consumption is expected to increase 2.3%
        per year in the United States and 3.7% per year world-wide through 2010.

     -  Increasing drilling activity.  According to Baker Hughes, the average
        United States and Canadian rig count for 2000 was 1,260 versus 854 for
        1999. Also according to Baker Hughes, the average international rig
        count for 2000 was 652 versus 588 for 1999.

     -  Changing profile of existing production.  The production profile of
        existing fields change over time, either naturally or due to
        implementation of enhanced recovery techniques. Consequently, the mix of
        oil, gas, water and contaminants changes, and the production stream
        requires additional processing equipment.

     -  Increasing focus on large-scale projects.  Due to the increased demand
        for oil and gas, oil companies are pursuing larger and more complex
        development projects that often require specialized production
        equipment. These projects may be in remote locations, deepwater or harsh
        environments and may involve complex production profiles and operations.

COMPETITIVE STRENGTHS

     We believe that the following are our key competitive strengths:

     -  Market leadership and industry reputation.  We have designed,
        manufactured and marketed production equipment and systems for 75 years.
        We believe that, among our competitors, we have the largest installed
        base of production equipment in the industry. We will continue to
        enhance our products and services in order to meet the demands of our
        customers.

     -  Technological leadership.  We believe that we have established a
        position of global technological leadership by pioneering the
        development of innovative separation technologies. We continue to be a
        technological leader in areas such as CO(2) separation using membrane
        technology and oil-water emulsion treatment using dual-polarity
        electrostatic technology. We hold approximately 175 active U.S. and
        foreign patents and continue to invest in research and development.

     -  Extensive line of products and services.  We provide a broad range of
        high quality production equipment and services, ranging from standard
        processing and control equipment, to highly specialized engineered
        systems and fully integrated solutions to our customers around the
        world. By providing the broadest range of products and services in the
        industry, we offer our customers the time and cost savings resulting
        from the use of a single supplier for process engineering, design,
        manufacturing and installation of production and related control
        systems.

     -  Experienced and focused management team.  Our management team has
        extensive experience in our industry with an average of over 20 years of
        experience. We believe that our management team has successfully
        demonstrated its ability to manage the growth of our business and the
        integration of acquisitions. Additionally, our management team has a
        substantial financial interest in our continued success through equity
        ownership or incentives.

BUSINESS STRATEGY

     Our objective is to maximize earnings by maintaining and enhancing our
position as a leading provider of equipment, systems and services used in the
production of crude oil and natural gas which we intend to achieve by pursuing
the following business strategies:

     -  Focusing on Customer Relationships.  We believe that our customers
        increasingly prefer to work on a regular basis with a small number of
        leading suppliers. We believe our size, scope of products, technological
        expertise and service orientation provide us with a competitive
        advantage in establishing

                                        4
<PAGE>   5

       preferred supplier relationships with customers. We intend to generate
       growth in revenue and market share by establishing new and further
       developing existing customer relationships.

     -  Providing Integrated Systems and Solutions.  We believe our integrated
        design and manufacturing capabilities enable us to reduce our customers'
        production equipment and systems costs and shorten delivery times. Our
        strategy is to be involved in projects early, to provide the broadest
        and most complete scope of equipment and services in our industry and to
        focus on larger integrated systems.

     -  Introducing New Technologies and Products.  Since our inception, we have
        developed and acquired leading technologies that enable us to address
        the global market demand for increasingly sophisticated production
        equipment and systems. We will continue to pursue new technologies
        through internal development, acquisitions and licenses.

     -  Pursuing Complementary Acquisitions.  Our industry is highly fragmented
        and contains many smaller competitors with narrow product lines and
        geographic scope. We intend to continue to acquire companies that
        provide complementary technologies, enhance our ability to offer
        integrated systems or expand our geographic reach.

     -  Expanding International Presence.  We have operated in various
        international markets for more than 50 years. We intend to continue to
        expand internationally in targeted geographic regions, such as Southeast
        Asia, South America and West Africa.

     You should carefully consider the risks described below as well as other
information and data included or incorporated by reference in this Form 10-K
filing before making an investment decision.

RISKS RELATING TO OUR BUSINESS

A SUBSTANTIAL OR EXTENDED DECLINE IN OIL OR GAS PRICES COULD RESULT IN LOWER
EXPENDITURES BY THE OIL AND GAS INDUSTRY, THEREBY NEGATIVELY AFFECTING OUR
REVENUE.

     Our business is substantially dependent on the condition of the oil and gas
industry and its willingness to spend capital on the exploration for and
development of oil and gas reserves. A substantial or extended decline in these
expenditures may result in the discovery of fewer new reserves of oil and gas,
adversely affecting the market for our production equipment and services. The
level of these capital expenditures is generally dependent on the industry's
view of oil and gas prices, which have been characterized by significant
volatility in recent years. Oil and gas prices are affected by numerous factors,
including:

     -  the level of exploration activity;

     -  worldwide economic activity;

     -  interest rates and the cost of capital;

     -  environmental regulation;

     -  tax policies;

     -  political requirements of national governments;

     -  coordination by OPEC;

     -  the cost of producing oil and gas; and

     -  technological advances.

WE MAY LOSE MONEY ON FIXED PRICE CONTRACTS.

     Many of our projects, including larger engineered systems projects, are
performed on a fixed-price basis. We are responsible for all cost overruns,
other than any resulting from change orders. Our costs and any gross

                                        5
<PAGE>   6

profit realized on our fixed-price contracts will often vary from the estimated
amounts on which these contracts were originally based. This may occur for
various reasons, including:

     -  errors in estimates or bidding;

     -  changes in availability and cost of labor and material; and

     -  variations in productivity from our original estimates.

     These variations and the risks inherent in engineered systems projects may
result in reduced profitability or losses on our projects. Depending on the size
of a project, variations from estimated contract performance can have a
significant negative impact on our operating results or our financial condition.

WE HAVE RELIED AND WE EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF
CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES.

     There have been and are expected to be periods where a substantial portion
of our revenues is derived from a single customer or a small group of customers.
On July 1, 1999, we were awarded a $73.0 million contract to supply gas treating
and conditioning equipment for a project in Southeast Asia. The project is a
joint venture under the control of the Carigali-Triton Operating Company SDN
BHD, or CTOC, which is principally owned by Petronas, the Malaysian national oil
company, and by BP. The project is located in the Gulf of Thailand. This project
produced approximately 20% of our revenues in 2000 and is approximately 85%
complete.

THE LOSS OF ONE OR MORE OF OUR CUSTOMER RELATIONSHIPS COULD MATERIALLY HARM OUR
BUSINESS AND EARNINGS.

     We expect to continue our practice of entering into relationships with
major oil companies and large independent producers. In these relationships, we
are typically designated as the preferred supplier of equipment or services or
both. Many of these relationships are nonbinding arrangements in which both
parties undertake to satisfy the objectives of the relationship. They may be
characterized as:

     -  blanket purchase orders for specified amounts of standardized equipment;

     -  project-specific integrated relationships; or

     -  ongoing informal working relationships.

     The loss of one or more of these relationships could have a material
adverse effect on our business and results of operations.

THE DOLLAR AMOUNT OF OUR BACKLOG, AS STATED AT ANY GIVEN TIME, IS NOT
NECESSARILY INDICATIVE OF OUR FUTURE CASH FLOW.

     Backlog consists of firm customer orders that have satisfactory credit or
financing arrangements in place, for which authorization to begin work or
purchase materials has been given and for which a delivery date has been
established.

     We cannot assure you that the revenues projected in our backlog will be
realized, or if realized, will result in profits. To the extent that we
experience significant terminations, suspensions or adjustments in the scope of
our projects as reflected in our backlog contracts, we could be materially
adversely affected.

     Occasionally, a customer will cancel or delay a project for reasons beyond
our control. In the event of a project cancellation, we are generally reimbursed
for our costs but typically have no contractual right to the total revenues
expected from such project as reflected in our backlog. In addition, projects
may remain in our backlog for extended periods of time. If we were to experience
significant cancellations or delays of projects in our backlog, our results of
operations and financial condition could be materially adversely affected.

                                        6
<PAGE>   7

RESTRICTIONS IN OUR DEBT AGREEMENTS COULD LIMIT OUR GROWTH THROUGH ACQUISITIONS
AND OTHERWISE AND AFFECT OUR ABILITY TO RESPOND TO CHANGING CONDITIONS.

     Our credit facility contains a number of significant covenants. These
covenants will limit our ability, among other things, to:

     - incur additional indebtedness;

     - pay dividends or distributions on our capital stock or repurchase our
       capital stock;

     - repurchase junior indebtedness;

     - issue and sell capital stock of our subsidiaries;

     - enter into sale and leaseback transactions;

     - make certain investments;

     - create certain liens on our assets to secure indebtedness;

     - enter into transactions with affiliates;

     - merge or to consolidate with another company; and

     - transfer and sell assets.

     Our credit facility requires us to maintain certain financial ratios and
satisfy certain financial condition tests, a number of which will become more
restrictive over time and may require us to take action to reduce our debt or
take some other action in order to comply with them. These restrictions could
also limit our ability to obtain future financings, make needed capital
expenditures, withstand a future downturn in our business or the economy in
general, or otherwise conduct necessary corporate activities. We may also be
prevented from taking advantage of business opportunities, including
complementary acquisitions, that arise because of the limitations imposed on us
by the restrictive covenants under the credit facility and the indenture.

     A breach of any of these covenants would result in a default under the
applicable debt agreement. A default, if not waived, could result in
acceleration of the debt outstanding under the agreement and in a default with
respect to, and acceleration of, the debt outstanding under the other debt
agreement. The accelerated debt would become immediately due and payable. If
that should occur, we may not be able to pay all such debt or to borrow
sufficient funds to refinance it. Even if new financing were then available, it
may not be on terms that are acceptable to us.

OUR ABILITY TO ATTRACT AND RETAIN SKILLED LABOR IS CRUCIAL TO THE PROFITABILITY
OF OUR FABRICATION
AND SERVICES ACTIVITIES.

     Our ability to succeed depends in part on our ability to attract and retain
skilled manufacturing workers, equipment operators, engineers and other
technical personnel. Our ability to expand our operations depends primarily on
our ability to increase our labor force. Demand for these workers is currently
high and the supply is extremely limited. A significant increase in the wages
paid by competing employers could, nevertheless, result in a reduction in our
skilled labor force, increases in the rates of wages we must pay or both. If
this were to occur, the immediate effect on us would be a reduction in our
profits and the extended effect would be diminishment of our production capacity
and profitability and impairment of our growth potential.

POSTRETIREMENT HEALTH CARE BENEFITS THAT WE PROVIDE TO CERTAIN FORMER EMPLOYEES
EXPOSE US TO POTENTIAL INCREASES IN FUTURE CASH OUTLAYS THAT CANNOT BE RECOUPED
THROUGH INCREASED PREMIUMS.

     We are obligated to provide postretirement health care benefits to a group
of former employees who retired before June 21, 1989. For the year ended
December 31, 2000, our cash costs related to these benefits were $1.8 million.
At that date, there were 596 retirees and surviving eligible dependents covered
by the specified postretirement benefit obligation. As of December 31, 2000, our
accumulated postretirement benefit obligation was approximately $16.0 million as
determined by actuarial calculations. We cannot assure you that the costs of the
actual benefits will not exceed those projected or that future actuarial
assessments of the extent of those costs will not exceed the current assessment.
Inflationary trends in

                                        7
<PAGE>   8

medical costs may outpace our ability to recoup these increases through higher
premium charges, benefit design changes or both. As a result, our actual cash
costs of providing this benefit may increase in the future and have a negative
impact on our future cash flow and earnings.

OUR INTERNATIONAL OPERATIONS MAY EXPERIENCE INTERRUPTIONS DUE TO POLITICAL AND
ECONOMIC RISKS.

     We operate our business and market our products and services in oil and gas
producing areas throughout the world. We are, therefore, subject to the risks
customarily attendant to international operations and investments in foreign
countries. These risks include:

     - nationalization;

     - expropriation;

     - war and civil disturbances;

     - restrictive actions by local governments;

     - limitations on repatriation of earnings;

     - changes in foreign tax laws; and

     - changes in currency exchange rates.

     The occurrence of any of these risks could have an adverse effect on
regional demand for our products and services or our ability to provide them. An
interruption of our international operations could have a material adverse
effect on our results of operations and financial condition.

     The occurrence of some of these risks, such as changes in foreign tax laws
and changes in currency exchange rates, may have extended consequences.

FUTURE ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND
ADVERSELY AFFECT OUR OPERATING RESULTS.

     We intend to continue our practice of acquiring other companies, assets and
product lines that complement or expand our existing business. We cannot assure
you that we will be able to successfully identify suitable acquisition
opportunities or finance and complete any particular acquisition. Furthermore,
acquisitions involve a number of risks and challenges, including:

     -  the diversion of our management's attention to the assimilation of the
       operations and personnel of the acquired business;

     -  possible adverse effects on our operating results during the integration
       process;

     -  potential loss of key employees and customers of the acquired companies;

     -  potential lack of experience operating in a geographic market of the
       acquired business;

     -  an increase in our expenses and working capital requirements; and

     -  the possible inability to achieve the intended objectives of the
       combination.

     Any of these factors could adversely affect our ability to achieve
anticipated levels of cash flow from an acquired business or realize other
anticipated benefits of an acquisition.

OUR INSURANCE POLICIES MAY NOT COVER ALL PRODUCTS LIABILITY CLAIMS.

     Some of our products are used in potentially hazardous production
applications that can cause:

     -  personal injury;

     -  loss of life;

     -  damage to property, equipment or the environment; and

                                        8
<PAGE>   9

     -  suspension of operations.

     We maintain insurance coverage against these risks in accordance with
normal industry practice. This insurance will not protect us against liability
for some kinds of events, including events involving pollution or losses
resulting from business interruption. We cannot assure you that our insurance
will be adequate in risk coverage or policy limits to cover all losses or
liabilities that we may incur. Moreover, we cannot assure you that we will be
able in the future to maintain insurance at levels of risk coverage or policy
limits that we deem adequate. Any future damages caused by our products or
services that are not covered by insurance or are in excess of policy limits
could have a material adverse effect on our business, results of operations and
financial condition.

LIABILITY TO CUSTOMERS UNDER WARRANTIES MAY MATERIALLY AND ADVERSELY AFFECT OUR
CASH FLOW.

     We typically provide warranties as to the proper operation and conformance
to specifications of the equipment we manufacture. Failure of this equipment to
operate properly or to meet specifications may increase our costs by requiring
additional engineering resources, replacement of parts and equipment or service
or monetary reimbursement to a customer. Our warranties are often backed by
letters of credit. At December 31, 2000, we had provided to our customers
approximately $931,000 in letters of credit related to warranties. We have in
the past received warranty claims and we expect to continue to receive them in
the future. To the extent that we should incur warranty claims in any period
substantially in excess of our warranty reserve, our results of operations and
financial condition could be materially and adversely affected.

WE MAY INCUR SUBSTANTIAL COSTS TO COMPLY WITH OUR ENVIRONMENTAL OBLIGATIONS.

     In our equipment fabrication and refurbishing operations, we generate and
manage hazardous wastes. These include:

     -  waste solvents;

     -  waste paint;

     -  waste oil;

     -  washdown wastes; and

     -  sandblasting wastes.

     We attempt to identify and address environmental issues before acquiring
properties and to utilize industry accepted operating and disposal practices
regarding the management and disposal of hazardous wastes. Nevertheless, either
we or others may have released hazardous materials on our properties or in other
locations where hazardous wastes have been taken for disposal. We may be
required by federal or state environmental laws to remove hazardous wastes or to
remediate sites where they have been released. We could also be subjected to
civil and criminal penalties for violations of those laws. Our costs to comply
with these laws may adversely affect our earnings.

OUR QUARTERLY SALES AND CASH FLOW MAY FLUCTUATE SIGNIFICANTLY.

     A substantial amount of our revenues are derived from significant contracts
which are often performed over periods of two to six quarters. As a result, our
revenues and cash flow may fluctuate significantly from quarter to quarter,
depending upon our ability to replace existing contracts with new orders and
upon the extent of any delays in completing existing projects.

THE LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.

     Our success depends heavily on the continued services of our senior
management. Our senior management consists of a small number of individuals
relative to other comparable or larger companies. These are the individuals who
possess our bidding, procurement, transportation, logistics, planning, project
management, risk management and financial skills. If we lost or suffered an
extended interruption in the services of one or more

                                        9
<PAGE>   10

of our senior officers, our results of operations could be adversely affected.
Moreover, we cannot assure you that we will be able to attract and retain
qualified personnel to succeed members of our senior management. We do not
maintain key man life insurance.

COMPETITION COULD RESULT IN REDUCED PROFITABILITY AND LOSS OF MARKET SHARE.

     Contracts for our products and services are generally awarded on a
competitive basis, and competition is intense. Historically, the existence of
overcapacity in our industry has caused increased price competition in many
areas of our business. The most important factors considered by our customers in
awarding contracts include:

     -  the availability and capabilities of our equipment;

     -  our ability to meet the customer's delivery schedule;

     -  our price;

     -  our reputation;

     -  our experience; and

     -  our safety record.

     In addition, we may encounter obstacles in our international operations
that impair our ability to compete in individual countries. These obstacles may
include:

     -  subsidies granted in favor of local companies;

     -  import duties and fees imposed on us and other foreign operators;

     -  taxes imposed on foreign operators;

     -  lower wage rates in foreign countries; and

     -  fluctuations in the exchange value of the United States dollar compared
       with the local currency.

     Any or all these factors could adversely affect our ability to compete and
thus adversely affect our results of operations.

AN ECONOMIC DOWNTURN COULD ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS AND
SERVICES.

     The economic downturn that began in Southeast Asia in 1997 affected the
economies in other regions of the world, including South America and the former
Soviet Union, and contributed to the decline in the price of oil and the level
of drilling activity. If the United States or European economies were to begin
to decline or if the economies of South America or Southeast Asia were to
experience further material problems, the demand and price for oil and gas and
our products and services could again adversely affect our results of
operations.

OUR ABILITY TO COMPETE SUCCESSFULLY IS DEPENDENT ON TECHNOLOGICAL ADVANCES IN
OUR PRODUCTS, AND OUR FAILURE TO RESPOND TIMELY OR ADEQUATELY TO TECHNOLOGICAL
ADVANCES IN OUR INDUSTRY MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

     Our ability to succeed with our long-term growth strategy is dependent on
the technological competitiveness of our products. If we are unable to innovate
and implement advanced technology in our products, other competitors may be able
to compete more effectively with us and our business and results of operations
may be adversely affected.

OPERATIONS

     We offer our products and services as either integrated systems or
individual components primarily through three business lines: traditional
production equipment and services, engineered systems and automa-

                                        10
<PAGE>   11

tion and control systems. See Note 22 to our Consolidated Financial Statements
for further information about our reporting segments and geographic areas.

TRADITIONAL PRODUCTION EQUIPMENT AND SERVICES

     Traditional production equipment and services consists of production
equipment, replacement parts, and used equipment refurbishing and servicing
which is sold primarily onshore in North America and in the Gulf of Mexico.
Through our NATCO Canada subsidiary, we provide traditional production equipment
with modifications to operate in a cold weather environment. The equipment built
for the North American oil and gas industry "off the shelf" or in customized
variations of standardized equipment requires limited engineering. Traditional
production equipment and services are marketed through 33 sales and service
centers in the United States, one in Canada and one in Venezuela.

     Traditional production equipment includes:

     -  Separators.  Separators are used for the primary separation of a
       hydrocarbon stream into oil, water and gas. Our separator product line
       includes:

       -  horizontal separators, which are used to separate hydrocarbon streams
         with large volumes of gas, liquids or foam;

       -  vertical separators, which are used to separate hydrocarbon streams
         containing contaminants including salt and wax;

       -  filter separators, which are used to remove particulate contaminants
         from gas streams; and

       -  Thermo Pak(TM) Units, which are used for the combined heating and
         separating of production in cold climates.

     -  Oil Dehydration Equipment.  Oil dehydrators are used to remove water
       from oil. The oil dehydration product line includes:

       -  horizontal PERFORMAX()(R)() treaters, which separate oil and water
         mixtures using gravity and proprietary technology;

       -  Dual Polarity()(R)() electrostatic treaters, which dehydrate oil using
         high voltage electrical pulsation;

       -  vertical treaters, which optimize recovery of condensable, salable
         hydrocarbons;

       -  Vertical Flow Horizontal (VFH(TM)) processors, which combine the
         advantages of horizontal and vertical vessels to remove gas and water
         from oil streams; and

       -  heater-treaters, which use heat to accelerate the dehydration process.

     -  Heaters.  Heaters are used to reduce the viscosity of oil to improve
       flow rates and to prevent hydrates from forming in natural gas streams.
       We manufacture both indirect fired heaters and standardized and
       customized direct fired heaters. In each system, heat is transferred to
       the hydrocarbon stream through media such as water, water/glycol, steam,
       salt or flue gas. Our heater product line includes:

       -  water bath heaters;

       -  vaporizers used to vaporize propane and other liquefied gases;

       -  salt bath heaters;

       -  steam bath heaters; and

       -  Controlled Heat Flux (CHF(TM)) heaters, which use flue gas to create a
         heat transfer medium.

     -  Gas Conditioning Equipment.  Gas conditioning equipment removes
       contaminants from gas streams. Gas conditioning equipment includes:

       -  glycol dehydration equipment, which exposes gas streams to glycol in
         order to remove water vapor;

                                        11
<PAGE>   12

       -  amine systems, which use amine to remove acidic gases such as hydrogen
         sulfide and CO(2) from gas streams;

       -  conditioning equipment used to remove hydrogen sulfide from gas;

       -  Glymine()(R)() units, which combine the effects of glycol equipment
         and amine systems;

       -  the BTEX-Buster()(R)(), which virtually eliminates the emissions of
         volatile hydrocarbons associated with glycol dehydration reboilers; and

       -  Desi-Dri()(R)() Systems, which use highly compressed drying agents to
         remove water vapor from gas streams.

     -  Gas Processing Equipment.  We offer standard and custom processing
       equipment for the extraction of liquid hydrocarbons to meet feed gas and
       liquid product requirements. We manufacture several standard mechanical
       refrigeration units for the recovery of salable hydrocarbon liquids from
       gas streams. Low Temperature Extractor (LTX()(R)()) units are mechanical
       separation systems designed for handling high-pressure gas at the
       wellhead. These systems remove liquid hydrocarbons from gas streams more
       efficiently and economically than other methods.

     -  Water Treatment Equipment.  We design and manufacture water treatment
       and conditioning equipment for the removal of contaminants from water
       extracted in oil and gas production. Oil producers use our
       PERFORMAX()(R)() Matrix Plate Coalescer in primary separators of oil and
       water and final skimming. Flow splitters remove gases from an oil-water
       dispersion, separate oil and water and discharge the oil and/or emulsion
       through controllable outlets.

     -  Equipment Refurbishment.  We source, refurbish and integrate used oil
       and gas production equipment. Customers that purchase this equipment
       enjoy reduced delivery times and lower equipment costs relative to new
       equipment. The used equipment market is focused primarily in North
       America, both onshore and offshore, although we have observed a growing
       interest internationally. We have entered into agreements with major,
       large independent oil companies in both the United States and Canada to
       evaluate, track and refurbish used production equipment and may act as a
       broker between another oil company and our customer or may purchase,
       refurbish and sell used equipment to our customers. We believe that we
       have one of the largest databases in the North American oil and gas
       industry of available surplus production equipment. This database,
       coupled with our extensive refurbishing facilities and experience,
       enables us to respond to customer requests for refurbished equipment
       quickly and efficiently.

     -  Parts, Service and Training.  We provide replacement parts for our own
        equipment and for equipment manufactured by others. Each branch of our
        marketing network also serves as a local parts and service business. We
        have service employees stationed in some branches of Wilson Supply
        Company and National-Oilwell, Inc., and also offer operational and
        safety training to the oil and gas production industry. We use training
        programs as a marketing tool for our other products and services.

ENGINEERED SYSTEMS

     We design, engineer and manufacture engineered systems for large production
development projects throughout the world. We also provide start-up services for
our engineered products. Engineered systems typically require a significant
amount of technology, engineering and project management.

     We market our engineered systems through our direct sales forces based in
Houston, Calgary, London, Tokyo, Kuala Lumpur and Singapore, augmented by
independent representatives in other countries. We also use the unique oil
testing capabilities at our research and development facilities to market
engineered systems. This capability enables us to determine equipment
specifications that best suit customers' requirements.

     Engineered systems include:

     -  Integrated Oil and Gas Processing Trains.  These consist of multiple
        units that process oil and gas from primary separation through
        contaminant removal. For example, we designed, manufactured and
                                        12
<PAGE>   13

       assembled a module for a production facility situated off the coast of
       West Africa that is capable of processing 20,000 barrels of oil, 4,000
       barrels of water and 24 million standard cubic feet of gas per day. We
       also designed, manufactured and installed process systems for BP
       Exploration (Alaska), Inc.'s Badami development on the North Slope of
       Alaska and its Northstar development, also located on the North Slope.

     -  Floating Production Systems.  These consist of large skid-mounted
        processing units used in conjunction with semi-submersible, converted
        tankers and other floating production vessels. Floating production
        equipment must be specially designed to overcome the detrimental effects
        of wave motion on floating vessels. We pioneered and patented the first
        wave-motion production vessel internal system and continue to advance
        this technology at our research and development facility using a
        wave-motion table, which simulates a variety of sea states.

     -  Dehydration and Desalting Systems.  Dehydration and desalting involves
        the removal of water and salt from an oil stream. Desalting is a
        specialized form of dehydration. In this process, water is injected into
        an oil stream to dissolve the salt and the saltwater is then removed
        from the stream. Large production projects often use electrostatic
        technology to desalt oil. We believe that we are the leading developer
        of electrostatic technologies for oil treating and desalting. One of our
        dehydration and desalting systems, the Electro Dynamic(TM) Desalter, can
        be used in oil refineries, where stringent desalting requirements have
        grown increasingly important. These requirements have increased as crude
        quality has declined and catalysts have become more sensitive and
        sophisticated, requiring lower levels of contaminants. The reduced
        number of vessels employed by this system is particularly important in
        refinery applications where space is at a premium.

     -  Large Gas Processing Facilities.  We provide large gas processing
        facilities for the separation, heating, dehydration and removal of
        liquids and contaminants to produce pipeline-quality gas. We also
        design, manufacture and, in some cases, operate gas-processing
        facilities that remove CO(2) from gas streams. These facilities use
        membrane technology that provides the most cost-effective separation
        solution for gas streams containing more than 20% CO(2). A primary
        market for this application is production from gas wells, such as those
        located in Southeast Asia, which have high levels of naturally occurring
        CO(2). Another market is production from wells, such as those located in
        West Texas, in which CO(2) injection is used to enhance the recovery of
        oil and gas reserves.

     -  Oily Water Cleanup Systems.  We design and engineer systems that,
        through the use of liquid/liquid hydrocyclone technology and induced or
        dissolved gas flotation technology, remove oil and solids from a
        produced water stream. Oily water cleanup is often required prior to the
        disposal or reinjection of produced water.

     -  Downstream Facilities.  We offer several technologies that have
        crossover applications in the refinery and petrochemical sectors. Most
        involve aspects of oil treating and water treating. We discussed above
        the use in refineries of one of our dehydration and desalting systems.
        In addition, we can provide DOX(TM) units to ethylene processors that
        clean both heavy and light dispersed oil from water.

AUTOMATION AND CONTROL SYSTEMS

     The primary market for automation and control systems is in offshore
applications throughout the world. We market and service these products through
a three-branch network primarily located in the Gulf Coast area. These
automation and controls systems include:

     -  Control Systems.  We design, assemble and install pneumatic, hydraulic,
        electrical and computerized control panels and systems. These systems
        monitor and change key parameters of oil and gas production systems. Key
        parameters include wellhead flow control and emergency shutdown of
        production and safety systems. A control system consists of a control
        panel and related tubing, wiring, sensors and connections.

                                        13
<PAGE>   14

     -  Engineering and Field Services.  We provide start-up support, testing,
        maintenance, repair, renovation, expansion and upgrade of control
        systems including those designed or installed by competitors. Our design
        and engineering staff also provide contract electrical engineering
        services.

     -  SCADA Systems.  Supervisory control and data acquisition ("SCADA")
        systems provide remote monitoring and control of equipment, production
        facilities, pipelines and compressors via radio, cellular phone,
        microwave and satellite communication links. SCADA systems reduce the
        number of personnel and frequency of site visits and allow for continued
        production during periods of emergency evacuation, thereby reducing
        operating costs.

MARKETING

     Our products and services are marketed primarily through an internal sales
force augmented by technical applications specialists for specific customer
requirements. In addition, we maintain agency relationships in most energy
producing regions of the world to enhance our efforts in countries where we do
not have employees. Our traditional production equipment and services business
has approximately 34 operating branches in North America through which we sell
production equipment, spare parts and services directly to oil and gas
operators. Our engineered systems business typically involves a significant
pre-award effort during which we must provide technical qualifications, evaluate
the requirements of the specific project, design a conceptual solution that
meets the project requirements and estimate our cost to provide the system to
the customer in the time frame required. Our automation and control systems
business is primarily marketed through our internal sales force.

CUSTOMERS

     We devote a considerable portion of our marketing time and effort to
developing and maintaining relationships with key customers. Some of these are
project specific, such as our participation in several Alaskan projects with BP.
However, our customer base ranges from independent operators to major and
national oil companies worldwide. In 2000, CTOC and Chevron, and affiliates,
accounted for approximately 20% and 8%, respectively, of our consolidated
revenue. Our level of technical expertise, extensive distribution network and
breadth of product offerings contributes to the maintenance of good working
relationships with our customers.

BACKLOG

     Backlog consists of firm customer orders for which satisfactory credit or
financing arrangements have been made, authorization has been given to begin
work or purchase materials and a delivery date has been scheduled.

     Our sales backlogs at December 31, 2000, 1999 and 1998, were $49.9 million,
$76.5 million and $46.6 million, respectively. Backlog at December 31, 1999
included a $73.0 million booking for one customer, CTOC, which contributed 20%
of total revenues for the year ended December 31, 2000. Backlog at December 31,
2000 included $12.5 million related to CTOC. Backlogs at December 31, 2000, 1999
and 1998, less the CTOC project, were $37.4 million, $18.0 million and $46.6
million, respectively. The improvement in backlog for the year ended December
31, 2000, excluding CTOC, was consistent with our expectations and was due to
increased drilling activity in 2000. However, the improved backlog for 2000 was
less than the backlog level at December 31, 1998 due to fewer awards of large
engineered systems projects by our customers since the overall slowdown in the
energy industry in 1999. No individual customer provided more than 10% of total
revenues for the year ended December 31, 1999 and the nine months ended December
31, 1998.

                                        14
<PAGE>   15

     Occasionally, a customer will cancel or delay a project for reasons beyond
our control. In the event of a project cancellation, we generally are reimbursed
for certain costs but typically have no contractual right to the total revenues
reflected in our backlog. In addition, projects may remain in our backlog for
extended periods of time. If we were to experience significant cancellations or
delays of projects in our backlog, our results of operations and financial
condition could be materially adversely affected.

RESEARCH AND DEVELOPMENT

     We believe we are a leader in the development of oil and gas industry
production equipment technology. We pioneered many of the original separation
technologies for converting unprocessed hydrocarbon fluids into salable oil and
gas. For example, we developed:

     -  the first high capacity oil and gas separator;

     -  the first emulsion treating systems;

     -  Dual Polarity(TM) electrostatic oil treaters;

     -  DOX(TM) and OSX(TM) water filtration systems;

     -  high pressure indirect heaters; and

     -  PERFORMAX(R) oil and water treating systems.

     Our wave-motion compensating separator has become the industry standard for
floating production applications, and our electrostatic oil treating technology
is the most advanced in the industry. As of December 31, 2000, we held
approximately 125 active U.S. and foreign patents and numerous U.S. and foreign
trademarks. We also have an application pending for one additional U.S. patent.
In addition, we are licensed under approximately seven patents held by others.

     We operate a research and development facility in Tulsa, Oklahoma, at which
a number of test devices are used to simulate and analyze oil and gas production
processes. At our manufacturing facility in Pittsburg, California, we are
engaged in active, ongoing research and development in the area of membrane
technology.

     At December 31, 2000, NATCO had approximately 15 employees engaged in
research and development activities.

COMPETITION

     Contracts for our products and services are generally awarded on a
competitive basis, and competition is intense. The most important factors
considered by customers in awarding contracts include the availability and
capabilities of equipment, the ability to meet the customer's delivery schedule,
price, reputation, experience and safety record.

     Historically, the existence of overcapacity in the industry has caused
increased price competition in many areas of the business. In addition, we may
encounter obstacles in our international operations that impair our ability to
compete in individual countries. These obstacles may include:

     -  subsidies granted in favor of local companies;

     -  taxes, import duties and fees imposed on foreign operators;

     -  lower wage rates in foreign countries; and

     -  fluctuations in the exchange value of the United States dollar compared
       with the local currency.

Any or all these factors could adversely affect our ability to compete and thus
adversely affect results of operations.

     Our primary competitors in our traditional production equipment and
services business are several publicly-traded companies, as well as numerous
privately held, mainly regional companies. Competitors in our engineered systems
business include Baker Hughes Process Systems, a division of Baker Hughes,
Kvaerner
                                        15
<PAGE>   16

Process Systems, Hanover APS, U.S. Filter and numerous other engineering and
construction firms. The primary competitors in our automation and control
systems business are several publicly-traded companies and numerous privately
held companies operating in the area of the Gulf of Mexico.

     We believe that we are one of the largest crude oil and natural gas
production equipment providers in North America and that our size, research and
development capabilities, brand names and marketing organization provide us with
a competitive advantage over the other participants in the industry.

ENVIRONMENTAL MATTERS

     NATCO is subject to environmental regulation by federal, state and local
authorities in the United States and in several foreign countries. Although we
believe that we are in substantial compliance with all applicable environmental
laws, rules and regulations ("laws"), the field of environmental regulation can
change rapidly with the enactment or enhancement of laws and stepped up
enforcement of these laws, either of which could require us to change or
discontinue certain business activities. At present, NATCO is not involved in
any material environmental matters of any nature and is not aware of any
material environmental matters threatened against it.

EMPLOYEES

     At December 31, 2000, we had approximately 1,411 employees. Of these,
approximately 145 were represented under collective bargaining agreements that
extend through July 2001. We believe that our relationships with our employees
are satisfactory.

ITEM 2.  PROPERTIES

     We operate 6 primary manufacturing plants ranging in size from
approximately 11,400 square feet to approximately 131,000 square feet of
manufacturing space. We also own and lease distribution and service centers,
sales offices, and warehouses. NATCO leases its corporate headquarters in
Houston, Texas. At December 31, 2000, we owned or leased approximately 884,000
square feet of facility of which approximately 424,000 square feet was leased,
and approximately 460,000 square feet was owned. Of the total manufacturing
space, approximately 274,000 was located in the United States and approximately
156,000 was located in Canada.

     The following chart summarizes the number of facilities owned or leased by
NATCO by geographic region and business segment.

<TABLE>
<CAPTION>
                                                               UNITED STATES     CANADA     OTHER
                                                               -------------     ------     -----
    <S>                                                        <C>               <C>        <C>
    Traditional Production Equipment and Services.........            5            --          3
    Engineered Systems....................................           34            --          2
    Automation and Control Systems........................            3            --          1
    NATCO Canada..........................................           --             2         --
                                                                    ---           ---        ---
         Totals...........................................           42             2          6
                                                                    ===           ===        ===
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

     Our company is a party to various routine legal proceedings that are
incidental to its business activities. We insure against the risk of these
proceedings to the extent deemed prudent by our management, but we offer no
assurance that the type or value of this insurance will meet the liabilities
that may arise from any pending or future legal proceedings related to our
business activities. We do not, however, believe the pending legal proceedings,
individually or taken together, will have a material adverse effect on our
results of operations or financial condition.

                                        16
<PAGE>   17

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

     There were no matters submitted to a vote of security holders during the
fourth quarter of 2000.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     NATCO's authorized common stock consists of 45,000,000 shares of Class A
common stock and 5,000,000 shares of Class B common stock. There were 15,027,625
Class A shares and 699,874 Class B shares outstanding as of March 15, 2001. The
approximate number of record holders of our Class A shares and Class B shares
was 35 and 6, respectively, at March 15, 2001. The number of record holders of
our Class A shares does not include the stockholders for whom shares are held in
a "nominee" or "street" name. There were 500,000 authorized preferred shares at
March 15, 2001, of which none was issued. Our Class A common stock is traded on
the New York Stock Exchange under the ticker symbol NTG.

     The following table sets forth, for the calendar quarters indicated, the
high and low sales prices of our Class A common stock reported by the NYSE. No
information is provided for the period prior to our common stock offering
completed on January 27, 2000.

<TABLE>
<CAPTION>
                                                 CLASS A COMMON STOCK
                                                 ---------------------
                                                   HIGH         LOW
                                                 ---------   ---------
<S>                                              <C>         <C>
2000
First Quarter..................................  $14.9370    $10.2500
Second Quarter.................................   11.2500      7.7500
Third Quarter..................................   10.9375      7.8750
Fourth Quarter.................................    8.8750      6.5000
</TABLE>

     We do not intend to declare or pay any dividends on our common stock in the
foreseeable future, but rather intend to retain any future earnings for use in
the business. Currently, our bank credit facilities restrict the amount of
dividends and other distributions that our operating subsidiaries may remit to
us. Since NATCO is a holding company, these restrictions have the practical
effect of precluding us from paying dividends on our common stock.

                                        17
<PAGE>   18

ITEM 6.  SELECTED FINANCIAL DATA

     The following summary consolidated historical financial information for the
periods and the dates indicated should be read in conjunction with our
consolidated historical financial statements. During 1998, NATCO changed its
fiscal year-end to December 31 from March 31.

<TABLE>
<CAPTION>
                                     YEAR            YEAR        NINE MONTHS
                                    ENDED           ENDED           ENDED        YEAR ENDED MARCH 31,
                                 DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    --------------------
                                     2000            1999            1998          1998        1997
                                 ------------    ------------    ------------    --------    --------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                              <C>             <C>             <C>             <C>         <C>
Statement of Operations
  Data(1):
  Revenues...................      $224,552        $169,948        $145,611      $202,023    $126,657
  Cost of goods sold.........       162,757         127,609         115,521       161,801     100,803
                                   --------        --------        --------      --------    --------
  Gross profit...............        61,795          42,339          30,090        40,222      25,854
  Selling, general and
     administrative
     expense.................        39,456          32,437          24,530        28,553      23,313
  Depreciation and
     amortization expense....         5,111           4,681           1,473         1,322         862
  Unusual charges............         1,528              --              --            --          --
  Interest expense...........         1,588           3,256           2,215         2,992       1,861
  Interest cost on
     postretirement
     liability...............         1,287           1,048             786         1,048         957
  Revaluation (gain) loss on
     postretirement
     liability...............            --          (1,016)             53           159       1,466
  Interest income............          (181)           (256)           (227)         (140)       (116)
                                   --------        --------        --------      --------    --------
  Income (loss) before income
     taxes...................        13,006           2,189           1,260         6,288      (2,489)
  Income tax provision
     (benefit)...............         5,345           1,548             608         1,141        (659)
                                   --------        --------        --------      --------    --------
  Income before cumulative
     effect of a change in
     accounting principle....      $  7,661        $    641        $    652      $  5,147    $ (1,830)
                                   ========        ========        ========      ========    ========
  Basic earnings (loss) per
     share from continuing
     operations..............      $   0.52        $   0.07        $   0.08      $   0.68    $  (0.31)
  Diluted earnings (loss) per
     share from continuing
     operations..............          0.51            0.06            0.07          0.64       (0.28)
  Basic earnings per share...          0.52            0.07            0.08          0.78        0.67
  Diluted earnings per
     share...................          0.51            0.06            0.07          0.73        0.64
Balance Sheet Data
  (at the end of the period)
  Total assets...............      $153,126        $106,830        $118,412      $ 95,413    $ 70,044
  Stockholders' equity
     (deficit)...............        86,179          28,514          24,190         5,419      (6,737)
  Long-term debt.............        14,959          31,180          41,777        33,719      27,566
  Other long-term
     obligations.............        14,589          15,853          15,587        15,194      14,608
</TABLE>

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

(1) In June 1997, we distributed our investment in Process Technology Holdings,
     Inc. ("PTH") to its then sole stockholder in a tax-free transaction. In
     accordance with generally accepted accounting principles, we accounted for
     the results of operations of PTH as discontinued operations for all periods
     presented. Accordingly, the net income of PTH is excluded from income
     (loss) from continuing operations in the statement of operations data for
     the periods presented.

                                        18
<PAGE>   19

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The following discussion of the Company's historical results of operations
and financial condition should be read in conjunction with our consolidated
financial statements and notes thereto.

OVERVIEW

     We offer our products and services as either integrated systems or
individual components primarily through three business lines:

     -  Traditional production equipment and services, through which we provide
        standardized components, replacement parts and used components and
        equipment servicing;

     -  Engineered systems, through which we provide customized, large scale
        integrated oil and gas production systems; and

     -  Automation and control systems, through which we provide control panels
        and systems that monitor and control oil and gas production.

For financial reporting purposes, however, we report our Canadian operations,
which combine traditional production equipment and services and engineered
systems, as its own segment. We therefore report four separate business
segments: traditional production equipment and services, engineered systems,
automation and control systems and Canadian operations.

     We recognize revenues from significant contracts (contracts greater than
$250,000 and longer than four months in duration) and all automation and control
systems contracts and orders on the percentage of completion method. Earned
revenue is based on the percentage of costs incurred to date relative to total
estimated costs. If estimated total costs on any contract or work-in-process
indicate a loss, we recognize the entire loss immediately. We generally
recognize revenues and earnings to which the percentage of completion method
applies over a period of two to six quarters. We record revenues on other sales
as shipments are made.

     In January 2000, we completed our initial public offering of common stock,
resulting in the issuance of 5,178,807 shares of common stock with net proceeds
of $46.7 million. In July 2000, we changed our presentation of certain assets
that were acquired from The Cynara Company in November 1998, and the related
operating results, for segment reporting purposes. The majority of the assets
were reclassified to the traditional production equipment and services business
segment from the engineered systems business segment. This change has been
retroactively reflected in all periods presented.

FORWARD-LOOKING STATEMENTS

     Management's Discussion and Analysis includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (each a
"Forward-Looking Statement"). The words "believe," "expect," "plan," "intend,"
"estimate," "project," "will," "could," "may" and similar expressions are
intended to identify Forward-Looking Statements. Forward-Looking Statements in
this document include, but are not limited to, discussions regarding synergies
and opportunities resulting from recent acquisitions (see "-- Acquisitions"),
indicated trends in the level of oil and gas exploration and production and the
effect of such conditions on the Company's results of operations (see "--
Industry and Business Environment") and future uses of and requirements for
financial resources (see "-- Liquidity and Capital Resources"). Our expectations
about our business outlook, customer spending, oil and gas prices and the
business environment for NATCO and the industry in general are only our
expectations regarding these matters. No assurance can be given that actual
results may not differ materially from those in the Forward-Looking Statements
herein for reasons including, but not limited to: market factors such as pricing
and demand for petroleum related products, the level of petroleum industry
exploration and production expenditures, the effects of competition, world
economic conditions, the level of drilling activity, the legislative environment
in the United States and other countries, policies of the Organization of
Petroleum Exporting Countries, conflict in major petroleum producing or
consuming regions, the development of technology which could lower overall
finding and development costs,

                                        19
<PAGE>   20

weather patterns and the overall condition of capital and equity markets for
countries in which NATCO operates.

     The following discussion should be read in conjunction with the financial
statements, related notes and other financial information appearing elsewhere in
this Form 10-K. Readers are also urged to carefully review and consider the
various disclosures advising interested parties of the factors that affect the
Company, including without limitation, the disclosures made under the caption
"Business -- Risks Relating to Our Business" and the other factors and risks
discussed in our Registration Statement on Form S-1/A and subsequent reports
filed with the Securities and Exchange Commission. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
Forward-Looking Statement to reflect any change in our expectations with regard
thereto or any change in events, conditions or circumstances on which any
Forward-Looking Statement is based.

ACQUISITIONS

     In November 1998, we acquired all the outstanding common stock of The
Cynara Company, a designer and manufacturer of specialized production equipment
utilizing membrane technology to separate bulk CO(2) from natural gas streams,
for approximately $15.5 million, 500,000 shares of our common stock and the
right to receive additional shares of common stock based upon the financial
performance of the Cynara assets. Ultimately, we had issued 743,981 additional
shares as of December 31, 2000.

     In January 2000, we acquired all the outstanding common stock of Porta-Test
International, Inc., a manufacturer of centrifugal devices used to enhance the
effectiveness of separation equipment, for approximately $7.0 million and the
right to receive additional payments based upon the performance of certain
Porta-Test assets.

     In February 2000, we acquired all the outstanding common stock of Modular
Production Equipment, Inc. ("MPE"), a designer and manufacturer of wastewater
treatment separation systems specializing in hydrocyclone technology, for
approximately $2.7 million.

     In April 2000, we acquired all the outstanding common stock of Engineered
Specialties Inc. ("ESI"), a provider of proprietary technologies for oily water
treatment and heavy metals removal from production at or near the wellhead, for
approximately $7.1 million.

     On March 19, 2001, we acquired all the outstanding share capital of Axsia
Group Limited, a privately held process and design company based in the United
Kingdom, for approximately $45.8 million. Axsia specializes in the design and
supply of water reinjection systems for oil and gas fields, oily water
treatment, oil separation, hydrogen production and other process equipment
systems. This acquisition was financed with borrowings under our new credit
facility.

     We accounted for each of the above transactions using the purchase method
of accounting.

INDUSTRY AND BUSINESS ENVIRONMENT

     Generally, oil and gas exploration and production companies reduce
exploration and development activity during periods of weak oil prices and
demand and increase this activity during periods of strong oil prices and
demand. The extent to which the revenues of the industry increase depends in
part upon the success of the exploration efforts. In general, these revenue
increases lag expansion of exploration and development capital budgets in times
of recovery in the oil and gas industry. These lag times can be up to several
years in offshore operations but are generally shorter for onshore operations.

     Changing production profiles in existing fields also increase the demand
for products and services in the industry. As existing fields are reworked or
enhanced recovery methods are employed due to depletion, additional and more
complex equipment may be required to produce oil and gas from these fields. This
can result from changes in the mix of oil and gas produced by the field or an
increase in water, CO(2) or other naturally occurring contaminants or as the
result of enhanced recovery techniques. In addition, many new oil and gas fields
produce lower quality or contaminated hydrocarbon streams that require more
complex

                                        20
<PAGE>   21

production equipment. Examples include CO(2) rich formations in West Texas and
Southeast Asia and heavy crude in Western Canada and in the Orinoco Delta in
Venezuela.

     Throughout much of 1999, the oil and gas industry was suffering the effects
of a significant decline in overall drilling and production expenditures by oil
and gas operators due to low hydrocarbon prices. Since our business is closely
linked to the market conditions of our customers, lower drilling and production
expenditures can result in a reduction of our revenues. Our traditional
production equipment and services business segment was affected most
significantly as this business line primarily provides replacement parts used in
oil and gas production.

     An indicator of capital spending in the oil and gas industry is commodity
prices. Energy prices were low in 1998 and 1999 and began to rise steadily in
mid-year as production cuts by OPEC and other oil producing countries reduced
excess inventory levels. Energy prices remained high until the spring of 2000
when these same producers elected to increase production to bring energy prices
down to more sustainable levels. The following table summarizes the average
prices of oil and gas during the years ended December 31, 2000, 1999 and 1998,
and the actual spot prices of oil and gas at March 15, 2001:

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                        MARCH 15,    --------------------------
                                                          2001        2000      1999      1998
                                                        ---------    ------    ------    ------
    <S>                                                 <C>          <C>       <C>       <C>
    Oil (per barrel)(1).............................     $26.58      $30.37    $19.30    $14.38
    Gas (per MMBtu)(2)..............................     $ 4.92      $ 4.30    $ 2.27    $ 2.08
</TABLE>

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

(1) Based on West Texas Intermediate spot prices for the dates indicated.

(2) Based on the NYMEX Henry Hub prices for the dates indicated.

     Another indicator of capital spending is the number of operating drilling
rigs. The average U.S. and international operating rig counts, as published
weekly by Baker Hughes, increased in 2000 when compared to 1999. The following
table summarizes the average U.S., Canadian and international operating rig
counts for the years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,       CHANGE
                                                                --------------    -----------
                                                                2000     1999      #      %
                                                                -----    -----    ---    ----
    <S>                                                         <C>      <C>      <C>    <C>
    U.S.....................................................      916      608    308    50.7
    Canada..................................................      344      246     98    39.8
    International...........................................      652      588     64    10.9
                                                                -----    -----    ---
         Total..............................................    1,912    1,442    470    32.6
                                                                =====    =====    ===
</TABLE>

     The increase in oil prices from 1999 to 2000 has had a positive effect on
our overall sales for 2000 as compared to 1999. The recent price and rig count
improvements have contributed to improved overall industry conditions and should
also cause our customers to continue to increase their exploration and
development efforts. Although energy price and rig count increases are
indicators that additional oil and gas production may occur in 2001, there can
be no assurance that overall production will increase, that an increase in
production trends will continue through 2001 or that such an increase in
production would result in an increase in revenues for our company.

                                        21
<PAGE>   22

     The following discussion of our historical results of operations and
financial condition should be read in conjunction with our audited consolidated
financial statements and notes thereto.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             FOR THE YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               2000        1999      1998(1)
                                                             --------    --------    --------
                                                                      (IN THOUSANDS)
    <S>                                                      <C>         <C>         <C>
    Statement of Operations Data:
    Revenues.............................................    $224,552    $169,948    $200,830
    Cost of goods sold...................................     162,757     127,609     160,093
                                                             --------    --------    --------
    Gross profit.........................................      61,795      42,339      40,737
    Selling, general and administrative expense..........      39,456      32,437      31,898
    Depreciation and amortization expense................       5,111       4,681       1,883
    Unusual charges......................................       1,528          --          --
    Interest expense.....................................       1,588       3,256       2,919
    Interest cost on postretirement liability............       1,287       1,048       1,048
    Revaluation (gain) loss on postretirement
      liability..........................................          --      (1,016)         53
    Interest income......................................        (181)       (256)       (227)
                                                             --------    --------    --------
    Income before income taxes...........................      13,006       2,189       3,163
    Provision for income taxes...........................       5,345       1,548         606
                                                             --------    --------    --------
    Income before cumulative effect of change in
      accounting principle...............................       7,661         641       2,557
    Cumulative effect of change in accounting principle
      (net of income taxes of $7)(2).....................         (10)         --          --
                                                             --------    --------    --------
    Net income...........................................    $  7,671    $    641    $  2,557
                                                             ========    ========    ========
</TABLE>

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

(1) In 1998, we changed our fiscal year end from March 31 to December 31. For
     comparative purposes, we have presented unaudited statement of operations
     data for the twelve months ended December 31, 1998.

(2) In 2000, we changed our method of accounting for gains and losses on our
     postretirement benefit obligation which resulted in a cumulative change in
     accounting principle.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

     Revenues.  Revenues for the year ended December 31, 2000 increased $54.6
million, or 32% to $224.6 million, from $169.9 million for the year ended
December 31, 1999. The following table summarizes revenues by business segment
for the years ended December 31, 2000 and 1999, respectively:

<TABLE>
<CAPTION>
                                                    FOR THE YEAR ENDED
                                                       DECEMBER 31,               CHANGE
                                                   --------------------    ---------------------
    REVENUES:                                        2000        1999      DOLLARS    PERCENTAGE
    ---------                                      --------    --------    -------    ----------
                                                        (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                            <C>         <C>         <C>        <C>
    Traditional Equipment and Services.........    $ 83,428    $ 62,588    $20,840         33%
    Engineered Systems.........................      67,821      52,518     15,303         29
    Automation and Control Systems.............      42,761      41,843        918          2
    NATCO Canada...............................      40,317      19,757     20,560        104
    Corporate and Eliminations.................      (9,775)     (6,758)    (3,017)       (45)
                                                   --------    --------    -------
         Total.................................    $224,552    $169,948    $54,604         32%
                                                   ========    ========    =======
</TABLE>

     Revenues from our traditional equipment and services business segment for
the year ended December 31, 2000 increased $20.8 million, or 33%, to $83.4
million from $62.6 million for the year ended December 31, 1999. This increase
was due to an increase in oilfield activity resulting from an overall increase
in oil and gas prices in 2000. We experienced increased demand for our
production process equipment, as well as in the

                                        22
<PAGE>   23

domestic parts and service business. Partially offsetting this increase was a
decline in service revenues of $2.8 million related to a gas plant operation
that was closed in the fourth quarter of 1999. Affiliated revenues for this
business segment were approximately $1.3 million and $1.2 million for the years
ended December 31, 2000 and 1999, respectively.

     Revenues from our engineered systems business segment for the year ended
December 31, 2000 increased $15.3 million, or 29%, to $67.8 million from $52.5
million for the year ended December 31, 1999. This increase was primarily due to
the contribution of one customer, CTOC, which provided revenues of $45.9 million
for the year ended December 31, 2000 as compared to $14.6 million for the year
ended December 31, 1999. The acquisitions of MPE and ESI in February 2000 and
April 2000, respectively, also contributed to the increase in engineered systems
revenue. This increase in revenue was partially offset by a decline in other
domestic and international engineered systems, consistent with a decrease in
project awards by our customers throughout 1999 and early 2000 as a result of
lower natural gas prices in 1999. Engineered systems revenues of $67.8 million
for the year ended December 31, 2000 included affiliated revenues of $286,000,
as compared to $1.7 million of affiliated revenues for the year ended December
31, 1999.

     Revenues from our automation and control systems business segment for the
year ended December 31, 2000 increased $918,000, or 2%, to $42.8 million from
$41.8 million for the year ended December 31, 1999. Despite the completion of
several large projects in 1999, revenues for this business segment increased due
to stable demand for our automation and controls products and an increase in
affiliated revenues from $2.3 million for the year ended December 31, 1999 to
$4.1 million for the year ended December 31, 2000.

     Revenues from our NATCO Canada business segment for the year ended December
31, 2000 increased $20.6 million, or 104%, to $40.3 million from $19.7 million
for the year ended December 31, 1999. This increase was partially due to the
acquisition of Porta-Test, which contributed revenues of $6.1 million for the
year ended December 31, 2000, and an increase in affiliated revenues of $2.6
million associated with large projects, including CTOC. The NATCO Canada
business segment results included two significant gas plant projects for Chevron
Canada and several projects for Pemex completed in 2000. Overall industry market
conditions in Canada improved, which was consistent with an increase in Canadian
rig count during 2000. Affiliated revenue for the year ended December 31, 2000
was $4.1 million, as compared to $1.5 million for the year ended December 31,
1999.

     The change in revenues for corporate and eliminations represents the
elimination of revenues of affiliates as discussed above.

     Gross Profit.  Gross profit for the year ended December 31, 2000 increased
$19.5 million, or 46%, to $61.8 million from $42.3 million for the year ended
December 31, 1999. As a percentage of revenue, gross margins improved to 27% for
the year ended December 31, 2000 compared to 25% for the year ended December 31,
1999. The following table summarizes gross profit by business segment for the
years ended December 31, 2000 and 1999, respectively:

<TABLE>
<CAPTION>
                                                    FOR THE YEAR ENDED
                                                       DECEMBER 31,                 CHANGE
                                                  -----------------------    ---------------------
    GROSS PROFIT:                                     2000         1999      DOLLARS    PERCENTAGE
    -------------                                 ------------    -------    -------    ----------
                                                         (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                           <C>             <C>        <C>        <C>
    Traditional Equipment and Services........      $20,143       $16,868    $ 3,275        19%
    Engineered Systems........................       24,362        13,490     10,872        81
    Automation and Control Systems............        8,824         8,893        (69)       (1)
    NATCO Canada..............................        8,466         3,088      5,378       174
                                                    -------       -------    -------
         Total................................      $61,795       $42,339    $19,456        46%
                                                    =======       =======    =======
</TABLE>

     Gross profit from our traditional equipment and services business segment
for the year ended December 31, 2000 increased $3.3 million, or 19%, to $20.1
million from $16.9 million for the year ended December 31, 1999. This increase
in margin was primarily due to a 33% increase in revenues from this

                                        23
<PAGE>   24

segment and improved margins on export parts and services. As a percentage of
revenue, gross margins for the segment were 24% and 27% for the years ended
December 31, 2000 and 1999, respectively.

     Gross profit from our engineered systems business segment for the year
ended December 31, 2000 increased $10.9 million, or 81%, to $24.4 million from
$13.5 million for the year ended December 31, 1999. This increase was due
primarily to a 29% increase in revenues from this segment and higher margin
projects included in the sales mix for 2000 as compared to 1999. As a percentage
of revenue, gross margins for this segment were 36% and 26% for the years ended
December 31, 2000 and 1999, respectively.

     Gross profit from our automation and control systems business segment
remained relatively constant from the year ended December 31, 1999 to the year
ended December 31, 2000. Revenues from this business segment increased 2%
primarily due to an increase in affiliated sales with little impact on gross
margin. As a percentage of revenue, gross margins for this segment were 21% for
each of the years ended December 31, 2000 and 1999.

     Gross profit from our NATCO Canada business segment for the year ended
December 31, 2000 increased $5.4 million, or 174%, to $8.5 million from $3.1
million for the year ended December 31, 1999. This increase in gross margin was
primarily due to a 104% increase in revenues from this segment. In addition,
Porta-Test, which we acquired in January 2000, provided margins of $2.8 million
for the year ended December 31, 2000. As a percentage of revenue, gross margins
for this segment were 21% and 16% for the years ended December 31, 2000 and
1999, respectively.

     Selling, General and Administrative Expense.  Selling, general and
administrative expense for the year ended December 31, 2000 increased $7.0
million, or 22%, to $39.5 million from $32.5 million for the year ended December
31, 1999. This increase was largely related to the execution of our business
plan and included:

     -  additional costs associated with the acquisitions of Porta-Test, MPE and
       ESI;

     -  increased spending for technology and product development;

     -  additional expenses related to being a public company; and

     -  continued investment in pre-order engineering expenses.

     Depreciation and Amortization Expense.  Depreciation and amortization
expense for the year ended December 31, 2000 increased $430,000, or 9%, to $5.1
million from $4.7 million for the year ended December 31, 1999. Depreciation
expense for the year ended December 31, 2000 decreased $555,000, or 15%, to $3.1
million from $3.7 million for the year ended December 31, 1999. This decrease
was primarily due to extending the service life of certain operational assets.
This decrease in depreciation expense for the year ended December 31, 2000 as
compared to the year ended December 31, 1999, was partially offset by: (1)
depreciation on the addition of capital assets during the last four quarters,
which included renovations and expansions of existing manufacturing plants,
technological improvements to management information systems and the purchase of
computer hardware and software, and acquisitions of and improvements to other
equipment used in the Company's business; and (2) depreciation expense due to
the inclusion of results from Porta-Test, MPE and ESI, acquired during fiscal
2000. Amortization expense for the year ended December 31, 2000 increased
$913,000, or 90%, to $1.9 million from $1.0 million for the year ended December
31, 1999. This increase was primarily due to amortization of goodwill associated
with the Porta-Test, MPE and ESI acquisitions. Also, amortization expense
increased due to an increase in goodwill related to the acquisition of Cynara in
November 1998. Pursuant to the Cynara purchase agreement, we issued 325,836
shares and 418,145 shares of our Class B common stock during September 1999 and
June 2000, respectively, to Cynara's former shareholders based upon the
achievement of certain performance criteria, and the cost of such shares was
recorded as goodwill.

     Interest Expense.  Interest expense for the year ended December 31, 2000
decreased $1.7 million, or 52%, to $1.6 million from $3.3 million for the year
ended December 31, 1999. This decrease was due primarily to a reduction of
long-term debt under our term loan and revolving credit facilities from $31.2
million at December 31, 1999 to $15.0 million at December 31, 2000. We retired
$27.9 million of
                                        24
<PAGE>   25

long-term debt under our term loan facility during February 2000 with a portion
of the proceeds from our initial public offering.

     Unusual Charges.  Unusual charges for the year ended December 31, 2000 were
$1.5 million. The charge was primarily for compensation expense associated with
the employment agreement of an executive officer. The terms of the agreement
entitled the officer to a sum equal to an outstanding note and accrued interest,
totaling $1.2 million at December 31, 1999, upon the sale of our Class A common
stock in an initial public offering. We completed our initial public offering on
January 27, 2000, and, pursuant to the terms of the agreement, we recorded
compensation expense for the amount of the note and accrued interest, including
related payroll burdens, totaling $1.3 million. In addition, we recorded
relocation expenses totaling $208,000 associated with the consolidation of two
facilities following the acquisition of Porta-Test.

     Revaluation Gain on Postretirement Benefit Liability.  In December 2000, we
changed our method of accounting for gains and losses on our postretirement
benefit obligation. Rather than record gains and losses to the income statement,
we now amortize gains or losses that exceed 10% of our accumulated
postretirement benefit obligation over the expected remaining lives of the
participants. Therefore, we did not record a gain or loss on the revaluation of
postretirement benefit liability for the year ended December 31, 2000. During
the year ended December 31, 1999, a revaluation gain on postretirement benefit
liability of $1.0 million was recorded due to a change in the actuarial discount
rate used to calculate the net present value of the underlying liability.

     Provision for Income Taxes.  Income tax expense for the year ended December
31, 2000 increased $3.8 million, or 245%, to $5.3 million from $1.5 million for
the year ended December 31, 1999. This increase in income tax expense was
primarily due to an increase in income before income taxes, which was $13.0
million for the year ended December 31, 2000 as compared to $2.2 million for the
year ended December 31, 1999. This increase in income tax expense was partially
offset by a decrease in the effective tax rate from 71% for 1999 to 41% for 2000
primarily due to the impact of non-deductible goodwill expense.

     Cumulative Effect of Change in Accounting Principle.  A gain of $10,000,
net of tax, was recorded for the year ended December 31, 2000 related to the
cumulative effect of a change in the method used to account for gains and losses
on our postretirement benefit obligation.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1998

     Revenues.  Revenues for the year ended December 31, 1999 decreased $30.9
million, or 15%, to $169.9 million from $200.8 million for the twelve months
ended December 31, 1998. The following table summarizes revenues by business
segment for the year ended December 31, 1999 and the twelve months ended
December 31, 1998:

<TABLE>
<CAPTION>
                                         FOR THE YEAR ENDED   FOR THE TWELVE MONTHS          CHANGE
                                            DECEMBER 31,        ENDED DECEMBER 31     ---------------------
    REVENUES:                                   1999                 1998(1)          DOLLARS    PERCENTAGE
    ---------                            ------------------   ---------------------   --------   ----------
                                                         (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                  <C>                  <C>                     <C>        <C>
    Traditional Equipment and
      Services.........................       $ 62,588              $ 71,684          $ (9,096)    (13)%
    Engineered Systems.................         52,518                44,872             7,646      17
    Automation and Control Systems.....         41,843                46,583            (4,740)    (10)
    NATCO Canada.......................         19,757                43,490           (23,733)    (55)
    Corporate and Eliminations.........         (6,758)               (5,799)             (959)    (17)
                                              --------              --------          --------
      Total............................       $169,948              $200,830          $(30,882)    (15)%
                                              ========              ========          ========
</TABLE>

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

(1) In 1998, we changed our fiscal year end from March 31 to December 31. For
     comparative purposes, we have presented unaudited statement of operations
     data for the twelve months ended December 31, 1998.

     Revenues from our traditional equipment and services business segment for
the year ended December 31, 1999 decreased $9.1 million, or 13%, to $62.6
million from $71.7 million for the twelve months ended December 31, 1998. This
decrease was due to an overall decline in the oil and gas industry during the
fourth

                                        25
<PAGE>   26

quarter of 1998 and throughout 1999. This decline was consistent with the
reduction in the average number of drilling rigs operating in the United States
and Canada from 1,089 in 1998 to 854 in 1999. Affiliated revenues for this
business segment were $1.2 million and $700,000 for the year ended December 31,
1999 and the twelve months ended December 31, 1998, respectively.

     Revenues from our engineered systems business segment for the year ended
December 31, 1999 increased $7.6 million, or 17%, to $52.5 million from $44.9
million for the twelve months ended December 31, 1998. This increase relates
primarily to the acquisition of Cynara, as twelve months of operations were
included in the 1999 results versus only one month of operations during 1998.
Affiliated revenues for this business segment were $1.7 million and $1.5 million
for the year ended December 31, 1999 and the twelve months ended December 31,
1998, respectively.

     Revenues from our automation and control systems business segment for the
year ended December 31, 1999 decreased $4.7 million, or 10%, to $41.8 million
from $46.6 million for the twelve months ended December 31, 1998. This decrease
was due to the completion of a significant project during 1998. Affiliated
revenues for this business segment were $2.3 million and $1.1 million for the
year ended December 31, 1999 and the twelve months ended December 31, 1998,
respectively.

     Revenues from our NATCO Canada business segment for the year ended December
31, 1999 decreased $23.7 million, or 55%, to $19.8 million from $43.5 million
for the twelve months ended December 31, 1998. This decrease was due primarily
to the overall decline in the oil and gas industry and the completion of
significant projects during 1998. Affiliated revenues for this business segment
were $1.5 million and $2.5 million for the year ended December 31, 1999 and the
twelve months ended December 31, 1998, respectively.

     The change in revenues for corporate and eliminations represents the
elimination of revenues of affiliates as discussed above.

     Gross Profit.  Gross profit for the year ended December 31, 1999 increased
$1.6 million, or 4%, to $42.3 million, from $40.7 million for the twelve months
ended December 31, 1998. As a percentage of revenue, gross margins improved to
25% for the year ended December 31, 1999 from 20% for the twelve months ended
December 31, 1998. The following table summarizes gross profit by business
segment for the year ended December 31, 1999 and the twelve months ended
December 31, 1998:

<TABLE>
<CAPTION>
                                                                      FOR THE TWELVE              CHANGE
                                              FOR THE YEAR ENDED       MONTHS ENDED        --------------------
    GROSS PROFIT:                             DECEMBER 31, 1999    DECEMBER 31, 1998(1)    DOLLARS   PERCENTAGE
    -------------                             ------------------   ---------------------   -------   ----------
                                                             (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                       <C>                  <C>                     <C>       <C>
    Traditional Equipment and Services......       $16,868                $17,889          $(1,021)       (6)%
    Engineered Systems......................        13,490                  8,045            5,445        68
    Automation and Control Systems..........         8,893                  8,852               41        --
    NATCO Canada............................         3,088                  5,951           (2,863)      (48)
                                                   -------                -------          -------
         Total..............................       $42,339                $40,737          $ 1,602         4%
                                                   =======                =======          =======
</TABLE>

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

(1) In 1998, we changed our fiscal year end from March 31 to December 31. For
     comparative purposes, we have presented unaudited statement of operations
     data for the twelve months ended December 31, 1998.

     Gross profit from our traditional equipment and services business segment
for the year ended
December 31, 1999 decreased $1.0 million, or 6%, to $16.9 million from $17.9
million for the twelve months ended December 31, 1998. This decrease was due to
a 13% decline in revenues. As a percentage of revenue, gross margins for this
business segment were 27% and 25% for the year ended December 31, 1999 and the
twelve months ended December 31, 1998, respectively.

     Gross profit from our engineered systems business segment for the year
ended December 31, 1999 increased $5.4 million, or 68%, to $13.5 million from
$8.0 million for the twelve months ended December 31, 1998. This increase was
primarily due to the contribution of $9.2 million from Cynara, included in the
1999

                                        26
<PAGE>   27

results, as compared to approximately $400,000 contributed by Cynara for the one
month of operations included in the 1998 results. As a percentage of revenues,
gross margin for this business segment were 26% and 18% for the year ended
December 31, 1999 and the twelve months ended December 31, 1998, respectively.

     Gross profit from our automation and control systems business segment
remained relatively constant when comparing the year ended December 31, 1999 and
the twelve months ended December 31, 1998. As a percentage of revenue, gross
margins were 21% and 19% for these periods, respectively.

     Gross profit from our NATCO Canada business segment for the year ended
December 31, 1999 decreased $2.9 million, or 48%, to $3.1 million from $6.0
million for the twelve months ended December 31, 1998. Gross profit decreased
due to a 55% decline in revenue during the same period. As a percentage of
revenue, gross margins were 16% and 14% for the year ended December 31, 1999 and
the twelve months ended December 31, 1998, respectively.

     Selling, General and Administrative Expense.  Selling, general and
administrative expense for the year ended December 31, 1999 increased $539,000,
or 2%, to $32.4 million from $31.9 million for the twelve months ended December
31, 1998. Overall, expenses were reduced in the United States and Canada, due to
a downturn in the industry. These expense reductions were offset, however, due
to the addition of Cynara, which provided $1.9 million of selling, general and
administrative expense for the year ended December 31, 1999. In addition, during
1999 we recorded non-recurring costs of approximately $400,000 primarily
associated with the retirement of an officer and approximately $600,000 related
to our purchase of stock options previously granted to our chief executive
officer. Also in 1999, we revised previous estimates related to the remaining
costs associated with the closure of NATCO (UK) Ltd., and reversed these related
accruals.

     Depreciation and Amortization Expense.  Depreciation and amortization
expense for the year ended December 1999 increased $2.8 million, or 147%, to
$4.7 million from $1.9 million for the twelve months ended December 31, 1998.
This increase was due primarily to the addition of Cynara, which contributed
$3.0 million of depreciation and amortization expense for the year ended
December 31, 1999.

     Interest Expense.  Interest expense for the year ended December 31, 1999
increased $337,000, or 12%, to $3.3 million from $2.9 million for the twelve
months ended December 31, 1998. This increase in interest expense was due
primarily to an increase in debt as a result of the acquisition of Cynara in
November 1998, partially offset by debt repayments throughout 1999.

     Revaluation Gain on Postretirement Benefit Liability.  A revaluation gain
on postretirement benefit liability of $1.0 million was recorded during the year
ended December 31, 1999 due to a change in actuarial assumptions. No gain was
recognized for the twelve months ended December 31, 1998.

     Provision for Income Taxes.  Income tax expense for the year ended December
31, 1999 increased $942,000, or 155%, to $1.5 million from $606,000 for the
twelve months ended December 31, 1998. This increase was due to the following:
(1) higher state income tax as a greater percentage of revenues for 1999 as
compared to 1998 were contributed by Total Engineering Services Testing, Inc.
("TEST"), whose manufacturing facilities are located in the state of Louisiana;
(2) an increase in permanent book-to-tax differences due to the
non-deductibility of goodwill amortization related to the Cynara acquisition
made in November 1998; and (3) a one-time charge of approximately $300,000
incurred as a deferred state rate adjustment which resulted when a former
holding company was liquidated and the resulting assets were transferred to an
entity with a lower effective tax rate for deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

     As of February 28, 2001, we had cash and working capital of $1.4 million
and $49.5 million. As of December 31, 2000, we had cash and working capital of
$1.0 million and $49.1 million, as compared to $1.7 million and $25.3 million at
December 31, 1999.

                                        27
<PAGE>   28

     Net cash provided by (used in) operating activities for the years ended
December 31, 2000 and 1999, and the nine months ended December 31, 1998 was
($6.3) million, $15.4 million and ($1.5) million, respectively. The decrease in
net cash provided by operating activities in 2000 was primarily due to an
increase in trade accounts receivable and inventories associated with higher
revenues and the new businesses acquired in 2000.

     Net cash used in investing activities for the years ended December 31, 2000
and 1999, and the nine months ended December 31, 1998 was $23.6 million, $2.6
million and $17.1 million, respectively. Our primary use of funds for the year
ended December 31, 2000 was the acquisitions of Porta-Test, MPE and ESI, which
required the use of $17.1 million, and capital expenditures that required $8.1
million. These capital expenditures consisted primarily of renovations and
expansions of our manufacturing plants, technological improvements to management
information systems and acquisitions of and improvements to other equipment used
in our business, including an upgrade to our membrane manufacturing facility in
Pittsburg, California, which was completed in the fourth quarter of 2000. Funds
for the Porta-Test acquisition in January 2000 were borrowed from our revolving
credit facility. These funds were repaid during February 2000 with the proceeds
from our initial public offering. Funds for the MPE acquisition in February 2000
were also provided by our initial public offering. The ESI acquisition was
financed with net borrowings of $7.1 million under our revolving credit
facilities. Our primary use of funds for the year ended December 31, 1999 and
the nine months ended December 31, 1998 was capital expenditures of $3.6 million
in 1999 and the acquisition of Cynara in 1998, which required the use of $15.5
million of cash.

     Net cash provided by (used in) financing activities for the years ended
December 31, 2000 and 1999, and the nine months ended December 31, 1998 was 29.7
million, ($13.7) million and $20.2 million, respectively. The primary source of
funds for financing activities during the year ended December 31, 2000 was our
initial public offering of common stock, which provided net proceeds of $46.7
million. These proceeds were used primarily to retire $27.9 million of
outstanding debt under a term loan arrangement, to repay $3.0 million borrowed
under the revolving credit agreement for the purchase of Porta-Test, and to
repay $2.9 million of debt assumed in the acquisitions of Porta-Test and MPE.
The use of cash for financing activities during 1999 was due primarily to the
repayment of long-term debt. Cash provided by financing activities for the nine
months ended December 31, 1998 related to issuances of common stock, and
borrowings of long-term debt to finance the Cynara and TEST acquisitions,
respectively.

     We maintain revolving credit and term loan facilities, as well as a working
capital facility for export sales. The revolving credit facility provides for up
to $22.0 million of borrowings in the United States and up to $10.0 million of
borrowings in Canada, subject to borrowing base limitations. At December 31,
2000, we had borrowings outstanding under the revolving credit facility of $15.0
million and had issued $2.1 million in outstanding letters of credit under this
facility. We amended the revolving credit agreement in October 2000 to extend
the maturity date from November 2001 to January 2003, with no other material
changes to the terms of the agreement. No borrowings were outstanding under the
term loan facility at December 31, 2000. The revolving credit and term loan
facility is secured by substantially all of our assets. We were in compliance
with all debt covenants as of December 31, 2000. As of December 31, 2000, the
weighted average interest rate of our borrowings under the term loan and
revolving credit agreement was 8.58%.

     On March 16, 2001, we entered into a new credit facility to finance the
acquisition of Axsia. This credit facility consists of a $50.0 million term
loan, a $35.0 million U.S. revolving facility, a $10.0 million Canadian
revolving facility and a $5.0 million U.K. revolving facility. The term loan
matures on March 15, 2006, and each of the revolving facilities matures on March
15, 2004.

     Amounts borrowed under the term loan portion of this new facility currently
bear interest at a rate of 7.23% per annum. Amounts borrowed under the revolving
portion of this new facility will bear interest as follows:

     - until April 1, 2002, at a rate equal to, at our election, either (1)
       LIBOR plus 2.25% or (2) a base rate plus 0.75%; and

                                        28
<PAGE>   29

     - on and after April 1, 2002, at a rate based upon the ratio of funded debt
       to EBITDA and ranging from, at our election, (1) a high of LIBOR plus
       2.50% to a low of LIBOR plus 1.75% or (2) a high of a base rate plus 1.0%
       to a low of a base rate plus 0.25%.

     We will pay commitment fees of 0.50% per year until April 1, 2002 and 0.30%
to 0.50% per year, depending upon the ratio of funded debt to EBITDA, on and
after April 1, 2002, in each case on the undrawn portion of the facility.

     Our new credit facility is guaranteed by all of our domestic subsidiaries
and is secured by a first priority lien on all our inventory, accounts
receivable and other material tangible and intangible assets. We have also
pledged 65% of the voting stock of our active foreign subsidiaries.

     Our export sales credit facility provides for aggregate borrowings of $10.0
million, subject to borrowing base limitations, of which no borrowings were
outstanding as of December 31, 2000. We had issued letters of credit totaling
$7.2 million under the export facility as of that date. The export sales credit
facility is secured by specific project inventory and receivables, and is
partially guaranteed by the Export-Import Bank of the United States. The export
sales credit facility loans mature in July 2003.

     Our capital expenditures generally consist of renovations and expansions of
our manufacturing plants, technological improvements to our management
information systems and acquisitions of, and improvements to, other equipment we
use in our business. For the year ended December 31, 2000, we had capital
expenditures of $8.1 million. We believe that our operating cash flow, supported
by our borrowing capacity, will be adequate to fund operations throughout 2001.
To the extent that we are successful in identifying additional acquisition
opportunities during 2001, our ability to finance these acquisitions will be a
critical element of the analysis of the opportunities.

INFLATION AND CHANGES IN PRICES

     The costs of materials (e.g., steel) for our products rise and fall with
their value in the commodity markets. Generally, increases in raw materials and
labor costs are passed on to our customers.

RECENT ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ('SFAS') No. 133, Accounting
for Derivative Instruments and Hedging Activities, was issued by the Financial
Accounting Standards Board ("FASB") in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including derivative instruments embedded
in other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. We
adopted SFAS 133 on January 1, 2001, which did not have a material effect on our
financial condition or results of operation because we had no derivative
arrangements or other financial instruments for trading or speculative purposes
at December 31, 2000.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our operations are conducted around the world in a number of different
countries. Accordingly, future earnings are exposed to changes in foreign
currency exchange rates when transactions are denominated in currencies other
than our functional currencies. Our functional currencies are the primary
currencies in which we conduct our business in various jurisdictions. The
majority of our foreign currency transactions are denominated in the Canadian
dollar, which is the functional currency of NATCO Canada. Because these
contracts are denominated and settled in the functional currency, risks
associated with currency fluctuations are minimized. We do not currently hedge
against foreign currency translation risks, and we believe that foreign currency
exchange risk is not significant to our operations.

     Our financial instruments are subject to changes in interest rates,
including our revolving credit and term loan facility and our working capital
facility for export sales. At December 31, 2000, we had no borrowings
outstanding under the term loan portion of the revolving credit and term loan
facility. At December 31, 2000, outstanding borrowings under our revolving
credit agreement totaled $15.0 million. The revolving credit

                                        29
<PAGE>   30

agreement was amended in October 2000 to extend the maturity date of these
borrowings from November 2001 to January 2003. Borrowings under our revolving
credit agreement bear interest at floating rates. As of December 31, 2000, the
weighted average interest rate of our borrowings under this credit facility was
8.58%. There were no borrowings outstanding under the working capital facility
for export sales at December 31, 2000.

     Based on past market movements and possible near-term market movements, we
do not believe that potential near-term losses in future earnings, fair values
or cash flows from changes in interest rates are likely to be material. Assuming
our current level of borrowings, as of December 31, 2000, a 100 basis point
increase in interest rates under the borrowings would decrease our current net
income and cash flow from operations by less than $100,000. In the event of an
adverse change in interest rates, we could take action to mitigate our exposure.
Due, however, to the uncertainty of actions that could be taken and the possible
effects, this calculation assumes no such actions. Furthermore, this calculation
does not consider the effects of a possible change in the level of overall
economic activity that could exist in such an environment.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     To follow are the consolidated financial statements of the Company for the
years ended December 31, 2000 and 1999, and the nine months ended December 31,
1998, as applicable, along with the Independent Auditors' report:

                                        30
<PAGE>   31

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
NATCO Group Inc.:

     We have audited the accompanying consolidated balance sheets of NATCO Group
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for the years ended December 31, 2000 and 1999 and for
the nine months ended December 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial position of NATCO Group
Inc. and subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for the years ended December 31, 2000 and 1999
and for the nine months ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States of America.

     As discussed in Note 15 to the Consolidated Financial Statements, the
Company changed its method of accounting for postretirement benefits in January
2000.

KPMG LLP

Houston, Texas
February 15, 2001

                                        31
<PAGE>   32

                       NATCO GROUP INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                DECEMBER 31,    DECEMBER 31,
                                                                    2000            1999
                                                                ------------    ------------
<S>                                                             <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................      $  1,031        $  1,747
  Trade accounts receivable, less allowance for doubtful
     accounts of $1,142 and $545 as of December 31, 2000 and
     1999, respectively.....................................        53,807          33,720
  Inventories...............................................        28,677          20,414
  Notes receivable from director............................            --           1,890
  Deferred income tax assets, net...........................         1,745           1,478
  Income tax receivable.....................................           178             837
  Prepaid expenses and other current assets.................         1,042           1,144
                                                                  --------        --------
     Total current assets...................................        86,480          61,230
Property, plant and equipment, net..........................        23,430          17,806
Goodwill....................................................        36,534          19,083
Deferred income tax assets, net.............................         5,409           6,517
Other assets, net...........................................         1,273           2,194
                                                                  --------        --------
     Total assets...........................................      $153,126        $106,830
                                                                  ========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current installments of long-term debt....................      $     --        $  4,643
  Notes payable.............................................         1,005              --
  Accounts payable..........................................        23,133          15,127
  Accrued expenses and other................................        12,098          10,900
  Customer advances.........................................         1,163           5,256
                                                                  --------        --------
     Total current liabilities..............................        37,399          35,926
Long-term debt, excluding current installments..............        14,959          26,537
Postretirement benefit liability............................        14,589          15,853
                                                                  --------        --------
     Total liabilities......................................        66,947          78,316
                                                                  --------        --------
Stockholders' equity:
  Preferred stock $.01 par value. 5,000,000 shares
     authorized; no shares outstanding......................            --              --
  Class A Common stock, $.01 par value. Authorized
     45,000,000 shares; issued and outstanding 14,977,354
     and 8,787,520 shares as of December 31, 2000 and 1999,
     respectively...........................................           150              88
  Class B Common stock, $.01 par value. Authorized 5,000,000
     shares; issued and outstanding 699,874 and 825,836
     shares as of December 31, 2000 and 1999,
     respectively...........................................             7               8
  Additional paid-in capital................................        96,601          43,273
  Accumulated deficit.......................................          (506)         (8,177)
  Treasury stock, 677,238 and 470,188 shares at cost as of
     December 31, 2000 and 1999, respectively...............        (6,316)         (4,550)
  Accumulated other comprehensive loss......................        (1,864)           (886)
  Note receivable from officer and stockholder..............        (1,893)         (1,242)
                                                                  --------        --------
     Total stockholders' equity.............................        86,179          28,514
                                                                  --------        --------
Commitments and contingencies
     Total liabilities and stockholders' equity.............      $153,126        $106,830
                                                                  ========        ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        32
<PAGE>   33

                       NATCO GROUP INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                         FOR THE         FOR THE       FOR THE NINE
                                                        YEAR ENDED      YEAR ENDED     MONTHS ENDED
                                                       DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                           2000            1999            1998
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
Revenues...........................................      $224,552        $169,948        $145,611
Cost of goods sold.................................       162,757         127,609         115,521
                                                         --------        --------        --------
  Gross profit.....................................        61,795          42,339          30,090
Selling, general and administrative expense........        39,456          32,437          24,530
Depreciation and amortization expense..............         5,111           4,681           1,473
Unusual charges....................................         1,528              --              --
Interest expense...................................         1,588           3,256           2,215
Interest cost on postretirement benefit
  liability........................................         1,287           1,048             786
Revaluation loss (gain) on postretirement benefit
  liability........................................            --          (1,016)             53
Interest income....................................          (181)           (256)           (227)
                                                         --------        --------        --------
  Income from continuing operations before
     income taxes..................................        13,006           2,189           1,260
Income tax provision...............................         5,345           1,548             608
                                                         --------        --------        --------
Income before cumulative effect of change in
  accounting principle.............................         7,661             641             652
Cumulative effect of change in accounting principle
  (net of income taxes of $7)......................            10              --              --
                                                         --------        --------        --------
  Net income.......................................      $  7,671        $    641        $    652
                                                         ========        ========        ========
Earnings per share--basic:
Income before cumulative effect of change in
  accounting principle.............................      $   0.52        $   0.07        $   0.08
Cumulative effect of change in accounting
  principle........................................            --              --              --
                                                         --------        --------        --------
  Net income.......................................      $   0.52        $   0.07        $   0.08
                                                         ========        ========        ========
Earnings per share--diluted:
Income before cumulative effect of change in
  accounting principle.............................      $   0.51        $   0.06        $   0.07
Cumulative effect of change in accounting
  principle........................................            --              --              --
                                                         --------        --------        --------
  Net income.......................................      $   0.51        $   0.06        $   0.07
                                                         ========        ========        ========
Basic weighted average number of shares of common
  stock outstanding................................        14,653           9,302           8,243
Diluted weighted average number of shares of common
  stock outstanding................................        15,158           9,953           8,942
Pro forma net income (retroactive of change in
  accounting principle):
  Net income.......................................                      $     43        $    683
  Earnings per share--basic........................                      $     --        $    .08
  Earnings per share--diluted......................                      $     --        $    .08
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        33
<PAGE>   34

                       NATCO GROUP INC. AND SUBSIDIARIES

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                         COMMON             COMMON
                                          STOCK             STOCK                                             ACCUMULATED
                                         SHARES             CLASS      ADDITIONAL                                OTHER
                                  ---------------------   ----------    PAID-IN     ACCUMULATED   TREASURY   COMPREHENSIVE
                                      A           B        A      B     CAPITAL       DEFICIT      STOCK         LOSS
                                  ----------   --------   ----   ---   ----------   -----------   --------   -------------
<S>                               <C>          <C>        <C>    <C>   <C>          <C>           <C>        <C>
Balances at March 31, 1998......   6,666,668         --   $ 67    --    $20,272       $(9,470)    $(4,350)      $(1,100)
Conversion of subordinated
  debt..........................   1,479,258         --     14    --      8,172            --          --            --
Issue common stock for
  acquisition...................          --    500,000     --     5      5,245            --          --            --
Issue common stock..............     504,762         --      5    --      5,295            --          --            --
Employee stock compensation.....          --         --     --    --         23            --          --            --
Stock options repurchased.......          --         --     --    --       (119)           --          --            --
Call option on common stock.....          --         --     --    --         --            --        (200)           --
Comprehensive income
  Net income....................          --         --     --    --         --           652          --            --
  Foreign currency translation
    adjustment..................          --         --     --    --         --            --          --          (321)
Total comprehensive income......          --         --     --    --         --            --          --            --
                                  ----------   --------   ----   ---    -------       -------     -------       -------
Balances at December 31, 1998...   8,650,688    500,000   $ 86   $ 5    $38,888       $(8,818)    $(4,550)      $(1,421)
Issue common stock for
  acquisition...................          --    325,836     --     3      3,419            --          --            --
Stock options repurchased.......          --         --     --    --       (237)           --          --            --
Stock subscription..............     136,832         --      2    --      1,203            --          --            --
Interest on stock subscription
  note receivable...............          --         --     --    --         --            --          --            --
Comprehensive income
  Net income....................          --         --     --    --         --           641          --            --
  Foreign currency translation
    adjustment..................          --         --     --    --         --            --          --           535
Total comprehensive income......          --         --     --    --         --            --          --            --
                                  ----------   --------   ----   ---    -------       -------     -------       -------
Balances at December 31, 1999...   8,787,520    825,836   $ 88   $ 8    $43,273       $(8,177)    $(4,550)      $  (886)
Issue common stock in connection
  with initial public
  offering......................   5,532,904   (354,097)    55    (3)    46,632            --          --            --
Conversion of Class B shares to
  Class A shares................     190,010   (190,010)     2    (2)        --            --          --            --
Issue common stock for
  acquisition...................          --    418,145     --     4      4,073            --          --            --
Issue treasury shares as partial
  settlement of a note
  receivable from director......    (173,050)        --     (2)   --         --            --      (1,523)           --
Treasury shares reacquired......     (34,000)        --     --    --         --            --        (243)           --
Issue stock subscription note
  receivable....................          --         --     --    --      1,260            --          --            --
Interest on stock subscription
  note receivable...............          --         --     --    --         --            --          --            --
Receipt for stock subscribed
  note receivable...............          --         --     --    --         --            --          --            --
Issuances related to benefit
  plans.........................     673,970         --      7    --      1,363            --          --            --
Comprehensive income
  Net income....................          --         --     --    --         --         7,671          --            --
  Foreign currency translation
    adjustment..................          --         --     --    --         --            --          --          (978)
Total comprehensive income......          --         --     --    --         --            --          --            --
                                  ----------   --------   ----   ---    -------       -------     -------       -------
Balances at December 31, 2000...  14,977,354    699,874   $150   $ 7    $96,601       $  (506)    $(6,316)      $(1,864)
                                  ==========   ========   ====   ===    =======       =======     =======       =======

<CAPTION>

                                     NOTE          TOTAL
                                  RECEIVABLE    STOCKHOLDERS
                                     FROM          EQUITY
                                  STOCKHOLDER    (DEFICIT)
                                  -----------   ------------
<S>                               <C>           <C>
Balances at March 31, 1998......        --          5,419
Conversion of subordinated
  debt..........................        --          8,186
Issue common stock for
  acquisition...................        --          5,250
Issue common stock..............        --          5,300
Employee stock compensation.....        --             23
Stock options repurchased.......        --           (119)
Call option on common stock.....        --           (200)
Comprehensive income
  Net income....................        --            652
  Foreign currency translation
    adjustment..................  --......           (321)
                                                   ------
Total comprehensive income......        --            331
                                    ------         ------
Balances at December 31, 1998...        --         24,190
Issue common stock for
  acquisition...................        --          3,422
Stock options repurchased.......        --           (237)
Stock subscription..............    (1,205)            --
Interest on stock subscription
  note receivable...............       (37)           (37)
Comprehensive income
  Net income....................        --            641
  Foreign currency translation
    adjustment..................        --            535
                                                   ------
Total comprehensive income......        --          1,176
                                    ------         ------
Balances at December 31, 1999...    (1,242)        28,514
Issue common stock in connection
  with initial public
  offering......................        --         46,684
Conversion of Class B shares to
  Class A shares................        --             --
Issue common stock for
  acquisition...................        --          4,077
Issue treasury shares as partial
  settlement of a note
  receivable from director......        --         (1,525)
Treasury shares reacquired......        --           (243)
Issue stock subscription note
  receivable....................    (1,260)            --
Interest on stock subscription
  note receivable...............       (56)           (56)
Receipt for stock subscribed
  note receivable...............       665            665
Issuances related to benefit
  plans.........................        --          1,370
Comprehensive income
  Net income....................        --          7,671
  Foreign currency translation
    adjustment..................        --           (978)
                                                   ------
Total comprehensive income......        --          6,693
                                    ------         ------
Balances at December 31, 2000...    (1,893)        86,179
                                    ======         ======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        34
<PAGE>   35

                       NATCO GROUP INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                          FOR THE
                                                           FOR THE YEAR ENDED   FOR THE YEAR ENDED   NINE MONTHS ENDED
                                                              DECEMBER 31,         DECEMBER 31,        DECEMBER 31,
                                                                  2000                 1999                1998
                                                           ------------------   ------------------   -----------------
<S>                                                        <C>                  <C>                  <C>
Cash flows from operating activities:
  Net income.............................................       $  7,671             $    641            $    652
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
    Deferred income tax provision (benefit)..............          1,611                1,107                 (16)
    Depreciation and amortization expense................          5,111                4,681               1,473
    Noncash interest income..............................            (85)                (211)                 --
    Interest cost on postretirement benefit liability....          1,287                1,048                 786
    Gain on sale of property, plant and equipment........           (110)                (560)                (49)
    Loss (gain) on revaluation of postretirement benefit
      liability..........................................             --               (1,016)                 53
    Cumulative effect of change in accounting
      principle..........................................            (10)                  --                  --
    Other, net...........................................            (77)                 (60)                366
    Change in assets and liabilities:
      (Increase) decrease in restricted cash.............             --                  883                (334)
      (Increase) decrease in trade accounts receivable...        (14,230)               9,296               2,853
      (Increase) decrease in inventories.................         (6,647)               2,858                 570
      (Increase) decrease in prepaid and other current
        assets...........................................           (482)                 391                 874
      Increase (decrease) in other income taxes..........            633                  234              (1,642)
      Decrease in long-term assets.......................            418                   --                  --
      Increase (decrease) in accounts payable............          4,221               (3,707)             (5,834)
      Decrease in accrued expenses and other.............           (742)              (2,609)             (1,894)
      Increase (decrease) in customer advances...........         (4,819)               2,415                 692
                                                                --------             --------            --------
        Net cash provided by (used in) operating
          Activities.....................................         (6,250)              15,391              (1,450)
                                                                --------             --------            --------
Cash flows from investing activities:
  Capital expenditures for property, plant and
    equipment............................................         (8,137)              (3,593)             (1,636)
  Proceeds from sales of property, plant and equipment...            575                  977                  66
  Acquisitions, net of working capital acquired..........        (17,126)                  --             (15,499)
  Repayment of related party note receivable.............          1,059                   --                  --
                                                                --------             --------            --------
        Net cash used in investing activities............        (23,629)              (2,616)            (17,069)
                                                                --------             --------            --------
Cash flows from financing activities:
  Net repayments under revolving credit agreements.......             --               (1,585)             (2,562)
  Change in bank overdrafts..............................          2,864               (1,878)               (156)
  Net borrowings.........................................             --                   --              39,477
  Net borrowing (repayments) under long-term revolving
    credit facilities....................................          8,932               (3,852)                 --
  Repayments of long-term debt...........................        (27,858)              (5,357)            (20,631)
  Issuance of common stock, net..........................         46,738                   --               5,300
  Issuance of common stock for benefit plans.............            156                   --                  --
  Payments on postretirement benefit liability...........         (1,772)                (524)               (446)
  Receipt as partial payment of the net present value of
    postretirement benefit liability of affiliate........            600                  475                  --
  Repurchase of treasury shares..........................           (243)                  --                  --
  Other, principally bank and IPO fees...................            285                 (980)               (803)
                                                                --------             --------            --------
        Net cash provided by (used in) financing
          activities.....................................         29,702              (13,701)             20,179
                                                                --------             --------            --------
Effect of exchange rate changes on cash and cash
  equivalents............................................           (539)                 293                (221)
                                                                --------             --------            --------
Increase (decrease) in cash and cash equivalents.........           (716)                (633)              1,439
Cash and cash equivalents at beginning of period.........          1,747                2,380                 941
                                                                --------             --------            --------
Cash and cash equivalents at end of period...............       $  1,031             $  1,747            $  2,380
                                                                ========             ========            ========
Cash payments for:
  Interest...............................................       $  1,061             $  3,285            $  2,045
  Income taxes...........................................       $  1,903             $    751            $  2,093
Significant non-cash investing and financing activities:
  Issuance of common stock for acquisition...............       $  4,077             $  3,422            $  5,250
  Conversion of subordinated debt........................             --                   --            $  8,172
  Debt assumed in acquisition............................       $  2,862                   --                  --
  Partial settlement of note arrangement with treasury
    shares...............................................       $  1,525                   --                  --
  Promissory note issued for business acquisition........       $  1,026                   --                  --
  Related party note receivable issued for stock
    subscribed...........................................       $  1,260                   --                  --
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        35
<PAGE>   36

                       NATCO GROUP INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION

     NATCO Group Inc. ("NATCO") was formed in June 1988 by Capricorn Investors,
L.P., which led a group of investors who provided capital for the Company to
acquire several businesses from Combustion Engineering, Inc. ("C-E"). On June
21, 1989, the Company acquired from C-E all of the outstanding common stock of
W.S. Tyler, Incorporated ("Tyler"), and National Tank Company, as well as the
net assets of certain foreign affiliates. The accompanying consolidated
financial statements and all related disclosures include the results of
operations of the Company and its majority-owned subsidiaries for the years
ended December 31, 2000 and 1999, and the nine months ended December 31, 1998.

     During 1992, NATCO contributed its common stock investment in Tyler and
$5.5 million in cash to Process Technology Holdings, Inc. ("PTH") in exchange
for all of the issued and outstanding common stock of PTH. In 1992 and 1993, PTH
and NATCO sold certain shares of PTH common stock to third parties and, during
1997, the Company completed a tax-free spin off of PTH to its stockholder.

     On June 30, 1997, NATCO acquired Total Engineering Services Team, Inc.
("TEST"), and on November 20, 1998, NATCO acquired The Cynara Company
("Cynara"). The Company acquired Porta-Test International, Inc. ("Porta-Test")
on January 24, 2000.

     On January 27, 2000, the Company completed an initial public offering of
7,500,000 shares of its Class A common stock at a price of $10.00 per share
(4,053,807 shares issued by the Company and 3,446,193 shares issued by selling
stockholders). On February 3, 2000, the underwriter exercised its over-allotment
option that resulted in the issuance of 1,125,000 additional shares of Class A
common stock.

     On February 8, 2000 and April 4, 2000, NATCO acquired Modular Production
Equipment, Inc. ("MPE") and Engineering Specialties, Inc. ("ESI"), respectively.

     References to "NATCO" and "the Company" are used throughout this document
and relate collectively to NATCO Group Inc. and its consolidated subsidiaries.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Fiscal Year Change.  Effective April 1, 1998, the Company changed its
fiscal year end from March 31 to December 31.

     Principles of Consolidation.  The consolidated financial statements include
the accounts of the Company and all of its majority-owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated in
consolidation.

     Concentration of Credit Risk.  Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers comprising
the Company's customer base and their geographic dispersion. However, for the
year ended December 31, 2000, one customer, Carigali-Triton Operating Company,
SDN BHD ("CTOC") through its general contractor, Samsung, provided revenues of
$45.9 million or approximately 20% of total revenues. No other customer provided
more than 10% of revenues for the year ended December 31, 2000. No customer
provided more than 10% of revenues for the year ended December 31, 1999 or the
nine months ended December 31, 1998. See Note 22, Industry Segments and
Geographic Information.

     Cash Equivalents.  The Company considers all highly liquid investment
instruments with original maturities of three months or less to be cash
equivalents.

     Restricted Cash.  At December 31, 1998 cash in the amount of $883,000 was
pledged as collateral on outstanding letters of credit related to performance
and warranty guarantees, and was classified as restricted cash on the balance
sheet. No restricted cash existed at December 31, 2000 or December 31, 1999.

                                        36
<PAGE>   37

     Inventories.  Inventories are stated at the lower of cost or market. Cost
is determined using the last in, first out ("LIFO") method for NATCO domestic
inventories, average cost for TEST inventories and the first in, first out
("FIFO") method for all other inventories.

     Property, Plant and Equipment.  Property, plant and equipment are stated at
cost less an allowance for depreciation. Depreciation on plant and equipment is
calculated using the straight-line method over the assets' estimated useful
lives. Maintenance and repair costs are expensed as incurred; renewals and
betterments are capitalized. Upon the sale or retirement of properties, the
accounts are relieved of the cost and the related accumulated depreciation, and
any resulting profit or loss is included in income. The carrying values of
property, plant and equipment by location are reviewed annually and more often
if there are indications that these assets may be impaired.

     Goodwill.  Goodwill is being amortized on a straight-line basis over
periods of 20 to 40 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization over its remaining life
can be recovered through undiscounted future operating cash flows. Based on its
most recent analysis, the Company's management believes that no material
impairment of goodwill exists at December 31, 2000. Amortization expense for the
years ended December 31, 2000 and 1999, and the nine months ended December 31,
1998 was $2.0 million, $739,000 and $167,000, respectively. Accumulated
amortization at December 31, 2000 and December 31, 1999 was $2.8 million and
$1.1 million, respectively.

     Other Assets, Net.  Other assets consist of prepaid pension assets,
long-term deposits, deferred financing costs and covenants not to compete.
Deferred financing costs and covenants not to compete are being amortized over
the term of the related agreements. Amortization expense for the years ended
December 31, 2000 and 1999, and for the nine months ended December 31, 1998 was
$554,000, $570,000, and $244,000, respectively.

     Environmental Remediation Costs.  The Company accrues environmental
remediation costs based on estimates of known environmental remediation
exposure. Such accruals are recorded when the cost of remediation is probable
and estimable, even if significant uncertainties exist over the ultimate cost of
the remediation. Ongoing environmental compliance costs, including maintenance
and monitoring costs, are expensed as incurred.

     Revenue Recognition.  Revenues from significant contracts (NATCO contracts
greater than $250,000 and longer than four months in duration and all TEST
contracts and orders) are recognized on the percentage of completion method.
Earned revenue is based on the percentage that incurred costs to date bear to
total estimated costs after giving effect to the most recent estimates of total
cost. The cumulative impact of revisions in total cost estimates during the
progress of work is reflected in the year in which the changes become known.
Earned revenue reflects the original contract price adjusted for agreed claims
and change order revenues, if any. Losses expected to be incurred on jobs in
progress, after consideration of estimated minimum recoveries from claims and
change orders, are charged to income as soon as such losses are known. Customers
typically retain an interest in uncompleted projects. Other revenues and related
costs are recognized when products are shipped or services are rendered to the
customer.

     Stock-Based Compensation.  Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25 and provide pro forma net income and earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provision of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.

     Research and Development.  Research and development costs are charged to
operations in the year incurred. The cost of equipment used in research and
development activities, which has alternative uses, is capitalized as equipment
and not treated as an expense of the period. Such equipment is depreciated over
estimated lives of 5 to 10 years. Research and development expenses totaled $1.8
million, $1.9 million and

                                        37
<PAGE>   38

$1.0 million for the years ended December 31, 2000 and 1999, and for the nine
months ended December 31, 1998, respectively.

     Warranty Costs.  Estimated future warranty obligations related to products
are charged to cost of goods sold in the period in which the related revenue is
recognized. Additionally, the Company provides some of its customers with
letters of credit covering potential warranty claims. At December 31, 2000 and
December 31, 1999, the Company had $931,000 and $1.8 million, respectively, in
outstanding letters of credit related to warranties.

     Income Taxes.  Deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the future generation of taxable income during the periods in
which those temporary differences become deductible. Management has considered
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment.

     Translation of Foreign Currencies.  Financial statement amounts related to
foreign operations are translated into their United States dollar equivalents at
exchange rates as follows: (1) balance sheet accounts at year-end exchange
rates, and (2) statement of operations accounts at the weighted average exchange
rate for the period. The gains or losses resulting from such translations are
deferred and included in accumulated other comprehensive loss as a separate
component of stockholders' equity. Gains or losses from foreign currency
transactions are reflected in the consolidated statements of operations.

     Use of Estimates.  The Company's management has made estimates and
assumptions relating to the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities and the amounts of revenues and
expenses recognized during the period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

     Earnings per Common Share.  Basic earnings per share excludes the dilutive
effect of common stock equivalents. The diluted earnings per common and common
equivalent share are computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding. For the purposes of
this calculation, outstanding employee stock options are considered common stock
equivalents. In conformity with Securities and Exchange Commission requirements,
common stock, options and warrants, or other potentially dilutive instruments
which have been issued for nominal consideration during the periods covered by
the income statements presented, are reflected in earnings per share
calculations for all periods presented. Anti-dilutive stock options were
excluded from the calculation of common stock equivalents. The impact of these
anti-dilutive shares would have been a reduction of 36,000 shares for the year
ended December 31, 2000. There were no anti-dilutive stock options for the year
ended December 31, 1999 and the nine months ended December 31, 1998.

                                        38
<PAGE>   39

     The following table presents earnings per common share amounts computed
using SFAS 128:

<TABLE>
<CAPTION>
                                                                  NET                 PER SHARE
    PERIOD ENDED                                                 INCOME    SHARES      AMOUNTS
    ------------                                                 ------    -------    ---------
                                                                  (IN THOUSANDS, EXCEPT SHARE
                                                                     AND PER SHARE AMOUNTS)
    <S>                                                          <C>       <C>        <C>
    Nine months ended December 31, 1998
    Basic EPS................................................    $  652      8,243      $0.08
    Effect of dilutive securities:
    Options..................................................        --        699      (0.01)
                                                                 ------    -------      -----
    Diluted EPS..............................................    $  652      8,942      $0.07
                                                                 ======    =======      =====
    Year ended December 31, 1999
    Basic EPS................................................    $  641      9,302      $0.07
    Effect of dilutive securities
    Options..................................................        --        651      (0.01)
                                                                 ------    -------      -----
    Diluted EPS..............................................    $  641      9,953      $0.06
                                                                 ======    =======      =====
    Year ended December 31, 2000
    Basic EPS................................................    $7,671     14,653      $0.52
    Effect of dilutive securities
    Options..................................................        --        505      (0.01)
                                                                 ------    -------      -----
    Diluted EPS..............................................    $7,671     15,158      $0.51
                                                                 ======    =======      =====
</TABLE>

(3) CAPITAL STOCK

     On November 18, 1998, the Company's charter was amended to divide its
common stock into two classes: Class A common stock (45,000,000 shares) and
Class B common stock (5,000,000 shares). The two classes of common stock have
the same relative rights and preferences except the holders of the Class B
common stock have the right, voting separately as a class, to elect one member
of the Company's board of directors. Class B shares may be converted by the
holder to Class A shares at any time, and will automatically convert to Class A
shares on January 1, 2002.

     On January 27, 2000, the Company completed an initial public offering of
7,500,000 shares of Class A common stock at a price of $10.00 per share
(4,053,807 shares issued by the Company and 3,446,193 shares issued by selling
stockholders). The proceeds to the Company, less underwriting fees, were $37.7
million. These funds were used to retire debt of $27.9 million under the term
loan facility, to repay borrowings of $3.0 million under the revolving credit
facility used to acquire Porta-Test, to retire $2.2 million of Porta-Test debt
acquired, to pay offering costs of $1.5 million and to fund other working
capital needs. On February 3, 2000, the underwriter exercised its over-allotment
option, which resulted in the issuance of 1,125,000 additional shares of Class A
common stock and proceeds of $10.5 million, net of underwriter's fees. Proceeds
from the over-allotment were used to complete the acquisition of MPE including
the repayment of $685,000 of debt acquired, and for other working capital needs.

     During 1997, the Company provided a loan of $1.5 million (at an interest
rate of 10% per annum) to a director of the Company who is also an affiliate of
Capricorn Holdings, Inc. ("Capricorn"). In March 1998, the related promissory
note was amended to change the interest rate to 11% per annum. The principal was
to be due on the date on which Capricorn distributed its holdings of NATCO's
common stock to its partners. During 1998, the Company acquired an option at a
cost of approximately $200,000 to purchase 173,050 shares of NATCO's common
stock from the director at a price of $8.81 per share. At the Company's option,
the note provided that the obligation could be repaid with shares of NATCO's
common stock. The cost to acquire this option was recorded as treasury stock in
the accompanying consolidated balance sheets. During February 2000, the Company
exercised its option to acquire 173,050 shares of NATCO's Class A common stock
from the director for $1.5 million, which reduced the note due from the director
by this amount. The shares were

                                        39
<PAGE>   40

recorded as treasury stock at cost in the accompanying consolidated balance
sheet. The balance of the note due from the director was repaid in June 2000.

     In September 1999 and June 2000, 325,836 Class B shares and 418,145 Class B
shares, respectively, were issued to the former shareholders of The Cynara
Company ("Cynara"), in connection with the achievement of certain performance
criteria defined in the November 1998 purchase agreement. Goodwill was increased
$3.4 million in 1999 and $4.1 million in 2000, as a result of these
transactions.

     In October 2000, the Company's board of directors approved a stock
repurchase plan under which up to 750,000 shares of the Company's Class A common
stock could be acquired. During November 2000, the Company reacquired 34,000
shares of its Class A common stock under this repurchase plan for $242,000, an
average cost of $7 per share. The cost to reacquire these shares has been
recorded as treasury stock at December 31, 2000.

(4) ACQUISITIONS

     On November 20, 1998, the Company completed the acquisition of Cynara from
a group of private investors for $5.3 million in cash, the assumption of $10.1
million in Cynara bank debt, and the issuance of 500,000 shares of NATCO Class B
common stock valued at $5.3 million. The purchase agreement also stipulated that
NATCO may be required to issue up to an additional 1,400,000 shares of Class B
common stock to Cynara's former shareholders based on certain performance
criteria defined in the purchase agreement. The Company issued 325,836 Class B
shares and 418,145 Class B shares in September 1999 and June 2000, respectively,
as per this agreement, which resulted in an increase in goodwill. See Note 3,
Capital Stock. The funds used for the acquisition of Cynara were provided by
$5.3 million of equity and proceeds of borrowings from a senior credit facility
provided by a syndicate of major international banks. The acquisition was
accounted for as a purchase and the results of Cynara have been included in the
consolidated financial statements since the date of acquisition. Goodwill at
December 31, 2000 and 1999 was $17.6 million and $13.5 million, respectively.
Accumulated amortization was $1.4 million and $577,000 for the respective
periods.

     The Company acquired all the outstanding common stock of Porta-Test on
January 24, 2000, for approximately $6.3 million in cash, net of cash acquired,
which included payment of specific accrued liabilities of the former company and
the purchase of certain proprietary intellectual property of an associated U.S.
company, the issuance of a one-year promissory note for $1.0 million denominated
in Canadian dollars and a payment contingent upon certain operating criteria
being met. See Note 19, Commitments and Contingencies. This acquisition has been
accounted for using the purchase method of accounting, and results of operations
for Porta-Test have been included in NATCO's consolidated financial statements
since the date of acquisition. The excess of the purchase price over the fair
values of the net assets acquired is being amortized over a twenty-year period.
Goodwill and accumulated amortization related to the Porta-Test acquisition were
$5.7 million and $277,000, respectively, at December 31, 2000.

     The Company acquired all the outstanding common stock of MPE on February 8,
2000, for approximately $2.4 million in cash, net of cash acquired, and the
issuance of a one-year promissory note for $338,000, which accrues interest at
10% per annum. This acquisition has been accounted for using the purchase method
of accounting, and results of operations for MPE have been included in NATCO's
consolidated financial statements since the date of acquisition. The excess of
the purchase price over the fair values of the net assets acquired is being
amortized over a twenty-year period. Goodwill and accumulated amortization
related to the MPE acquisition were $3.4 million and $169,000, respectively, at
December 31, 2000.

     The Company acquired all the outstanding common stock of ESI on April 4,
2000 for approximately $7.1 million, net of cash and cash equivalents acquired,
subject to adjustment. This acquisition, which was financed with borrowings of
$7.1 million under the existing revolving credit facility and borrowings of $2.6
million under the existing export sales facility, was accounted for using the
purchase method of accounting, and results of operations for ESI have been
included in NATCO's consolidated financial statements since the date of
acquisition. The final purchase price adjustment had not been determined as of
December 31, 2000. The excess of the purchase price over the fair values of the
net assets acquired is being
                                        40
<PAGE>   41

amortized over a twenty-year period. Goodwill and accumulated amortization
related to the ESI acquisition were $6.0 million and $212,000, respectively, at
December 31, 2000.

(5) UNUSUAL CHARGES

     Pursuant to an employment agreement, an executive officer was entitled to a
bonus upon the occurrence of any sale or public offering of the Company. The
bonus equaled one and one-half percent (1.5%) of the value of all securities
owned by stockholders of the Company prior to the sale or offering, including
common stock valued at the price per share received in either the sale or public
offering, and any debt held by such stockholders. In July 1999, the Company
amended the employment agreement to eliminate the bonus and agreed to loan the
officer $1.2 million to purchase 136,832 shares of common stock. Per the
agreement, the officer would receive a bonus equal to the outstanding principal
and interest of the note upon the sale or public offering of the Company. During
February 2000, after the Company completed an initial public offering of its
Class A common stock, NATCO recorded expense of $1.3 million in settlement of
its obligation under this agreement. The officer used the proceeds, net of tax,
to repay the Company approximately $665,000. The outstanding balance of this
note at December 31, 2000, was $616,000. The loan accrues interest at 6%
annually.

     During the first quarter of 2000, NATCO incurred relocation charges of
approximately $208,000 associated with the consolidation of an existing Company
facility with a facility that was acquired in connection with the acquisition of
Porta-Test.

(6) INVENTORIES

     Inventories consisted of the following amounts:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,    DECEMBER 31,
                                                                        2000            1999
                                                                    ------------    ------------
                                                                           (IN THOUSANDS)
    <S>                                                             <C>             <C>
    Finished goods..............................................      $ 7,641         $ 6,828
    Work-in-process.............................................       10,403           4,745
    Raw materials and supplies..................................       11,203           9,106
                                                                      -------         -------
    Inventories at FIFO.........................................       29,247          20,679
    Excess of FIFO over LIFO cost...............................         (570)           (265)
                                                                      -------         -------
                                                                      $28,677         $20,414
                                                                      =======         =======
</TABLE>

     At December 31, 2000 and December 31, 1999, inventories valued using the
LIFO method and included above amounted to $22.3 million and $14.6 million,
respectively. For the year ended December 31, 1999, liquidations of LIFO layers
resulted in a reduction of cost of sales of $21,000. There were no reductions in
the LIFO layers for the year ended December 31, 2000 and the nine months ended
December 31, 1998.

                                        41
<PAGE>   42

(7) COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

     Cost and estimated earnings on uncompleted contracts were as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,    DECEMBER 31,
                                                                        2000            1999
                                                                    ------------    ------------
                                                                           (IN THOUSANDS)
    <S>                                                             <C>             <C>
    Cost incurred on uncompleted contracts......................      $67,477         $47,533
    Estimated earnings..........................................       34,475          15,625
                                                                      -------         -------
                                                                      101,952          63,158
    Less billings to date.......................................       91,301          64,656
                                                                      -------         -------
                                                                      $10,651         $(1,498)
                                                                      =======         =======
    Included in accompanying balance sheets under the following
      captions:
      Trade accounts receivable.................................      $10,651         $   866
      Customer advances.........................................           --          (2,364)
                                                                      -------         -------
                                                                      $10,651         $(1,498)
                                                                      =======         =======
</TABLE>

(8) PROPERTY, PLANT AND EQUIPMENT, NET

     The components of property, plant and equipment, were as follows:

<TABLE>
<CAPTION>
                                                        ESTIMATED
                                                          USEFUL         DECEMBER 31,    DECEMBER 31,
                                                      LIVES (YEARS)          2000            1999
                                                     ----------------    ------------    ------------
                                                                                (IN THOUSANDS)
    <S>                                              <C>                 <C>             <C>
    Land and improvements........................              --          $  1,789        $  1,666
    Buildings and improvements...................        20 to 40            10,458           6,995
    Machinery and equipment......................         3 to 12            22,432          19,004
    Office furniture and equipment...............         3 to 12             4,331           3,409
    Less accumulated depreciation................                           (15,580)        (13,268)
                                                                           --------        --------
                                                                           $ 23,430        $ 17,806
                                                                           ========        ========
</TABLE>

     Depreciation expense was $3.1 million, $3.7 million and $1.3 million,
respectively, for the years ended December 31, 2000 and 1999, and for the nine
months ended December 31, 1998. The Company leases certain machinery and
equipment to its customers, generally for periods of one month to one year. The
cost of leased machinery and equipment was $5.1 million and $3.0 million, and
the related accumulated depreciation was $3.4 million and $2.2 million, at
December 31, 2000 and 1999, respectively. Lease and rental income of $581,000,
$450,000 and $536,000 for the years ended December 31, 2000 and 1999, and the
nine months ended December 31, 1998, respectively, were included in revenues.

(9) OTHER ASSETS, NET

     Other assets consisted of the following:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,    DECEMBER 31,
                                                                        2000            1999
                                                                    ------------    ------------
                                                                           (IN THOUSANDS)
    <S>                                                             <C>             <C>
    Deferred financing costs....................................       $  433          $  656
    Deferred costs of public offering...........................           --             572
    Covenants not to compete....................................          273             542
    Prepaid pension asset.......................................          187             206
    Other.......................................................          380             218
                                                                       ------          ------
                                                                       $1,273          $2,194
                                                                       ======          ======
</TABLE>

                                        42
<PAGE>   43

     Deferred financing costs are amortized over the life of the related debt
instruments (three and five years). Accumulated amortization was $552,000 and
$294,000 at December 31, 2000 and 1999, respectively.

(10) ACCRUED EXPENSES AND OTHER

     Accrued expense and other consisted of the following:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,    DECEMBER 31,
                                                                        2000            1999
                                                                    ------------    ------------
                                                                           (IN THOUSANDS)
    <S>                                                             <C>             <C>
    Accrued compensation and benefits...........................      $ 7,683         $ 7,509
    Accrued insurance reserves..................................        1,012             502
    Warranty and product reserves...............................          900           1,251
    Taxes.......................................................          700             425
    Other.......................................................        1,803           1,213
                                                                      -------         -------
         Total..................................................      $12,098         $10,900
                                                                      =======         =======
</TABLE>

     During the nine months ended December 31, 1998, the Company revised its
previous estimate of accrued insurance reserves resulting in a reduction of
insurance expense of $1.2 million.

(11) SHORT-TERM DEBT

     In conjunction with the purchase of Porta-Test in January 2000, the Company
issued a one-year promissory note for $1 million denominated in Canadian
dollars, which accrues interest at 15% per annum. The note is payable, along
with accrued interest, on January 24, 2001.

     During February 2000, the Company issued a one-year promissory note, face
value of $338,000, with interest payable per annum at 10%, in conjunction with
the acquisition of MPE. This note is payable, along with accrued interest, on
February 8, 2001.

(12) LONG-TERM DEBT

     The consolidated borrowings of the Company are as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,    DECEMBER 31,
                                                                        2000            1999
                                                                    ------------    ------------
                                                                           (IN THOUSANDS)
    <S>                                                             <C>             <C>
    BANK DEBT
    Term loan with variable interest rate (8.98% at December 31,
      1999) and quarterly payments of principal ($1,161) and
      interest, due November 30, 2003...........................           --          27,858
    Revolving credit bank loans with variable interest rate
      (8.58% and 8.04% at December 31, 2000 and 1999,
      respectively) quarterly payment of interest, due January
      1, 2003...................................................       14,959           3,322
                                                                      -------         -------
         Total..................................................       14,959          31,180
         Less current installments..............................           --          (4,643)
                                                                      -------         -------
         Long-term debt.........................................      $14,959         $26,537
                                                                      =======         =======
</TABLE>

     For the next five years ended December 31, the aggregate future maturities
of long-term debt of $15.0 million are due in 2003. No annual future maturities
are due in 2001, 2002, 2004 or 2005.

     On November 20, 1998, a revolving credit and term loan facility was put
into place with a syndicate of major international banks. The credit facility
provides for a $32.0 million revolving credit line ($22.0 million available in
the U.S., $10.0 million available in Canada) to finance eligible accounts
receivable and inventories, and a $32.5 million term loan. Indebtedness under
the credit facility bears interest at a floating

                                        43
<PAGE>   44

rate based, at the Company's option, upon (i) the Base Rate, or Canadian prime
rate with respect to Base Rate Loans, plus the Margin Percentage or (ii) the
London Interbank Offered Rate for one, two, three or six months, plus the Margin
Percentage. The Margin Percentage for Base Rate and Canadian prime rate loans
varies from 1.00% to 0.00% depending on the Company's debt to capitalization
ratio; and the Margin Percentage for Eurodollar loans varies from 2.50% to 1.00%
depending on the Company's debt to capitalization ratio. The term borrowings
mature on November 30, 2003. During October 2000, the Company amended the
revolving credit and term loan facility to extend the maturity date of the
revolving credit facility to January 1, 2003. These agreements contain
affirmative covenants including financial requirements related to minimum net
worth, debt to capitalization ratio, and fixed charge coverage ratio, as well as
restrictions on NATCO making any distributions of any property or cash to the
Company in excess of an agreed sum without prior lender approval, and requires
commitment fees in accordance with standard banking practices. The loan is
collateralized by substantially all the assets of the Company and its
subsidiaries, as well as a guarantee by the Company. As of December 31, 2000,
the Company was in compliance with all restrictive covenants. NATCO had letters
of credit outstanding under the revolving credit facility totaling $2.1 million
at December 31, 2000. These letters of credit constitute contract performance
and warranty collateral and expire at various dates through September 2002.

     The Company maintains a working capital facility for export sales that
provides for aggregate borrowings of $10.0 million, subject to borrowing base
limitations, of which no borrowings were outstanding as of December 31, 2000.
The Company had issued letters of credit under this facility that totaled $7.2
million as of December 31, 2000. The export sales credit facility is secured by
specific project inventory and receivables, and is partially guaranteed by the
EXIM Bank. The export sales credit facility loans mature in July 2003.

     During the first quarter of 2000, NATCO retired all outstanding debt under
the term loan facility utilizing the proceeds from the initial public offering
of the Company's Class A common stock. In addition, the Company borrowed $3.0
million under the revolving credit facility to finance the acquisition of
Porta-Test, which was repaid during February 2000. The Company borrowed $7.1
million under the revolving credit facility and $2.6 million under the facility
for export sales during April 2000 to finance the purchase of ESI. In August
2000, the Company retired all outstanding borrowings under the export sales
facility. Net borrowings under the revolving credit facility for the year ended
December 31, 2000 were $11.6 million.

     Dividend Restrictions.  With respect to its credit facilities, NATCO has
agreed that it will not make any distributions of any property or cash to the
Company or its stockholders' in excess of $2.0 million for 1999, and $2.2
million for any year thereafter, plus 50% of excess cash flow beginning in 2001.

                                        44
<PAGE>   45

(13) INCOME TAXES

     Income tax expense (benefit) consisted of the following components:

<TABLE>
<CAPTION>
                                                            YEAR            YEAR        NINE MONTHS
                                                           ENDED           ENDED           ENDED
                                                        DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                            2000            1999            1998
                                                        ------------    ------------    ------------
                                                                       (IN THOUSANDS)
    <S>                                                 <C>             <C>             <C>
    Current:
      Federal.......................................       $2,569          $   --          $  --
      State.........................................          206             240            129
      Foreign.......................................          959             201            495
                                                           ------          ------          -----
                                                            3,734             441            624
                                                           ------          ------          -----
    Deferred:
      Federal.......................................        1,279             912             77
      State.........................................          167             104             36
      Foreign.......................................          165              91           (129)
                                                           ------          ------          -----
                                                            1,611           1,107            (16)
                                                           ------          ------          -----
                                                           $5,345          $1,548          $ 608
                                                           ======          ======          =====
</TABLE>

     Temporary differences related to the following items that give rise to
deferred tax assets and liabilities were as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,    DECEMBER 31,
                                                                        2000            1999
                                                                    ------------    ------------
                                                                           (IN THOUSANDS)
    <S>                                                             <C>             <C>
    Deferred tax assets:
      Postretirement benefit liability..........................       $5,324          $5,786
      Accrued liabilities.......................................        2,585           2,437
      Net operating loss carry forward..........................          559             699
      Accounts receivable.......................................          254             197
      Property, plant and equipment.............................           64              15
                                                                       ------          ------
         Total deferred tax assets..............................       $8,786          $9,134
                                                                       ------          ------
    Deferred tax liabilities:
      Inventory.................................................       $  871          $  934
      Property, plant and equipment.............................          692             118
      Pension assets............................................           69              88
                                                                       ------          ------
         Total deferred tax liabilities.........................        1,632           1,140
                                                                       ------          ------
         Net deferred tax assets................................       $7,154          $7,994
                                                                       ======          ======
</TABLE>

     At December 31, 2000 and 1999, the Company did not record a valuation
allowance related to its deferred tax assets because it was the opinion of
management that future operations will more likely than not generate sufficient
taxable income to realize the deferred tax assets. At December 31, 2000, the
company had net operating loss carry-forwards for federal income tax purposes of
$1.5 million that were available to offset future federal income tax, if any,
through 2020.

                                        45
<PAGE>   46

     Income tax expense differs from the amount computed by applying the U.S.
federal income tax rate of 34% to income from continuing operations before
income taxes as a result of the following:

<TABLE>
<CAPTION>
                                                                                        NINE MONTHS
                                                         YEAR ENDED      YEAR ENDED        ENDED
                                                        DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                            2000            1999            1998
                                                        ------------    ------------    ------------
                                                                       (IN THOUSANDS)
    <S>                                                 <C>             <C>             <C>
    Income tax expense computed at statutory rate...       $4,422          $  744           $428
    State income tax expense net of federal income
      tax effect....................................          303             262             87
    Foreign income tax expense (benefit) net of
      federal income tax effect.....................           75            (204)            31
    Foreign losses for which no tax benefit is
      currently available...........................          137              91             49
    Tax benefit of foreign losses not previously
      claimed.......................................           --             (39)           (79)
    Permanent differences, primarily meals and
      entertainment and amortization................          641             390            122
    Deferred state rate adjustment..................           --             235             --
    Research and development tax credit.............         (150)             --             --
    Other...........................................          (83)             69            (30)
                                                           ------          ------           ----
                                                           $5,345          $1,548           $608
                                                           ======          ======           ====
</TABLE>

     A provision has not been made for U.S. income taxes that would be payable
if undistributed earnings of foreign subsidiaries were distributed to the
Company in the form of dividends, since it is management's intention to reinvest
such earnings permanently in the related foreign operations. At December 31,
2000, 1999 and 1998, such amounts were not significant.

     Federal income tax returns for fiscal years beginning with 1998 are open
for review by the Internal Revenue Service.

(14) STOCKHOLDERS' EQUITY

     CEO Stock Options.  In connection with the employment of Nathaniel A.
Gregory as the chief executive officer of the Company, the Company granted to
him options to purchase National Tank Company common stock that were
subsequently converted to options to purchase common stock of the Company. At
December 31, 2000 and 1999, these options related to an aggregate of 264,363
shares and 880,104 shares, respectively, of the Company's common stock.

     Stock Appreciation Rights.  During 1994, NATCO adopted the National Tank
Company Stock Appreciation Rights Plan (the National Tank Plan). The National
Tank Plan provided for grants to officers and key employees of NATCO of rights
to the appreciation in value of a stated number of shares of NATCO common stock.
Value was to be determined by a committee of the NATCO board of directors. The
maximum number of rights issuable under the National Tank Plan was 500,000.
Rights vested over a three-year period. Compensation expense has been adjusted
in connection with the plan for the nine months ended December 31, 1998 to
reflect expense of $23,000.

     Individual Stock Options.  On July 1, 1997, the board of directors of the
Company approved the exchange of rights outstanding under the National Tank
Plan, discussed previously, for individual options to purchase common stock of
the Company. Furthermore, additional stock options were granted at that time.
The exercise price of these options was determined as the fair market value of
the common stock at the date of issue. Accordingly, no compensation expense was
recorded associated with these grants. The individual stock options granted on
July 1, 1997 vested ratably over a period of three or four years. The maximum
term of these options was 7.5 years. At December 31, 2000, an aggregate of
764,204 stock options remained outstanding under this plan.

                                        46
<PAGE>   47

     Stock Option Plans.  In January 1998 and February 1998, the Company adopted
the Directors Compensation Plan and the Employee Stock Incentive Plan. These
plans authorize the issuance of options to purchase up to an aggregate of
760,000 shares of Company common stock. The options vest over periods of up to
four years. The maximum term under these options is ten years. At December 31,
2000, 1999 and 1998, options relating to an aggregate of 743,953 shares, 455,085
shares and 464,672 shares, respectively, were outstanding under these plans.

     2000 Employee Stock Option Plan.  In November 2000, the board of directors
of the Company approved and authorized the issuance of up to 300,000 shares of
the Company's common stock for the 2000 Employee Stock Option Plan. No options
were granted under this plan as of December 31, 2000.

     The following table summarizes the transactions of the Company's stock
option plans for the years ended December 31, 2000 and 1999 and the nine months
ended December 31, 1998:

<TABLE>
<CAPTION>
                                                                                        WEIGHTED
                                                                    STOCK OPTIONS       AVERAGE
                                                                       SHARES        EXERCISE PRICE
                                                                    -------------    --------------
    <S>                                                             <C>              <C>
    Balance at March 31, 1998...................................      1,555,115          $2.75
      Granted...................................................        262,751          $8.81
      Exercised.................................................        (38,333)         $8.81
      Canceled..................................................        (19,752)         $6.71
                                                                      ---------          -----
    Balance at December 31, 1998................................      1,759,781          $3.48
      Granted...................................................        194,167          $9.25
      Exercised.................................................       (143,334)         $1.51
      Canceled..................................................        (15,417)         $7.58
                                                                      ---------          -----
    Balance at December 31, 1999................................      1,795,197          $4.35
      Granted...................................................        411,035          $9.14
      Exercised.................................................       (674,240)         $2.09
      Canceled..................................................        (23,835)         $8.39
                                                                      ---------          -----
    Balance at December 31, 2000................................      1,508,157          $6.83
    Price range $1.47 -- $2.22 (weighted average remaining
      contractual life of 1.20 years)...........................        286,504          $1.60
    Price $5.03 (weighted average remaining contractual life of
      5.09 years)...............................................        377,700          $5.03
    Price range $8.00 -- $11.69 (weighted average remaining
      contractual life of 8.39 years)...........................        843,953          $9.41
</TABLE>

<TABLE>
<CAPTION>
                                                                                        WEIGHTED
                                                                    STOCK OPTIONS       AVERAGE
    EXERCISABLE OPTIONS                                                SHARES        EXERCISE PRICE
    -------------------                                             -------------    --------------
    <S>                                                             <C>              <C>
    December 31, 1998...........................................      1,379,638          $2.69
    December 31, 1999...........................................      1,382,858          $3.24
    December 31, 2000...........................................        840,969          $4.95
</TABLE>

     Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined by applying the Black-Scholes
Single Option -- Reduced Term valuation method. This valuation model requires
management to make highly subjective assumptions about volatility of NATCO's
common stock, the expected term of outstanding stock options, the Company's
risk-free interest rate and expected dividend payments during the contractual
life of the options. Volatility of stock prices was evaluated based upon
historical data from the New York Stock Exchange from the date of the initial
public offering, January 28, 2000, to February 28, 2001. Volatility was
calculated at 59% for the year ended December 31, 2000, but was stepped-down by
10% per year for the next five years to reflect expected stabilization. The

                                        47
<PAGE>   48

following table summarizes other assumptions used to determine pro forma
compensation expense under SFAS 123 as of December 31, 2000:

<TABLE>
<CAPTION>
    DATE OF GRANT          NUMBER OF OPTIONS   EXPECTED OPTION LIFE   RISK-FREE RATE
    -------------          -----------------   --------------------   --------------
    <S>                    <C>                 <C>                    <C>
    Pre-IPO                     952,038         7 to 7.5 years        5.97% - 6.97%
    Pre-IPO                     374,619             5 years           5.29% - 6.31%
    Post-IPO                     60,000             7 years           6.40% - 6.65%
    Post-IPO                    121,500            3.5 years          5.85% - 6.40%
</TABLE>

     Risk-free rates were determined based upon U.S. Treasury obligations as of
the option date and outstanding for a similar term. The Company does not intend
to pay dividends on its common stock during the term of the options outstanding
as of December 31, 2000.

     For the year ended December 31, 1999 and the nine months ended December 31,
1998, the Company accounted for its employee stock options under the minimum
value method permitted by SFAS 123 under the assumptions of a risk free rate of
5.5% and an expected life of options of 10 years for options issued after March
31, 1998. For options issued prior to March 31, 1998, the risk free rate of
return used was 7% and the expected life used was 7.5 years.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share for the years ended December 31,
2000 and 1999, and the nine months ended December 31, 1998 were as follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED      YEAR ENDED     NINE MONTHS ENDED
                                                   DECEMBER 31,    DECEMBER 31,      DECEMBER 31,
                                                       2000            1999              1998
                                                   ------------    ------------    -----------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
    <S>                                            <C>             <C>             <C>
    Net earnings--as reported..................       $7,671          $ 641              $ 652
    Net earnings--pro forma....................       $7,106          $ 276              $ 495
    Diluted earnings per share--as reported....       $ 0.51          $0.06              $0.07
    Diluted earnings per share--pro forma......       $ 0.47          $0.03              $0.06
</TABLE>

     Because SFAS 123 requires pro forma amounts for options granted beginning
in 1995, the pro forma expense will likely increase in future years as the new
option grants become subject to the pricing model.

Preferred Stock Purchase Rights

     In May 1998, the board of directors of the Company declared a dividend of
one preferred share purchase right ("right") for each outstanding share of
common stock and for each share of common stock thereafter issued prior to the
time the rights become exercisable. When the rights become exercisable, each
right will entitle the holder to purchase one one-hundredth of one share of
Series A Junior Participating Preferred Stock at a price of $72.50 in cash.
Until the rights become exercisable, they will be evidenced by the certificates
or ownership of NATCO's common stock, and they will not be transferable apart
from the common stock.

     The rights will become exercisable following the tenth day after a person
or group announces acquisition of 15% or more of the Company's common stock or
announces commencement of a tender offer, the consummation of which would result
in ownership by the person or group of 15% or more of the Company's common
stock. If a person or group were to acquire 15% or more of the Company's common
stock, each right would become a right to buy that number of shares of common
stock that would have a market value of two times the exercise price of the
right. Rights beneficially owned by the acquiring person or group would,
however, become void.

     At any time prior to the time the rights become exercisable, the board of
directors may redeem the rights at a price of $0.01 per right. At any time after
the acquisition by a person or group of 15% or more but less than 50% of the
common stock, the board may redeem all or part of the rights by issuing common
stock in exchange for them at the rate of one share of common stock for each two
shares of common stock for which each right is then exercisable. The rights will
expire on May 15, 2008 unless previously extended or redeemed.

                                        48
<PAGE>   49

(15) CHANGE IN ACCOUNTING PRINCIPLE

     Effective January 1, 2000, NATCO recorded the cumulative effect of a change
in accounting principle related to gains and losses on postretirement benefit
obligation. In prior years, gains and losses that resulted from experience or
assumption changes were recorded as a charge to current income in the period of
the change. In order to reduce volatility of earnings associated with these
gains or losses and as permitted under SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," NATCO revised its method of
accounting for these gains and losses to amortize the net gain or loss that
exceeds 10% of the Company's adjusted postretirement benefit obligation over the
remaining life expectancy of the plan participants. A gain of $10,000, net of
tax, was recorded in the consolidated statement of income for the year ended
December 31, 2000, as a result of this change in accounting principle. The pro
forma impact on earnings of this change for the year ended December 31, 1999 and
the nine months ended December 31, 1998 was a reduction of $598,000 and an
increase of $31,000, respectively. See Note 16, Pension and Other Postretirement
Benefits.

(16) PENSION AND OTHER POSTRETIREMENT BENEFITS

     The Company has adopted SFAS 132, which revised disclosures about pension
and other postretirement benefit plans. Disclosures regarding pension benefits
represent the plan for certain union employees of a foreign subsidiary.
Disclosures regarding postretirement benefits represent health care and life
insurance benefits for employees who were retired at the time the Company was
acquired from C-E.

     In December 1999, the Company entered into an agreement with Tyler and
Capricorn I, through which the Company assumed responsibility for the retired
employee health and life insurance obligations of Tyler. The liability accrued
with respect to these obligations as determined by an independent actuarial
firm, was $1.1 million. In consideration of this agreement, Tyler paid the
Company $475,000 in cash and assigned a portion of the federal income tax refund
due to Tyler in the amount of approximately $600,000. Tyler remitted $600,000 in
January 2000 as settlement of this arrangement.

     In December 2000, NATCO changed the method used to record gains and losses
on its postretirement benefit obligation, which resulted in a gain of $10,000,
net of tax, for the year ended December 31, 2000, and an unrecognized loss of
$1.5 million. See Note 15, Change in Accounting Principle.

                                        49
<PAGE>   50

     The following table sets forth the plan's benefit obligation, fair value of
plan assets, and funded status at December 31, 2000 and 1999.

<TABLE>
<CAPTION>
                                              PENSION BENEFITS             POSTRETIREMENT BENEFITS
                                        ----------------------------    ------------------------------
                                        DECEMBER 31,    DECEMBER 31,    DECEMBER 31,     DECEMBER 31,
                                            2000            1999            2000             1999
                                        ------------    ------------    -------------    -------------
                                                                (IN THOUSANDS)
    <S>                                 <C>             <C>             <C>              <C>
    CHANGE IN BENEFIT OBLIGATION
    Benefit obligation at beginning
      of the period.................        $604            $527         $    15,853      $    15,587
    Cumulative effect of change in
      accounting principle..........          --              --                 (17)              --
    Service cost....................          42              36                  --               --
    Interest cost...................          47              42               1,287            1,048
    Participant contributions.......          --              --                 127              121
    Actuarial (gain) loss...........         (33)             (4)                 --           (1,016)
    Foreign currency exchange rate
      differences...................         (23)             31                  --               --
    Contribution from former plan
      holder........................          --              --                  --              410
    Liability assumed from related
      party.........................          --              --                  --            1,000
    Benefit payments................         (27)            (28)             (2,661)          (1,297)
                                            ----            ----         -----------      -----------
    Benefit obligation at end of
      period........................        $610            $604         $    14,589      $    15,853
                                            ====            ====         ===========      ===========
    CHANGE IN FAIR VALUE OF PLAN
      ASSETS
    Fair value of plan assets at
      beginning of period...........        $674            $617         $        --      $        --
    Actual return on plan assets....          48              46                  --               --
    Foreign currency exchange rate
      differences...................          37              39                  --               --
    Employer contributions..........          --              --               2,534              766
    Participant contributions.......          --        --......                 127              121
    Contribution from former plan
      holder........................          --              --                  --              410
    Benefit payments................         (27)            (28)             (2,661)          (1,297)
                                            ----            ----         -----------      -----------
    Fair value of plan assets at end
      of period.....................         732             674                  --               --
                                            ----            ----         -----------      -----------
    Funded status...................         122              70             (16,064)         (15,853)
    Unrecognized loss...............          --              --               1,475               --
    Unrecognized experience gain....          89             151                  --               --
                                            ----            ----         -----------      -----------
    Prepaid (accrued) benefit
      cost..........................        $211            $221         $   (14,589)     $   (15,853)
                                            ====            ====         ===========      ===========
</TABLE>

                                        50
<PAGE>   51

<TABLE>
<CAPTION>
                                              PENSION BENEFITS             POSTRETIREMENT BENEFITS
                                        ----------------------------    ------------------------------
                                        DECEMBER 31,    DECEMBER 31,    DECEMBER 31,     DECEMBER 31,
                                            2000            1999            2000             1999
                                        ------------    ------------    -------------    -------------
                                                      (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                 <C>             <C>             <C>              <C>
    WEIGHTED AVERAGE ASSUMPTIONS
    Discount rate...................         7.0%            7.5%                7.5%             8.0%
    Expected return on plan
      assets........................         7.0%            7.5%                N/A              N/A
    Rate of compensation increase...         N/A             N/A                 N/A              N/A
    Health care trend rates.........          --              --           4.5%-6.75%       4.5%-7.25%
    COMPONENTS OF NET PERIODIC
      BENEFIT COST:
    Service cost....................        $ 42            $ 36         $        --      $        --
    Interest cost...................          47              42               1,287            1,048
    Recognized gains................         (38)            (41)                 --               --
                                            ----            ----         -----------      -----------
    Net periodic benefit cost.......        $ 51            $ 37         $     1,287      $     1,048
                                            ====            ====         ===========      ===========
                                                                        1% Increase      1% Increase
    Effect on interest cost
      component.....................                                     $        89      $        89
    Effect on the health care
      component of the accumulated
      postretirement benefit
      obligation....................                                     $     1,261      $     1,116
</TABLE>

     Deferred Compensation Plan.  TEST adopted a deferred compensation plan (the
"TEST Plan") effective July 1, 1995 to provide incentives and rewards to certain
individuals. Awards are payable in five equal annual installments plus any
earnings, which have been allocated to a participant's account. The Company has
elected not to make any additional awards for the plan year beginning January 1,
1998. As of December 31, 2000 and December 31, 1999, the total amounts owed
under the TEST Plan were $244,000 and $303,000 respectively. The balance
presently accrues interest at the prime rate plus 1%.

     Defined Contribution Plans.  The Company and its subsidiaries each have
defined contribution pension plans covering substantially all nonunion hourly
and salaried employees who have completed three months of service. Employee
contributions of up to 3% of each covered employee's compensation are matched
100% by the Company, with an additional 2% of covered employee's compensation
matched at 50%. In addition, the Company may make discretionary contributions as
profit sharing contributions. Company contributions to the plan totaled $1.4
million, $1.6 million and $1.9 million for the years ended December 31, 2000 and
1999, and the nine months ended December 31, 1998, respectively.

(17) OPERATING LEASES

     The Company and its subsidiaries lease various facilities and equipment
under non-cancelable operating lease agreements. These leases expire on various
dates through 2005. Future minimum lease payments required under operating
leases that have remaining non-cancelable lease terms in excess of one year at
December 31, 2000, were as follows: 2001 -- $2.9 million, 2002 -- $2.1 million,
2003 -- $444,000, 2004 -- $138,000, and 2005 -- $52,000. Total expense for
operating leases for the years ended December 31, 2000 and 1999, and for the
nine months ended December 31, 1998 was $4.4 million, $3.5 million and $2.3
million, respectively.

     For a discussion of lease and rental income, see Note 8, Property, Plant
and Equipment, net.

(18) RELATED PARTIES

     The Company paid a management fee to Capricorn Management for advisory
information, research and administrative services, which included office space
and parking in Connecticut for the Company's Chief Executive Officer, reception,
telephone, computer services and other normal office support relating to that

                                        51
<PAGE>   52

space. Fees paid to Capricorn Management totaled $75,000, $75,000 and $56,000,
for the years ended December 31, 2000 and 1999, and the nine months ended
December 31, 1998, respectively.

     Employees of Capricorn Management have participated in various NATCO
employee benefit plans and the Company has from time to time received billings
from vendors for services provided to Capricorn Management personnel acting for
the benefit of the Company. Capricorn Management reimburses the Company for the
foregoing expenses. At December 31, 1999, Capricorn Management owed the Company
$5,000 for these expenses. No receivable from Capricorn Management existed at
December 31, 2000.

     For the year ended December 31, 1999 and the nine months ended December 31,
1998, PTH paid $84,000 and $49,000, respectively to the Company for tax
consulting and analysis services. No receivable from PTH existed at December 31,
2000, as the tax consulting arrangement terminated during January 2000.

     During 1997, the Company loaned $1.5 million (at a rate of 10% per annum)
to a director of the Company who was also an affiliate of Capricorn. In March
1998, the related promissory note was amended to change the interest rate to 11%
per annum. The principal was due on the date on which Capricorn distributed its
holding of NATCO common stock to its partners. During 1998, NATCO acquired an
option at a cost of $200,000 to purchase 173,050 shares of its common stock from
the director at a price of $8.81 per share. At NATCO's option, the note could be
repaid with shares of the Company's common stock. The cost to acquire the option
was recorded as treasury stock in the accompanying consolidated balance sheet. A
note arrangement with a director, recorded as a $1.9 million current asset at
December 31, 1999, was partially settled during February 2000, when the Company
exercised an option to purchase 173,050 shares of its common stock from this
director at a cost of $1.5 million. The remaining balance of the note was repaid
during June 2000.

     Pursuant to an employment agreement, the Company lent an executive officer
$1.2 million in July 1999 to purchase 136,832 shares of common stock. During
February 2000, after the Company completed an initial public offering of its
Class A common stock, NATCO paid this executive officer a bonus equal to the
principal and interest accrued under this note arrangement and recorded
compensation expense of $1.3 million. The officer used the proceeds of this
settlement, net of tax, to repay the Company approximately $665,000. The
remaining loan balance accrues interest at 6% annually. In addition, on October
27, 2000, the Company's board of directors agreed to provide a full recourse
loan to this executive officer to facilitate the exercise of certain outstanding
stock options. This loan matures on July 31, 2003, and provides interest stated
at the Company's current borrowing rate, and principal equal to the cost to
exercise the options plus any personal tax burdens that result from the
exercise. As of December 31, 2000, the balance of the receivable and accrued
interest due from this officer under both loan arrangements was $1.9 million.
See Note 5, Unusual Charges.

     During December 1999, the Company assumed the postretirement pension
liability of a former affiliate, Tyler. In February 2000, the Company received
$600,000 from Tyler as settlement of an agreement entered into between Tyler,
Capricorn I and the Company, whereby the Company assumed responsibility for the
retired employee health and life insurance obligations of Tyler. See Note 16,
Pension and Other Postretirement Benefits.

(19) COMMITMENTS AND CONTINGENCIES

     In June 1997, the Company, in connection with a financing effected to
provide funds for the acquisition of TEST and other corporate purposes,
distributed all of the outstanding stock of PTH then owned by the Company to its
then sole stockholder, Capricorn. In connection with the distribution, the
Company received an opinion of counsel to the effect that the distribution would
be tax-free to both the Company and Capricorn. Tax-free treatment of the
distribution depends, in part, upon the underlying facts and circumstances at
the time of the distribution. There can be no assurance that the Internal
Revenue Service will agree with the interpretation of the Company and its
counsel of such facts and circumstances. If the Internal Revenue Service were to
challenge the tax-free treatment of the distribution and such challenge were
ultimately to prevail, the Company would be treated as recognizing gain with
respect to the distribution in an amount equal to the excess of the fair market
value of the PTH stock at the time of the distribution over its tax basis to the

                                        52
<PAGE>   53

Company. Such treatment could have a material adverse effect on the Company's
results of operations and financial condition.

     The Porta-Test purchase agreement, executed in January 2000, contains a
provision to calculate a payment to certain former stockholders of Porta-Test,
based upon sales of a limited number of specified products designed by or
utilizing technology that existed at the time of the acquisition. Liability
under this arrangement is contingent upon attaining certain performance
criteria, including gross margins and sales volumes for the specified products.
The potential payment will be calculated each year on the anniversary date of
the acquisition, extending for a three-year period ended January 24, 2003. As of
December 31, 2000, the Company has accrued approximately $253,000 related to its
obligation under this arrangement with a corresponding increase in goodwill. Any
future liabilities incurred under this arrangement will also result in an
increase in goodwill.

(20) CHANGE IN ACCOUNTING ESTIMATE

     During April 2000, the Company extended the service life of certain assets
based upon operational factors. The effect on net income and basic and diluted
earnings per share before the cumulative effect of a change in accounting
principle was an increase of $305,000 and $.02, respectively, for the year ended
December 31, 2000.

(21) LITIGATION

     The Company is a party to various routine legal proceedings. These
primarily involve commercial claims, products liability claims, asbestos related
personal injury claims and workers' compensation claims. We cannot predict the
outcome of these lawsuits, legal proceedings and claims with certainty.
Nevertheless, we believe that the outcome of all of these proceedings, even if
determined adversely, would not have a material adverse effect on our business
or financial condition.

(22) INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION

     The Company has adopted the provisions of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The Company's eight business
units have separate management teams and infrastructures that offer different
products and services. The business units have been aggregated into four
reportable segments (described below) since the long-term financial performance
of these reportable segments is affected by similar economic conditions.

     Traditional Production Equipment and Services:  U.S. Sales & Service is the
sole business unit reported in this segment. This unit designs, engineers,
manufactures, and provides start-up services for production equipment, which is
generally less complex than that provided by engineered systems. This segment
also provides replacement parts, field and shop servicing of equipment, and used
equipment refurbishing. The principal market for this segment is the U.S.
onshore and offshore market, but also serves the international market. Customers
include major multi-national, independent and national or state-owned companies.

     Engineered Systems:  This segment consists of five business units; U.S.
Engineered Systems, NTC Technical Services, NATCO Japan, NATCO Venezuela and
NATCO London, that provide design, engineering, manufacturing and start-up
services for engineered process systems. The principal markets for this segment
include all major oil and gas producing regions of the world including North
America, Latin America, Europe, Africa and the Far East. Customers include major
multi-national, independent and national or state-owned companies.

     Automation and Control Systems:  TEST is the sole business unit reported in
this segment. This unit designs, manufactures, installs and services
instrumentation and electrical control systems. The principal markets for this
segment include all major oil and gas producing regions of the world including
North America, Latin America, Europe, Kazakhstan, Africa and the Far East.
Customers include major multi-national, independent and national or state-owned
companies. This segment was formerly named instrumentation and electrical
systems.

                                        53
<PAGE>   54

     NATCO Canada:  This segment consists of our subsidiary in Canada. NATCO
Canada provides design, engineering, manufacturing and start-up services for
engineered process systems. It also provides replacement parts, field and shop
servicing of equipment and used equipment refurbishing. NATCO Canada has also
done selective manufacturing for the engineered systems segment in the past. The
principal markets for this segment are the oil and gas producing regions of
Canada. Customers include major multi-national and independent companies.

     The accounting policies of the reportable segments are the same as those
described in Note 2. The Company evaluates the performance of its operating
segments based on income before net interest expense, income taxes, depreciation
and amortization expense, accounting changes and nonrecurring items. Summarized
financial information concerning the Company's reportable segments is shown in
the following table.

     In July 2000, the Company changed its presentation of certain assets that
were acquired from The Cynara Company ("Cynara") in November 1998, and the
related operating results, for segment reporting purposes. The majority of the
assets were reclassified to the traditional production equipment and services
business segment from the engineered systems business segment. This change has
been retroactively reflected in all periods presented.

<TABLE>
<CAPTION>
                                  TRADITIONAL
                                  PRODUCTION                   AUTOMATION
                                  EQUIPMENT &    ENGINEERED    & CONTROL      NATCO     CORPORATE &
                                   SERVICES       SYSTEMS       SYSTEMS      CANADA     ELIMINATIONS    CONSOLIDATED
                                  -----------    ----------    ----------    -------    ------------    ------------
                                                                  (IN THOUSANDS)
    <S>                           <C>            <C>           <C>           <C>        <C>             <C>
    DECEMBER 31, 2000*
      Revenues from
        unaffiliated
        customers.............      $82,105       $67,535       $38,646      $36,266           --         $224,552
      Revenues from
        affiliates............        1,323           286         4,115       4,051       $(9,775)              --
      Segment profit (loss)...        4,916        13,978         4,184       2,716        (4,983)          20,811
      Total assets............       67,829        34,811        20,512      20,792         9,182          153,126
      Capital expenditures....        1,377         5,316           246         946           252            8,137
      Depreciation and
        amortization..........        2,265         1,460           526         700           160            5,111
    DECEMBER 31, 1999*
      Revenues from
        unaffiliated
        customers.............      $61,419       $50,792       $39,497      $18,240           --         $169,948
      Revenues from
        affiliates............        1,169         1,726         2,346       1,517       $(6,758)              --
      Segment profit (loss)...        3,412         5,357         4,577          48        (3,492)           9,902
      Total assets............       33,122        26,128        18,438      15,306        13,836          106,830
      Capital expenditures....        2,731           152           295         437           (22)           3,593
      Depreciation and
        amortization..........        2,594         1,095           545         320           127            4,681
    DECEMBER 31, 1998**
      Revenues from
        unaffiliated
        customers.............      $52,174       $33,186       $34,458      $25,793           --         $145,611
      Revenues from
        affiliates............          386         1,317         1,095       2,484       $(5,282)              --
      Segment profit (loss)...        3,220         1,311         3,944       2,425        (3,420)           7,480
      Total assets............       37,146        27,419        24,137      14,052        15,658          118,412
      Capital expenditures....          391           191           169         871            14            1,636
      Depreciation and
        amortization..........          512           219           445         187           110            1,473
</TABLE>

---------------
* Year then ended.

** Nine months then ended.

     The Company's geographic data for continuing operations for the years ended
December 31, 2000 and 1999, and the nine months ended December 31, 1998 were as
follows:

                                        54
<PAGE>   55

<TABLE>
<CAPTION>
                                             UNITED                UNITED                CORPORATE &
                                             STATES     CANADA     KINGDOM     OTHER     ELIMINATIONS    CONSOLIDATED
                                            --------    -------    -------    -------    ------------    ------------
                                                                         (IN THOUSANDS)
    <S>                                     <C>         <C>        <C>        <C>        <C>             <C>
    DECEMBER 31, 2000
      Revenues from unaffiliated
        customers.......................    $177,878    $36,266    $1,631     $ 8,777      $    --         $224,552
      Revenues from affiliates..........       5,724      4,051        --          --       (9,775)              --
                                            --------    -------    ------     -------      -------         --------
      Revenues..........................    $183,602    $40,317    $1,631     $ 8,777      $(9,775)        $224,552
                                            --------    -------    ------     -------      -------         --------
      Operating income (loss)...........    $ 22,167    $ 2,716    $ (166)    $ 1,077      $(4,983)        $ 20,811
      Total assets......................    $129,525    $20,792    $  295     $ 2,514      $    --         $153,126
    DECEMBER 31, 1999
      Revenues from unaffiliated
        customers.......................    $138,203    $18,240    $3,416     $10,089      $    --         $169,948
      Revenues from affiliates..........       4,697      1,517        53         491       (6,758)              --
                                            --------    -------    ------     -------      -------         --------
      Revenues..........................    $142,900    $19,757    $3,469     $10,580      $(6,758)        $169,948
                                            --------    -------    ------     -------      -------         --------
      Operating income (loss)...........    $ 12,408    $    59    $  228     $ 1,255      $(4,047)        $  9,903
      Total assets......................    $ 86,173    $15,306    $1,520     $ 3,831      $    --         $106,830
    DECEMBER 31, 1998
      Revenues from unaffiliated
        customers.......................    $113,396    $25,793    $2,152     $ 4,270      $    --         $145,611
      Revenues from affiliates..........       2,494      2,484        78         226       (5,282)              --
                                            --------    -------    ------     -------      -------         --------
      Revenues..........................    $115,890    $28,277    $2,230     $ 4,496      $(5,282)        $145,611
                                            --------    -------    ------     -------      -------         --------
      Operating income (loss)...........    $  3,328    $ 2,173    $ (505)    $   959      $(2,707)        $  3,248
      Total assets......................    $ 98,562    $14,052    $1,750     $ 4,048      $    --         $118,412
</TABLE>

     Corporate expenses consist of corporate overhead and research and
development expenses.

(23) QUARTERLY DATA

     The following tables summarize unaudited quarterly information for the
years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                        2000
                                               ------------------------------------------------------
                                                               FOR THE QUARTER ENDED
                                               MARCH 31,    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,
                                               ---------    --------    -------------    ------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
    <S>                                        <C>          <C>         <C>              <C>
    Revenues, net..........................     $51,855     $55,935        $60,244         $56,518
    Gross profit...........................      13,118      16,178         16,265          16,234
    Income before cumulative effect........     $   194     $ 2,471        $ 2,637         $ 2,359
                                                -------     -------        -------         -------
    Basic earnings per share(1)............     $  0.01     $  0.17        $  0.18         $  0.16
                                                -------     -------        -------         -------
    Fully diluted earnings per share(1)....     $  0.01     $  0.16        $  0.18         $  0.16
                                                -------     -------        -------         -------
<CAPTION>
                                                                        1999
                                               ------------------------------------------------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
    <S>                                        <C>          <C>         <C>              <C>
    Revenues, net..........................     $42,142     $44,019        $39,733         $44,054
    Gross profit...........................       9,119      11,203         10,670          11,347
    Net income (loss)......................     $  (214)    $   504        $   112         $   239
                                                -------     -------        -------         -------
    Basic earnings (loss) per share........     $ (0.02)    $  0.06        $  0.01         $  0.02
                                                -------     -------        -------         -------
    Fully diluted earnings (loss) per
      share................................     $ (0.02)    $  0.05        $  0.01         $  0.02
                                                -------     -------        -------         -------
</TABLE>

(24) OFFICE CLOSURE

     Prior to 1997, the Company began winding down the operations of NATCO U.K.
Ltd. These activities include transferring the net assets and employees at the
Company's parts and service business to a new U.S. subsidiary, NATCO London,
Inc., and resolving pending severance, office closure and leasehold issues.
During 1999, the Company reached favorable settlements related to various
amounts owed to and by customers and vendors related to a number of contracts
entered into between 1993 and 1995. An accrual for the costs associated with
these various claims had been made during fiscal years 1995 through 1998 based
on

                                        55
<PAGE>   56

the best available information at that time. As a result of favorable
settlements, the Company revised its previous estimates and reversed $314,000 of
these accruals.

(25) SUBSEQUENT EVENTS

     On March 16, 2001, the Company entered into a new credit facility with a
group of banks led by The Chase Manhattan Bank. This credit facility consists of
a $50.0 million term loan, a $35.0 million U.S. revolving facility, a $10.0
million Canadian revolving facility and a $5.0 million U.K. revolving facility.
The term loan matures on March 15, 2006, and each of the revolving facilities
matures on March 15, 2004.

     On March 19, 2001, NATCO acquired all the outstanding capital stock of
Axsia Group Limited, a privately held process and design company based in the
United Kingdom, for approximately $45.8 million in cash. This acquisition was
funded through borrowings under our new revolving credit facilities and was
recorded using the purchase method of accounting.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     There are no changes or disagreements with accountants on accounting and
financial disclosure matters during the periods for which consolidated financial
statements have been presented within this document.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Reference is made to the information responsive to the Items comprising
this Part III that is contained in the Company's definitive proxy statement for
its 2001 Annual Meeting of Stockholders, which is incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

     Reference is made to the information responsive to the Items comprising
this Part III that is contained in the Company's definitive proxy statement for
its 2001 Annual Meeting of Stockholders, which is incorporated herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Reference is made to the information responsive to the Items comprising
this Part III that is contained in the Company's definitive proxy statement for
its 2001 Annual Meeting of Stockholders, which is incorporated herein by
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Reference is made to the information responsive to the Items comprising
this Part III that is contained in the Company's definitive proxy statement for
its 2001 Annual Meeting of Stockholders, which is incorporated herein by
reference.

                                        56
<PAGE>   57

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K

     (a)  Index to Financial Statements, Financial Statement Schedules and
        Exhibits

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
         <S>                                                           <C>
         (1) Financial Statements
                   Independent Auditors' Report......................   31
                   Consolidated Balance Sheets.......................   32
                   Consolidated Statements of Operations.............   33
                   Consolidated Statements of Stockholders'
                        Equity and Comprehensive Income..............   34
                   Consolidated Statements of Cash Flows.............   35
                   Notes to Consolidated Financial Statements........   36
         (2) Financial Statement Schedules
                   No schedules have been included herein because the
                 information required to be submitted has been
                 included in the Company's Consolidated Financial
                 Statements or the notes thereto, or the required
                 information is inapplicable.
         (3) Index of Exhibits.......................................   61
                   See Index of Exhibits for a list of those exhibits
                 filed herewith, which index also includes and
                 identifies management contracts or compensatory
                 plans or arrangements required to be filed as
                 exhibits to this Form 10-K by Item 601 (10) (iii) of
                 Regulation S-K
</TABLE>

     (b)  Reports on Form 8-K. The Company filed a Form 8-K on November 7, 2000,
        to announce board of directors resolutions to adopt a stock repurchase
        plan and to provide a full recourse loan to an executive officer to
        facilitate the exercise of certain outstanding stock options.

     (c)  Index of Exhibits

<TABLE>
<CAPTION>
                     EXHIBIT NUMBER                              DESCRIPTION
                     --------------                              -----------
                     <C>              <S>  <C>
                           2.1        --   Amended and Restated Agreement and Plan of Merger dated
                                           November 17, 1998 but effective March 26, 1998 among
                                           the Company, NATCO Acquisition Company, National Tank
                                           Company and The Cynara Company (incorporated by
                                           reference to Exhibit 2.1 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
                           2.2        --   Stock Purchase Agreement dated as of May 7, 1997 among
                                           Enterra Petroleum Equipment Group, Inc., National Tank
                                           Company and Weatherford Enterra, Inc. (incorporated by
                                           reference to Exhibit 2.2 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
                           2.3*       --   Stock Purchase Agreement dated as of January 25, 2001
                                           but effective March 16, 2001 between the Company and
                                           Axsia Group Limited.
                           2.4*       --   Amendment to Stock Purchase Agreement dated as of March
                                           16, 2001 between the Company and Axsia Group Limited.
                           3.1        --   Restated Certificate of Incorporation of the Company,
                                           as amended by Certificate of Amendment dated November
                                           18, 1998 and Certificate of Amendment dated November
                                           29, 1999 (incorporated by reference to Exhibit 3.1 of
                                           the Company's Registration Statement No. 333-48851 on
                                           Form S-1).
</TABLE>

                                        57
<PAGE>   58

<TABLE>
<CAPTION>
                     EXHIBIT NUMBER                              DESCRIPTION
                     --------------                              -----------
                     <C>              <S>  <C>
                           3.2        --   Certificate of Designations of Series A Junior
                                           Participating Preferred Stock (incorporated by
                                           reference to Exhibit 3.2 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
                           3.3        --   Amended and Restated Bylaws of the Company, as amended.
                                           (incorporated by reference to Exhibit 3.3 of the
                                           Company's Quarterly Report on Form 10-Q for the period
                                           ended March 31, 2000).
                           4.1        --   Specimen Common Stock certificate (incorporated by
                                           reference to Exhibit 4.1 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
                           4.2        --   Rights Agreement dated as of May 15, 1998 by and among
                                           the Company and ChaseMellon Shareholder Services,
                                           L.L.C., as Rights Agent (incorporated by reference to
                                           Exhibit 4.2 of the Company's Registration Statement No.
                                           333-48851 on Form S-1).
                           4.3        --   Registration Rights Agreement dated as of November 18,
                                           1998 among the Company and Capricorn Investors, L.P.
                                           and Capricorn Investors II, L.P. (incorporated by
                                           reference to Exhibit 4.3 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
                           4.4        --   Registration Rights Agreement dated as of November 18,
                                           1998 among the Company and the former stockholders of
                                           The Cynara Company (incorporated by reference to
                                           Exhibit 4.4 of the Company's Registration Statement No.
                                           333-48851 on Form S-1).
                          10.1**      --   Directors Compensation Plan (incorporated by reference
                                           to Exhibit 10.1 of the Company's Registration Statement
                                           No. 333-48851 on Form S-1).
                          10.2**      --   Form of Nonemployee Director's Option Agreement
                                           (incorporated by reference to Exhibit 10.2 of the
                                           Company's Registration Statement No. 333-48851 on Form
                                           S-1).
                          10.3**      --   Employee Stock Incentive Plan (incorporated by
                                           Reference to Exhibit 10.3 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
                          10.4**      --   Form on Nonstatutory Stock Option Agreement
                                           (incorporated by reference to Exhibit 10.24 to the
                                           Company's Registration Statement No. 333-48851 on Form
                                           S-1).
                          10.5        --   Commitment Letter dated November 24, 1994 from The Bank
                                           of Nova Scotia to NATCO Canada, Ltd. (incorporated by
                                           reference to Exhibit 10.5 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
                          10.6        --   Service and Reimbursement Agreement dated as of July 1,
                                           1997 between the Company and Capricorn Management, G.P.
                                           (incorporated by reference to Exhibit 10.6 of the
                                           Company's Registration Statement No. 333-48851 on Form
                                           S-1).
                          10.7**      --   Form of Indemnification Agreement between the Company
                                           and its officers and directors (incorporated by
                                           reference to Exhibit 10.9 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
                          10.8        --   Securities Exchange Agreement dated as of March 5, 1998
                                           by and among the Company, Capricorn Investors, L.P. and
                                           Capricorn Investors II, L.P. (incorporated by reference
                                           to Exhibit 10.10 of the Company's Registration
                                           Statement No. 333-48851 on Form S-1).
</TABLE>

                                        58
<PAGE>   59

<TABLE>
<CAPTION>
                     EXHIBIT NUMBER                              DESCRIPTION
                     --------------                              -----------
                     <C>              <S>  <C>
                          10.9        --   Stockholders' Agreement by and among the Company,
                                           Capricorn Investors, L.P. and Capricorn Investors II,
                                           L.P. (incorporated by reference to Exhibit 10.11 of the
                                           Company's Registration Statement No. 333-48851 on Form
                                           S-1).
                          10.10**     --   Employment Agreement dated as of July 31, 1997 between
                                           the Company and Nathaniel A. Gregory, as amended as of
                                           July 12, 1999 (incorporated by reference to Exhibit
                                           10.12 of the Company's Registration Statement No.
                                           333-48851 on Form S-1).
                          10.11       --   Stockholder's Agreement dated as of November 18, 1998
                                           among the Company, Capricorn Investors, L.P., Capricorn
                                           Investors II, L.P. and the former stockholders of The
                                           Cynara Company (incorporated by reference to Exhibit
                                           10.19 of the Company's Registration Statement No.
                                           333-48851 on Form S-1).
                          10.12**     --   Change of Control Policy dated as of September 28, 1999
                                           (incorporated by reference to Exhibit 10.20 of the
                                           Company's Registration Statement No. 333-48851 on Form
                                           S-1).
                          10.13**     --   Severance Pay Summary Plan Description (incorporated by
                                           reference to Exhibit 10.21 of the Company's
                                           Registration Statement No. 333-48851 on Form S-1).
                          10.14       --   Loan Agreement ($22,000,000 U.S. Revolving Loan
                                           Facility, $10,000,000 Canadian Revolving Loan Facility
                                           and $32,500,000 Term Loan Facility) dated as of
                                           November 20, 1998 among National Tank Company, NATCO
                                           Canada, Ltd., Chase Bank of Texas, National
                                           Association, The Bank of Nova Scotia and the other
                                           lenders parties thereto and joined in by NATCO Group,
                                           Inc., as amended (incorporated by reference to Exhibit
                                           10.22 to the Company's Registration Statement No.
                                           333-48851 on Form S-1).
                          10.15       --   International Revolving Loan Agreement dated as of June
                                           30, 1997 between National Tank Company and Texas
                                           Commerce Bank, National Association, as amended
                                           (incorporated by reference to Exhibit 10.23 to the
                                           Company's Registration Statement No. 333-48851 on Form
                                           S-1).
                          10.16*      --   Loan Agreement ($35,000,000 U.S. Revolving Loan
                                           Facility, $10,000,000 Canadian Revolving Loan Facility,
                                           $5,000,000 U.K. Revolving Loan Facility and $50,000,000
                                           Term Loan Facility) dated as of March 16, 2001 among
                                           NATCO Group, Inc. NATCO Canada, Ltd., Axsia Group
                                           Limited, The Chase Manhattan Bank, Royal Bank of
                                           Canada, Chase Manhattan International Limited, Bank
                                           One, NA (Main Office Chicago Illinois), Wells Fargo
                                           Bank Texas, National Association, JP Morgan, a Division
                                           of Chase Securities, Inc. and the other lenders now or
                                           hereafter parties hereto.
                          18.1*       --   Letter Regarding Change in Accounting Principle.
                          21.1*       --   List of Subsidiaries.
</TABLE>

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

*  Included herewith.

** Management contracts or compensatory plans or arrangements.

                                        59
<PAGE>   60

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on the 29th day of March 2001.

                                          NATCO GROUP INC.
                                          (Registrant)

                                               /s/ NATHANIEL A. GREGORY
                                          By:
                                          --------------------------------------

                                            Nathaniel A. Gregory
                                            Chief Executive Officer and
                                            Chairman of the Board of Directors

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated, on March 29th, 2001.

<TABLE>
<CAPTION>
                 SIGNATURE                                            TITLE
                 ---------                                            -----
<C>                                                <S>

          /s/ NATHANIEL A. GREGORY                 Chairman of the Board and Chief Executive
--------------------------------------------       Officer (Principal Executive Officer)
            Nathaniel A. Gregory

            /s/ J. MICHAEL MAYER                   Senior Vice President and Chief Financial
--------------------------------------------       Officer (Principal Financial Officer)
              J. Michael Mayer

             /s/ RYAN S. LILES                     Vice President and Controller (Principal
--------------------------------------------       Accounting Officer)
               Ryan S. Liles

        /s/ HERBERT S. WINOKUR, JR.                Director
--------------------------------------------
          Herbert S. Winokur, Jr.

             /s/ JOHN U. CLARKE                    Director
--------------------------------------------
               John U. Clarke

          /s/ PATRICK M. MCCARTHY                  Director
--------------------------------------------
            Patrick M. McCarthy

             /s/ HOWARD I. BULL                    Director
--------------------------------------------
               Howard I. Bull

             /s/ KEITH K. ALLAN                    Director
--------------------------------------------
               Keith K. Allan

         /s/ GEORGE K. HICKOX, JR.                 Director
--------------------------------------------
           George K. Hickox, Jr.
</TABLE>

                                        60
<PAGE>   61

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT NUMBER                              DESCRIPTION
    --------------                              -----------
    <C>            <S>  <C>
          2.1      --   Amended and Restated Agreement and Plan of Merger dated
                        November 17, 1998 but effective March 26, 1998 among the
                        Company, NATCO Acquisition Company, National Tank Company
                        and The Cynara Company (incorporated by reference to Exhibit
                        2.1 of the Company's Registration Statement No. 333-48851 on
                        Form S-1).
          2.2      --   Stock Purchase Agreement dated as of May 7, 1997 among
                        Enterra Petroleum Equipment Group, Inc., National Tank
                        Company and Weatherford Enterra, Inc. (incorporated by
                        reference to Exhibit 2.2 of the Company's Registration
                        Statement No. 333-48851 on Form S-1).
          2.3*     --   Stock Purchase Agreement dated as of January 25, 2001 but
                        effective March 16, 2001 between the Company and Axsia Group
                        Limited
          2.4*     --   Amendment to Stock Purchase Agreement dated as of March 16,
                        2001 between the Company and Axsia Group Limited.
          3.1      --   Restated Certificate of Incorporation of the Company, as
                        amended by Certificate of Amendment dated November 18, 1998
                        and Certificate of Amendment dated November 29, 1999
                        (incorporated by reference to Exhibit 3.1 of the Company's
                        Registration Statement No. 333-48851 on Form S-1).
          3.2      --   Certificate of Designations of Series A Junior Participating
                        Preferred Stock (incorporated by reference to Exhibit 3.2 of
                        the Company's Registration Statement No. 333-48851 on Form
                        S-1).
          3.3      --   Amended and Restated Bylaws of the Company, as amended
                        (incorporated by reference to Exhibit 3.3 of the Company's
                        Quarterly Report on Form 10-Q for the period ended March 31,
                        2000).
          4.1      --   Specimen Common Stock certificate (incorporated by reference
                        to Exhibit 4.1 of the Company's Registration Statement No.
                        333-48851 on Form S-1).
          4.2      --   Rights Agreement dated as of May 15, 1998 by and among the
                        Company and ChaseMellon Shareholder Services, L.L.C., as
                        Rights Agent (incorporated by reference to Exhibit 4.2 of
                        the Company's Registration Statement No. 333-48851 on Form
                        S-1).
          4.3      --   Registration Rights Agreement dated as of November 18, 1998
                        among the Company and Capricorn Investors, L.P. and
                        Capricorn Investors II, L.P. (incorporated by reference to
                        Exhibit 4.3 of the Company's Registration Statement No.
                        333-48851 on Form S-1).
          4.4      --   Registration Rights Agreement dated as of November 18, 1998
                        among the Company and the former stockholders of The Cynara
                        Company (incorporated by reference to Exhibit 4.4 of the
                        Company's Registration Statement No. 333-48851 on Form S-1).
         10.1**    --   Directors Compensation Plan (incorporated by reference to
                        Exhibit 10.1 of the Company's Registration Statement No.
                        333-48851 on Form S-1).
         10.2**    --   Form of Nonemployee Director's Option Agreement
                        (incorporated by reference to Exhibit 10.2 of the Company's
                        Registration Statement No. 333-48851 on Form S-1).
         10.3**    --   Employee Stock Incentive Plan (incorporated by Reference to
                        Exhibit 10.3 of the Company's Registration Statement No.
                        333-48851 on Form S-1).
         10.4**    --   Form on Nonstatutory Stock Option Agreement (incorporated by
                        reference to Exhibit 10.24 to the Company's Registration
                        Statement No. 333-48851 on Form S-1).
         10.5      --   Commitment Letter dated November 24, 1994 from The Bank of
                        Nova Scotia to NATCO Canada, Ltd. (incorporated by reference
                        to Exhibit 10.5 of the Company's Registration Statement No.
                        333-48851 on Form S-1).
         10.6      --   Service and Reimbursement Agreement dated as of July 1, 1997
                        between the Company and Capricorn Management, G.P.
                        (incorporated by reference to Exhibit 10.6 of the Company's
                        Registration Statement No. 333-48851 on Form S-1).
</TABLE>

                                        61
<PAGE>   62

<TABLE>
<CAPTION>
    EXHIBIT NUMBER                              DESCRIPTION
    --------------                              -----------
    <C>            <S>  <C>
         10.7**    --   Form of Indemnification Agreement between the Company and
                        its officers and directors (incorporated by reference to
                        Exhibit 10.9 of the Company's Registration Statement No.
                        333-48851 on Form S-1).
         10.8      --   Securities Exchange Agreement dated as of March 5, 1998 by
                        and among the Company, Capricorn Investors, L.P. and
                        Capricorn Investors II, L.P. (incorporated by reference to
                        Exhibit 10.10 of the Company's Registration Statement No.
                        333-48851 on Form S-1).
         10.9      --   Stockholders' Agreement by and among the Company, Capricorn
                        Investors, L.P. and Capricorn Investors II, L.P.
                        (incorporated by reference to Exhibit 10.11 of the Company's
                        Registration Statement No. 333-48851 on Form S-1).
         10.10**   --   Employment Agreement dated as of July 31, 1997 between the
                        Company and Nathaniel A. Gregory, as amended as of July 12,
                        1999 (incorporated by reference to Exhibit 10.12 of the
                        Company's Registration Statement No. 333-48851 on Form S-1).
         10.11     --   Stockholder's Agreement dated as of November 18, 1998 among
                        the Company, Capricorn Investors, L.P., Capricorn Investors
                        II, L.P. and the former stockholders of The Cynara Company
                        (incorporated by reference to Exhibit 10.19 of the Company's
                        Registration Statement No. 333-48851 on Form S-1).
         10.12**   --   Change of Control Policy dated as of September 28, 1999
                        (incorporated by reference to Exhibit 10.20 of the Company's
                        Registration Statement No. 333-48851 on Form S-1).
         10.13**   --   Severance Pay Summary Plan Description (incorporated by
                        reference to Exhibit 10.21 of the Company's Registration
                        Statement No. 333-48851 on Form S-1).
         10.14     --   Loan Agreement ($22,000,000 U.S. Revolving Loan Facility,
                        $10,000,000 Canadian Revolving Loan Facility and $32,500,000
                        Term Loan Facility) dated as of November 20, 1998 among
                        National Tank Company, NATCO Canada, Ltd.,Chase Bank of
                        Texas, National Association, The Bank of Nova Scotia and the
                        other lenders parties thereto and joined in by NATCO Group,
                        Inc., as amended (incorporated by reference to Exhibit 10.22
                        to the Company's Registration Statement No. 333-48851 on
                        Form S-1).
         10.15     --   International Revolving Loan Agreement dated as of June 30,
                        1997 between National Tank Company and Texas Commerce Bank,
                        National Association, as amended (incorporated by reference
                        to Exhibit 10.23 to the Company's Registration Statement No.
                        333-48851 on Form S-1).
         10.16*    --   Loan Agreement ($35,000,000 U.S. Revolving Loan Facility,
                        $10,000,000 Canadian Revolving Loan Facility, $5,000,000
                        U.K. Revolving Loan Facility and $50,000,000 Term Loan
                        Facility) dated as of March 16, 2001 among NATCO Group,
                        Inc., NATCO Canada, Ltd., Axsia Group Limited, The Chase
                        Manhattan Bank, Royal Bank of Canada, Chase Manhattan
                        International Limited, Bank One, NA (Main Office Chicago
                        Illinois), Wells Fargo Bank Texas, National Association, JP
                        Morgan, a Division of Chase Securities, Inc. and the other
                        lenders now or hereafter parties hereto.
         18.1*     --   Letter Regarding Change in Accounting Principle.
         21.1*     --   List of Subsidiaries.
</TABLE>

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

*  Included herewith.

** Management contracts or compensatory plans or arrangements.

                                        62