<PAGE>

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                       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, 2002      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, $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.   [ ]

Indicate by  check mark  whether  the registrant  is  an accelerated  filer  (as
defined in Exchange Act Rule 12b-2).     Yes ___  No  X

State the aggregate market value of the voting and non-voting common equity held
by  non-affiliates computed by reference to the price at which the common equity
was last sold, or the  average bid and asked price  of such common equity as  of
the  last business day of the registrant's most recently completed second fiscal
quarter.

As of June 30, 2002                                                  $80,911,175

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 10, 2003  Common Stock, $0.01 par value per share  15,803,797 shares

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the NATCO Group  Inc. Notice of Annual  Meeting of Stockholders and
Proxy Statement relating to the 2003  Annual Meeting of Shareholders, which  the
Registrant   intends  to  file  within  120  days  of  December  31,  2002,  are
incorporated by reference in Part III of this form.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                NATCO GROUP INC.
                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                                PAGE
                                                                                NO.
                                                                                ----
<S>               <C>                                                           <C>
                                       PART I
Item 1.           Business....................................................    3
Item 2.           Properties..................................................   18
Item 3.           Legal Proceedings...........................................   18
Item 4.           Submission of Matters to a Vote of Security Holders.........   18
                                      PART II
Item 5.           Market for the Registrant's Common Equity and Related
                    Stockholder Matters.......................................   18
Item 6.           Selected Financial Data.....................................   20
Item 7.           Management's Discussion and Analysis of Financial Condition
                    and Results of Operations.................................   20
Item 7A           Quantitative and Qualitative Disclosures About Market
                    Risk......................................................   36
Item 8.           Financial Statements and Supplementary Data.................   36
                  Consolidated Financial Statements...........................   38
                  Notes to Consolidated Financial Statements..................   42
Item 9.           Changes in and Disagreements with Accountants on Accounting
                    and Financial Disclosure..................................   65
                                      PART III
                  Information called for by Part III, excluding Item 14, 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.
Item 14.          Controls and Procedures.....................................   65
                                      PART IV
Item 15.          Exhibits, Financial Statements Schedules and Reports on Form
                    8-K.......................................................   66
Signatures....................................................................   71
Certifications................................................................   72
</Table>

                                        2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

     NATCO  Group Inc. is 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, gas  and water  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 hydrates  from forming in  gas streams and reduce
       the viscosity of oil;

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

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

     - gas  conditioning  units and  membrane  separation systems,  which remove
       carbon dioxide and other contaminants from gas streams;

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

     - water processing systems, which  include systems for water  re-injection,
       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, gas and water production and processing systems; and

     - automation  and  control  systems, which  provides  and  services control
       panels and systems that  monitor and control oil  and gas production,  as
       well as repair, testing and inspection services for existing systems.

     We  have  designed,  manufactured  and  marketed  production  equipment and
systems  for  more  than  75  years.  We  operate  eight  primary  manufacturing
facilities  located in the U.S. and Canada  and 36 sales and service facilities,
34 of which are  located in the U.S.  and Canada, and two  of which are  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.

     General information about us can be found at www.natcogroup.com. Our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on  Form
8-K, as well as any amendments and exhibits to those reports, are available free
of  charge through our website  as soon as reasonably  practicable after we file
them with, or furnish them to, the SEC.

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 production profiles of existing  fields (meaning the mix of
       oil,  gas  and  water  in  the   production  stream  and  the  level   of
       contaminants);

     - the discovery of new oil and gas fields;

                                        3
<PAGE>

     - the quality of new hydrocarbon production; and

     - investment   in  exploration  and  production  efforts  by  oil  and  gas
       producers.

     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 U.S.
       Department of Energy, petroleum and natural gas consumption are  expected
       to  increase at average rates of 1.7% and 1.8%, respectively, per year in
       the United States  through 2025, with  higher consumption rates  expected
       worldwide.

     - Long-term  demand for  oil and gas  products should lead  to increases in
       drilling activity.    The number  of  drilling rigs  operating  in  North
       America  and internationally has fluctuated in recent years, depending on
       market conditions.  The average  North American  rig count  for 2002  was
       1,093  versus 1,497 for  2001 and 1,263  for 2000, as  published by Baker
       Hughes Incorporated. The international rig count as of December 31, 2002,
       2001 and 2000 was 753, 752  and 705, respectively, as published by  Baker
       Hughes  Incorporated. Although North American  rig counts declined during
       2002, we believe  that rig  counts will  increase over  the long-term  as
       demand for oil and gas products and services continues to increase.

     - Changing  profile  of existing  production.   The  production  profile of
       existing  fields  changes   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, 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 more than
       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  carbon  dioxide  separation  using  membrane
       technology,   oil-water    emulsion   treatment    using    dual-polarity
       electrostatic technology, seawater injection systems and complex produced
       oily  water  treatment systems.  We hold  35  active U.S.  and equivalent
       foreign patents  and  continue to  invest  in research  and  development.
       Applications have been filed for nine additional patents in the U.S.

     - 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 senior 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 grow our business and integrate acquisitions.

                                        4
<PAGE>

       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 cash  flow 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.  We intend  to achieve  this goal 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  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.

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  expenditures is generally  dependent on the  industry's view  of
future  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  the  Organization  of  Petroleum  Exporting   Countries
       ("OPEC");

     - political environment, including the threat of war and terrorism;
                                        5
<PAGE>

     - the cost of producing oil and gas;

     - technological advances;

     - relatively  minor changes in the supply of and demand for oil and natural
       gas; and

     - weather conditions.

WE MAY LOSE MONEY ON FIXED-PRICE CONTRACTS.

     Some 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  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.
We  had  revenues  of $28.8  million,  or  10% of  total  revenues,  provided by
ExxonMobil Corporation  and  affiliates,  $17.2  million,  or  6%  of  revenues,
provided  by BP and  affiliates excluding the  Carigali-Triton Operating Company
SDN BHD ("CTOC"), and $16.5 million, or 5%, provided by ChevronTexaco Corp.  and
affiliates,  for the  year ended  December 31,  2002. We  had revenues  of $15.7
million, or 5% of our total revenues, provided by Anadarko and affiliates, $15.5
million,  or  5%  of  total  revenues,  provided  by  ChevronTexaco  Corp.   and
affiliates,  and  $13.4 million,  or 5%  of  total revenues  provided by  BP and
affiliates excluding  CTOC, for  the  year ended  December  31, 2001.  The  CTOC
project  provided $10.9 million, or  4% of total revenues,  for fiscal 2001. The
CTOC project was a $73.0 million contract awarded in 1999 to supply gas treating
and  conditioning  equipment  for   a  project  in   Southeast  Asia,  and   was
substantially  complete  as  of December  31,  2001. The  CTOC  project provided
approximately 20% of our revenues in 2000.

     We have  a  number  of  ongoing relationships  with  major  oil  companies,
national  oil companies and large independent producers. The loss of one or more
of these ongoing relationships could have an 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. As of December 31, 2002, we had backlog of $90.1 million, of  which
approximately  32% related to ExxonMobil Corporation and affiliates, 13% related
to ChevronTexaco Corp. and affiliates and 6% related to Snamprogetti.

     We cannot guarantee  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.

                                        6
<PAGE>

     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.

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 can  fluctuate
in line with overall activity levels within our industry. A significant increase
in  the wages  paid by competing  employers could  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 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, 2002, our cash costs  related to these benefits were $1.8  million,
net of reimbursement of $79,000 from the predecessor plan sponsor. At that date,
there  were  539  retirees  and surviving  eligible  dependents  covered  by the
specified postretirement  benefit  obligations. As  of  December 31,  2002,  our
accumulated  pre-tax  postretirement  benefit obligation  was  calculated  to be
approximately $12.7 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 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.

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

     We operate our business and market our products and services throughout the
world.  We  are,  therefore,  subject  to  the  risks  customarily  attendant to
international operations and investments in foreign countries. Moreover, oil and
gas producing regions in which we  operate include many countries in the  Middle
East  and other less  developed parts of  the world, where  risks have increased
significantly in the  recent past.  We cannot accurately  predict whether  these
risks  will increase or  abate as a  result of current  military action in Iraq.
These risks include:

     - nationalization;

     - expropriation;

     - war, terrorism 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.
Further, we may experience restrictions in travel to visit customers or start-up
projects, and  we incur  added costs  by implementing  security precautions.  An
interruption of our

                                        7
<PAGE>

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.

     Axsia  has  made  sales (as  part  of  its ongoing  business  prior  to the
acquisition) and has  informed us that  it expects to  continue making sales  of
equipment  and services to  customers in certain countries  which are subject to
U.S. government trade sanctions ("Embargoed Countries"), including sales to  the
Iraqi  national oil  companies permitted  under the  United Nations Food-for-Oil
Program. Current outstanding  receivables related to  the Food-for-Oil  Program,
which  amounted to $711,000  at December 31,  2002, are supported  by letters of
credit issued on  Western banks and  sanctioned by the  United Nations.  Axsia's
sales  to  customers in  Embargoed Countries  were approximately  3 1/2%  of our
consolidated revenue in 2002 and approximately 2 1/2% of consolidated revenue in
2001.

FUTURE ACQUISITIONS, IF ANY, 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 businesses.  We  cannot
assure  you that we  will be able to  successfully identify suitable acquisition
opportunities  or   to  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 PRODUCT LIABILITY CLAIMS AGAINST US OR
MAY BE INSUFFICIENT IN AMOUNT TO COVER SUCH 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

     - suspension of operations.

     We maintain  insurance  coverage against  these  risks in  accordance  with
standard  industry practice. This insurance may not protect us against liability
for some  kinds  of  events,  including events  involving  pollution  or  losses
resulting  from business interruption or acts of terrorism. 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.

                                        8
<PAGE>

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

     We typically warrant the workmanship and materials used in the equipment we
manufacture.  At  the  request of  our  customers, we  occasionally  warrant the
operational performance  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, 2002, we had provided to our
customers approximately $6.0 million in letters of credit related to warranties.
We have received  warranty claims  in the  past, 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.

OUR ABILITY TO SECURE AND RETAIN NECESSARY FINANCING MAY BE LIMITED.

     Our  ability to execute our growth strategies may be limited by our ability
to secure and  retain reasonably  priced financing. From  time to  time we  have
utilized  significant amounts of letters of  credit to secure our performance on
large projects  as well  as  provide warranties  to our  customers.  Outstanding
letters  of credit can consume a  significant portion of our available liquidity
under our  revolving  credit facilities.  Some  of our  competitors  are  larger
companies  with better  access to capital,  which could give  them a competitive
advantage over us  should our access  to capital be  limited. Additionally,  the
industry  in which  we compete  is often  characterized by  significant cyclical
fluctuations in activity levels that can adversely impact our financial results.
Our revolving credit and term loan facilities contain restrictive loan covenants
with which we are required to comply.  There is no assurance that our  financial
results  will be adequate to ensure we remain in compliance with these covenants
in the future, nor is there any assurance we can obtain amendments to or waivers
of these covenants should we not be in compliance.

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
others or we 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,  state or foreign  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.

     Our revenues are substantially derived from significant contracts that  are
often  performed over periods of  two to six or more  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.

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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.  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 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;

     - price;

     - our reputation;

     - our technology;

     - 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;

     - 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 our results of operations.

A FURTHER ECONOMIC DECLINE COULD ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS AND
SERVICES.

     Economic growth in several of our key markets, including the United  States
and  Southeast Asia,  declined throughout  2001 due  to a  world-wide recession,
which was exacerbated by significant terrorist acts in the United States  during
September 2001. Slower than expected economic growth in the United States during
2002,  as well  as in other  regions of the  world, contributed to  a decline in
exploration and production activity in the  oil and gas industry. If the  United
States  economy were to decline further or  if the economies of other nations in
which we do business  were to experience further  material problems, the  demand
and  price for oil and gas and,  therefore, for our products and services, could
decline, which would 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

                                        10
<PAGE>

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 automation and control
systems.

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 are "off the  shelf" items or  are
customized  variations of standardized  equipment requiring limited engineering.
We market traditional  production equipment  and services through  28 sales  and
service  centers in the United  States, six in Canada, one  in Mexico 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/or to coalesce liquids;

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

       - Whirly  Scrub(TM)  V   centrifugal  separators,  which   are  used   as
         state-of-the-art compact scrubbers.

     - Oil Dehydration Equipment.  Oil dehydrators are used to remove water from
       oil. Our 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 coalescence;

       - vertical treaters, which separate oil and water using gravity and heat;

       - 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 gas streams. We manufacture
       both  standardized and customized  direct and indirect  fired heaters. In
       each system,  heat is  transferred to  the hydrocarbon  stream through  a
       medium  such as water, water/glycol, steam,  salt or flue gas. Our heater
       product line includes:

       - indirect fired water bath heaters;

       - vaporizers used to vaporize propane and other liquefied gases;

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       - salt bath heaters  used to heat  high pressure natural  gas streams  to
         elevated temperatures above that obtained with indirect 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  hydrocarbon  and gas  streams.  Our  gas conditioning
       equipment includes:

       - Cynara(R) membrane  systems,  which  extract carbon  dioxide  from  gas
         streams;

       - glycol  dehydration equipment, which uses  glycol to absorb water vapor
         from gas streams;

       - amine systems, which use amine to remove acidic gases such as  hydrogen
         sulfide and carbon dioxide from gas streams;

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

       - Paques(TM) and  Shell-Paques(TM) licensed  desulfurization  technology,
         which utilizes a biological system to efficiently take hydrogen sulfide
         out of gas streams;

       - the BTEX-BUSTER(R), which virtually eliminates the emission 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.

     - Carbon   Dioxide  Field  Operations.    We  also  provide  gas-processing
       facilities for the  removal of carbon  dioxide from hydrocarbon  streams.
       These  facilities use our proprietary  Cynara(R) membrane technology that
       provides one of the most  effective separation solutions for  hydrocarbon
       streams   containing  carbon  dioxide.  The   primary  market  for  these
       facilities is production from wells such  as those located in west  Texas
       in  which carbon dioxide injection is used to enhance the recovery of oil
       reserves.

     - Water Treatment Equipment.  We offer  a complete line of water  treatment
       and  conditioning equipment  for the  removal of  contaminants from water
       extracted during oil  and gas production.  Our water treatment  equipment
       includes:

       - PERFORMAX(R)  Matrix Plate Coalescers,  which are used  in both primary
         separation and final skimming applications;

       - TriPack(TM) Corrugated Plate Interceptors, which are used to remove oil
         and salable hydrocarbons from water;

       - Oilspin AV(TM)  and  AVi(TM)  liquid/liquid  hydrocyclones,  which  are
         compact  centrifugal separation devices used in primary water treatment
         applications;

       - Tridair(TM) Sparger Gas  Flotation units, which  are used as  secondary
         water cleanup systems; and

       - PowerClean(TM)  Nutshell Filters,  which are used  where tertiary water
         cleanup is required.

     - Equipment Refurbishment.  We source, refurbish and integrate used oil and
       gas production equipment. Customers that purchase this equipment  benefit
       from  reduced delivery  times and lower  equipment costs  relative to new
       equipment. The  used  equipment  market is  focused  primarily  in  North

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<PAGE>

       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.

     - Centrifugal  Separations Systems.   In order to  substantially reduce the
       size and weight of equipment for operators, we utilize our  Porta-Test(R)
       Revolution(TM) centrifugal separator inlet devices and Whirly Scrub(TM) I
       inline  centrifugal scrubbers to eliminate the need for large traditional
       vessels.

     - 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
       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  engineered systems  through  our direct  sales forces  based  in
Houston,  Texas; Calgary, Alberta, Canada; Camberley, England; Redruth, England;
Gloucester, England; Caracas, Venezuela; Singapore; and Tokyo, Japan,  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, during 2002, we designed,  manufactured
       and  assembled a module for a  production facility situated off the coast
       of West Africa that is capable  of processing 250,000 barrels of oil  per
       day.

     - 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 natural gas. We also
       design  and  manufacture  gas-processing  facilities  that  remove carbon
       dioxide from hydrocarbon streams. These facilities use Cynara(R) membrane
       technology, which provides  the most  cost-effective separation  solution
       for  hydrocarbon  streams  containing  more than  20%  carbon  dioxide. A
       primary market for this application is production from gas wells, such as
       those located in  Southeast Asia, which  have naturally occurring  carbon
       dioxide.

     - 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  internals 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.  We  also
       utilize  Computational Fluid Dynamic modeling and Finite Element Analysis
       to ensure that these facilities are optimally designed and are fabricated
       to meet the durability requirements at defined 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.
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<PAGE>

       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. This  technology
       reduces  the number and  size of vessels  employed by this  system and is
       particularly important in refinery and offshore applications where  space
       is at a premium.

     - Water  Injection Systems.   We provide water  injection systems used both
       onshore and offshore  to remove  contaminants from water  to be  injected
       into  a  reservoir  during  production  so  that  the  formation  or  its
       production characteristics are not adversely affected. These systems  may
       involve  media and cartridge filters,  deaeration, chemical injection and
       sulfate removal. Offshore facilities to treat raw seawater involving  use
       of  sulfate removal membranes  can be and often  are very large projects,
       and are increasingly necessary for field development in locations such as
       West Africa. Water injection systems may also use our compact SeaJect(TM)
       oxygen removal systems.

     - Oily Water Cleanup Systems.  We design and engineer systems that, through
       the  use  of  liquid/liquid  hydro-cyclone  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 re-injection 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. Through our
       subsidiary operation in  Camberley, England,  we also  design and  supply
       process  facilities for hydrogen generation  and purification, for use in
       refineries and petrochemical  plants or by  industrial gas suppliers.  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 four-branch network primarily located in the Gulf Coast area. These automation
and control 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,   emergency  shutdown  of
       production and safety  systems. A  control system consists  of a  control
       panel and related tubing, wiring, sensors and connections.

     - 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.

MANUFACTURING FACILITIES

     We  operate  eight primary  manufacturing facilities  ranging in  size from
approximately  8,000  square  feet  to  approximately  130,000  square  feet  of
manufacturing space. We own five of these facilities and lease the other three.

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<PAGE>

     Our major manufacturing facilities are located in:

     - Pittsburg,  California.  We manufacture the membranes for our bulk carbon
       dioxide membrane separation equipment at this 8,000 square foot facility.

     - Covington, Louisiana.   We  fabricate various  types of  water  treatment
       equipment,  as  well as  low-pressure production  vessels at  this 51,000
       square foot facility.

     - Harvey, Louisiana.  We fabricate  control panels for delivery  throughout
       the world at this 12,000 square foot climate-controlled facility.

     - New  Iberia,  Louisiana.   We fabricate  packaged production  systems for
       delivery throughout the  world at  this 60,000  square foot  and 16  acre
       waterfront  facility,  which  can  handle  large  equipment  systems.  We
       upgraded and expanded this facility in 2001.

     - Electra, Texas.   We  produce  various types  of low-  and  high-pressure
       production  vessels,  as well  as skid-mounted  packages at  this 130,000
       square foot facility.

     - Houston, Texas.  We fabricate control panels for delivery throughout  the
       world at this 8,000 square foot climate-controlled facility.

     - Magnolia,  Texas.  We fabricate  various types of low-pressure production
       vessels as  skid  packages at  this  38,000 square  foot  facility.  This
       facility also refurbishes used equipment.

     - Calgary,  Alberta,  Canada.    We produce  heavy  wall  and  cold weather
       packaged equipment and  systems primarily  for the  Canadian and  Alaskan
       markets at this 68,000 square foot facility.

     Our  manufacturing operations are vertically integrated. At most locations,
we are able to engineer, fabricate,  heat treat, inspect and test our  products.
Consequently,  we are able to  control the quality of  our products and the cost
and schedule of our manufacturing activities.

     Our New Iberia, Electra and Calgary  facilities have been certified to  ISO
9002 standards. This certification is an internationally recognized verification
system   for  quality   management  overseen  by   the  International  Standards
Organization based  in Geneva,  Switzerland.  The certification  is based  on  a
review  of our programs and procedures  designed to maintain and enhance quality
production and is subject to annual review and re-certification.

     We fabricate  to the  standards of  the American  Petroleum Institute,  the
American  Welding  Society, the  American  Society of  Mechanical  Engineers and
specific customer specifications. We use  welding and fabrication procedures  in
accordance  with  the  latest  technology  and  industry  requirements.  We have
instituted training  programs to  upgrade skilled  personnel and  maintain  high
quality  standards. We believe that these programs generally enhance the quality
of our products and reduce their repair rate.

RESEARCH AND DEVELOPMENT

     We believe we  are an industry  leader in  the development of  oil and  gas
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,  which has been enhanced
       with the development of our centrifugal inlet vortex tubes (Porta-Test(R)
       Revolution(TM))   and   other    centrifugal   separation    technologies
       (WhirlyScrub(TM) V's and I's);

     - the first emulsion treating systems, which have been advanced through the
       application   of   our  Dual   Polarity(TM),   TriVolt(TM),  TriGrid(TM),
       TriGridmax(TM)   and   the    EDD(TM)   (ElectroDynamic    Desalting(TM))
       electrostatic oil treaters;

     - a  PC-based  Load  Responsive  Controller(TM)  (LRC(TM))  for controlling
       electrostatic treaters remotely;

     - a composite grid system for use in complex separation applications;

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<PAGE>

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

     - the  Oilspin   AV(TM)  and   the  automatic   turndown  capable   AVi(TM)
       liquid/liquid hydro-cyclones;

     - the  Mozley  Sandspin(TM)  solid/liquid  hydro-cyclones  and  the  Mozley
       Wellspin(TM) wellhead desander;

     - the Mozley SandClean(TM)  System for  cleanup of sand  prior to  offshore
       discharge;

     - the Tridair(TM) Single Cell VersaFlo(TM) flotation unit;

     - the Subfloat(TM) submerged column flotation unit;

     - high pressure indirect and Controlled Heat Flux(TM) (CHF(TM)) heaters;

     - PERFORMAX(R) oil and water treating systems;

     - SeaJect(TM)  compact seawater deoxygenation system  for removal of oxygen
       in injection facilities; and

     - Enhancements in Cynara(R) membrane fibers to allow for increased acid gas
       separation efficiencies.

     Our internal designs and devices  used inside separators and other  vessels
to  compensate for  wave motion have  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, 2002, we held 35 active U.S.
and equivalent foreign patents and numerous U.S. and foreign trademarks. We also
have applications pending for nine additional U.S. patents. In addition, we  are
licensed under several 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.  We also have research and  development operations at our facilities
in the United Kingdom, where we primarily focus on water treatment developments.

     At December  31, 2002,  NATCO  had 22  employees  engaged in  research  and
development or product commercialization activities.

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 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
relationships 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 2002, ExxonMobil Corporation
and affiliates, BP and  affiliates excluding CTOC,  and ChevronTexaco Corp.  and
affiliates,  provided 10%, 6% and 5% of our consolidated revenues, respectively.
No other customer  provided more  than 5%  of our  consolidated revenues  during
2002.  In 2001, Anadarko and affiliates, ChevronTexaco Corp. and affiliates, and
BP and affiliates excluding CTOC, each provided 5% of our consolidated  revenue.
No  other customer contributed more than 5% of total revenues for the year ended
December 31,  2001. Our  level of  technical expertise,  extensive  distribution
network  and breadth of product offerings contributes to the maintenance of good
working relationships with our customers.
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<PAGE>

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, 2002, 2001 and 2000, were $90.1 million,
$101.3 million and  $49.9 million,  respectively. Backlog at  December 31,  2002
included  $28.7 million  related to  ExxonMobil Corporation  and affiliates, and
$11.7 million  for ChevronTexaco  Corp. Backlog  at December  31, 2001  included
$27.4 million for ExxonMobil Corporation and affiliates, and $11.1 million for a
North  Sea  consortium.  Backlog at  December  31, 2000  included  $12.5 million
related to CTOC.

     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 costs incurred 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.

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 our results of operations.

     The  primary  competitors  in  the  traditional  production  equipment  and
services  business  include  Hanover  Compressor  Corp.,  as  well  as  numerous
privately held, mainly regional companies. Competitors in our engineered systems
business include  Petreco,  Kvaerner Process  Systems,  UOP, Hanover  APS,  U.S.
Filter  and numerous engineering and construction firms. The primary competitors
in our automation and control systems business are W Industries, MMR-Radon, SECO
and numerous privately held companies operating in the Gulf Coast region.

     We believe  that we  are  one of  the largest  crude  oil and  natural  gas
production  equipment providers  in North  America and  have one  of the leading
market shares internationally. We  further believe 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

     We  are 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, we are not involved in any
material

                                        17
<PAGE>

environmental  matters  of  any  nature  and  are  not  aware  of  any  material
environmental matters threatened against us.

EMPLOYEES

     At  December  31, 2002,  we had  approximately  1,700 employees.  Of these,
approximately 80 were  represented under collective  bargaining agreements  that
extend  through July 2003. We believe  that our relationships with our employees
are satisfactory.

ITEM 2. PROPERTIES

     We  operate  eight  primary  manufacturing  plants  ranging  in  size  from
approximately  8,000  square  feet  to  approximately  130,000  square  feet  of
manufacturing space. We  also own  and lease distribution  and service  centers,
sales  offices and warehouses.  We lease our  corporate headquarters in Houston,
Texas. At December 31, 2002, we owned or leased approximately 1.1 million square
feet of facility  of which  approximately 501,000  square feet  was leased,  and
approximately  551,000 square feet was owned.  Of the total manufacturing space,
approximately  278,000  square  feet  was  located  in  the  United  States  and
approximately 100,000 square feet was located in Canada.

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

<Table>
<Caption>
                                                                  UNITED
                                                                  STATES   CANADA   OTHER
                                                                  ------   ------   -----
    <S>                                                           <C>      <C>      <C>
    North American Operations...................................    34       6        4
    Engineered Systems..........................................     2      --       10
    Automation and Control Systems..............................     2      --        1
    Corporate and Other.........................................     2      --       --
                                                                    --       --      --
      Totals....................................................    40       6       15
                                                                    ==       ==      ==
</Table>

ITEM 3. LEGAL PROCEEDINGS

     We are a party to various routine legal proceedings that are incidental  to
our  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.

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 2002.

                                    PART II

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

     Our  authorized common stock consists of 50,000,000 shares of common stock.
Prior to  January  1,  2002, our  common  stock  was divided  into  two  classes
designated  as "Class A common stock" and  "Class B common stock." On January 1,
2002, all  outstanding  shares  of  Class  B  common  stock  were  automatically
converted  into shares  of Class  A common stock,  at which  time the authorized
common stock reverted to a single class designated as "common stock." There were
15,803,797 shares outstanding as of March 10, 2003. The number of record holders
of our common stock was  73 at March 10, 2003.  The number of record holders  of
our common stock does not include the stockholders for whom shares are held in a
"nominee" or "street" name.

                                        18
<PAGE>

There  were 5,000,000 shares of preferred stock authorized at March 10, 2003. On
March 13, 2003,  we agreed to  sell 15,000  shares of our  Series B  Convertible
Preferred  Stock to  a private  investment fund.  We expect  this transaction to
close prior to the end of March  2003. See "Item 7, Management's Discussion  and
Analysis  of  Financial  Condition and  Results  of  Operations--Commitments and
Contingencies." Our 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  common  stock reported  by  the  NYSE.  No
information  is provided for the period prior  to our initial public offering of
our common stock on January 27, 2000.

<Table>
<Caption>
                                                                   COMMON STOCK
                                                                  ---------------
                                                                   HIGH     LOW
                                                                  ------   ------
    <S>                                                           <C>      <C>
    2000
    First Quarter...............................................  $14.94   $10.25
    Second Quarter..............................................   11.25     7.75
    Third Quarter...............................................   10.94     7.88
    Fourth Quarter..............................................    8.88     6.50

    2001
    First Quarter...............................................  $11.50   $ 8.06
    Second Quarter..............................................   13.74     8.80
    Third Quarter...............................................    9.02     6.82
    Fourth Quarter..............................................    8.20     6.00

    2002
    First Quarter...............................................  $ 8.60   $ 6.51
    Second Quarter..............................................    9.12     6.80
    Third Quarter...............................................    8.60     5.85
    Fourth Quarter..............................................    7.54     5.85
</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. Our  credit facility restricts  our ability to  pay dividends and
other distributions.

                                        19
<PAGE>

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, we changed our fiscal
year-end to December 31 from March 31.

<Table>
<Caption>
                                                                                        NINE MONTHS
                                                     YEAR ENDED DECEMBER 31,               ENDED
                                            -----------------------------------------   DECEMBER 31,
                                              2002       2001       2000       1999         1998
                                            --------   --------   --------   --------   ------------
                                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>        <C>        <C>        <C>        <C>
Statement of Operations Data:
  Revenues................................  $289,539   $286,582   $224,552   $169,948     $145,611
  Cost of goods sold......................   219,354    210,512    162,757    127,609      115,521
                                            --------   --------   --------   --------     --------
  Gross profit............................    70,185     76,070     61,795     42,339       30,090
  Selling, general and administrative
     expense..............................    53,947     51,471     39,443     32,437       24,530
  Depreciation and amortization expense...     4,958      8,143      5,111      4,681        1,473
  Closure and other.......................       548      1,600      1,528         --           --
  Interest expense........................     4,527      4,941      1,588      3,256        2,215
  Interest cost on postretirement benefit
     liability............................       471        888      1,287      1,048          786
  Revaluation (gain) loss on
     post-retirement benefit liability....        --         --         --     (1,016)          53
  Interest income.........................      (248)      (660)      (181)      (256)        (227)
  Other expense, net......................       400        429         13         --           --
                                            --------   --------   --------   --------     --------
  Income before income taxes..............     5,582      9,258     13,006      2,189        1,260
  Income tax provision....................     1,705      3,895      5,345      1,548          608
                                            --------   --------   --------   --------     --------
  Income before cumulative effect of a
     change in accounting principle.......  $  3,877   $  5,363   $  7,661   $    641     $    652
                                            ========   ========   ========   ========     ========
  Basic earnings per share before
     cumulative effect of a change in
     accounting principle.................  $   0.25   $   0.34   $   0.52   $   0.07     $   0.08
  Diluted earnings per share before
     cumulative effect of a change in
     accounting principle.................  $   0.24   $   0.34   $   0.51   $   0.06     $   0.07
Balance Sheet Data (at the end of the
  period)
  Total assets............................  $231,595   $232,751   $153,126   $106,830     $118,412
  Stockholders' equity....................  $ 91,852   $ 88,930   $ 86,179   $ 28,514     $ 24,190
  Long-term debt, excluding current
     installments.........................  $ 45,257   $ 51,568   $ 14,959   $ 31,180     $ 41,777
  Postretirement and other long-term
     obligations..........................  $ 12,718   $ 14,107   $ 14,589   $ 15,853     $ 15,587
</Table>

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

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

OVERVIEW

     We  offer 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;

                                        20
<PAGE>

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

     - automation  and control systems, through  which we provide control panels
       and systems that monitor and control  oil and gas production, as well  as
       repair, testing and inspection services for existing systems.

     We  report  three separate  business  segments: North  American operations,
engineered systems and automation and control systems.

     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 North American  operations 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 of Financial Condition and Results of
Operations 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
acquisitions  (see "--Acquisitions"), indicated  trends in the  level of oil and
gas exploration and production and the effect of such conditions on our  results
of  operations (see "--Industry  and Business Environment"),  future uses of and
requirements for financial resources (see "--Liquidity and Capital  Resources"),
and  anticipated backlog  levels for 2003.  Our expectations  about our business
outlook, customer spending, oil and gas prices and the business environment  for
the  industry,  in general,  and us,  in particular,  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 OPEC, conflict in major petroleum producing  or
consuming  regions,  the development  of  technology which  could  lower overall
finding and development  costs, weather  patterns and the  overall condition  of
capital markets for countries in which we operate.

     The  following discussion should be read  in conjunction with the financial
statements, related notes and other financial information appearing elsewhere in
this Annual Report on Form 10-K. Readers are also urged to carefully review  and
consider the various disclosures advising interested parties of the factors that
affect us, including, without limitation, the disclosures made under the caption
"Risk  Factors" and the other factors and  risks discussed in this Annual Report
on Form 10-K and  in 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The preparation of  our consolidated  financial statements  requires us  to
make  certain estimates and assumptions that  affect the results reported in our
consolidated financial statements  and accompanying notes.  These estimates  and
assumptions  are based on  historical experience and  on our future expectations
that we  believe  to  be reasonable  under  the  circumstances. Note  2  to  our
consolidated   financial  statements  contains  a  summary  of  our  significant
accounting policies. We believe the  following accounting policies are the  most
critical in the preparation of our consolidated financial statements.

                                        21
<PAGE>

     Revenue Recognition: Percentage-of-Completion Method. We recognize revenues
from significant contracts (contracts greater than $250,000 and longer than four
months  in duration) and certain automation and controls contracts and orders on
the percentage of completion  method of accounting. Earned  revenue is based  on
the  percentage that costs incurred  to date relate to  total estimated costs of
the project, after giving effect to the most recent estimates of total cost. The
timing of  costs  incurred,  and  therefore recognition  of  revenue,  could  be
affected  by various internal or external factors including, but not limited to:
changes in project scope (change  orders), changes in productivity,  scheduling,
the  cost and availability of labor, the  cost an availability of raw materials,
the weather, client  delays in providing  approvals at benchmark  stages of  the
project  and  the  timing  of  deliveries  from  third-party  providers  of  key
components. The cumulative impact  of revisions in  total cost estimates  during
the  progress of work is  reflected in the period  in which these changes become
known. Earned revenue reflects the  original contract price adjusted for  agreed
claims  and change order revenues, if applicable. Losses expected to be incurred
on the  jobs in  progress,  after consideration  of estimated  probable  minimum
recoveries  from claims and change orders, are charged to income as soon as such
losses are known. Claims for additional contract revenue are recognized if it is
probable that the claim will result in additional revenue and the amount can  be
reliably  estimated. We  generally recognize revenue  and earnings  to which the
percentage-of-completion method applies over a period of two to six quarters. In
the event  a  project is  terminated  by  our customer  before  completion,  our
customer  is liable for costs  incurred under the contract.  We believe that our
operating results should be evaluated over  a term of several years to  evaluate
our  performance  under  long-term  contracts, after  all  change  orders, scope
changes and  cost  recoveries  have  been negotiated  and  realized.  We  record
revenues  and profits on all  other sales as shipments  are made or services are
performed.

     Impairment  Testing:  Goodwill.  As  required  by  Statement  of  Financial
Accounting  Standards ("SFAS") No. 142,  "Goodwill and Other Intangible Assets,"
we evaluate goodwill  annually for  impairment by  comparing the  fair value  of
operating  assets to the  carrying value of those  assets, including any related
goodwill. As required by SFAS No. 142, we identify separate reportable units for
purposes of this evaluation. In determining carrying value, we segregate  assets
and  liabilities  that,  to the  extent  possible, are  clearly  identifiable by
specific reportable unit. All  inter-company receivables/payables are  excluded.
Certain  corporate  and  other  assets and  liabilities,  that  are  not clearly
identifiable by specific reportable  unit, are allocated based  on the ratio  of
each  unit's net  assets relative to  total net  assets. The fair  value is then
compared to the carrying  value of the reportable  unit to determine whether  or
not  impairment  has occurred  at the  reportable  unit level.  In the  event an
impairment is indicated, an additional test is performed whereby an implied fair
value of goodwill is determined through an  allocation of the fair value to  the
reporting  unit's assets and liabilities, whether recognized or unrecognized, in
a manner similar  to a purchase  price allocation, in  accordance with SFAS  No.
141,  "Business Combinations." Any residual fair value after this purchase price
allocation would be assumed to relate to goodwill. If the carrying value of  the
goodwill  exceeded the residual fair value, we would record an impairment charge
for that  amount.  Net goodwill  was  $79.0 million  at  December 31,  2002.  No
impairment charge was recorded as of December 31, 2002.

ACQUISITIONS

     In  November  1998, we  acquired all  the outstanding  common stock  of The
Cynara Company ("Cynara"), a designer and manufacturer of specialized production
equipment utilizing membrane  technology to  separate bulk  carbon dioxide  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 issued
752,501 additional shares, as Class B Common Stock, which was converted to Class
A Common Stock, on a share-for-share basis, prior to December 31, 2002.

     In January 2000, we acquired all the outstanding common stock of Porta-Test
International, Inc. ("Porta-Test"), 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. See--Commitments and Contingencies.

                                        22
<PAGE>

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

     In April 2000, we acquired all the outstanding common stock of  Engineering
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.

     In  March 2001, we acquired  all the outstanding share  capital of Axsia, a
privately held  process and  design company  based in  the United  Kingdom,  for
approximately  $42.8 million,  net of  cash acquired.  Axsia specializes  in the
design and supply of  equipment for water re-injection  systems for oil and  gas
fields,  oily water treatment, oil separation, hydrogen production and other oil
and gas  processing  equipment  systems.  This  acquisition  was  financed  with
borrowings under our term loan and revolving credit facility.

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

INDUSTRY AND BUSINESS ENVIRONMENT

     As a leading provider of  wellhead process equipment, systems and  services
used  in the production of  oil and gas, our  revenues and results of operations
are closely tied to demand for oil and gas products and spending by oil and  gas
companies  for  exploration  and  development of  oil  and  gas  reserves. These
companies generally invest  more in exploration  and development efforts  during
periods  of  favorable oil  and  gas commodity  prices,  and invest  less during
periods of  unfavorable  oil  and  gas prices.  As  supply  and  demand  change,
commodity  prices fluctuate  producing cyclical  trends in  the industry. During
periods of lower demand, revenues for service providers such as NATCO  generally
decline,  as existing  projects are  completed and  new projects  are postponed.
During periods of recovery,  revenues for service providers  can lag behind  the
industry due to the timing of new project awards.

     Changes  in  commodity  prices have  impacted  our business  over  the past
several years. The following  table summarizes the price  of domestic crude  oil
per  barrel  and the  wellhead  price of  natural  gas per  thousand  cubic feet
("mcf"), as published by the U.S. Department of Energy, and the number of rotary
drilling rigs in operation, as published  by Baker Hughes Incorporated, for  the
most recent five years:

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                      ----------------------------------------------
                                                       2002         2001     2000     1999     1998
                                                      -------      ------   ------   ------   ------
    <S>                                               <C>          <C>      <C>      <C>      <C>
    Average price of crude oil per barrel in the
      U.S...........................................  $ 22.51      $21.86   $26.72   $15.56   $10.87
    Average wellhead price of natural gas per mcf in
      the U.S.......................................  $  2.87(1)   $ 4.12   $ 3.69   $ 2.19   $ 1.96
    Average U.S. rig count..........................      830       1,156      918      625      826
</Table>

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

(1)Average  wellhead price  of natural gas  per mcf  in the U.S.  for the period
   January 1, 2002 through November 30, 2002.

     At December 31, 2002, the spot  price of West Texas Intermediate crude  oil
was  $31.17 per barrel, the price of natural gas was $4.75 per mcf, and the U.S.
rig count  was  862.  At  February  28, 2003,  the  spot  price  of  West  Texas
Intermediate crude oil was $36.98 per barrel, the price of Henry Hub natural gas
was  $8.00 per mcf,  as per the New  York Mercantile Exchange,  and the U.S. rig
count was 912,  per Baker  Hughes Incorporated.  These spot  prices reflect  the
overall  volatility of oil  and gas commodity  prices in the  current and recent
years. Although increased commodity prices generally correlate directly with  an
increase  in spending by  oil and gas companies  for exploration and development
efforts, rig counts remain lower than expected based on historical experience.

     From a longer-term  perspective, the  U.S. Department  of Energy  estimates
that  U.S. demand for petroleum products will  grow at an average annual rate of
1.7% through 2025  and that  U.S. demand  for natural  gas will  increase at  an
average  annual rate of 1.8%  through 2025. As demand  grows and reserves in the
United States  decline, producers  and  service providers  in  the oil  and  gas
industry may continue to rely more

                                        23
<PAGE>

heavily on global sources of energy and expansion into new markets. The industry
continues to seek more innovative and technologically efficient means to extract
hydrocarbons  from existing fields, as production  profiles change. As a result,
additional and more  complex equipment may  be required to  produce oil and  gas
from  these fields, especially since  many new oil and  gas fields produce lower
quality or contaminated hydrocarbon  streams, requiring more complex  production
equipment.  In general, these trends should increase the demand for our products
and services.

     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,
                                                                 ---------------------------------
                                                                   2002        2001        2000
                                                                 ---------   ---------   ---------
                                                                          (IN THOUSANDS)
    <S>                                                          <C>         <C>         <C>
    Statement of Operations Data:
    Revenues...................................................  $289,539    $286,582    $224,552
    Cost of goods sold.........................................   219,354     210,512     162,757
                                                                 --------    --------    --------
    Gross profit...............................................    70,185      76,070      61,795
    Selling, general and administrative expense................    53,947      51,471      39,443
    Depreciation and amortization expense......................     4,958       8,143       5,111
    Closure and other..........................................       548       1,600       1,528
    Interest expense...........................................     4,527       4,941       1,588
    Interest cost on postretirement benefit liability..........       471         888       1,287
    Interest income............................................      (248)       (660)       (181)
    Other expense, net.........................................       400         429          13
                                                                 --------    --------    --------
    Income from continuing operations before income taxes and
      change in accounting principle...........................     5,582       9,258      13,006
    Provision for income taxes.................................     1,705       3,895       5,345
                                                                 --------    --------    --------
    Income before cumulative effect of change in accounting
      principle................................................     3,877       5,363       7,661
    Cumulative effect of change in accounting principle (net of
      income taxes of $7)......................................        --          --          10
                                                                 --------    --------    --------
    Net income.................................................  $  3,877    $  5,363    $  7,671
                                                                 ========    ========    ========
</Table>

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

     Revenues. Revenues  for the  year ended  December 31,  2002 increased  $3.0
million,  or  1%, to  $289.5 million,  from  $286.6 million  for the  year ended
December 31, 2001. The following  table summarizes revenues by business  segment
for the years ended December 31, 2002 and 2001, respectively:

<Table>
<Caption>
                                                         FOR THE YEAR ENDED
                                                            DECEMBER 31,              CHANGE
                                                         -------------------   --------------------
                         REVENUES:                         2002       2001     DOLLARS   PERCENTAGE
                         ---------                       --------   --------   -------   ----------
                                                             (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                                  <C>        <C>        <C>       <C>
    North American Operations..........................  $137,374   $145,147   $(7,773)     (5)%
    Engineered Systems.................................   107,041     99,021     8,020       8
    Automation and Control Systems.....................    52,142     47,693     4,449       9
    Corporate and Inter-segment Eliminations...........    (7,018)    (5,279)   (1,739)    (33)
                                                         --------   --------   -------
      Total............................................  $289,539   $286,582   $ 2,957       1 %
                                                         ========   ========   =======
</Table>

                                        24
<PAGE>

     Revenues  from our North American operations  business segment for the year
ended December 31, 2002  decreased $7.8 million, or  5%, to $137.4 million  from
$145.1  million for the year ended December 31, 2001. This decrease was directly
related to a  decline in oilfield  activity throughout 2002.  The average  North
American  rotary rig count declined  from 1,497 for the  year ended December 31,
2001 to 1,093 for the  year ended December 31,  2002. Although revenues for  our
traditional  equipment  and  finished  goods  declined,  results  for  our Latin
American  operations  and  CO2  gas-processing  operations  and  field  services
improved  during 2002  relative to 2001.  Revenues from  our Canadian operations
decreased as Canadian rotary rig counts continued to decline from an average  of
341 for the year ended December 31, 2001 to an average of 263 for the year ended
December  31,  2002.  Inter-segment  revenues  for  this  business  segment were
approximately $917,000 and $781,000  for the years ended  December 31, 2002  and
2001, respectively.

     Revenues  from our engineered  systems business segment  for the year ended
December 31, 2002 increased  $8.0 million, or 8%,  to $107.0 million from  $99.0
million for the year ended December 31, 2001. This increase was primarily due to
several  large projects,  primarily in  West Africa,  that provided  revenues of
approximately $31.0 million during  2002, offset by a  decline in revenues  from
our  U.K.-based operations and  a decline in revenues  earned in Southeast Asia,
with the substantial  completion of the  CTOC project in  late 2001.  Engineered
systems revenues of $107.0 million for the year ended December 31, 2002 included
inter-segment revenues of $1.8 million, as compared to $748,000 of inter-segment
revenues for the year ended December 31, 2001.

     Revenues  from our automation and control  systems business segment for the
year ended December  31, 2002 increased  $4.4 million, or  9%, to $52.1  million
from $47.7 million for the year ended December 31, 2001. The increase was due to
higher demand for our control equipment and field services, partially associated
with  repair projects in  the Gulf of Mexico  following several tropical weather
systems in 2002. Inter-segment revenues increased from $3.8 million for the year
ended December 31, 2001 to $4.3 million for the year ended December 31, 2002.

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

     Gross  Profit. Gross profit for the  year ended December 31, 2002 decreased
$5.9 million, or  8%, to $70.2  million from  $76.1 million for  the year  ended
December  31, 2001. As a percentage of  revenue, gross margins declined from 27%
for the year  ended December 31,  2001 to 24%  for the year  ended December  31,
2002.  The following table  summarizes gross profit by  business segment for the
years ended December 31, 2002 and 2001, respectively:

<Table>
<Caption>
                                                           FOR THE YEAR ENDED
                                                              DECEMBER 31,              CHANGE
                                                           -------------------   --------------------
                        GROSS PROFIT:                        2002       2001     DOLLARS   PERCENTAGE
                        -------------                      --------   --------   -------   ----------
                                                               (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                                    <C>        <C>        <C>       <C>
    North American Operations............................  $37,583    $35,475    $ 2,108       6 %
    Engineered Systems...................................   23,213     31,221     (8,008)    (26)
    Automation and Control Systems.......................    9,389      9,374         15      --
                                                           -------    -------    -------
         Total...........................................  $70,185    $76,070    $(5,885)     (8)%
                                                           =======    =======    =======
</Table>

     Gross profit from our  North American operations  business segment for  the
year  ended December 31,  2002 increased $2.1  million, or 6%,  to $37.6 million
from $35.5 million for the year ended December 31, 2001. This increase in margin
was primarily due to the contribution  of our Latin American operations and  our
CO2   gas-processing  operations   and  field   services,  reflecting  increased
throughput from  the  expansion at  our  Sacroc  facility. As  a  percentage  of
revenue,  gross margins  for the segment  were 27%  and 24% for  the years ended
December 31, 2002 and 2001, respectively.

     Gross profit  from our  engineered systems  business segment  for the  year
ended  December 31, 2002 decreased  $8.0 million, or 26%,  to $23.2 million from
$31.2 million for the year  ended December 31, 2001,  despite an 8% increase  in
revenues. This decline was due to the completion of several high-margin projects
during  2001 in Southeast  Asia and within  our U.K.-based operations, partially
offset by new projects for 2002
                                        25
<PAGE>

awarded at more traditional margins. As  a percentage of revenue, gross  margins
for  this segment  were 22% and  32% for the  years ended December  31, 2002 and
2001, respectively.

     Gross profit from our automation  and control systems business segment  for
the  years ended  December 31,  2002 and  2001 remained  constant, despite  a 9%
increase in revenues for the period, primarily due to an increase in labor costs
attributable to higher medical benefit costs and an unfavorable mix of labor and
materials in 2002 compared  to 2001. As a  percentage of revenue, gross  margins
for  this segment  were 18% and  20% for the  years ended December  31, 2002 and
2001, respectively.

     Selling,  General  and   Administrative  Expense.   Selling,  general   and
administrative  expense  for the  year ended  December  31, 2002  increased $2.5
million, or 5%, to $53.9 million from $51.5 million for the year ended  December
31, 2001. This increase was largely related to the following factors:

     - one  year of  operating expenses  at Axsia  during 2002  compared to nine
       months during fiscal 2001;

     - additional costs associated with the start-up of the Singapore office  in
       March 2001;

     - costs  associated with the start-up of the Mexico marketing office opened
       in late 2001; and

     - additional costs associated with employee medical claims.

     Depreciation  and  Amortization  Expense.  Depreciation  and   amortization
expense  for the year ended December 31, 2002 decreased $3.2 million, or 39%, to
$5.0  million  from  $8.1  million  for  the  year  ended  December  31,   2001.
Depreciation expense for the year ended December 31, 2002 increased $764,000, or
19%,  to $4.9 million  from $4.1 million  for the year  ended December 31, 2001.
This increase was  primarily due  to the  inclusion of  depreciation expense  on
assets acquired through the purchase of Axsia in March 2001, and depreciation on
assets  placed in service in late 2001 and 2002, including a significant upgrade
of our drying plant facility in Pittsburg, California, and the expansion of  our
gas-processing  plant at  the Sacroc  field. Amortization  expense for  the year
ended December 31,  2002 decreased $3.9  million, or 98%,  to $92,000 from  $4.0
million  for the  year ended  December 31,  2001. This  decrease in amortization
expense was attributable to a change in accounting method prescribed by SFAS No.
142, "Goodwill  and Other  Intangible Assets."  This pronouncement,  adopted  on
January 1, 2002, requires that goodwill no longer be amortized over a prescribed
period  but rather  intangible assets  not assigned  a useful  life be evaluated
annually for impairment. See "--Recent Accounting Pronouncements." Therefore, no
goodwill amortization  was  recorded  for  the year  ended  December  31,  2002,
compared  to $3.7 million for the year ended December 31, 2001. In addition, the
results for  the  year ended  December  31, 2001  include  amortization  expense
associated  with certain  employment contracts that  were fully  amortized as of
December 31, 2001.

     Closure and Other. Closure  and other charges for  the year ended  December
31,  2002 of $548,000 related to the  closure of a manufacturing and engineering
facility in Edmonton, Alberta, Canada. Costs include the involuntary termination
of certain  employees, relocation  of equipment  and certain  personnel and  the
modification  of related operating lease arrangements. At December 31, 2002, our
remaining accrued liability related to  this restructuring was $304,000, and  we
expect  to  incur additional  relocation  and shop  moving  costs which  will be
expensed as incurred through the second  quarter of 2003. During the year  ended
December  31, 2001,  we incurred a  charge totaling $920,000  related to certain
restructuring  costs  to  streamline  activities  and  consolidate  offices   in
connection  with  the acquisition  of  Axsia in  March  2001, and  an additional
$680,000 related to our decision to withdraw a private debt offering.

     Interest Expense. Interest  expense for  the year ended  December 31,  2002
decreased  $414,000, or 8%, to $4.5 million from $4.9 million for the year ended
December 31, 2001. This decrease was due  to a decline in outstanding debt  from
$58.6  million at December 31,  2001 to $52.4 million  at December 31, 2002. The
weighted average interest rate of  our outstanding borrowings remained  constant
for the respective periods.

     Interest  Cost  on  Postretirement  Benefit  Liability.  Interest  cost  on
postretirement benefit liability decreased $417,000,  or 47%, from $888,000  for
the  year ended December  31, 2001 to  $471,000 for the  year ended December 31,
2002. This decrease in interest  cost was due to an  amendment to the plan  that
provides medical and dental coverage to retirees of a predecessor company. Under
the  amended plan, retirees will bear  more cost for coverages, thereby reducing
our projected liability and the related interest cost.
                                        26
<PAGE>

     Interest Income. Interest income decreased $412,000, or 62%, from  $660,000
for the year ended December 31, 2001 to $248,000 for the year ended December 31,
2002.  This change in interest income was  primarily due to interest earned on a
federal income tax refund paid during 2001 by the Canadian taxing authorities.

     Other Expense,  net. Other  expense, net  of $400,000  for the  year  ended
December  31, 2002, declined $29,000, or 7%, compared to the year ended December
31, 2001. The change relates primarily to foreign currency transaction gains and
losses incurred through our operations in the United Kingdom and Canada.

     Provision for Income Taxes. Income tax expense for the year ended  December
31,  2002 decreased $2.2 million, or 56%,  to $1.7 million from $3.9 million for
the year  ended  December 31,  2001.  This decline  in  income tax  expense  was
primarily  due  to a  decrease in  income  before income  taxes, which  was $5.6
million for the year ended December 31, 2002 as compared to $9.3 million for the
year ended December 31, 2001. The decrease in the effective tax rate from  42.1%
for  the year ended December  31, 2001 to 30.5% for  the year ended December 31,
2002, was  due  primarily  to  no  longer  recognizing  non-deductible  goodwill
amortization expense, as per SFAS No. 142, adopted January 1, 2002.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     Revenues.  Revenues for  the year ended  December 31,  2001 increased $62.0
million, or  28%, to  $286.6 million,  from $224.6  million for  the year  ended
December  31, 2000. The following table  summarizes revenues by business segment
for the years ended December 31, 2001 and 2000, respectively:

<Table>
<Caption>
                                                         FOR THE YEAR ENDED
                                                            DECEMBER 31,              CHANGE
                                                         -------------------   --------------------
                         REVENUES:                         2001       2000     DOLLARS   PERCENTAGE
                         ---------                       --------   --------   -------   ----------
                                                             (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                                  <C>        <C>        <C>       <C>
    North American Operations..........................  $145,147   $119,689   $25,458       21%
    Engineered Systems.................................    99,021     67,803    31,218       46
    Automation and Control Systems.....................    47,693     42,761     4,932       12
    Corporate and Inter-segment Eliminations...........    (5,279)    (5,701)      422        7
                                                         --------   --------   -------
      Total............................................  $286,582   $224,552   $62,030       28%
                                                         ========   ========   =======
</Table>

     Revenues from our North American  operations business segment for the  year
ended  December 31, 2001 increased $25.5 million, or 21%, to $145.1 million from
$119.7 million for the year ended December 31, 2000. This increase was due to an
increase in oilfield activity during fiscal 2000 through mid-2001 as a result of
favorable oil and gas prices.  Although oil and gas  prices began to decline  in
late  2001,  demand remained  high for  our  traditional equipment  and finished
goods. We also experienced  increased demand for our  domestic and export  parts
and  service business  and our CO2  gas-processing and  field services business.
Partially offsetting these increases was a  decline in revenues of $8.1  million
provided  by our Canadian affiliate, as  large projects were completed in fiscal
2000 and several planned  projects for fiscal  2001 were delayed.  Inter-segment
revenues  for this business segment were approximately $781,000 and $1.3 million
for the years ended December 31, 2001 and 2000, respectively.

     Revenues from our engineered  systems business segment  for the year  ended
December  31, 2001 increased $31.2 million, or  46%, to $99.0 million from $67.8
million for the year ended December 31, 2000. This increase was primarily due to
the acquisition of  Axsia in  March 2001,  which contributed  revenues of  $58.1
million for the year ended December 31, 2001. This increase was partially offset
by  a decline in revenues earned under the CTOC project, which contributed $45.9
million in revenues for the  year ended December 31,  2000, as compared to  only
$10.9  million for the year ended December 31, 2001. Excluding the impact of the
Axsia acquisition  and the  CTOC  project, revenues  for this  business  segment
increased  $8.1  million during  fiscal  2001 as  compared  to fiscal  2000, due
primarily to export projects  including a number of  projects in South  America.
Engineered  systems revenues  of $99.0 million  for the year  ended December 31,
2001 included inter-segment  revenues of  $748,000, as compared  to $268,000  of
inter-segment revenues for the year ended December 31, 2000.

                                        27
<PAGE>

     Revenues  from our automation and control  systems business segment for the
year ended December 31,  2001 increased $4.9 million,  or 12%, to $47.7  million
from $42.8 million for the year ended December 31, 2000. The increase was due to
higher  demand  for our  control  equipment, especially  equipment  provided for
deep-water projects,  and  an  increase  in field  services  performed  for  our
customers.  Inter-segment revenues declined from $4.1 million for the year ended
December 31, 2000 to $3.8 million for the year ended December 31, 2001.

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

     Gross  Profit. Gross profit for the  year ended December 31, 2001 increased
$14.3 million, or 23%, to  $76.1 million from $61.8  million for the year  ended
December  31, 2000. As a percentage of  revenue, gross margins declined from 28%
for the year  ended December 31,  2000 to 27%  for the year  ended December  31,
2001.  The following table  summarizes gross profit by  business segment for the
years ended December 31, 2001 and 2000, respectively:

<Table>
<Caption>
                                                           FOR THE YEAR ENDED
                                                              DECEMBER 31,              CHANGE
                                                           -------------------   --------------------
                        GROSS PROFIT:                        2001       2000     DOLLARS   PERCENTAGE
                        -------------                      --------   --------   -------   ----------
                                                               (IN THOUSANDS, EXCEPT PERCENTAGES)
    <S>                                                    <C>        <C>        <C>       <C>
    North American Operations............................  $35,475    $28,609    $ 6,866       24%
    Engineered Systems...................................   31,221     24,362      6,859       28
    Automation and Control Systems.......................    9,374      8,824        550        6
                                                           -------    -------    -------
      Total..............................................  $76,070    $61,795    $14,275       23%
                                                           =======    =======    =======
</Table>

     Gross profit from our  North American operations  business segment for  the
year  ended December 31, 2001  increased $6.9 million, or  24%, to $35.5 million
from $28.6 million for the year ended December 31, 2000. This increase in margin
was primarily due to a 21% increase  in revenues from this segment and  improved
margins  on  export parts  and  services and  traditional  finished goods.  As a
percentage of revenue, gross margins for the segment were consistent at 24%  for
the years ended December 31, 2001 and 2000.

     Gross  profit from  our engineered  systems business  segment for  the year
ended December 31, 2001  increased $6.9 million, or  28%, to $31.2 million  from
$24.4  million  for the  year ended  December  31, 2000.  This increase  was due
primarily to the acquisition of Axsia  in March 2001, partially offset by  lower
margin  projects  included  in the  sales  mix  for 2001  as  compared  to 2000.
Excluding the impact of Axsia and the CTOC project, gross margin increased  $1.5
million  related primarily to export projects. As a percentage of revenue, gross
margins for this segment were 32% and 36% for the years ended December 31,  2001
and 2000, respectively.

     Gross  profit from our automation and  control systems business segment for
the year ended December 31, 2001 increased $550,000, or 6%, to $9.4 million from
$8.8 million for the year ended  December 31, 2000. This margin improvement  was
due  to an  increase in  demand for  electrical equipment  which resulted  in an
increase in segment  revenues of 12%,  partially offset by  a shift from  higher
margin  quote jobs to time and materials  jobs during fiscal 2001 as compared to
fiscal 2000. As a percentage of revenue, gross margins for this segment were 20%
and 21% for the years ended December 31, 2001 and 2000, respectively.

     Selling,  General  and   Administrative  Expense.   Selling,  general   and
administrative  expense for  the year  ended December  31, 2001  increased $12.0
million, or 30%, to $51.5 million from $39.4 million for the year ended December
31, 2000. This  increase was largely  related to the  execution of our  business
plan and included:

     - additional costs associated with the acquisition of Axsia;

     - additional costs associated with the start-up of the Singapore and Mexico
       offices;

     - increased spending for technology and product development; and

     - additional costs associated with employee medical claims.
                                        28
<PAGE>

     Depreciation   and  Amortization  Expense.  Depreciation  and  amortization
expense for the year ended December 31, 2001 increased $3.0 million, or 59%,  to
$8.1   million  from  $5.1  million  for  the  year  ended  December  31,  2000.
Depreciation expense for the year ended December 31, 2001 increased $991,000, or
32%, to $4.1 million  from $3.1 million  for the year  ended December 31,  2000.
This  increase was  primarily due  to the  inclusion of  depreciation expense on
assets acquired through the purchase of Axsia in March 2001, and depreciation on
assets placed in service during fiscal  2001. Amortization expense for the  year
ended  December 31, 2001 increased  $2.0 million, or 102%,  to $4.0 million from
$2.0 million for the year ended  December 31, 2000. This increase was  primarily
due  to amortization of goodwill associated  with the Axsia acquisition in March
2001.

     Closure and Other. Closure  and other charges for  the year ended  December
31,  2001 increased $72,000,  or 5%, to  $1.6 million from  $1.5 million for the
year ended  December 31,  2000. The  charge for  fiscal 2001  included  $920,000
related  to certain restructuring costs to streamline activities and consolidate
offices in  connection with  the acquisition  of  Axsia in  March 2001,  and  an
additional $680,000 related to our decision to withdraw a private debt offering.
The  charge for  fiscal 2000 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 the
Company's Class A common  stock in an initial  public offering. NATCO  completed
its  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 in
January 2000.

     Interest Expense. Interest  expense for  the year ended  December 31,  2001
increased  $3.4 million, or 211%, to $5.0 million from $1.6 million for the year
ended December 31, 2000.  This increase was due  to borrowings of $50.0  million
under  a  term loan  arrangement to  finance the  purchase of  Axsia, additional
borrowings under revolving credit facilities  during fiscal 2001 as compared  to
fiscal  2000, an increase in commitment fees under borrowing arrangements and an
increase in  interest incurred  for  letter of  credit  arrangements due  to  an
increase in overall letters of credit outstanding.

     Interest  Cost  on  Postretirement  Benefit  Liability.  Interest  cost  on
postretirement benefit liability decreased $399,000,  or 31%, from $1.3  million
for the year ended December 31, 2000 to $888,000 for the year ended December 31,
2001.  This decrease in interest  cost was due to an  amendment to the plan that
provides medical and dental coverage to retirees of a predecessor company. Under
the amended plan, retirees will bear  more cost for coverages, thereby  reducing
our projected liability and the related interest cost.

     Interest Income. Interest income increased $479,000, or 265%, from $181,000
for the year ended December 31, 2000 to $660,000 for the year ended December 31,
2001. This increase in interest income was primarily due to interest earned on a
federal income tax refund paid during 2001 by the Canadian taxing authorities.

     Other  Expense,  net. Other  expense, net  of $429,000  for the  year ended
December 31, 2001 relates  primarily to foreign  currency transaction gains  and
losses  incurred  primarily  at  Axsia, and  certain  costs  to  exit derivative
arrangements acquired with the purchase of Axsia in March 2001.

     Provision for Income Taxes. Income tax expense for the year ended  December
31,  2001 decreased $1.5 million, or 27%,  to $3.9 million from $5.3 million for
the year  ended  December 31,  2000.  This decline  in  income tax  expense  was
primarily  due  to a  decrease in  income  before income  taxes, which  was $9.3
million for the year ended  December 31, 2001 as  compared to $13.0 million  for
the  year  ended December  31, 2000.  This  decrease in  income tax  expense was
partially offset by an increase  in the effective tax  rate from 41.1% to  42.1%
for  the years ended December 31, 2000  and 2001, respectively, primarily due to
the impact of non-deductible goodwill amortization expense.

                                        29
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     As of February 28, 2003,  we had cash and  working capital of $2.6  million
and  $47.1  million, respectively.  As of  December  31, 2002,  we had  cash and
working capital of $1.7 million and $34.6 million, respectively, as compared  to
$3.1 million and $37.1 million at December 31, 2001, respectively.

     Net  cash provided  by (used in)  operating activities for  the years ended
December 31, 2002,  2001 and  2000 was $9.7  million, $19.3  million and  ($6.3)
million, respectively. The decrease in net cash provided by operating activities
for fiscal 2002 was primarily due to lower net income, as well as an increase in
accounts  receivable  and a  decrease  in customer  advance  payments, partially
offset by a decline in inventory levels.

     Net cash used  in investing  activities for  the years  ended December  31,
2002,  2001  and  2000  was  $5.6  million,  $57.7  million  and  $23.6 million,
respectively. The primary use of funds for the year ended December 31, 2002  was
for  capital expenditures  of $5.3 million,  which included an  expansion of our
gas-processing facility in the  Sacroc field. The primary  use of funds for  the
year  ended December 31, 2001  was the acquisition of  Axsia, which required the
use of $48.3 million, and capital expenditures of $10.0 million, which  included
the purchase of a shop facility in Magnolia, Texas, expansion of and improvement
to  our  facilities in  New Iberia,  Louisiana, and  improvements to  our Sacroc
gas-processing plant  in  west  Texas.  Funds for  the  Axsia  acquisition  were
borrowed  under a  $50.0 million  term loan  facility. Capital  expenditures for
fiscal 2001 were financed  with borrowings under  our revolving credit  facility
and  cash generated from  current operations. The  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  of $8.1
million. These  capital  expenditures  consisted primarily  of  renovations  and
expansions  of  manufacturing plants,  technological improvements  to management
information systems and  acquisitions of  and improvements  to other  equipment,
including  an  upgrade  to  the membrane  manufacturing  facility  in Pittsburg,
California. 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 the
revolving credit facilities.

     Net cash provided  by (used in)  financing activities for  the years  ended
December  31, 2002, 2001  and 2000 was  ($5.4) million, $41.1  million and $29.7
million, respectively. The primary use of funds for financing activities for the
year ended December 31, 2002 was the repayment of long-term debt of $7.1 million
and benefit  payments under  our postretirement  benefit plan  of $1.9  million,
partially  offset by  long-term borrowings  of $1.5  million and  a $1.9 million
increase  in  bank  overdrafts.  The  primary  source  of  funds  for  financing
activities  during the  year ended  December 31,  2001, was  borrowings of $50.0
million under the term loan  facility, partially offset by principal  repayments
of  $5.3 million under the term loan  facility, net repayments of $747,000 under
the revolving credit facility, payments  on postretirement benefit liability  of
$1.8  million and  repayment of  short-term notes  of $1.0  million. 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.

     We maintain revolving credit and term loan facilities, as well as a working
capital facility  for export  sales. The  term  loan provides  for up  to  $50.0
million  of borrowings  and the  revolving credit  facilities provide  for up to
$30.0 million  of  borrowings in  the  United States,  up  to $10.0  million  of
borrowings  in  Canada and  up  to $10.0  million  of borrowings  in  the United
Kingdom, subject to borrowing base limitations.  The term loan matures on  March
15,  2006, and each  of the revolving  facilities matures on  March 15, 2004. At
December 31, 2002, we had borrowings outstanding under the term loan facility of
$37.8 million and  borrowings of  $9.0 million outstanding  under the  revolving
credit  facility and had  issued $17.4 million in  outstanding letters of credit
under this  facility. Amounts  borrowed  under the  term  loan portion  of  this
facility  currently bear interest at a rate of 4.21% per annum. Amounts borrowed
under the revolving portion of this facility bear interest at a rate based  upon
the  ratio  of  funded  debt  to  EBITDA,  as  defined  in  the  credit facility

                                        30
<PAGE>

("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 0.30% to 0.50% per year, depending upon the
ratio of funded debt to EBITDA on the undrawn portion of the facility.

     In July 2002, our lenders approved  the amendment of various provisions  of
the  term loan and revolving credit facility agreement, effective April 1, 2002.
This amendment allowed for future  capital investment in our CO2  gas-processing
facility  at Sacroc in west Texas,  and revised certain debt covenants, modified
certain defined terms, increased the aggregate amount of operating lease expense
allowed during a fiscal year and  permitted an increase in borrowings under  the
export  sales credit facility, without further consent, up to a maximum of $20.0
million. These modifications  will result in  higher commitment fee  percentages
and interest rates if the funded debt to EBITDA ratio exceeds 3 to 1.

     The  revolving credit and  term loan facility  is guaranteed by  all of our
domestic subsidiaries and is secured by a first priority lien on all  inventory,
accounts  receivable  and  other  material tangible  and  intangible  assets. In
addition, we  have  pledged  65% of  the  voting  stock of  our  active  foreign
subsidiaries.  The revolving credit and  term loan facility contains restrictive
covenants which, among other things, limit the amount of funded debt to  EBITDA,
imposes  a minimum fixed  charge coverage ratio, a  minimum asset coverage ratio
and a  minimum net  worth  requirement. As  of December  31,  2002, we  were  in
compliance  with all debt  covenants. The weighted average  interest rate of our
borrowings under the term loan and  revolving credit agreement on that date  was
4.26%.

     The export sales credit facility provides for aggregate borrowings of $10.0
million,  subject  to  borrowing base  limitations,  of which  $4.3  million was
outstanding as  of December  31, 2002.  In addition,  we had  issued letters  of
credit  totaling $720,000 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 2004.

     We borrowed $1.5 million under  a long-term promissory note arrangement  on
February  6, 2002. This note accrues interest at the 90-day LIBOR plus 3.25% per
annum, and requires quarterly payments of principal of approximately $24,000 and
interest  for  five  years   beginning  May  2002.   This  promissory  note   is
collateralized  by  our  manufacturing  facility  in  Magnolia,  Texas  that  we
purchased in the fourth quarter of 2001.

     We had unsecured letters of credit totaling $432,000 at December 31, 2002.

     At January  31,  2003, borrowing  base  limitations reduced  our  available
borrowing  capacity under the  revolving credit facilities  to $24.3 million. No
borrowing capacity was available under our export sales credit facility.

                                        31
<PAGE>

COMMITMENTS AND CONTINGENCIES

     The following  table summarizes  our known  contractual obligations  as  of
December 31, 2002.

<Table>
<Caption>
                                                                 PAYMENTS DUE BY PERIOD
                                             ---------------------------------------------------------------
                                                       LESS THAN
            CONTRACTUAL OBLIGATIONS           TOTAL     1 YEAR     1-3 YEARS   3-5 YEARS   MORE THAN 5 YEARS
            -----------------------          -------   ---------   ---------   ---------   -----------------
                                                                     (IN THOUSANDS)
    <S>                                      <C>       <C>         <C>         <C>         <C>
    Long-Term Obligations..................  $52,354    $ 7,097     $27,409     $17,848             --
    Capital (Finance) Lease Obligations
      (1)..................................       --         --          --          --             --
    Operating Lease Obligations (2)........   15,550      4,038       4,235       1,964          5,313
    Purchase Obligations (1)...............       --         --          --          --             --
    Other Long-Term Liabilities (3)........   12,718      1,909       3,818       3,818          3,173
                                             -------    -------     -------     -------         ------
    Total..................................  $80,622    $13,044     $35,462     $23,630         $8,486
                                             =======    =======     =======     =======         ======
</Table>

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

(1) We   have  no  capital  lease  arrangements  or  significant  firm  purchase
    commitments as of December 31, 2002.

(2) Operating lease obligations  for periods  that exceed  five years  primarily
    include  costs associated with the usage of waterways in the United Kingdom,
    which have lease terms  that extend up  to 125 years.  If the property  were
    sold  or sublet  to a  new tenant, these  lease arrangements  would be fully
    transferable.

(3) Other long-term liabilities represent our postretirement benefit  obligation
    as  of December  31, 2002. Benefit  payments associated  with the obligation
    were estimated based upon actual experience for the year ended December  31,
    2002.  Changes in actuarial assumptions or medical trend rates in subsequent
    years could cause our  liability under this  postretirement benefit plan  to
    change.

     The  Porta-Test purchase  agreement, executed  in January  2000, contains a
provision to calculate a  payment to certain  former stockholders of  Porta-Test
Systems,  Inc. for a three-year period ended  January 23, 2003, 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. If applicable, payment is required
annually. In April 2001, we paid $226,000 under this arrangement related to  the
year  ended January 23,  2001. In August  2002, the Company  paid $197,000 under
this arrangement related  to the year  ended January 23,  2002, resulting in  an
increase  in goodwill. No  liability was accrued under  this arrangement for the
years ended January 23, 2003 and 2002.

     We have  no  special  purpose  entities  or  unconsolidated  affiliates  or
partnerships.

     On  March 13, 2003, we executed an  agreement to issue 15,000 shares of our
Series B Convertible  Preferred Stock  along with warrants  to purchase  248,800
shares  of our common stock to Lime Rock Partners II, L.P., a private investment
fund, for  an  aggregate purchase  price  of  $15.0 million.  Of  the  aggregate
purchase  price, approximately $99,000 will be allocated to the warrants, and we
will amortize this  discount over three  years. The proceeds  from the  issuance
will  be used to reduce our outstanding  revolving debt balances and for general
corporate purposes. This transaction  is expected to close  prior to the end  of
March 2003.

     Each  share of  Series B  Convertible Preferred Stock  has a  face value of
$1,000 and pays a cumulative dividend of  10% per annum of face value, which  is
payable  semi-annually on June  15 and December  15 of each  year. Each share of
Series B Convertible Preferred Stock is convertible, at the option of the holder
thereof, into (i) a number of shares of common stock equal to the face value  of
such  share divided by  the conversion price,  which is $7.805,  and (ii) a cash
payment equal to the amount of dividends  on such share that have accrued  since
the prior semi-annual dividend payment date. The warrants that will be issued to
Lime  Rock have an exercise price of $10.00 per share of common stock and expire
on the third anniversary of its issuance. We can force exercise of the  warrants
if  our stock price  trades above $13.50  per share for  30 consecutive days. We
estimate that accounting  for issuance of  the preferred shares  will lower  our
earnings  by $0.05  per diluted  share in 2003  relative to  what earnings might
otherwise have been.

                                        32
<PAGE>

     Although no assurances  can be given,  we believe that  our operating  cash
flow,  supported by our borrowing capacity and additional financing obtained for
capital investment, will be  adequate to fund operations  for at least the  next
twelve  months.  Should  we  decide  to  pursue  acquisition  opportunities, the
determination of our ability  to finance these acquisitions  will be a  critical
element  of the analysis of the opportunity. Although we were in compliance with
existing restrictive  loan covenants  as  of December  31,  2002 and  expect  to
continue  to  be in  compliance, there  can be  no assurance  we will  remain in
compliance in  future periods  and, therefore,  we may  be required  to  request
amendments  or  waivers of  some or  all of  these covenants  in the  future. We
believe these amendments or waivers can be obtained, if necessary, on reasonable
terms.

RELATED PARTY TRANSACTIONS

     We do  not own  a minority  interest in  or guarantee  obligations for  any
related  party. There are  no debt obligations  of related parties  for which we
have responsibility but were not reported in our balance sheet.

     We pay  Capricorn  Management,  G.P., an  affiliate  company  of  Capricorn
Holdings,  Inc., for  administrative services,  which included  office space and
parking in Connecticut  for our Chief  Executive Officer, reception,  telephone,
computer  services and other  normal office support relating  to that space. Mr.
Herbert S.  Winokur,  Jr., one  of  our directors,  is  the Chairman  and  Chief
Executive  Officer  of Capricorn  Holdings, Inc.,  and  the Managing  Partner of
Capricorn Holdings LLC, the general partner  of Capricorn Investors II, L.P.,  a
private   investment   partnership,   and   directly   or   indirectly  controls
approximately 31%  of  our outstanding  common  stock. In  addition,  our  Chief
Executive  Officer, Mr. Gregory, is a  non-salaried member of Capricorn Holdings
LLC. Capricorn  Investors II,  L.P.  controls approximately  20% of  our  common
stock.  Fees paid to Capricorn Management  totaled $115,000, $85,000 and $75,000
for the years ended December 31,  2002, 2001 and 2000, respectively.  Commencing
October  1, 2001,  the fee  increased to $28,750  quarterly due  primarily to an
upward adjustment in Capricorn Management's  underlying lease for office  space;
this  increase was reviewed and approved by  the Audit Committee of our Board of
Directors.

     Under the terms  of an  employment agreement in  effect prior  to 1999,  we
loaned our Chief Executive Officer $1.2 million in July 1999 to purchase 136,832
shares  of common  stock. During February  2000, after we  completed the initial
public offering of our Class A common stock, also pursuant to the terms of  that
employment  agreement,  we 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 us  approximately $665,000.  In addition,  on
October  27, 2000, our board of directors agreed to provide a full recourse loan
to this  executive officer  to facilitate  the exercise  of certain  outstanding
stock  options. The  amount of the  loan was equal  to the cost  to exercise the
options plus  any personal  tax burdens  that resulted  from the  exercise.  The
maturity of these loans was July 31, 2003, and interest accrued at rates ranging
from  6%  to  7.8% per  annum.  As of  June  30, 2002,  these  outstanding notes
receivable totaled  $3.4  million,  including principal  and  accrued  interest.
Effective  July 1,  2002, the notes  were reviewed  by our board  and amended to
extend the  maturity dates  to July  31, 2004,  and to  require interest  to  be
calculated  at an  annual rate  based on LIBOR  plus 300  basis points, adjusted
quarterly, applied  to  the  notes  balances as  of  June  30,  2002,  including
previously  accrued interest. As of December 31,  2002, the balance of the notes
(principal and  accrued  interest)  due  from  this  officer  under  these  loan
arrangements was $3.5 million. These loans to this executive officer, which were
made on a full recourse basis in prior periods to facilitate direct ownership of
our  common stock, are currently subject to and in compliance with provisions of
the Sarbanes-Oxley Act of 2002.

     As previously agreed  in 2001, we  loaned an employee  who is an  executive
officer  and director  $216,000 on  April 15,  2002, under  a full-recourse note
arrangement which accrues interest at 6% per annum and matures on July 31, 2003.
The funds were used to pay the exercise cost and personal tax burdens associated
with stock options exercised during 2001.  Effective July 1, 2002, the note  was
amended to extend the maturity date to July 31, 2004, and to require interest to
be  calculated at an annual rate based  on LIBOR plus 300 basis points, adjusted
quarterly, applied to the note balance as of June 30, 2002, including previously
accrued interest. As of  December 31, 2002, the  balance of the note  (principal
and   interest)  due  from   this  officer  under   this  loan  arrangement  was
approximately $223,000. This loan to this executive officer, which was made on a
full

                                        33
<PAGE>

recourse basis in  prior periods to  facilitate direct ownership  of our  common
stock,  is  currently  subject  to  and in  compliance  with  provisions  of the
Sarbanes-Oxley Act of 2002.

     During 1997, we loaned $1.5 million (at a rate of 10% per annum) to one  of
our  directors who was  also an affiliate  of Capricorn Holdings,  Inc. 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 Investors,  L.P.
distributed  its holding of  our common stock  to its partners.  During 1998, we
acquired an option  at a  cost of  $200,000 to  purchase 173,050  shares of  our
common stock from the director at a price of $8.81 per share. At our option, the
note  could be repaid with  shares of our 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  we
exercised  an option to  purchase 173,050 shares  of our common  stock from this
director at a cost of $1.5 million. The remaining balance of the note was repaid
during June 2000.

     During December 1999, we assumed the postretirement pension liability of  a
former  affiliate,  W.S.  Tyler  Incorporated ("Tyler").  In  February  2000, we
received $600,000 from Tyler as settlement of an agreement entered into  between
Tyler,  Capricorn Investors L.P.  and us, whereby  we assumed responsibility for
the retired employee health  and life insurance obligations  of Tyler. See  Note
15, Pension and Other Postretirement Benefits.

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.  However, current  economic and
political  unrest  in  Venezuela  has  increased  inflation  and  affected   our
operations  in  that country.  Since revenues  earned  in Venezuela  during 2002
represented less than 1% of our total revenues, our exposure to this increase in
inflation was not significant.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001,  the Financial Accounting  Standards Board ("FASB")  approved
SFAS  No. 141, "Business Combinations." This standard requires that any business
combination initiated after June  30, 2001 be accounted  for using the  purchase
method of accounting. This standard became effective on July 1, 2001. We adopted
this  standard  on  July 1,  2001,  with  no material  effect  on  our financial
condition or results of operations.

     The FASB approved SFAS No. 142,  "Goodwill and Other Intangible Assets"  in
June  2001. This pronouncement  requires that intangible  assets with indefinite
lives, including goodwill, cease being amortized and be evaluated for impairment
on an annual  basis. Intangible  assets with a  defined term,  such as  patents,
would  continue to be  amortized over the  useful life of  the asset. We adopted
SFAS No. 142 on January  1, 2002, and continued  to amortize certain net  assets
totaling  $1.6  million  at December  31,  2002, and  recorded  amortization and
interest expense related to those assets of $840,000 for the year ended December
31, 2002. We ceased periodic amortization  of goodwill on the date of  adoption.
Net  goodwill at December  31, 2002 was  $79.0 million. The  pro forma impact of
applying SFAS No. 142 to operating results for the years ended December 31, 2001
and 2000, would have  been a reduction in  amortization expense of $3.7  million
and $1.6 million, respectively, resulting in net income of $9.0 million and $9.3
million,  respectively. The pro forma increase in basic and diluted earnings per
share would have been $.23 and $.23, respectively, for 2001, and $.11 and  $.10,
respectively, for 2000.

     In  accordance with SFAS No.  142, we tested goodwill  for impairment as of
December 31, 2002. Based upon the testing performed, we determined that goodwill
was not impaired as  of December 31, 2002.  Therefore, no impairment charge  was
recorded under SFAS No. 142 as of December 31, 2002. Goodwill will be tested for
impairment annually on December 31.

     In  June  2001,  the  FASB  issued  SFAS  No.  143,  "Accounting  for Asset
Retirement Obligations." This standard requires us  to record the fair value  of
an   asset   retirement   obligation   as  a   liability   in   the   period  in

                                        34
<PAGE>

which we incur  a legal obligation  associated with the  retirement of  tangible
long-lived assets that result from acquisition, construction, development and/or
normal  use of  the assets. In  addition, the  standard requires us  to record a
corresponding asset that  will be depreciated  over the life  of the asset  that
gave  rise to the liability. Subsequent to the initial measurement of this asset
retirement obligation, we will be required to adjust the liability at the end of
each period to reflect changes in  estimated retirement cost and the passage  of
time.  We  are required  to adopt  this  pronouncement on  January 1,  2003. The
provisions of this pronouncement  will require us  to record certain  retirement
obligations  during the first quarter of  2003. We are currently determining the
impact that this pronouncement will have on our financial condition and  results
of operations.

     In  October  2001,  the  FASB  issued SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets." This statement replaces SFAS  No.
121,  "Accounting for  the Impairment  of Long-Lived  Assets and  for Long-Lived
Assets to be Disposed Of," and standardizes the accounting model to be used  for
asset  dispositions and related implementation issues. This pronouncement became
effective for  financial  statements issued  for  fiscal years  beginning  after
December  15, 2001. We adopted this  pronouncement on January 1, 2002, resulting
in an immaterial impact on our financial condition or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
This statement  amends  existing  guidance  on reporting  gains  and  losses  on
extinguishment  of debt, prohibiting  the classification of the  gain or loss as
extraordinary. SFAS No. 145  also amends SFAS No.  13 to require  sale-leaseback
accounting for certain lease modifications that have economic effects similar to
sale-leaseback  arrangements.  The provisions  of the  Statement related  to the
rescission of Statement  No. 4  will be applied  for the  fiscal year  beginning
after  May  14, 2002,  with  early adoption  encouraged.  The provisions  of the
Statement related to Statement No. 13 were effective for transactions  occurring
after  May  15, 2002,  with early  adoption  encouraged. SFAS  No. 145  has been
adopted with respects to the revision of  Statement No. 13 on May 15, 2002,  and
will be adopted on January 1, 2003, with respect to the amendment of SFAS No. 4.
However,  the adoption of SFAS No. 145 is not expected to have a material effect
on our financial condition or results of operations.

     In June  2002,  the FASB  issued  SFAS No.  146,  "Accounting for  Exit  or
Disposal  Activities," which  addresses financial  accounting and  reporting for
costs associated  with exit  and  disposal activities,  including  restructuring
activities  that are currently accounted for  pursuant to the guidance set forth
in EITF Issue No. 94-3, "Liability Recognition for Certain Employee  Termination
Benefits  and Other Costs  to Exit an  Activity." SFAS No.  146 is effective for
exit or disposal  activities that are  initiated after December  31, 2002,  with
early  adoption encouraged. The provisions of this pronouncement will be applied
to any exit or disposal activities on  or after January 1, 2003. However, we  do
not  expect  this  pronouncement to  have  a  material effect  on  our financial
condition or results of operations.

     In November  2002,  the FASB  issued  Interpretation No.  45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness to Others,  an interpretation of FASB Statements  No.
5,   57  and  107  and  a  rescission  of  FASB  Interpretation  No.  34."  This
interpretation elaborates on the  disclosures to be made  by a guarantor in  its
interim  and annual financial statements  about its obligations under guarantees
issued. The  interpretation  also clarifies  that  a guarantor  is  required  to
recognize,  at the inception of  a guarantee, a liability  for the fair value of
the obligation taken. The initial recognition and measurement provisions of  the
interpretation  are applicable to  guarantees issued or  modified after December
31, 2002. We do not expect this interpretation to have a material impact on  our
financial condition or results of operations.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition  and  Disclosure, an  amendment  to FASB  Statement No.
123." This statement amends FASB Statement No. 123, "Accounting for  Stock-Based
Compensation,"   to   provide   alternative   methods   to   transition,   on  a
volunteer-basis, to the fair value method of accounting for stock-based employee
compensation. Additionally, this statement amends the disclosure requirements of
SFAS No.  123  to require  prominent  disclosures  in both  annual  and  interim
financial  statements. Certain disclosure modifications  are required for fiscal
years ending  after December  15,  2002, if  a transition  to  SFAS No.  123  is
elected.  We have not yet  elected to transition to SFAS  No. 123 as of December
31, 2002.

                                        35
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our operations are  conducted around  the world  in a  number of  different
countries.  Accordingly, our earnings are exposed to changes in foreign currency
exchange rates.  The majority  of our  foreign currency  transactions relate  to
operations  in  Canada  and  the  U.K.  At  NATCO  Canada,  most  contracts  are
denominated in Canadian dollars, and most of the costs incurred are in  Canadian
dollars,  thereby  mitigating risks  associated  with currency  fluctuations. At
Axsia, which is our U.K.-based operation acquired in March 2001, many  contracts
are  denominated in U.S. dollars, and occasionally in euros, whereas most of the
costs may be  in British pounds  sterling. Consequently, we  have some  currency
risk in our U.K. operations. Prior to the date of acquisition, Axsia had entered
into  certain forward  contract arrangements  whereby it  sold U.S.  dollars for
future delivery  at a  specified strike  price, in  order to  hedge exposure  to
currency fluctuations on contracts denominated in U.S. dollars. During the third
and  fourth quarters of 2001, we  paid approximately $249,000 to terminate these
forward contracts. No forward contracts or other derivative arrangements existed
at December 31, 2002, and we do  not currently intend to enter into new  forward
contracts  or  other  derivative  arrangements  as  part  of  our  currency risk
management strategy.

     Our financial  instruments  are  subject  to  changes  in  interest  rates,
including  our  revolving credit  and term  loan  facility, our  working capital
facility for export  sales and our  long-term facility secured  by our  Magnolia
manufacturing  plant. At  December 31,  2002, we  had $37.8  million outstanding
under the term loan portion of the  revolving credit and term loan facility.  At
December  31, 2002, outstanding borrowings  under our revolving credit agreement
totaled $9.0  million.  Borrowings under  our  revolving credit  agreement  bear
interest  at  floating rates.  As  of December  31,  2002, the  weighted average
interest rate of borrowings  under the revolving credit  and term loan  facility
was  4.26%. Borrowings outstanding  under the export  sales credit facility were
$4.3 million at December 31, 2002,  and bore interest at 4.25%. Borrowing  under
the long-term arrangement secured by our Magnolia manufacturing facility totaled
$1.4 million at December 31, 2002, and accrued interest at 4.65%.

     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, 2002, a  100 basis point
increase in interest  rates under  these borrowings would  decrease our  current
year  net income and  cash flow from operations  by approximately $364,000. This
calculation assumes no action on our part to mitigate our exposure. 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  our consolidated  financial statements for  the years  ended
December  31, 2002,  2001 and  2000, as  applicable, along  with the Independent
Auditors' report:

                                        36
<PAGE>

                          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,  2002  and 2001,  and  the  related
consolidated  statements of  operations, stockholders'  equity and comprehensive
income, and cash  flows for each  of the  three years ended  December 31,  2002.
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, 2002 and 2001 and the results of  their
operations  and their cash flows for each  of the three years ended December 31,
2002, in conformity with accounting principles generally accepted in the  United
States of America.

     As  discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the  Company adopted the provisions  of Statement of  Financial
Accounting  Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," as
required. As discussed in Note 14 to the Consolidated Financial Statements,  the
Company  changed its method of accounting for postretirement benefits in January
2000.

KPMG LLP

Houston, Texas
February 19, 2003

                                        37
<PAGE>

                       NATCO GROUP INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<Table>
<Caption>
                                                                DECEMBER 31,    DECEMBER 31,
                                                                    2002            2001
                                                                ------------    ------------
<S>                                                             <C>             <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................      $  1,689        $  3,093
  Trade accounts receivable, less allowance for doubtful
     accounts of $1,028 and $905 as of December 31, 2002 and
     2001, respectively.....................................        74,677          67,922
  Inventories...............................................        32,400          37,517
  Deferred income tax assets, net...........................         5,506           3,693
  Income tax receivable.....................................           299             993
  Prepaid expenses and other current assets.................         1,806           2,039
                                                                  --------        --------
     Total current assets...................................       116,377         115,257
Property, plant and equipment, net..........................        31,485          31,003
Goodwill....................................................        78,977          79,907
Deferred income tax assets, net.............................         2,984           4,378
Other assets, net...........................................         1,772           2,206
                                                                  --------        --------
     Total assets...........................................      $231,595        $232,751
                                                                  ========        ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current installments of long-term debt....................      $  7,097        $  7,000
  Notes payable.............................................            --              --
  Accounts payable..........................................        36,074          30,440
  Accrued expenses and other................................        37,243          34,781
  Customer advances.........................................         1,354           5,925
                                                                  --------        --------
     Total current liabilities..............................        81,768          78,146
Long-term debt, excluding current installments..............        45,257          51,568
Postretirement and other long-term liabilities..............        12,718          14,107
                                                                  --------        --------
     Total liabilities......................................       139,743         143,821
                                                                  --------        --------
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 15,803,797
     and 15,469,078 shares as of December 31, 2002 and 2001,
     respectively...........................................           158             155
  Class B Common stock, $.01 par value. Authorized 5,000,000
     shares; issued and outstanding 334,719 shares as of
     December 31, 2001......................................            --               3
  Additional paid-in capital................................        97,223          97,223
  Accumulated earnings......................................         8,734           4,857
  Treasury stock, 795,692 shares at cost as of December 31,
     2002 and 2001..........................................        (7,182)         (7,182)
  Accumulated other comprehensive loss......................        (3,395)         (2,858)
  Note receivable from officer and stockholder..............        (3,686)         (3,268)
                                                                  --------        --------
     Total stockholders' equity.............................        91,852          88,930
                                                                  --------        --------
Commitments and contingencies
     Total liabilities and stockholders' equity.............      $231,595        $232,751
                                                                  ========        ========
</Table>

          See accompanying notes to consolidated financial statements.

                                        38
<PAGE>

                       NATCO GROUP INC. AND SUBSIDIARIES

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

<Table>
<Caption>
                                                         FOR THE         FOR THE         FOR THE
                                                        YEAR ENDED      YEAR ENDED      YEAR ENDED
                                                       DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                           2002            2001            2000
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
Revenues...........................................      $289,539        $286,582        $224,552
Cost of goods sold.................................       219,354         210,512         162,757
                                                         --------        --------        --------
  Gross profit.....................................        70,185          76,070          61,795
Selling, general and administrative expense........        53,947          51,471          39,443
Depreciation and amortization expense..............         4,958           8,143           5,111
Closure and other..................................           548           1,600           1,528
Interest expense...................................         4,527           4,941           1,588
Interest cost on postretirement benefit
  liability........................................           471             888           1,287
Interest income....................................          (248)           (660)           (181)
Other expense, net.................................           400             429              13
                                                         --------        --------        --------
  Income from continuing operations before income
     taxes and change in accounting principle......         5,582           9,258          13,006
Income tax provision...............................         1,705           3,895           5,345
                                                         --------        --------        --------
Income before cumulative effect of change in
  accounting principle.............................         3,877           5,363           7,661
Cumulative effect of change in accounting principle
  (net of income taxes of $7)......................            --              --              10
                                                         --------        --------        --------
  Net income.......................................      $  3,877        $  5,363        $  7,671
                                                         ========        ========        ========
Earnings per share--basic:
Net income before cumulative effect of change in
  accounting principle.............................      $   0.25        $   0.34        $   0.52
Cumulative effect of change in accounting
  principle........................................             -               -               -
                                                         --------        --------        --------
  Net income.......................................      $   0.25        $   0.34        $   0.52
                                                         ========        ========        ========
Earnings per share--diluted:
Net income before cumulative effect of change in
  accounting principle.............................      $   0.24        $   0.34        $   0.51
Cumulative effect of change in accounting
  principle........................................             -               -               -
                                                         --------        --------        --------
  Net income.......................................      $   0.24        $   0.34        $   0.51
                                                         ========        ========        ========
Basic weighted average number of shares of common
  stock outstanding................................        15,804          15,722          14,653
Diluted weighted average number of shares of common
  stock outstanding................................        15,920          15,966          15,158
</Table>

          See accompanying notes to consolidated financial statements.

                                        39
<PAGE>

                       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   ACCUMULATED                  OTHER
                                     ---------------------   ----------    PAID-IN      EARNINGS/    TREASURY   COMPREHENSIVE
                                         A           B        A      B     CAPITAL      (DEFICIT)     STOCK         LOSS
                                     ----------   --------   ----   ---   ----------   -----------   --------   -------------
<S>                                  <C>          <C>        <C>    <C>   <C>          <C>           <C>        <C>
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 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.......          --         --     --    --         --            --          --            --
Issuances related to benefit
  plans............................     673,970         --      7    --      1,363            --          --            --
Comprehensive income
  Income before cumulative effect
    of change in accounting
    principle......................          --         --     --    --         --         7,661          --            --
  Cumulative effect of change in
    accounting principle...........          --         --     --    --         --            10          --            --
  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)
Conversion of Class B shares to
  Class A shares...................     373,675   (373,675)     4    (4)        --            --          --            --
Issue common stock for
  acquisition......................          --      8,520     --    --         85            --          --            --
Treasury shares reacquired.........    (118,454)        --     (1)   --         --            --        (866)           --
Issue note receivable to
  stockholder......................          --         --     --    --         --            --          --            --
Interest on stock subscription note
  receivable.......................          --         --     --    --         --            --          --            --
Issuances related to benefit
  plans............................     236,503         --      2    --        537            --          --            --
Comprehensive income
  Net income.......................          --         --     --    --         --         5,363          --            --
  Foreign currency translation
    adjustment.....................          --         --     --    --         --            --          --          (994)
Total comprehensive income.........          --         --     --    --         --            --          --            --
                                     ----------   --------   ----   ---    -------       -------     -------       -------
Balances at December 31, 2001......  15,469,078    334,719   $155   $ 3    $97,223       $ 4,857     $(7,182)      $(2,858)
Conversion of Class B shares to
  Class A shares...................     334,719   (334,719)     3    (3)        --            --          --            --
Issue note receivable to
  stockholder......................          --         --     --    --         --            --          --            --
Interest on stock subscription note
  receivable.......................          --         --     --    --         --            --          --            --
Comprehensive income
  Net income.......................          --         --     --    --         --         3,877          --            --
  Foreign currency translation
    adjustment.....................          --         --     --    --         --            --          --          (537)
Total comprehensive income.........          --         --     --    --         --            --          --            --
                                     ----------   --------   ----   ---    -------       -------     -------       -------
Balances at December 31, 2002......  15,803,797         --   $158   $--    $97,223       $ 8,734     $(7,182)      $(3,395)
                                     ==========   ========   ====   ===    =======       =======     =======       =======

<Caption>

                                        NOTE
                                     RECEIVABLE        TOTAL
                                        FROM       STOCKHOLDERS'
                                     STOCKHOLDER      EQUITY
                                     -----------   -------------
<S>                                  <C>           <C>
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 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.......        665            665
Issuances related to benefit
  plans............................         --          1,370
Comprehensive income
  Income before cumulative effect
    of change in accounting
    principle......................         --          7,661
  Cumulative effect of change in
    accounting principle...........         --             10
  Foreign currency translation
    adjustment.....................         --           (978)
                                                      -------
Total comprehensive income.........         --          6,693
                                       -------        -------
Balances at December 31, 2000......    $(1,893)       $86,179
Conversion of Class B shares to
  Class A shares...................         --             --
Issue common stock for
  acquisition......................         --             85
Treasury shares reacquired.........         --           (867)
Issue note receivable to
  stockholder......................     (1,178)        (1,178)
Interest on stock subscription note
  receivable.......................       (197)          (197)
Issuances related to benefit
  plans............................         --            539
Comprehensive income
  Net income.......................         --          5,363
  Foreign currency translation
    adjustment.....................         --           (994)
                                                      -------
Total comprehensive income.........         --          4,369
                                       -------        -------
Balances at December 31, 2001......    $(3,268)       $88,930
Conversion of Class B shares to
  Class A shares...................         --             --
Issue note receivable to
  stockholder......................       (216)          (216)
Interest on stock subscription note
  receivable.......................       (202)          (202)
Comprehensive income
  Net income.......................         --          3,877
  Foreign currency translation
    adjustment.....................         --           (537)
                                                      -------
Total comprehensive income.........         --          3,340
                                       -------        -------
Balances at December 31, 2002......    $(3,686)       $91,852
                                       =======        =======
</Table>

          See accompanying notes to consolidated financial statements.

                                        40
<PAGE>

                       NATCO GROUP INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                       FOR THE YEAR ENDED   FOR THE YEAR ENDED   FOR THE YEAR ENDED
                                                          DECEMBER 31,         DECEMBER 31,         DECEMBER 31,
                                                              2002                 2001                 2000
                                                       ------------------   ------------------   ------------------
<S>                                                    <C>                  <C>                  <C>
Cash flows from operating activities:
  Net income.........................................       $  3,877             $  5,363             $  7,671
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
    Deferred income tax provision....................            605                 (733)               1,611
    Depreciation and amortization expense............          4,958                8,143                5,111
    Non-cash interest income.........................           (202)                (197)                 (85)
    Interest cost on postretirement benefit
      liability......................................            471                  888                1,287
    Loss (gain) on sale of property, plant and
      equipment......................................            124                 (141)                (110)
    Cumulative effect of change in accounting
      principle......................................             --                   --                  (10)
    Change in assets and liabilities:
      (Increase) decrease in trade accounts
        receivable...................................         (4,904)              19,908              (14,230)
      (Increase) decrease in inventories.............          5,305               (8,004)              (6,647)
      (Increase) decrease in prepaid and other
        current assets...............................            613                  141                 (482)
      Increase (decrease) in other income taxes......            720                 (826)                 633
      (Increase) decrease in long-term assets........           (408)              (1,935)                 418
      Increase (decrease) in accounts payable........          3,297               (1,818)               4,221
      Decrease in accrued expenses and other.........           (122)              (6,325)                (819)
      Increase (decrease) in customer advances.......         (4,594)               4,804               (4,819)
                                                            --------             --------             --------
        Net cash provided by (used in) operating
          activities.................................          9,740               19,268               (6,250)
                                                            --------             --------             --------
Cash flows from investing activities:
  Capital expenditures for property, plant and
    equipment........................................         (5,255)             (10,023)              (8,137)
  Proceeds from sales of property, plant and
    equipment........................................             84                  268                  575
  Acquisitions, net of working capital acquired......           (197)             (48,285)             (17,126)
  Issuance of related party note receivable..........           (216)              (1,178)                  --
  Repayment of related party note receivable.........             --                   --                1,059
  Proceeds from claim settlement.....................             --                1,500                   --
                                                            --------             --------             --------
        Net cash used in investing activities........         (5,584)             (57,718)             (23,629)
                                                            --------             --------             --------
Cash flows from financing activities:
  Change in bank overdrafts..........................          1,917                   26                2,864
  Net borrowing (repayments) under long-term
    revolving credit facilities......................           (668)                (747)               8,932
  Repayment of short-term notes payable..............             --               (1,001)                  --
  Borrowings of long-term debt.......................          1,460               50,000                   --
  Repayment of long-term debt........................         (7,073)              (5,250)             (27,858)
  Issuance of common stock, net......................             --                    1               46,894
  Net payments on postretirement benefit liability...         (1,909)              (1,787)              (1,772)
  Receipt as partial payment of the net present value
    of postretirement benefit liability of
    affiliate........................................             --                   --                  600
  Receipt of postretirement benefit cost
    reimbursement from predecessor company...........             79                   79                   --
  Treasury stock reacquired..........................             --                 (867)                (243)
  Other, principally bank and IPO fees...............            753                  659                  285
                                                            --------             --------             --------
        Net cash provided by (used in) financing
          activities.................................         (5,441)              41,113               29,702
                                                            --------             --------             --------
Effect of exchange rate changes on cash and cash
  equivalents........................................           (119)                (601)                (539)
                                                            --------             --------             --------
Increase (decrease) in cash and cash equivalents.....         (1,404)               2,062                 (716)
Cash and cash equivalents at beginning of period.....          3,093                1,031                1,747
                                                            --------             --------             --------
Cash and cash equivalents at end of period...........       $  1,689             $  3,093             $  1,031
                                                            ========             ========             ========
Cash payments for:
  Interest...........................................       $  2,543             $  3,977             $  1,061
  Income taxes.......................................       $  2,263             $  1,791             $  1,903
Significant non-cash investing and financing
  activities:
  Issuance of common stock for acquisition...........       $     --             $     85             $  4,077
  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.
                                        41
<PAGE>

                       NATCO GROUP INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION

     NATCO Group Inc.  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"). In June 1989,  the
Company  acquired from C-E all of the  outstanding common stock of National Tank
Company  and  certain  other  businesses  that  were  subsequently  divested  or
distributed to shareholders.

     On  June 30,  1997, NATCO  acquired Total  Engineering Services  Team, Inc.
("TEST"),  and  on  November  18,  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.

     On  March  19,  2001,  NATCO  acquired  Axsia  Group  Limited  ("Axsia"), a
privately held process and design company based in the United Kingdom.

     The  accompanying  consolidated  financial   statements  and  all   related
disclosures   include  the  results  of  operations   of  the  Company  and  its
wholly-owned subsidiaries for the years ended December 31, 2002, 2001 and  2000.
Furthermore,  certain reclassifications have been made to fiscal 2001 and fiscal
2000 amounts  in order  to present  these  results on  a comparable  basis  with
amounts for fiscal 2002.

     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

     Principles of Consolidation.  The consolidated financial statements include
the  accounts  of  the  Company  and  all  of  its  wholly-owned   subsidiaries.
Significant  inter-company  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. For the year ended
December 31, 2002, one customer, ExxonMobil Corporation and affiliates,  through
its  general  contractor, Hyundai  Heavy Industries,  Co.,  provided 10%  of the
Company's  consolidated  revenues.  No  customer  provided  more  than  10%   of
consolidated  revenues for the year ended December 31, 2001. During fiscal 2000,
Carigali-Triton  Operating  Company,  SDN  BHD  ("CTOC")  through  its   general
contractor,  Samsung, provided revenues of $45.9 million or approximately 20% of
total revenues,  pursuant to  a large  project awarded  in July  1999. No  other
customer  provided more  than 10%  of revenues for  the year  ended December 31,
2000. See Note 21, 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.

     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.

                                        42
<PAGE>

     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.   Prior to  the adoption  on  January 1,  2002, of  Statement  of
Financial  Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", goodwill was being amortized on  a straight-line basis over periods  of
20 to 40 years. In accordance with SFAS No. 142, the Company ceased amortization
of goodwill and began to evaluate goodwill on an impairment basis. Based on this
testing, the Company's management believes that no impairment of goodwill exists
at  December 31,  2002. See Note  23, Goodwill  Impairment Testing. Amortization
expense for the years ended December 31, 2001 and 2000 was $3.7 million and $1.6
million, respectively. Accumulated  amortization at December  31, 2002 and  2001
was $6.4 million.

     Other  Assets, Net.  Other assets  include prepaid pension assets, patents,
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 and  interest  expense  was
$840,000, $932,000 and $554,000, for the years ended December 31, 2002, 2001 and
2000, 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 certain  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.    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.  In  December   2002,  SFAS   No.  148   "Accounting  for   Stock-Based
Compensation  -- Transition and  Disclosure, an amendment  to FASB Statement No.
123" was issued and provides alternative methods to transition to the fair value
method of accounting  for stock based  compensation, on a  volunteer basis,  and
requires  additional disclosures at both annual and interim periods. 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.

                                        43
<PAGE>

     The Company's pro forma net earnings  and earnings per share for the  years
ended December 31, 2002, 2001 and 2000 as per SFAS No. 123 were as follows:

<Table>
<Caption>
                                                           YEAR ENDED     YEAR ENDED     YEAR ENDED
                                                          DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                              2002           2001           2000
                                                          ------------   ------------   ------------
                                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
    <S>                                                   <C>            <C>            <C>
    Net income -- as reported...........................     $3,877         $5,363         $7,671
    Deduct: Total stock-based employee compensation
      expense determined under fair value based method
      for all awards, net of related tax effects........       (998)          (791)          (565)
                                                             ------         ------         ------
    Pro forma net income................................     $2,879         $4,572         $7,106
                                                             ======         ======         ======
    Earnings per share:
      Basic -- as reported..............................     $ 0.25         $ 0.34         $ 0.52
      Basic -- pro forma................................     $ 0.18         $ 0.29         $ 0.48
      Diluted -- as reported............................     $ 0.24         $ 0.34         $ 0.51
      Diluted -- pro forma..............................     $ 0.18         $ 0.29         $ 0.47
</Table>

     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 $2.0
million,  $2.1 million and $1.8  million for the years  ended December 31, 2002,
2001 and 2000, 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, 2002 and
2001,  the  Company  had  $6.0  million  and  $5.4  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.

     Derivative Arrangements.    Assets  and  liabilities  associated  with  and
underlying  derivative  arrangements  which  do  not  qualify  for  hedge  value
accounting are recorded at fair market value  as of the balance sheet date  with
any changes in fair value charged to income in the current period, in accordance
with   SFAS  No.  133,  "Accounting   for  Derivative  Instruments  and  Hedging
Activities."  The  Company  recorded  a  charge  of  $249,000  to  exit  certain
derivative  arrangements that were acquired with  the purchase of Axsia in March
2001. The Company  had no derivative  financial instruments as  of December  31,
2002, 2001 or 2000.

     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.

                                        44
<PAGE>

     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
potential common  share are  computed by  dividing net  income by  the  weighted
average  number  of  common and  potential  common shares  outstanding.  For the
purposes of this calculation, outstanding employee stock options are  considered
potential  common shares. In conformity  with Securities and Exchange Commission
requirements, common stock, options and warrants, or other potentially  dilutive
instruments  are reflected  in earnings per  share calculations  for all periods
presented. Anti-dilutive stock  options were  excluded from  the calculation  of
potential  common shares.  The impact of  these anti-dilutive  shares would have
been a reduction  of 314,000 shares,  145,000 shares and  36,000 shares for  the
years ended December 31, 2002, 2001 and 2000, respectively.

     The  following table  presents earnings  per common  share amounts computed
using SFAS No. 128:

<Table>
<Caption>
                                                                   NET                PER SHARE
                           PERIOD ENDED                           INCOME    SHARES     AMOUNTS
                           ------------                           ------    ------    ---------
                                                                      (IN THOUSANDS, EXCEPT
                                                                       PER SHARE AMOUNTS)
    <S>                                                           <C>       <C>       <C>
    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
                                                                  ======    ======     ======
    Year ended December 31, 2001
    Basic EPS.................................................    $5,363    15,722     $ 0.34
    Effect of dilutive securities:
    Options...................................................        --       244         --
                                                                  ------    ------     ------
    Diluted EPS...............................................    $5,363    15,966     $ 0.34
                                                                  ======    ======     ======
    Year ended December 31, 2002
    Basic EPS.................................................    $3,877    15,804     $ 0.25
    Effect of dilutive securities:
    Options...................................................        --       116      (0.01)
                                                                  ------    ------     ------
    Diluted EPS...............................................    $3,877    15,920     $ 0.24
                                                                  ======    ======     ======
</Table>

(3) CAPITAL STOCK

     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. 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  Holdings, Inc.  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  the same amount. The  shares were 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.

     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

                                        45
<PAGE>

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  automatically
converted 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.

     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   fiscal  2001,   the  Company   reacquired
approximately  118,000 shares of its Class  A common stock under this repurchase
agreement for $867,000,  an average cost  of $7.32 per  share. During 2000,  the
Company  reacquired  34,000  shares  of  its Class  A  common  stock  under this
repurchase plan for $243,000, an  average cost of $7.16  per share. The cost  to
reacquire  these shares was recorded as treasury  stock at December 31, 2002 and
2001, respectively.

     In February 2001 and June 2000, the Company issued 8,520 Class B shares and
418,145 Class B shares, respectively, to  the former shareholders of Cynara,  in
connection  with the achievement of certain  performance criteria defined in the
November 1998 purchase  agreement. Goodwill  was increased $85,000  in 2001  and
$4.1 million in 2000, as a result of these transactions.

(4) ACQUISITIONS

     In  November 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 418,145 Class B
shares and 8,520 Class B shares in June 2000 and February 2001, 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. In accordance
with SFAS No. 142,  "Goodwill and Other Intangible  Assets," the Company  ceased
amortizing  goodwill associated with the Cynara  acquisition on January 1, 2002.
Goodwill and  accumulated  amortization  was $17.6  million  and  $2.3  million,
respectively, at December 31, 2002.

     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 18, 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 was being amortized over a twenty-year period
prior to the adoption of SFAS  No. 142, "Goodwill and Other Intangible  Assets,"
on  January  1,  2002.  Goodwill and  accumulated  amortization  related  to the
Porta-Test acquisition were $5.4 million and $532,000, respectively, at December
31, 2002.

                                        46
<PAGE>

     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 accrued 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 was  being
amortized  over a  twenty-year period  prior to  the adoption  of SFAS  No. 142,
"Goodwill and  Other  Intangible  Assets,"  on January  1,  2002.  Goodwill  and
accumulated  amortization related to  the MPE acquisition  were $3.4 million and
$338,000, respectively, at December 31, 2002.

     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 excess of the  purchase price over the  fair values of the  net
assets  acquired  was being  amortized over  a twenty-year  period prior  to the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," on January  1,
2002.  Goodwill and accumulated amortization related to the ESI acquisition were
$6.0 million and $510,000, respectively, at December 31, 2002.

     On March 19, 2001, the Company  acquired all the outstanding share  capital
of  Axsia,  for  approximately  $42.8  million,  net  of  cash  acquired.  Axsia
specializes in the design and supply  of water re-injection systems for oil  and
gas  fields,  oily water  treatment,  oil separation,  hydro-cyclone technology,
hydrogen production and  other process equipment  systems. This acquisition  was
financed  with borrowings under NATCO's term loan facility and was accounted for
using the purchase method  of accounting. Results of  operations for Axsia  have
been  included in  NATCO's consolidated financial  statements since  the date of
acquisition. The purchase price of $45.0 million was allocated as follows:  $2.2
million  of cash acquired, $38.4 million  of current assets excluding cash, $2.0
million of  long-term assets  excluding goodwill  and $46.0  million of  current
liabilities.  The excess of  the purchase price  over the fair  value of the net
assets acquired was  being amortized  over a  twenty-year period,  prior to  the
adoption  of SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1,
2002. Goodwill  and  accumulated  amortization  expense  related  to  the  Axsia
acquisition  were $47.4 million and $1.9  million, respectively, at December 31,
2002.

     Assuming the  Axsia acquisition  occurred on  January 1  of the  respective
year, the unaudited pro forma results of the Company for the twelve months ended
December 31, 2001, and 2000, respectively, would have been as follows:

<Table>
<Caption>
                                                                        PRO FORMA RESULTS
                                                                       TWELVE MONTHS ENDED
                                                              -------------------------------------
                                                              DECEMBER 31, 2001   DECEMBER 31, 2000
                                                              -----------------   -----------------
                                                                 (UNAUDITED)         (UNAUDITED)
                                                                 (IN THOUSANDS, EXCEPT PER SHARE
                                                                            AMOUNTS)
    <S>                                                       <C>                 <C>
    Revenues................................................      $301,529            $287,403
    Income before income taxes and cumulative effect of
      change in accounting principle........................      $  6,540            $ 13,232
    Net income..............................................      $  3,428            $  6,794
    Net income per share:
      Basic.................................................      $   0.22            $   0.46
      Diluted...............................................      $   0.21            $   0.45
</Table>

     These pro forma results assume debt service costs associated with the Axsia
acquisition,  net of tax effect, calculated  at the Company's effective tax rate
for the  applicable period,  and nondeductible  goodwill amortization.  Although
prepared  on a basis consistent  with NATCO's consolidated financial statements,
these pro forma results do  not purport to be  indicative of the actual  results
which would have been achieved had the acquisition been consummated on January 1
of  the  respective year,  and are  not intended  to be  a projection  of future
results.

                                        47
<PAGE>

     Effective January 8, 2001, the Company entered into a Compromise Settlement
Agreement with the former  owner of TEST,  which resulted in  a cash payment  of
$1.5  million to NATCO on May 31,  2001, to settle certain contingencies related
to NATCO's acquisition of  TEST in 1997.  The proceeds of  this payment, net  of
related   costs,  were  used  to  reduce   goodwill  associated  with  the  TEST
acquisition.

(5) CLOSURE AND OTHER

     As of November  4, 2002, the  Company's management committed  to a plan  to
close  a manufacturing  and engineering  facility in  Edmonton, Alberta, Canada.
This plan includes the involuntary  termination of 27 employees including  plant
workers  and  administrative  staff,  the relocation  of  equipment  and certain
personnel to other facilities and  costs related to modifying certain  operating
lease  arrangements. The Company began implementing  this plan in November 2002,
and  incurred  approximately  $548,000  of  costs  under  this  plan,  including
severance  related costs of $123,000, asset  impairment charges of $121,000, and
other costs  totaling  $304,000,  primarily related  to  lease  obligations.  At
December  31, 2002,  the Company's remaining  accrued liability  related to this
restructuring was  $304,000, and  additional relocation  and shop  moving  costs
which  will be expensed as  incurred are expected through  the second quarter of
2003.

     In June 2001, the Company recorded a charge of $1.6 million that  consisted
of  $920,000 pursuant to an  approved plan to close  and merge an existing NATCO
office into  the operations  of Axsia,  as well  as other  streamlining  actions
associated  with  the acquisition.  This  charge included  costs  for severance,
office consolidation and  other expenses.  Also, the Company  withdrew a  public
debt  offering and recorded a  charge of $680,000 for  costs incurred related to
the proposed offering.

     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. See Note 17, Related Parties.

     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,
                                                                      2002           2001
                                                                  ------------   ------------
                                                                        (IN THOUSANDS)
    <S>                                                           <C>            <C>
    Finished goods..............................................    $13,088        $ 9,902
    Work-in-process.............................................      6,486         13,441
    Raw materials and supplies..................................     14,362         15,242
                                                                    -------        -------
      Inventories at FIFO.......................................     33,936         38,585
    Excess of FIFO over LIFO cost...............................     (1,536)        (1,068)
                                                                    -------        -------
                                                                    $32,400        $37,517
                                                                    =======        =======
</Table>

     At December 31, 2002 and 2001, inventories valued using the LIFO method and
included above  amounted  to  $26.3 million  and  $29.5  million,  respectively.
Reductions in LIFO layers resulted in a $59,000

                                        48
<PAGE>

decrease  in net  income for  the year  ended December  31, 2002.  There were no
reductions in LIFO layers for the years ended December 31, 2001 and 2000.

(7) COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

     Cost and estimated earnings on uncompleted contracts were as follows:

<Table>
<Caption>
                                                                  DECEMBER 31,   DECEMBER 31,
                                                                      2002           2001
                                                                  ------------   ------------
                                                                        (IN THOUSANDS)
    <S>                                                           <C>            <C>
    Cost incurred on uncompleted contracts......................    $87,586        $131,702
    Estimated earnings..........................................     19,656          51,343
                                                                    -------        --------
                                                                    107,242         183,045
    Less billings to date.......................................     87,187         169,925
                                                                    -------        --------
                                                                    $20,055        $ 13,120
                                                                    =======        ========
    Included in accompanying balance sheets under the following
      captions:
      Trade accounts receivable.................................    $20,262        $ 17,497
      Customer advances.........................................       (207)         (4,377)
                                                                    -------        --------
                                                                    $20,055        $ 13,120
                                                                    =======        ========
</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)         2002           2001
                                                       ----------------   ------------   ------------
                                                                                (IN THOUSANDS)
    <S>                                                <C>                <C>            <C>
    Land and improvements............................            --         $  2,041       $  1,977
    Buildings and improvements.......................      20 to 40           14,019         14,396
    Machinery and equipment..........................       3 to 12           30,181         27,120
    Office furniture and equipment...................       3 to 12            6,958          5,270
    Less accumulated depreciation....................                        (21,714)       (17,760)
                                                                            --------       --------
                                                                            $ 31,485       $ 31,003
                                                                            ========       ========
</Table>

     Depreciation expense  was  $4.9 million,  $4.1  million and  $3.1  million,
respectively,  for the years ended December 31, 2002, 2001 and 2000. 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 $5.0
million and  $5.3 million,  and the  related accumulated  depreciation was  $3.3
million and $3.5 million, at December 31, 2002 and 2001, respectively. Lease and
rental  income of $1.3  million, $1.2 million  and $581,000 for  the years ended
December 31, 2002, 2001 and 2000, respectively, was included in revenues.

                                        49
<PAGE>

(9) ACCRUED EXPENSES AND OTHER

     Accrued expense and other consisted of the following:

<Table>
<Caption>
                                                                  DECEMBER 31,   DECEMBER 31,
                                                                      2002           2001
                                                                  ------------   ------------
                                                                        (IN THOUSANDS)
    <S>                                                           <C>            <C>
    Accrued compensation and benefits...........................    $ 7,756        $ 8,674
    Accrued insurance reserves..................................      1,201          1,731
    Accrued warranty and product costs..........................      3,021          3,053
    Accrued project costs.......................................     17,095         11,896
    Taxes.......................................................      3,139          3,817
    Other.......................................................      5,031          5,610
                                                                    -------        -------
      Totals....................................................    $37,243        $34,781
                                                                    =======        =======
</Table>

(10) 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 accrued interest at 15% per annum. On January 24, 2001, the note
was repaid along with accrued interest.

     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. In February 2001, the Company paid $206,000 as principal
and interest.

(11) LONG-TERM DEBT

     The consolidated borrowings of the Company were as follows:

<Table>
<Caption>
                                                                  DECEMBER 31,   DECEMBER 31,
                                                                      2002           2001
                                                                  ------------   ------------
                                                                        (IN THOUSANDS)
    <S>                                                           <C>            <C>
    BANK DEBT
    Term loan with variable interest rate (4.21% and 4.25% at
      December 31, 2002 and 2001, respectively) and quarterly
      payments of principal ($1,750) and interest, due March 16,
      2006......................................................    $37,750        $44,750
    Revolving credit bank loans with variable interest rate
      (4.43% and 4.52% at December 31, 2002 and 2001,
      respectively) quarterly payment of interest, due March 15,
      2004......................................................      8,967         12,768
    Promissory note with variable interest rate (4.65% at
      December 31, 2002) and quarterly payments of principal
      ($24) and interest, due February 8, 2007..................      1,387             --
    Revolving credit bank loans (Export Sales Facility) with
      variable interest rate (4.25% and 4.75% at December 31,
      2002 and 2001, respectively) and monthly interest
      payments, due July 23, 2004...............................      4,250          1,050
                                                                    -------        -------
         Total..................................................     52,354         58,568
         Less current installments..............................     (7,097)        (7,000)
                                                                    -------        -------
         Long-term debt.........................................    $45,257        $51,568
                                                                    =======        =======
</Table>

     The aggregate future maturities of long-term debt for the next five years
ended December 31 are as follows: 2003--$7.1 million; 2004--$20.3 million;
2005--$7.1 million; 2006--$16.8 million; and 2007--$1.0 million.

                                        50
<PAGE>

     On March 16, 2001, the Company entered into a credit facility that
consisted 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. In October 2001, the Company amended this
revolving credit agreement to reduce the borrowing capacity in the U.S. from
$35.0 million to $30.0 million, and to increase its borrowing capacity in the
U.K. from $5.0 million to $10.0 million. No other material modifications were
made to the agreement at that time.

     Amounts borrowed under the term loan bear interest at a rate of 4.21% per
annum as of December 31, 2002. Amounts borrowed under the revolving portion of
the facility bear interest as follows:

     - until April 1, 2002, at a rate equal to, at the Company's election,
       either (1) the London Interbank Offered Rate ("LIBOR") plus 2.25% or (2)
       a base rate plus 0.75%; and

     - on and after April 1, 2002, at a rate based upon the ratio of funded debt
       to EBITDA, as defined in the credit facility ("EBITDA"), and ranging
       from, at the Company's 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%.

     NATCO paid commitment fees of 0.50% per year until April 1, 2002, and will
pay 0.30% to 0.50% per year following 2002, 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.

     In July 2002, our lenders approved the amendment of various provisions of
the term loan and revolving credit facility agreement, effective April 1, 2002.
This amendment allowed for future capital investment in our CO(2) gas-processing
facility at Sacroc in west Texas, and revised certain debt covenants, modified
certain defined terms, increased the aggregate amount of operating lease expense
allowed during a fiscal year and permitted an increase in borrowings under the
export sales credit facility, without further consent, up to a maximum of $20.0
million. These modifications will result in higher commitment fee percentages
and interest rates if the funded debt to EBITDA ratio exceeds 3 to 1.

     The revolving credit and term loan facility is guaranteed by all of the
Company's domestic subsidiaries and is secured by a first priority lien on all
inventory, accounts receivable and other material tangible and intangible
assets. In addition, the Company has pledged 65% of the voting stock of its
active foreign subsidiaries. The revolving credit and term loan facility
contains restrictive covenants which, among other things, limit the amount of
funded debt to EBITDA, imposes a minimum fixed charge coverage ratio, a minimum
asset coverage ratio and a minimum net worth requirement. As of December 31,
2002, the Company was in compliance with all restrictive debt covenants. NATCO
had letters of credit outstanding under the revolving credit facilities totaling
$17.4 million at December 31, 2002. These letters of credit constitute contract
performance and warranty collateral and expire at various dates through
September 2005.

     Borrowings of $50.0 million under the term loan facility were used
primarily for the acquisition of Axsia. The remaining borrowings, along with
additional borrowings under the revolving credit facility, were used to repay
$16.5 million outstanding under a predecessor revolving credit and term loan
facility.

     The Company maintains a working capital facility for export sales that
provides for aggregate borrowings of $10.0 million, subject to borrowing base
limitations, under which borrowings of $4.3 million were outstanding at December
31, 2002. Letters of credit outstanding under the export sales credit facility
as of December 31, 2002 totaled $720,000. The export sales credit facility loans
are secured by specific project inventory and receivables, are partially
guaranteed by the EXIM Bank and mature in July 2004.

     The Company had unsecured letters of credit totaling $432,000 at December
31, 2002.

     The Company borrowed $1.5 million under a long-term promissory note
arrangement on February 6, 2002. This note accrues interest at the 90-day LIBOR
plus 3.25% per annum, and requires quarterly payments of principal of
approximately $24,000 and interest for five years beginning May 2002. This
promissory note is collateralized by a manufacturing facility in Magnolia, Texas
that the Company purchased in the fourth quarter of 2001.
                                        51
<PAGE>

     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  50% of net  income less excess cash
flow beginning in  2001. No  dividends were declared  or paid  during the  years
ended December 31, 2002, 2001 and 2000.

(12) INCOME TAXES

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

<Table>
<Caption>
                                                              YEAR           YEAR           YEAR
                                                             ENDED          ENDED          ENDED
                                                          DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                              2002           2001           2000
                                                          ------------   ------------   ------------
                                                                        (IN THOUSANDS)
    <S>                                                   <C>            <C>            <C>
    Current:
      Federal...........................................     $ (942)        $ (240)        $2,569
      State.............................................        168            190            206
      Foreign...........................................      1,874          4,678            959
                                                             ------         ------         ------
                                                              1,100          4,628          3,734
                                                             ------         ------         ------
    Deferred:
      Federal...........................................        678           (524)         1,279
      State.............................................        206             (9)           167
      Foreign...........................................       (279)          (200)           165
                                                             ------         ------         ------
                                                                605           (733)         1,611
                                                             ------         ------         ------
                                                             $1,705         $3,895         $5,345
                                                             ======         ======         ======
</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,
                                                                      2002           2001
                                                                  ------------   ------------
                                                                        (IN THOUSANDS)
    <S>                                                           <C>            <C>
    Deferred tax assets:
      Postretirement benefit liability..........................    $ 4,642        $ 5,138
      Accrued liabilities.......................................      2,748          3,043
      Net operating loss carry forward..........................      3,011          1,851
      Accounts receivable.......................................        332            298
      Fixed assets and intangibles..............................        152            234
      Foreign tax credit carry forward..........................      1,237            699
      R&D tax credit carry forward..............................         80             65
                                                                    -------        -------
         Deferred tax assets....................................     12,202         11,328
      Valuation allowance.......................................        258          1,281
                                                                    -------        -------
         Net deferred tax assets................................    $11,944        $10,047
                                                                    -------        -------
    Deferred tax liabilities:
      Inventory.................................................        889            732
      Fixed assets and intangibles..............................      2,565          1,244
                                                                    -------        -------
         Total deferred tax liabilities.........................      3,454          1,976
                                                                    -------        -------
         Net deferred tax assets................................    $ 8,490        $ 8,071
                                                                    =======        =======
</Table>

     At December 31, 2002 and 2001,  the Company recorded a valuation  allowance
of  $258,000 and $1.3  million, related to certain  deferred tax assets acquired
with the purchase of  Axsia in March  2001. The Company  had net operating  loss
carry-forwards  for federal income  tax purposes of $7.6  million as of December
31, 2002, that were available to offset future federal income tax through 2022.

                                        52
<PAGE>

     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>
                                                           YEAR ENDED     YEAR ENDED     YEAR ENDED
                                                          DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                              2002           2001           2000
                                                          ------------   ------------   ------------
                                                                        (IN THOUSANDS)
    <S>                                                   <C>            <C>            <C>
    Income tax expense computed at statutory rate.......     $1,898         $3,148         $4,422
    State income tax expense net of federal income tax
      effect............................................        247            116            303
    Tax effect of foreign operations....................       (163)          (635)            75
    Domestic and foreign losses for which no tax benefit
      is currently available............................         --            215            137
    Tax benefit of foreign losses not previously
      claimed...........................................       (142)            --             --
    Permanent differences, primarily meals and
      entertainment and amortization....................         53          1,475            641
    Foreign tax credit refund claims....................         --           (307)            --
    Research and development tax credit.................        (14)          (100)          (150)
    Other...............................................       (174)           (17)           (83)
                                                             ------         ------         ------
                                                             $1,705         $3,895         $5,345
                                                             ======         ======         ======
</Table>

     Cumulative undistributed  earnings of  foreign subsidiaries  totaled  $10.4
million  as  of December  31, 2002.  The Company  considers earnings  from these
foreign subsidiaries to be indefinitely reinvested and accordingly, no provision
for U.S. foreign or state  income taxes has been  made for these earnings.  Upon
distribution  of  foreign  subsidiary  earnings  in  the  form  of  dividends or
otherwise, such distributed  earnings would  be reportable for  U.S. income  tax
purposes (subject to adjustment for foreign tax credits.)

     Federal  income tax returns  for fiscal years beginning  with 1999 are open
for review by the Internal Revenue Service.

(13) STOCKHOLDERS' EQUITY

     CEO Stock  Options.    In  connection with  the  engagement  of  the  Chief
Executive  Officer of the  Company, the Company granted  him options to purchase
common shares  of National  Tank  Company that  were subsequently  converted  to
options  to purchase common  stock of the  Company. As of  December 31, 2002 and
2001, stock  options granted  to the  Chief Executive  Officer under  all  stock
option plans related to 346,113 shares 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.

     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.  Compensation  expense  was  recognized  to  the  extent  that the
projected fair  market value  of the  stock on  the exchange  date exceeded  the
exercise  price  of  the  options. Furthermore,  additional  stock  options were
granted under this plan with an exercise price equal to the fair market value of
the shares  on the  date  of grant.  Accordingly,  no compensation  expense  was
recorded  for these additional  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 10 years. At December 31, 2002, 2001 and 2000, options
relating  to an aggregate of 527,701  shares, 527,701 shares and 764,204 shares,
respectively, remained outstanding under this plan.

                                        53
<PAGE>

     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 the Company's common stock. The options vest over periods of
up to four years. The maximum term under these options is ten years. At December
31, 2002, 2001 and 2000, options relating to an aggregate of 731,587 shares,
743,920 shares, and 743,953 shares, respectively, were outstanding under these
plans.

     NATCO Group Inc. 2001 Stock Incentive 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. On
May 24, 2001, the Company's stockholders approved the NATCO Group Inc. 2001
Stock Incentive Plan, which superceded and replaced the 2000 Plan in its
entirety, and increased the number of shares as to which options or awards may
be granted under the plan to a maximum of 1,000,000 shares. At December 31, 2002
and 2001, options relating to an aggregate of 807,326 shares and 795,826 shares,
respectively, were outstanding under this plan. No options were outstanding
under this plan as of December 31, 2000.

     Transactions pursuant to the Company's stock option plans for the years
ended December 31, 2002, 2001 and 2000, include:

<Table>
<Caption>
                                                                                     WEIGHTED
                                                                  STOCK OPTIONS      AVERAGE
                                                                     SHARES       EXERCISE PRICE
                                                                  -------------   --------------
    <S>                                                           <C>             <C>
    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
      Granted...................................................      815,693         $ 9.13
      Exercised.................................................     (236,503)        $ 1.47
      Canceled..................................................      (19,900)        $10.05
                                                                    ---------
    Balance at December 31, 2001................................    2,067,447         $ 8.31
      Granted...................................................       17,167         $ 7.48
      Exercised.................................................           --             --
      Canceled..................................................      (18,000)        $ 9.24
                                                                    ---------
    Balance at December 31, 2002................................    2,066,614         $ 8.30
                                                                    =========
    Price $2.22 (weighted average remaining contractual life of
      .29 years)................................................       50,001         $ 2.22
    Price range $5.03--$6.27 (weighted average remaining
      contractual life of 5.61 years)...........................      664,017         $ 5.56
    Price range $7.00--$8.81 (weighted average remaining
      contractual life of 6.50 years)...........................      593,794         $ 8.64
    Price range $9.13--$10.19 (weighted average remaining
      contractual life of 7.43 years)...........................      534,635         $ 9.98
    Price range $11.69--$12.91 (weighted average remaining
      contractual life of 8.36 years)...........................      224,167         $12.87
</Table>

<Table>
<Caption>
                                                                                     WEIGHTED
                                                                  STOCK OPTIONS      AVERAGE
                        EXERCISABLE OPTIONS                          SHARES       EXERCISE PRICE
                        -------------------                       -------------   --------------
    <S>                                                           <C>             <C>
    December 31, 2000...........................................      840,969         $4.95
    December 31, 2001...........................................      851,872         $6.95
    December 31, 2002...........................................    1,238,198         $7.67
</Table>

     Pro forma information regarding net income and earnings per share is
required by SFAS No. 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

                                        54
<PAGE>

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  1,  2003.  Volatility  was
calculated at 52% as of December 31, 2002, but was stepped-down by 10% per  year
for  the next three years to reflect expected stabilization. The following table
summarizes other assumptions  used to determine  pro forma compensation  expense
under SFAS No. 123 as of December 31, 2002:

<Table>
<Caption>
    DATE OF GRANT  NUMBER OF OPTIONS   EXPECTED OPTION LIFE   RISK-FREE RATE
    -------------  -----------------   --------------------  ----------------
    <S>            <C>                 <C>                   <C>
    Pre-IPO             715,535           7 to 7.5 years        5.97% - 6.40%
    Pre-IPO             347,719              5 years            5.29% - 6.31%
    Post-IPO            564,950              7 years            4.83% - 6.65%
    Post-IPO            438,410             3.5 years           2.32% - 6.60%
</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, 2002.

     For purposes of  pro forma  disclosures, the  estimated fair  value of  the
options  is  amortized to  expense  over the  options'  vesting period.  For the
Company's pro forma  net earnings  and earnings per  share for  the years  ended
December  31, 2002, 2001 and 2000, See Note 2, Summary of Significant Accounting
Policies.

Preferred Stock Purchase Rights

     In May 1998, the Board of Directors  of the Company declared a dividend  of
one  preferred share purchase  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.

(14) 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. Prior to  December 31,  2000, gains  and losses  that resulted  from
experience  or assumption changes were recorded as a charge to current income in
the period  of  the change.  Under  SFAS  No. 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. The newly adopted accounting
principle  is preferable in the circumstances because the deferral of unrealized
gains and losses is more  common in practice and  results in less volatility  in
net  periodic postretirement benefit  cost. A gain  of $10,000, net  of tax, was
recorded in the consolidated

                                        55
<PAGE>

statement of income  as of  December 31,  2000, as a  result of  this change  in
accounting principle. See Note 15, Pension and Other Postretirement Benefits.

(15) 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 when the Company was acquired
from C-E.

     In December 1999,  the Company entered  into an agreement  with W.S.  Tyler
Incorporated  ("Tyler") and Capricorn Investors,  L.P. 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 14, Change in Accounting Principle.

     On May 1,  2001, the  Company amended  a postretirement  benefit plan  that
provided medical and dental coverage to retirees of a predecessor company. Under
the  amended plan, retirees bear additional  costs of coverage. Significant plan
changes include  higher deductibles,  prescription coverage  under a  drug  card
program  and the elimination of dental benefits. As of July 1, 2001, the Company
obtained a third-party valuation of  its liability under this plan  arrangement,
as  amended. Based upon this valuation, the  effect of this amendment was a $6.4
million reduction  in  the Company's  postretirement  benefit liability.  As  of
December  31,  2001,  a cumulative  unrecognized  loss of  $3.6  million existed
related to this postretirement  benefit plan. In accordance  with SFAS No.  106,
"Employers'  Accounting for  Postretirement Benefits  Other Than  Pensions," the
benefit associated with  the plan  amendment will be  amortized to  income as  a
prior  service cost  adjustment over the  remaining life expectancy  of the plan
participants. Additionally, the cumulative  unrecognized loss will be  amortized
to expense over the remaining life expectancy of the plan participants.

     In  November 2001, the Company agreed to maintain benefits at pre-amendment
levels for a specified class of  retirees in exchange for expense  reimbursement
from  the  former  sponsor of  the  postretirement benefit  plan.  The agreement
requires reimbursement  of $79,000  per year  for each  of the  four  succeeding
years.  Pursuant to this arrangement, the  Company received $79,000 each year as
reimbursement of postretirement benefit expenses for 2002 and 2001, and recorded
a receivable for the present value of the future benefits of $217,000.

     In August 2001,  the participants  of the  Canadian pension  plan voted  to
terminate  contributions  to the  plan and  receive actuarially  determined cash
distributions. As of December 31, 2002, the Company had formally terminated  the
pension  plan  and  benefit payments  were  distributed, except  amounts  due to
certain  retirees,  who  had  not   yet  replied  to  notification  of   pending
distributions.   The  Company  intends  to  purchase  an  annuity  contract  for
approximately  $234,000,  to  fund  any  remaining  liability  under  this  plan
arrangement.

                                        56
<PAGE>

     The following table sets forth the plan's benefit obligation, fair value of
plan assets, and funded status at December 31, 2002 and 2001.

<Table>
<Caption>
                                                      PENSION BENEFITS           POSTRETIREMENT BENEFITS
                                                 ---------------------------   ---------------------------
                                                 DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                     2002           2001           2002           2001
                                                 ------------   ------------   ------------   ------------
                                                                      (IN THOUSANDS)
    <S>                                          <C>            <C>            <C>            <C>
    CHANGE IN BENEFIT OBLIGATION
    Benefit obligation at beginning of the
      period...................................     $ 679          $ 610         $ 11,586      $  16,064
    Service cost...............................        34             35               --             --
    Interest cost..............................        42             41              830          1,006
    Participant and prior sponsor
      contributions............................        --             --              157            533
    Actuarial (gain) loss......................       (31)            49            3,503          2,338
    Foreign currency exchange rate
      differences..............................       (11)           (38)              --             --
    Plan amendment.............................        --             --               --         (6,422)
    Benefit payments...........................      (456)           (18)          (1,987)        (1,933)
                                                    -----          -----         --------      ---------
    Benefit obligation at end of period........     $ 257          $ 679         $ 14,089      $  11,586
                                                    =====          =====         ========      =========
    CHANGE IN FAIR VALUE OF PLAN ASSETS
    Fair value of plan assets at beginning of
      period...................................     $ 624          $ 732         $     --      $      --
    Actual return on plan assets...............        46             50               --             --
    Foreign currency exchange rate
      differences..............................         5            (40)              --             --
    Employer contributions.....................        54             25            1,830          1,400
    Participant and prior sponsor
      contributions............................        --             --              157            533
    Experience loss............................      (106)          (125)              --             --
    Benefit payments...........................      (456)           (18)          (1,987)        (1,933)
                                                    -----          -----         --------      ---------
    Fair value of plan assets at end of
      period...................................       167            624               --             --
                                                    -----          -----         --------      ---------
    Funded status..............................       (90)           (55)         (14,089)       (11,586)
    Unrecognized loss..........................        --             --            6,917          3,639
    Unrecognized prior service cost............        --             --           (5,546)        (6,130)
    Unrecognized experience gain/(loss)........       (18)           250               --             --
                                                    -----          -----         --------      ---------
    Prepaid (accrued) benefit cost.............     $(108)         $ 195         $(12,718)     $ (14,077)
                                                    =====          =====         ========      =========
    WEIGHTED AVERAGE ASSUMPTIONS
    Discount rate..............................      6.25%          6.25%            6.75%           7.5%
    Expected return on plan assets.............       7.0%           7.0%             N/A            N/A
    Rate of compensation increase..............       N/A            N/A              N/A            N/A
    Health care trend rates....................        --             --         5.0%-8.0%      4.5%-8.5%
    COMPONENTS OF NET PERIODIC BENEFIT COST:
    Service cost...............................     $  34          $  35         $     --      $      --
    Unrecognized prior service cost............        --             --             (584)          (292)
    Interest cost..............................        42             41              830          1,006
    Unrecognized loss..........................        --             --              225            174
    Recognized gains...........................       (46)           (49)              --             --
                                                    -----          -----         --------      ---------
    Net periodic benefit cost..................     $  30          $  27         $    471      $     888
                                                    =====          =====         ========      =========
                                                                               1% Increase    1% Increase
    Effect on interest cost component..........                                  $     73      $      82
    Effect on the health care component of the
      accumulated postretirement benefit
      obligation...............................                                  $  1,098      $     975
</Table>

     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

                                        58
<PAGE>

Company may make  discretionary contributions as  profit sharing  contributions.
Company  contributions to the  plan totaled $1.4 million,  $1.8 million and $1.4
million for the years ended December 31, 2002, 2001 and 2000, respectively.

(16) 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 September 2006,  excluding a lease arrangement  for a facility  at
Axsia  that requires lease  commitments until the facility  is sublet to another
party. Future minimum lease payments  required under operating leases that  have
remaining non-cancelable lease terms in excess of one year at December 31, 2002,
were  as follows:  2003--$4.0 million,  2004--$3.0 million,  2005--$1.2 million,
2006--$1.0 and 2007--$915,000. Total expense for operating leases for the  years
ended  December 31, 2002, 2001 and 2000  was $5.8 million, $5.3 million and $4.4
million, respectively.

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

(17) RELATED PARTIES

     The  Company  pays  Capricorn  Management  G.P.,  an  affiliate  company of
Capricorn Holdings,  Inc., for  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 space. Mr. Herbert S. Winokur,  Jr., one of the Company's directors,  is
the  Chairman and Chief  Executive Officer of Capricorn  Holdings, Inc., and the
Managing Partner of  Capricorn Holdings  LLC, the general  partner of  Capricorn
Investors II, L.P., a private investment partnership, and directly or indirectly
controls  approximately  31%  of  the  Company's  outstanding  common  stock. In
addition, the Company's Chief Executive Officer, Mr. Gregory, is a  non-salaried
member  of  Capricorn  Holdings  LLC.  Capricorn  Investors  II,  L.P.  controls
approximately 20%  of  the  Company's  common  stock.  Fees  paid  to  Capricorn
Management  totaled $115,000, $85,000  and $75,000 for  the years ended December
31, 2002,  2001 and  2000, respectively.  Commencing October  1, 2001,  the  fee
increased  to  $28,750  per  quarter  due  primarily  to  upward  adjustments in
Capricorn Management's  underlying lease  for office  space; this  increase  was
reviewed  and  approved  by  the  Audit  Committee  of  the  Company's  Board of
Directors.

     Under the terms  of an employment  agreement in effect  prior to 1999,  the
Company loaned its Chief Executive Officer $1.2 million in July 1999 to purchase
136,832  shares  of  common  stock.  During  February  2000,  after  the Company
completed the initial public offering of its Class A common stock, also pursuant
to the  terms of  that employment  agreement, the  Company 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. 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. The  amount of the loan  was
equal  to the cost  to exercise the  options plus any  personal tax burdens that
resulted from the exercise. The maturity of  these loans was July 31, 2003,  and
interest  accrued at  rates ranging from  6% to 7.8%  per annum. As  of June 30,
2002,  these  outstanding  notes  receivable  totaled  $3.4  million,  including
principal  and accrued interest. Effective July 1, 2002, the notes were reviewed
by the Company's  board and amended  to extend  the maturity dates  to July  31,
2004,  and to require interest to be calculated at an annual rate based on LIBOR
plus 300 basis points, adjusted quarterly,  applied to the notes balances as  of
June  30, 2002, including previously accrued  interest. As of December 31, 2002,
the balance of the notes (principal and accrued interest) due from this  officer
under  these loan arrangements  was $3.5 million. These  loans to this executive
officer, which were made on a full recourse basis in prior periods to facilitate
direct ownership in the Company's common stock, are currently subject to and  in
compliance with provisions of the Sarbanes-Oxley Act of 2002.

     As  previously agreed  in 2001,  the Company loaned  an employee  who is an
executive officer and director $216,000 on April 15, 2002, under a full-recourse
note arrangement which accrues interest at 6% per annum and matures on July  31,
2003.  The funds  were used to  pay the  exercise cost and  personal tax burdens

                                        59
<PAGE>

associated with stock options exercised during 2001. Effective July 1, 2002, the
note was amended to extend  the maturity date to July  31, 2004, and to  require
interest  to  be calculated  at an  annual rate  based on  LIBOR plus  300 basis
points, adjusted quarterly,  applied to the  note balance as  of June 30,  2002,
including  previously accrued interest. As of  December 31, 2002, the balance of
the note  (principal  and  interest)  due from  this  officer  under  this  loan
arrangement  was approximately  $223,000. This  loan to  this executive officer,
which was made on a  full recourse basis from time  to time in prior periods  to
facilitate  direct ownership in the Company's common stock, is currently subject
to and in compliance with provisions of the Sarbanes-Oxley Act of 2002.

     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 Holdings,
Inc. 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 Investors, L.P. 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.

     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   Investors  L.P.  and  the   Company,  whereby  the  Company  assumed
responsibility for the retired employee health and life insurance obligations of
Tyler. See Note 15, Pension and Other Postretirement Benefits.

(18) COMMITMENTS AND CONTINGENCIES

     The Porta-Test purchase  agreement, executed  in January  2000, contains  a
provision  to calculate a  payment to certain  former stockholders of Porta-Test
Systems, Inc. for a three-year period  ended January 23, 2003, 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. If applicable, payment is required
annually.  In  April  2001, the  Company  paid $226,000  under  this arrangement
related to the year  ended January 23,  2001. In August  2002, the Company  paid
$197,000  under this  arrangement related  to the  year ended  January 23, 2002,
resulting in an increase in goodwill. No liability was accrued pursuant to  this
arrangement as of December 31, 2002.

(19) CHANGE IN ACCOUNTING ESTIMATE

     During  April  2000, the  Company  extended the  service  life of  a carbon
dioxide gas-processing plant based upon the extension of an agreement to operate
the facility. 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.

(20) LITIGATION

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

                                        60
<PAGE>

(21) 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 business units
have separate management teams and infrastructures that offer different products
and services.  The business  units have  been aggregated  into three  reportable
segments  (described below) since  the long-term financial  performance of these
reportable segments is affected by similar economic conditions.

     North American Operations:   This segment  consists of the  U.S. Sales  and
Service business unit, the Company's Canadian and Venezuelan subsidiaries, Latin
American  operations  and  CO2  gas-processing operations.  The  U.S.  Sales and
Service business unit  designs, engineers, manufactures,  and provides  start-up
services  for production equipment,  which is generally  less complex than those
units provided by Engineered Systems, and provides replacement parts, field  and
shop  servicing  of equipment,  and  used equipment  refurbishing.  NATCO Canada
provides design, engineering, manufacturing and start-up services for production
equipment, as well as replacement parts,  field and shop servicing of  equipment
and   used  equipment   refurbishing.  NATCO  Canada   also  provides  selective
manufacturing services for the Engineered  Systems segment. NATCO Venezuela  and
Latin  American  operations  generally  provide  replacement  parts  to  service
customers in  South America  and Mexico,  respectively. The  CO2  gas-processing
operations  include on-going service at two  gas-processing plants in the United
States. The principal market for the U.S. Sales and Service business unit is the
U.S. onshore and offshore market and the international market. Customers include
major multi-national,  independent and  national or  state-owned companies.  The
principal  markets for  NATCO Canada  are the oil  and gas  producing regions of
Canada. Customers include major multi-national and independent companies.

     Engineered Systems:   This segment  consists of four  business units;  U.S.
Engineered  Systems, NTC Technical Services, NATCO Japan and Axsia, 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, South America,  Europe,
the   Middle  East,   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,  South 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.

     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.

     Summarized  financial  information  concerning  the  Company's   reportable
segments is shown in the following table.

<Table>
<Caption>
                                                 NORTH                   AUTOMATION
                                                AMERICAN    ENGINEERED   & CONTROL    CORPORATE &
                                               OPERATIONS    SYSTEMS      SYSTEMS     ELIMINATIONS   CONSOLIDATED
                                               ----------   ----------   ----------   ------------   ------------
                                                                   (UNAUDITED, IN THOUSANDS)
    <S>                                        <C>          <C>          <C>          <C>            <C>
    DECEMBER 31, 2002
      Revenues from unaffiliated customers...   $136,457     $105,227     $47,855            --        $289,539
      Inter-segment revenues.................   $    917     $  1,814     $ 4,287       $(7,018)             --
      Segment profit (loss)..................   $ 12,632     $  2,184     $ 4,627       $(4,153)       $ 15,290
      Total assets...........................   $ 89,639     $107,654     $22,972       $11,330        $231,595
      Capital expenditures...................   $  2,451     $  2,175     $   436       $   193        $  5,255
      Depreciation and amortization..........   $  2,365     $  1,830     $   456       $   307        $  4,958
</Table>

                                        61
<PAGE>

<Table>
<Caption>
                                                 NORTH                   AUTOMATION
                                                AMERICAN    ENGINEERED   & CONTROL    CORPORATE &
                                               OPERATIONS    SYSTEMS      SYSTEMS     ELIMINATIONS   CONSOLIDATED
                                               ----------   ----------   ----------   ------------   ------------
                                                                   (UNAUDITED, IN THOUSANDS)
    <S>                                        <C>          <C>          <C>          <C>            <C>
    DECEMBER 31, 2001
      Revenues from unaffiliated customers...   $144,366     $ 98,273     $43,943            --        $286,582
      Inter-segment revenues.................   $    781     $    748     $ 3,750       $(5,279)             --
      Segment profit (loss)..................   $ 12,589     $ 11,210     $ 4,718       $(5,947)       $ 22,570
      Total assets...........................   $ 98,767     $104,541     $17,708       $11,735        $232,751
      Capital expenditures...................   $  5,906     $  2,998     $   465       $   654        $ 10,023
      Depreciation and amortization..........   $  3,590     $  3,770     $   501       $   282        $  8,143
    DECEMBER 31, 2000
      Revenues from unaffiliated customers...   $118,371     $ 67,535     $38,646            --        $224,552
      Inter-segment revenues.................   $  1,318     $    268     $ 4,115       $(5,701)             --
      Segment profit (loss)..................   $  7,632     $ 13,978     $ 4,184       $(4,983)       $ 20,811
      Total assets...........................   $ 88,621     $ 34,811     $20,512       $ 9,182        $153,126
      Capital expenditures...................   $  2,323     $  5,316     $   246       $   252        $  8,137
      Depreciation and amortization..........   $  2,965     $  1,460     $   526       $   160        $  5,111
</Table>

     The Company's geographic data for continuing operations for the years ended
December 31, 2002, 2001 and 2000 were as follows:

<Table>
<Caption>
                                            UNITED              UNITED              CORPORATE &
                                            STATES    CANADA    KINGDOM    OTHER    ELIMINATIONS   CONSOLIDATED
                                           --------   -------   -------   -------   ------------   ------------
                                                                (UNAUDITED, IN THOUSANDS)
    <S>                                    <C>        <C>       <C>       <C>       <C>            <C>
    DECEMBER 31, 2002
      Revenues from unaffiliated
        customers........................  $195,215   $24,717   $43,507   $26,100     $    --        $289,539
      Inter-segment revenues.............     5,741        54    1,223         --      (7,018)             --
                                           --------   -------   -------   -------     -------        --------
      Revenues...........................  $200,956   $24,771   $44,730   $26,100     $(7,018)       $289,539
                                           --------   -------   -------   -------     -------        --------
      Operating income (loss)............  $ 12,459   $  (574)  $10,186   $(2,628)    $(4,153)       $ 15,290
      Total assets.......................  $140,456   $14,031   $71,529   $ 5,579     $    --        $231,595
    DECEMBER 31, 2001
      Revenues from unaffiliated
        customers........................  $190,034   $28,746   $50,854   $16,948     $    --        $286,582
      Inter-segment revenues.............     4,629        --      650         --      (5,279)             --
                                           --------   -------   -------   -------     -------        --------
      Revenues...........................  $194,663   $28,746   $51,504   $16,948     $(5,279)       $286,582
                                           --------   -------   -------   -------     -------        --------
      Operating income (loss)............  $ 13,634   $   589   $12,769   $ 1,525     $(5,947)       $ 22,570
      Total assets.......................  $131,007   $21,071   $71,407   $ 9,266     $    --        $232,751
    DECEMBER 31, 2000
      Revenues from unaffiliated
        customers........................  $177,878   $36,266   $1,631    $ 8,777     $    --        $224,552
      Inter-segment revenues.............     5,590       111       --         --      (5,701)             --
                                           --------   -------   -------   -------     -------        --------
      Revenues...........................  $183,468   $36,377   $1,631    $ 8,777     $(5,701)       $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
</Table>

     Equipment for large international projects is generally manufactured in the
U.S.  Therefore, revenues  and results of  operations related  to these projects
were presented as derived from the United States for purposes of this geographic
presentation.

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

                                        62
<PAGE>

(22) QUARTERLY DATA

     The  following  tables summarize  unaudited  quarterly information  for the
years ended December 31, 2002, 2001 and 2000:

<Table>
<Caption>
                                                                         2002
                                                  ---------------------------------------------------
                                                                 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...............................   $73,578    $74,396       $66,563        $75,002
    Gross profit................................   $18,263    $17,662       $14,908        $19,352
    Net income (loss)...........................   $ 1,773    $ 1,134       $  (336)       $ 1,306
    Basic earnings (loss) per share.............   $  0.12    $  0.07       $ (0.02)       $  0.08
    Fully diluted earnings (loss) per share.....   $  0.11    $  0.07       $ (0.02)       $  0.08
                                                                         2001
                                                  ---------------------------------------------------
    Revenues, net...............................   $62,910    $82,559       $74,522        $66,591
    Gross profit................................   $15,993    $20,305       $20,617        $19,155
    Net income..................................   $ 1,376    $   520       $ 1,767        $ 1,700
    Basic earnings per share....................   $  0.09    $  0.03       $  0.11        $  0.11
    Fully diluted earnings per share............   $  0.09    $  0.03       $  0.11        $  0.11
                                                                         2000
                                                  ---------------------------------------------------
    Revenues, net...............................   $51,855    $55,935       $60,244        $56,518
    Gross profit................................   $13,118    $16,178       $16,265        $16,234
    Net income before cumulative effect.........   $   194    $ 2,471       $ 2,637        $ 2,359
    Basic earnings per share....................   $  0.01    $  0.17       $  0.18        $  0.16
    Fully diluted earnings per share............   $  0.01    $  0.16       $  0.18        $  0.16
</Table>

(23) GOODWILL IMPAIRMENT TESTING

     The Financial Accounting  Standards Board ("FASB")  approved SFAS No.  142,
"Goodwill and Other Intangible Assets" in June 2001. This pronouncement requires
that  intangible assets with  indefinite lives, including  goodwill, cease being
amortized and be evaluated for impairment on an annual basis. Intangible  assets
with  a defined term, such  as patents, would continue  to be amortized over the
useful life of the asset.

     The Company adopted  SFAS No.  142 on  January 1,  2002. Intangible  assets
subject to amortization under the pronouncement as of December 31, 2002 and 2001
were summarized in the following table:

<Table>
<Caption>
                                               AS OF DECEMBER 31, 2002         AS OF DECEMBER 31, 2001
                                            -----------------------------   -----------------------------
                                                GROSS                           GROSS
                                               CARRYING      ACCUMULATED       CARRYING      ACCUMULATED
           TYPE OF INTANGIBLE ASSET             AMOUNT       AMORTIZATION       AMOUNT       AMORTIZATION
           ------------------------         --------------   ------------   --------------   ------------
                                                              (UNAUDITED, IN THOUSANDS)
    <S>                                     <C>              <C>            <C>              <C>
    Deferred Financing Fees...............      $3,304          $1,964          $2,902          $1,211
    Patents...............................         145              20             101              10
    Other.................................         303             186             240             109
                                                ------          ------          ------          ------
      Total...............................      $3,752          $2,170          $3,243          $1,330
                                                ======          ======          ======          ======
</Table>

     Amortization  and interest expense of  $840,000, $932,000 and $554,000 were
recognized related to these assets for  the years ended December 31, 2002,  2001
and  2000,  respectively.  The  estimated  aggregate  amortization  and interest
expense for  these  assets for  each  of the  following  five fiscal  years  is:
2003--$625,000; 2004--$383,000; 2005--$341,000; 2006--$152,000; and
2007--$27,000.  For segment reporting purposes,  these intangible assets and the
related amortization expense were recorded under "Corporate and Eliminations."

                                        63
<PAGE>

     Goodwill was the Company's only intangible asset that required no  periodic
amortization  as of the  date of the adoption  of SFAS No.  142. Net goodwill at
December 31, 2002 was $79.0 million. The  pro forma impact of applying SFAS  No.
142  to operating results for years ended December 31, 2001 and 2000, would have
been a  reduction of  amortization expense  of $3.7  million and  $1.6  million,
respectively,  resulting  in  net  income  of  $9.0  million  and  $9.3 million,
respectively. The pro  forma increase in  basic and diluted  earnings per  share
would  have  been $.23  and $.23,  respectively,  for 2001,  and $.11  and $.10,
respectively, for 2000.

     In accordance with SFAS No. 142, the Company tested impairment of  goodwill
by  comparing the fair value of operating  assets to the carrying value of those
assets, including any related  goodwill. As required  in the pronouncement,  the
Company identified separate reportable units for purposes of this evaluation. In
determining  carrying value, the Company segregated assets and liabilities that,
to the extent possible,  were clearly identifiable  by specific reporting  unit.
All  inter-company  receivables/payables  were excluded.  Certain  corporate and
other assets and  liabilities, that  were not clearly  identifiable by  specific
reporting  unit, were allocated based on the  ratio of each reporting unit's net
assets relative to total net assets. The resulting fair value was then  compared
to  the carrying  value of the  reportable unit  to determine whether  or not an
impairment had  occurred  at  the  reportable  unit  level.  No  impairment  was
indicated  and, in accordance  with the pronouncement,  no additional tests were
required.

     Since no  impairment  of goodwill  was  indicated based  upon  the  testing
performed,  no impairment charge was recorded under  SFAS No. 142 as of December
31, 2002. Goodwill will be tested for impairment annually on December 31.

(24) NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001,  the Financial Accounting  Standards Board ("FASB")  approved
SFAS  No. 141, "Business Combinations." This standard requires that any business
combination initiated after June  30, 2001 be accounted  for using the  purchase
method of accounting. This standard became effective on July 1, 2001, and had no
material effect on the Company's financial condition or results of operations.

     The  FASB approved SFAS No. 142,  "Goodwill and Other Intangible Assets" in
June 2001. This  pronouncement requires that  intangible assets with  indefinite
lives,  including  goodwill,  cease  being  amortized  and  be  evaluated  on an
impairment basis. See discussion and results  of impairment testing at Note  23,
Goodwill Impairment Testing.

     In  June  2001,  the  FASB  issued  SFAS  No.  143,  "Accounting  for Asset
Retirement Obligations." This standard requires  the Company to record the  fair
value  of an asset retirement obligation as a liability in the period in which a
legal obligation associated  with the retirement  of tangible long-lived  assets
that result from acquisition, construction, development and/or normal use of the
assets,  is incurred. In addition, the standard requires the Company to record a
corresponding asset that  will be depreciated  over the life  of the asset  that
gave  rise to the liability. Subsequent to the initial measurement of this asset
retirement obligation, the Company will be  required to adjust the liability  at
the  end of each period to reflect  changes in estimated retirement cost and the
passage of time. The Company will  adopt this pronouncement on January 1,  2003,
which  will require certain liabilities  to be recorded in  the first quarter of
2003. The Company is  currently determining the  effect that this  pronouncement
will have on its financial condition and results of operations.

     In  October  2001,  the  FASB  issued SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets." This statement replaces SFAS  No.
121,  "Accounting for  the Impairment  of Long-Lived  Assets and  for Long-Lived
Assets to be Disposed Of," and standardizes the accounting model to be used  for
asset  dispositions and related implementation issues. This pronouncement became
effective for  financial  statements issued  for  fiscal years  beginning  after
December  15, 2001. The  Company adopted this pronouncement  on January 1, 2002,
resulting in no material effect on financial condition or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
This statement  amends  existing  guidance  on reporting  gains  and  losses  on
extinguishment  of debt, prohibiting  the classification of the  gain or loss as
extraordinary. SFAS No. 145  also amends SFAS No.  13 to require  sale-leaseback
accounting for

                                        64
<PAGE>

certain lease modifications that have economic effects similar to sale-leaseback
arrangements.  The  provisions of  the statement  related  to the  rescission of
Statement No. 4  will be applied  for the  fiscal year beginning  after May  14,
2002, with early adoption encouraged. The provisions of the statement related to
Statement  No. 13 were effective for  transactions occurring after May 15, 2002,
with early adoption encouraged. SFAS No.  145 has been adopted with respects  to
the revision of Statement No. 13 on May 15, 2002, and will be adopted on January
1,  2003, with respect to the amendment of  SFAS No. 4. However, the adoption of
SFAS No.  145  is not  expected  to have  a  material effect  on  the  Company's
financial condition or results of operations.

     In  June  2002, the  FASB  issued SFAS  No.  146, "Accounting  for  Exit or
Disposal Activities,"  which addresses  financial accounting  and reporting  for
costs  associated  with exit  and  disposal activities,  including restructuring
activities that are currently accounted for  pursuant to the guidance set  forth
in  EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs  to Exit an  Activity." SFAS No.  146 is effective  for
exit  or disposal  activities that are  initiated after December  31, 2002, with
early adoption encouraged. The provisions of this pronouncement will be  applied
to  any exit or  disposal activities on  or after January  1, 2003. However, the
Company does not  expect this  pronouncement to have  a material  effect on  its
financial condition or results of operations.

     In  November  2002, the  FASB  issued Interpretation  No.  45, "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of Indebtedness to Others, an  interpretation of FASB Statements No.
5,  57  and  107  and  a  rescission  of  FASB  Interpretation  No.  34."   This
interpretation  elaborates on the disclosures  to be made by  a guarantor in its
interim and annual financial statements  about its obligations under  guarantees
issued.  The  interpretation  also clarifies  that  a guarantor  is  required to
recognize, at the inception of  a guarantee, a liability  for the fair value  of
the  obligation taken. The initial recognition and measurement provisions of the
Interpretation are applicable  to guarantees issued  or modified after  December
31,  2002. The Company  does not expect  this Interpretation to  have a material
effect on its financial condition or results of operations.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and  Disclosure, an  amendment  to FASB  Statement  No.
123."  This statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation,"  to   provide   alternative   methods   to   transition,   on   a
volunteer-basis, to the fair value method of accounting for stock-based employee
compensation. Additionally, this statement amends the disclosure requirements of
SFAS  No.  123  to require  prominent  disclosures  in both  annual  and interim
financial statements. Certain disclosure  modifications are required for  fiscal
years  ending  after December  15,  2002, if  a transition  to  SFAS No.  123 is
elected. The  Company has  not  elected to  transition to  SFAS  No. 123  as  of
December 31, 2002. See Note 13, Stockholders' Equity.

(25) SUBSEQUENT EVENTS

     On March 13, 2003, the Company executed an agreement to issue 15,000 shares
of  its Series  B Convertible  Preferred Stock  along with  warrants to purchase
248,800 shares of the Company's common stock  to Lime Rock Partners II, L.P.,  a
private  investment fund, for  an aggregate purchase price  of $15.0 million. Of
the aggregate purchase  price, approximately  $99,000 will be  allocated to  the
warrant,  and  the Company  will amortize  this discount  over three  years. The
proceeds from the  issuance will  be used  to reduce  the Company's  outstanding
revolving  debt balances and for general corporate purposes. This transaction is
expected to close prior to the end of March 2003.

     Each share of  Series B  Convertible Preferred Stock  has a  face value  of
$1,000  and pays a cumulative dividend of 10%  per annum of face value, which is
payable semi-annually on June  15 and December  15 of each  year. Each share  of
Series B Convertible Preferred Stock is convertible, at the option of the holder
thereof,  into (i) a number of shares of common stock equal to the face value of
such share divided by  the conversion price,  which is $7.805,  and (ii) a  cash
payment  equal to the amount of dividends  on such share that have accrued since
the prior semi-annual dividend payment date. The warrants that will be issued to
Lime Rock have an exercise price of $10.00 per share of common stock and  expire
on  the third anniversary of its issuance. The Company can force exercise of the
warrants if  the Company's  stock price  trades above  $13.50 per  share for  30
consecutive days.

                                        65
<PAGE>

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

     The information  on our  directors is  set forth  in the  section  entitled
"Election  of  Directors"  in the  Proxy  Statement  for the  Annual  Meeting of
Stockholders to be held on May 22, 2003, which section is incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information  for  this  item  is set  forth  in  the  section  entitled
"Director  and Executive Management Compensation" in the Proxy Statement for the
Annual Meeting of  Stockholders to be  held on  May 22, 2003,  which section  is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

     The  information concerning security ownership of certain beneficial owners
and management and  related stockholder  matters is  set forth  in the  sections
entitled  "Voting Securities and Principal Holders Thereof," "Security Ownership
of Management," and "Equity Compensation Plans"  in the Proxy Statement for  the
Annual  Meeting of Stockholders to  be held on May  22, 2003, which sections are
incorporated by reference.

     Equity compensation plan information at December 31, 2002 was as follows:

<Table>
<Caption>
                                                                                       NUMBER OF
                                                                                       SECURITIES
                                             NUMBER OF                            REMAINING AVAILABLE
                                         SECURITIES TO BE                         FOR FUTURE ISSUANCE
                                            ISSUED UPON       WEIGHTED-AVERAGE        UNDER EQUITY
                                            EXERCISE OF       EXERCISE PRICE OF       COMPENSATION
                                            OUTSTANDING          OUTSTANDING        PLANS (EXCLUDING
                                         OPTIONS, WARRANTS    OPTIONS, WARRANTS   SECURITIES REFLECTED
            PLAN CATEGORY                  AND RIGHTS(A)        AND RIGHTS(B)        IN COLUMN (A))
            -------------               -------------------   -----------------   --------------------
<S>                                     <C>                   <C>                 <C>
Equity compensation plans approved by
  security holders....................       2,066,614         $8.30 per share          216,671
Equity compensation plans not approved
  by security holders.................              --                      --               --
                                             ---------         ---------------          -------
  Total...............................       2,066,614         $8.30 per share          216,671
                                             =========         ===============          =======
</Table>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information concerning certain  relationships and related  transactions
is  included under the  caption "Certain Relationships  and Transactions" in the
Proxy Statement for the  Annual Meeting of  Stockholders to be  held on May  22,
2003, which sections are incorporated by reference.

ITEM 14. CONTROLS AND PROCEDURES

CONTROLS AND PROCEDURES

     On March 17, 2003 and on various dates throughout 2002 and 2003, members of
our  management team, including our Chief  Executive Officer and Chief Financial
Officer, reviewed  our disclosure  controls and  procedures, as  defined by  the
Securities  and Exchange Commission in Rule 13a-14(c) of the Securities Exchange
Act of 1934, to evaluate and continually improve the effectiveness of the design
and operation of  these controls.  Based upon  this review,  our management  has
determined that disclosure controls and
                                        66
<PAGE>

procedures operate such that important information is collected in a timely
manner, provided to management and made known to our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
disclosure in our public filings.

     In addition, no significant changes have been made to our internal controls
and procedures subsequent to December 31, 2002, and no corrective actions are
anticipated as we noted no significant deficiencies or material weaknesses in
our control structure. Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, our Chief Executive Officer and Chief Financial Officer have provided
certain certifications to the SEC. These certifications accompanied this report
when filed with the SEC, but are not set forth herein.

                                    PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

<Table>
<Caption>
                                                                      PAGE
                                                                      ----
        <S>                                                           <C>
        (1) Financial Statements
                  Independent Auditors' Report......................   38
                  Consolidated Balance Sheets.......................   39
                  Consolidated Statements of Operations.............   40
                  Consolidated Statements of Stockholders' Equity
                  and Comprehensive Income..........................   41
                  Consolidated Statements of Cash Flows.............   42
                  Notes to Consolidated Financial Statements........   43
<Caption>
        <S>                                                           <C>

        (2) Financial Statement Schedules
             No schedules have been included herein because the
             information required to be submitted has been included
             in our Consolidated Financial Statements or notes
             thereto, or the required information is inapplicable.

        (3) Index of Exhibits
             (a) 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.
             (b) Reports on Form 8-K. We filed a report on Form 8-K
                 on October 7, 2002, to announce the award of
                 certain Pemex projects and to comment on certain
                 project and revenue delays. We filed a report on
                 Form 8-K on November 5, 2002, to announce our
                 operating results for the third quarter of 2002. We
                 filed a report on Form 8-K on December 5, 2002, to
                 announce the execution of a contract to expand our
                 CO(2) membrane separation facility in the Sacroc
                 field. No other reports were filed on Form 8-K
                 during the fourth quarter of 2002.
             (c) Index of Exhibits
</Table>

<Table>
<Caption>
                     EXHIBIT NUMBER                              DESCRIPTION
                     --------------                              -----------
                     <C>              <S>  <C>
                           2.3        --   Securities Purchase Agreement by and among Lime Rock
                                           Partners II, L.P. and NATCO Group Inc., dated March 13,
                                           2003 (incorporated by reference to Exhibit 99.2 of the
                                           Company's Current Report on Form 8-K filed March 14,
                                           2003).
                           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>

                                        66
<PAGE>

<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).
                          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    of   Nonstatutory    Stock   Option   Agreement
                                           (incorporated by  reference  to Exhibit  10.24  to  the
                                           Company's  Registration Statement No. 333-48851 on Form
                                           S-1).
                          10.6        --   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).
                          10.10**     --   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  July  31,  1997
                                           between   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).
</Table>

                                        68
<PAGE>

<Table>
<Caption>
                     EXHIBIT NUMBER                              DESCRIPTION
                     --------------                              -----------
                     <C>              <S>  <C>
                          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, N.A. (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 (incorporated by reference to
                                           Exhibit 10.16 of  the Company's Annual  Report on  Form
                                           10-K for the period ended December 31, 2000).
                          10.17       --   First  Amendment  to 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, N.A. (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  (incorporated.
                                           by   reference  to  Exhibit   10.17  of  the  Company's
                                           Quarterly Report on Form 10-Q for the period ended June
                                           30, 2002).
                          10.18       --   Second Amendment  to 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, N.A. (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 (incorporated
                                           by  reference  to  Exhibit   10.18  of  the   Company's
                                           Quarterly Report on Form 10-Q for the period ended June
                                           30, 2002).
</Table>

                                        69
<PAGE>

<Table>
<Caption>
                     EXHIBIT NUMBER                              DESCRIPTION
                     --------------                              -----------
                     <C>              <S>  <C>
                          10.19       --   Second   Amended   Single   Installment   Note  Between
                                           Nathaniel A. Gregory  and NATCO  Group Inc.,  effective
                                           July  1,  2002  (incorporated by  reference  to Exhibit
                                           10.19 of the  Company's Quarterly Report  on Form  10-Q
                                           for the period ended June 30, 2002).
                          10.20       --   Amended   Single  Installment  Note  Between  Nathaniel
                                           Gregory and NATCO  Group Inc., effective  July 1,  2002
                                           (incorporated  by  reference  to Exhibit  10.20  of the
                                           Company's Quarterly Report on Form 10-Q for the  period
                                           ended June 30, 2002).
                          10.21       --   Amended   Single  Installment  Note  Between  Nathaniel
                                           Gregory and NATCO  Group Inc., effective  July 1,  2002
                                           (incorporated  by  reference  to Exhibit  10.21  of the
                                           Company's Quarterly Report on Form 10-Q for the  period
                                           ended June 30, 2002).
                          10.22       --   Amended   Single  Installment  Note  Between  Nathaniel
                                           Gregory and NATCO  Group Inc., effective  July 1,  2002
                                           (incorporated  by  reference  to Exhibit  10.22  of the
                                           Company's Quarterly Report on Form 10-Q for the  period
                                           ended June 30, 2002).
                          10.23       --   Amended  Single  Installment  Note  Between  Patrick M.
                                           McCarthy and NATCO Group  Inc., effective July 1,  2002
                                           (incorporated  by  reference  to Exhibit  10.23  of the
                                           Company's Quarterly Report on Form 10-Q for the  period
                                           ended June 30, 2002).
                          10.24*      --   Employment  Agreement dated December  11, 2002, between
                                           Nathaniel A. Gregory and NATCO Group Inc.
                          10.25*      --   Employment Agreement dated  December 11, 2002,  between
                                           Patrick M. McCarthy and NATCO Group Inc.
                          10.26*      --   Senior  Management  Change in  Control  Agreement dated
                                           December 11, 2002, between  Robert A. Curcio and  NATCO
                                           Group Inc.
                          10.27*      --   Senior  Management  Change in  Control  Agreement dated
                                           December 11, 2002, between Byron J. Eiermann and  NATCO
                                           Group Inc.
                          10.28*      --   Senior  Management  Change in  Control  Agreement dated
                                           December 11, 2002, between  J. Michael Mayer and  NATCO
                                           Group Inc.
                          10.29*      --   Senior  Management  Change in  Control  Agreement dated
                                           December 11, 2002, between Richard D. Peters and  NATCO
                                           Group Inc.
                          10.30*      --   Senior  Management  Change in  Control  Agreement dated
                                           December 11,  2002,  between Charles  Frank  Smith  and
                                           NATCO Group Inc.
                          10.31*      --   Senior  Management  Change in  Control  Agreement dated
                                           December 11, 2002, between David R. Volz, Jr. and NATCO
                                           Group Inc.
</Table>

                                        70
<PAGE>

<Table>
<Caption>
                     EXHIBIT NUMBER                              DESCRIPTION
                     --------------                              -----------
                     <C>              <S>  <C>
                          10.32*      --   Senior Management Change in Control Agreement dated
                                           December 11, 2002, between Joseph H. Wilson and NATCO
                                           Group Inc.
                          21.1*       --   List of Subsidiaries.
                          23.1        --   Consent of Independent Auditors.
</Table>

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

*  Included herewith.

** Management contracts or compensatory plans or arrangements.

                                        70
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section  13 or 15(d) of the Securities  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 21st day of March 2003.

                                          NATCO GROUP INC.
                                          (Registrant)

                                          By:   /s/ NATHANIEL A. GREGORY
                                            ------------------------------------
                                            Nathaniel A. Gregory
                                            Chief Executive Officer and
                                            Chairman of the Board of Directors

     Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities indicated, on March
21st, 2003.

<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/ PATRICK M. MCCARTHY               Director and President
--------------------------------------------
            Patrick M. McCarthy

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

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

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

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

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

                                        72
<PAGE>

                                 CERTIFICATIONS

     I, Nathaniel A. Gregory, certify that:

          1.  I have  reviewed this  annual report on  Form 10-K  of NATCO Group
     Inc.;

          2. Based on  my knowledge,  this annual  report does  not contain  any
     untrue  statement  of a  material fact  or  omit to  state a  material fact
     necessary to make the statements made, in light of the circumstances  under
     which  such statements were made, not misleading with respect to the period
     covered by this annual report;

          3.  Based  on  my  knowledge,  the  financial  statements,  and  other
     financial information included in this annual report, fairly present in all
     material  respects the financial condition,  results of operations and cash
     flows of  the registrant  as of,  and for,  the periods  presented in  this
     annual report;

          4.  The registrant's other  certifying officers and  I are responsible
     for establishing  and maintaining  disclosure controls  and procedures  (as
     defined  in Exchange  Act Rules 13a-14  and 15d-14) for  the registrant and
     have:

             a. designed such disclosure controls and procedures to ensure  that
        material   information  relating   to  the   registrant,  including  its
        consolidated subsidiaries, is made  known to us  by others within  those
        entities,  particularly during the period in which this annual report is
        being prepared;

             b. evaluated  the  effectiveness  of  the  registrant's  disclosure
        controls  and procedures as of a date within 90 days prior to the filing
        date of this annual report (the "Evaluation Date"); and

             c. presented  in  this  annual report  our  conclusions  about  the
        effectiveness  of the  disclosure controls  and procedures  based on our
        evaluation as of the Evaluation date;

          5. The registrant's  other certifying officers  and I have  disclosed,
     based  on our most recent evaluation,  to the registrant's auditors and the
     audit committee of registrant's board  of directors (or persons  performing
     the equivalent functions):

             a.  all  significant deficiencies  in  the design  or  operation of
        internal controls which could adversely affect the registrant's  ability
        to  record,  process,  summarize  and  report  financial  data  and have
        identified for  the registrant's  auditors  any material  weaknesses  in
        internal controls; and

             b.  any fraud, whether or not material, that involves management or
        other employees who have a significant role in the registrant's internal
        controls; and

          6. The registrant's other certifying officers and I have indicated  in
     this  annual  report whether  there  were significant  changes  in internal
     controls or  in  other factors  that  could significantly  affect  internal
     controls  subsequent to the  date of our  most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: March 21, 2003

                                                 /s/ Nathaniel A. Gregory
                                          --------------------------------------
                                                   Nathaniel A. Gregory
                                                 Chief Executive Officer

                                        73
<PAGE>

                                 CERTIFICATIONS

I, J. Michael Mayer, certify that:

          1. I have  reviewed this  annual report on  Form 10-K  of NATCO  Group
     Inc.;

          2.  Based on  my knowledge,  this annual  report does  not contain any
     untrue statement  of a  material fact  or  omit to  state a  material  fact
     necessary  to make the statements made, in light of the circumstances under
     which such statements were made, not misleading with respect to the  period
     covered by this annual report;

          3.  Based  on  my  knowledge,  the  financial  statements,  and  other
     financial information included in this annual report, fairly present in all
     material respects the financial condition,  results of operations and  cash
     flows  of the  registrant as  of, and  for, the  periods presented  in this
     annual report;

          4. The registrant's  other certifying officers  and I are  responsible
     for  establishing and  maintaining disclosure  controls and  procedures (as
     defined in Exchange  Act Rules 13a-14  and 15d-14) for  the registrant  and
     have:

             a.  designed such disclosure controls and procedures to ensure that
        material  information  relating   to  the   registrant,  including   its
        consolidated  subsidiaries, is made  known to us  by others within those
        entities, particularly during the period in which this annual report  is
        being prepared;

             b.  evaluated  the  effectiveness  of  the  registrant's disclosure
        controls and procedures as of a date within 90 days prior to the  filing
        date of this annual report (the "Evaluation Date"); and

             c.  presented  in  this  annual report  our  conclusions  about the
        effectiveness of the  disclosure controls  and procedures  based on  our
        evaluation as of the Evaluation date;

          5.  The registrant's other  certifying officers and  I have disclosed,
     based on our most recent evaluation,  to the registrant's auditors and  the
     audit  committee of registrant's board  of directors (or persons performing
     the equivalent functions):

             a. all  significant  deficiencies in  the  design or  operation  of
        internal  controls which could adversely affect the registrant's ability
        to record,  process,  summarize  and  report  financial  data  and  have
        identified  for  the registrant's  auditors  any material  weaknesses in
        internal controls; and

             b. any fraud, whether or not material, that involves management  or
        other employees who have a significant role in the registrant's internal
        controls; and

          6.  The registrant's other certifying officers and I have indicated in
     this annual  report  whether there  were  significant changes  in  internal
     controls  or  in other  factors  that could  significantly  affect internal
     controls subsequent to the  date of our  most recent evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: March 21, 2003

                                                   /s/ J. Michael Mayer
                                          --------------------------------------
                                                     J. Michael Mayer
                                                 Chief Financial Officer

                                        74
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT NO.                               DESCRIPTION
-----------                               -----------
<C>          <C>  <S>
   2.3        --  Securities Purchase Agreement by and among Lime Rock
                  Partners II, L.P. and NATCO Group Inc., dated March 13, 2003
                  (incorporated by reference to Exhibit 99.2 of the Company's
                  Current Report on Form 8-K filed March 14, 2003).
   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).
  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 of Nonstatutory Stock Option Agreement (incorporated by
                  reference to Exhibit 10.24 to the Company's Registration
                  Statement No. 333-48851 on Form S-1).
  10.6        --  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).
  10.10**     --  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 July 31, 1997 between
                  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).
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                               DESCRIPTION
-----------                               -----------
<C>          <C>  <S>
  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, N.A. (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 (incorporated by reference
                  to Exhibit 10.16 of the Company's Annual Report on Form 10-K
                  for the period ended December 31, 2000).
  10.17       --  First Amendment to 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, N.A. (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
                  (incorporated. by reference to Exhibit 10.17 of the
                  Company's Quarterly Report on Form 10-Q for the period ended
                  June 30, 2002).
  10.18       --  Second Amendment to 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, N.A. (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
                  (incorporated by reference to Exhibit 10.18 of the Company's
                  Quarterly Report on Form 10-Q for the period ended June 30,
                  2002).
  10.19       --  Second Amended Single Installment Note Between Nathaniel A.
                  Gregory and NATCO Group Inc., effective July 1, 2002
                  (incorporated by reference to Exhibit 10.19 of the Company's
                  Quarterly Report on Form 10-Q for the period ended June 30,
                  2002).
  10.20       --  Amended Single Installment Note Between Nathaniel Gregory
                  and NATCO Group Inc., effective July 1, 2002 (incorporated
                  by reference to Exhibit 10.20 of the Company's Quarterly
                  Report on Form 10-Q for the period ended June 30, 2002).
  10.21       --  Amended Single Installment Note Between Nathaniel Gregory
                  and NATCO Group Inc., effective July 1, 2002 (incorporated
                  by reference to Exhibit 10.21 of the Company's Quarterly
                  Report on Form 10-Q for the period ended June 30, 2002).
  10.22       --  Amended Single Installment Note Between Nathaniel Gregory
                  and NATCO Group Inc., effective July 1, 2002 (incorporated
                  by reference to Exhibit 10.22 of the Company's Quarterly
                  Report on Form 10-Q for the period ended June 30, 2002).
  10.23       --  Amended Single Installment Note Between Patrick M. McCarthy
                  and NATCO Group Inc., effective July 1, 2002 (incorporated
                  by reference to Exhibit 10.23 of the Company's Quarterly
                  Report on Form 10-Q for the period ended June 30, 2002).
  10.24*      --  Employment Agreement dated December 11, 2002, between
                  Nathaniel A. Gregory and NATCO Group Inc.
  10.25*      --  Employment Agreement dated December 11, 2002, between
                  Patrick M. McCarthy and NATCO Group Inc.
  10.26*      --  Senior Management Change in Control Agreement dated December
                  11, 2002, between Robert A. Curcio and NATCO Group Inc.
  10.27*      --  Senior Management Change in Control Agreement dated December
                  11, 2002, between Byron J. Eiermann and NATCO Group Inc.
  10.28*      --  Senior Management Change in Control Agreement dated December
                  11, 2002, between J. Michael Mayer and NATCO Group Inc.
  10.29*      --  Senior Management Change in Control Agreement dated December
                  11, 2002, between Richard D. Peters and NATCO Group Inc.
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                               DESCRIPTION
-----------                               -----------
<C>          <C>  <S>
  10.30*      --  Senior Management Change in Control Agreement dated December
                  11, 2002, between Charles Frank Smith and NATCO Group Inc.
  10.31*      --  Senior Management Change in Control Agreement dated December
                  11, 2002, between David R. Volz, Jr. and NATCO Group Inc.
  10.32*      --  Senior Management Change in Control Agreement dated December
                  11, 2002, between Joseph H. Wilson and NATCO Group Inc.
  21.1*       --  List of Subsidiaries.
  23.1        --  Consent of Independent Auditors.
</Table>

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

*  Included herewith.

** Management contracts or compensatory plans or arrangements.