##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



Form 10-Q/A



---



|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2002



OR



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number 333-60778



---



DRESSER, INC.

(Exact name of registrant as specified in its charter)



---



|Delaware                                                       |  | 75-2795365                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



15455 Dallas
Parkway, Suite 1100

Addison, Texas 75001

(Address of principal executive offices) (zip code)



(972) 361-9800

(Registrants telephone number, including area code)



---



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 ̈No  x



The number of shares outstanding of common stock (par value $0.01 per share) as of December 4, 2003, was 1,000.



---



---

##### Table of Contents

Explanatory Note



Dresser, Inc. (Dresser or the Company) amends its report on Form 10-Q for the period ending June 30,
2002, as filed with the Commission on August 14, 2002, to revise its financial statements for the discovery of errors, as described in the following paragraphs, impacting our financial statements for the periods ending June 30, 2002 and December
2001, respectively.



Our independent auditors for 1998 through
2001, Arthur Andersen LLP (Andersen) have ceased operations. We engaged new independent auditors, PricewaterhouseCoopers LLP (PwC), in June 2002 to audit our 2002 financial statements and, upon discovery of errors affecting
our 2001 financial statements, also engaged PwC to perform a new audit of our 2001 financial statements. PwC was not engaged to audit, and has not audited any of our financial statements prior to the year ended December 31, 2001. The Company and PwC
have discovered other errors in our financial statements affecting the years 1998 through 2000.



We concluded that re-audits for the years 1998 through 2000 were impracticable in light of the change in ownership and control early in 2001 and
subsequent changes in personnel, records, consolidations and operating realignments. Because our then independent auditors have ceased operations, we are unable to give effect to the corrections without rendering fiscal years 1998 through 2000
unaudited.



The Company has concluded that its internal
controls for the preparation of interim financial information during 2001 did not provide an adequate basis for its independent auditors to complete reviews of the 2001 quarterly financial information in accordance with standards established by the
American Institute of Certified Public Accountants. In connection with its restatement of the 2001 financial statements, management recorded adjustments to its financial statements. Certain of the closing and audit adjustments recorded in the fourth
quarter, aggregating $7.8 million, may have related to earlier quarters in the year, but the Company has been unable to determine the amounts, if any, which may relate to earlier quarters of 2001. As a result, there is a possibility that the results
of operations for the three and six months ended June 30, 2001 are overstated, with related understatement of results of operations for the quarter ended December 31, 2001.



The Company believes that the processes it used for the preparation of its June 30, 2002 interim financial statements has
improved. The Company believes it has been able to produce reliable interim financial statements as of June 30, 2002 and for the three and six months then ended.



We have not amended our annual report on Form 10-K for the year ended December 31, 2001 and our quarterly report on Form
10-Q for any period prior to that date, and the financial statements and related financial information contained in such reports should no longer be relied upon.



A summary of the accounting errors and restatements for the three and six months ended June 30, 2002 and 2001 and the impact
to our balance sheet at December 31, 2001 is included in Note 1 to our financial statements. Please see our annual report on Form 10-K for the year ended December 31, 2002 for a summary of accounting errors and restatements of our financial
statements for 1998 through 2001.



2



---

##### Table of Contents

DRESSER, INC.



INDEX



|                              |  |                                                                                                                       |  | PageNo.
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | -------
|PART I. FINANCIAL INFORMATION |  |                                                                                                                      
|                              |  |                                                                                                                      
|Item 1.                       |  | Financial Statements                                                                                                  |  |        
|                              |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001 (unaudited) |  | 4      
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001                           |  | 5      
|                              |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (unaudited)           |  | 6      
|                              |  | Notes to Condensed Consolidated Financial Statements as of June 30, 2002 (unaudited)                                  |  | 7      
|                              |  |                                                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 32     
|                              |  |                                                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                            |  | 57     
|                              |  |                                                                                                                      
|Item 4.                       |  | Controls and Procedures                                                                                               |  | 58     
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                      
|                              |  |                                                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                                                     |  | 60     
|                              |  |                                                                                                                      
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                             |  | 60     
|                              |  |                                                                                                                      
|Item 6.                       |  | Exhibits and Reports on Form 8-K:                                                                                     |  |        
|                              |  | Exhibits                                                                                                              |  | 61     
|                              |  | Reports on Form 8-K                                                                                                   |  | 61     
|                              | 
|Signatures                    |  | 62                                                                                                                   



3



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



DRESSER, INC.

Condensed Consolidated Statements of Operations

(in millions)

(unaudited)



|                                                                               |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|------------------------------------------------------------------------------ |  | --------------------------- | ----- | - | ------------------------- | -
|                                                                               |  | 2002                        |       |   | 2001                      |  
|                                                                               |  | Restated                    |       |   | Restated                  |  
|Revenues                                                                       |  | $                           | 418.0 |   |                           | $
|Cost of revenues                                                               |  |                             | 307.4 |   |                           |  
|                                                                               |  |                             |       |   |                           |  
|Gross profit                                                                   |  |                             | 110.6 |   |                           |  
|Selling, engineering, administrative and general expenses and general expenses |  |                             | 87.3  |   |                           |  
|                                                                               |  |                             |       |   |                           |  
|Operating income                                                               |  |                             | 23.3  |   |                           |  
|Equity earnings of unconsolidated subsidiaries                                 |  |                             | 1.1   |   |                           |  
|Interest expense                                                               |  |                             | (23.4 | ) |                           |  
|Interest income                                                                |  |                             | 0.4   |   |                           |  
|Other income (deductions), net                                                 |  |                             | 1.5   |   |                           |  
|                                                                               |  |                             |       |   |                           |  
|Income before taxes                                                            |  |                             | 2.9   |   |                           |  
|Provision for income taxes                                                     |  |                             | (4.3  | ) |                           |  
|                                                                               |  |                             |       |   |                           |  
|Net (loss) income                                                              |  | $                           | (1.4  | ) |                           | $
|                                                                               |  |                             |       |   |                           |  



See accompanying notes
to condensed consolidated financial statements



4



---

##### Table of Contents

DRESSER, INC.

Condensed Consolidated Balance Sheets

(in millions, except share information)



|                                                                                                    |  | June 30,2002 |         |   | December 31,2001 |  
|--------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | -
|                                                                                                    |  | Restated     |         |   | Restated         |  
|                                                                                                    |  | (unaudited)  |         |   |                  |  
|ASSETS                                                                                              |  |              |         |   |                  |  
|Current assets:                                                                                     |  |              |         |   |                  |  
|Cash and equivalents                                                                                |  | $            | 84.1    |   |                  | $
|Receivables                                                                                         |  |              | 330.0   |   |                  |  
|Inventories                                                                                         |  |              | 324.0   |   |                  |  
|Other current assets                                                                                |  |              | 15.6    |   |                  |  
|                                                                                                    |  |              |         |   |                  |  
|Total current assets                                                                                |  |              | 753.7   |   |                  |  
|Property, plant and equipment                                                                       |  |              | 224.9   |   |                  |  
|Investments in unconsolidated subsidiaries                                                          |  |              | 6.6     |   |                  |  
|Deferred financing fees and other assets                                                            |  |              | 68.4    |   |                  |  
|Prepaid and intangible pension assets                                                               |  |              | 59.7    |   |                  |  
|Deferred tax assets                                                                                 |  |              | 2.3     |   |                  |  
|Goodwill                                                                                            |  |              | 286.8   |   |                  |  
|Intangibles                                                                                         |  |              | 5.7     |   |                  |  
|                                                                                                    |  |              |         |   |                  |  
|Total assets                                                                                        |  | $            | 1,408.1 |   |                  | $
|                                                                                                    |  |              |         |   |                  |  
|LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCK AND SHAREHOLDERS DEFICIT                         
|Current liabilities:                                                                                |  |              |         |   |                  |  
|Accounts and notes payable                                                                          |  | $            | 226.1   |   |                  | $
|Deferred revenue                                                                                    |  |              | 17.1    |   |                  |  
|Accrued expenses                                                                                    |  |              | 116.3   |   |                  |  
|                                                                                                    |  |              |         |   |                  |  
|Total current liabilities                                                                           |  |              | 359.5   |   |                  |  
|Pension and other retiree benefit obligations                                                       |  |              | 272.0   |   |                  |  
|Long-term debt                                                                                      |  |              | 990.1   |   |                  |  
|Other liabilities                                                                                   |  |              | 45.1    |   |                  |  
|Commitments and contingencies                                                                       |  |              |         |   |                  |  
|                                                                                                    |  |              |         |   |                  |  
|Total liabilities                                                                                   |  |              | 1,666.7 |   |                  |  
|                                                                                                    |  |              |         |   |                  |  
|Mandatorily redeemable common stock                                                                 |  |              | 7.9     |   |                  |  
|                                                                                                    |  |              |         |   |                  |  
|Shareholders deficit:                                                                              |  |              |         |   |                  |  
|Common stock, $0.001 par value; issued and outstanding:                                             |  |              |         |   |                  |  
|10,488,222 class A and 1,159,486 class B in 2002 and 10,410,089 class A and 790,744 class B in 2001 |  |              |         |   |                  |  
|Shareholders deficit, net                                                                          |  |              | (189.8  | ) |                  |  
|Accumulated other comprehensive loss                                                                |  |              | (76.7   | ) |                  |  
|                                                                                                    |  |              |         |   |                  |  
|Total shareholders deficit                                                                         |  |              | (266.5  | ) |                  |  
|                                                                                                    |  |              |         |   |                  |  
|Total liabilities, mandatorily redeemable common stock and shareholders deficit                    |  | $            | 1,408.1 |   |                  | $
|                                                                                                    |  |              |         |   |                  |  



See accompanying notes
to condensed consolidated financial statements



5



---

##### Table of Contents

DRESSER, INC.

Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)



|                                                                                           |  | Six Months EndedJune 30, |       
|------------------------------------------------------------------------------------------ |  | ------------------------ | ------
|                                                                                           |  | 2002                     |       
|                                                                                           |  | Restated                 |       
|Cash flows from operating activities:                                                      |  |                          |       
|Net income (loss)                                                                          |  | $                        | 0.8   
|Adjustments to reconcile net income (loss) to cash flows provided by operating activities: |  |                          |       
|Depreciation and amortization                                                              |  |                          | 21.3  
|Equity earnings of unconsolidated affiliates                                               |  |                          | (1.8  
|Loss on repayment of debt                                                                  |  |                          | 13.2  
|Deferred tax valuation                                                                     |  |                          |      
|Other changes, net                                                                         |  |                          |       
|Receivables                                                                                |  |                          | (15.0 
|Inventories                                                                                |  |                          | 28.0  
|Accounts payable                                                                           |  |                          | (0.1  
|Other                                                                                      |  |                          | (11.1 
|                                                                                           |  |                          |       
|Net cash provided by operating activities                                                  |  |                          | 35.3  
|                                                                                           |  |                          |       
|Cash flows from investing activities:                                                      |  |                          |       
|Recapitalization transaction                                                               |  |                          |      
|Asset acquisitions                                                                         |  |                          | (21.4 
|Capital expenditures                                                                       |  |                          | (8.5  
|Proceeds from the sale of assets                                                           |  |                          |      
|                                                                                           |  |                          |       
|Net cash used in investing activities                                                      |  |                          | (29.9 
|                                                                                           |  |                          |       
|Cash flows from financing activities:                                                      |  |                          |       
|Changes in intercompany activities                                                         |  |                          |      
|Proceeds from the issuance of long-term debt                                               |  |                          | 256.3 
|Repayment of long-term debt (including current portion)                                    |  |                          | (283.5
|Increase in short-term notes payable                                                       |  |                          | 0.4   
|Payment of deferred financing fees                                                         |  |                          | (8.3  
|Proceeds from the issuance of stock                                                        |  |                          | 10.0  
|Equity issuance costs                                                                      |  |                          |      
|Cash overdrafts                                                                            |  |                          |      
|                                                                                           |  |                          |       
|Net cash (used in) provided by financing activities                                        |  |                          | (25.1 
|                                                                                           |  |                          |       
|Effect of translation adjustments on cash                                                  |  |                          | 2.1   
|                                                                                           |  |                          |       
|Net (decrease) increase in cash and equivalents                                            |  |                          | (17.6 
|Cash and equivalents, beginning of period                                                  |  |                          | 101.7 
|                                                                                           |  |                          |       
|Cash and equivalents, end of period                                                        |  | $                        | 84.1  
|                                                                                           |  |                          |       
|Supplemental disclosure of cash flow information:                                          |  |                          |       
|Cash payments during the period for:                                                       |  |                          |       
|Interest                                                                                   |  | $                        | 41.0  
|Income taxes                                                                               |  |                          | 9.8   



See accompanying notes
to condensed consolidated financial statements



6



---

##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)



Note 1. Organization and Basis of Presentation



Dresser, Inc. was originally incorporated in 1998, under the name of Dresser Equipment Group, Inc. under the laws of the state of Delaware. The
certificate of incorporation was amended and restated on April 9, 2001 and again on July 3, 2002. As used in this report, the terms Dresser, the Company,, we or us refer to Dresser, Inc. and its
subsidiaries and affiliates unless the context indicates otherwise.



In January 2001, Halliburton Company (Halliburton), together with its wholly-owned subsidiary Dresser B.V., signed an Agreement and Plan of Recapitalization with DEG Acquisitions, LLC, an entity owned by affiliates of First
Reserve Corporation (First Reserve) and Odyssey Investment Partners, LLC (Odyssey), to effect the recapitalization of its businesses relating to, among other things, the design, manufacture and marketing of flow control,
measurement systems and compression and power systems for customers primarily in the energy industry. Halliburton originally acquired the businesses as part of its acquisition of Dresser Industries, Inc. in 1998. Dresser Industries operations
consisted of the Companys businesses and certain other operating units retained by Halliburton following the consummation of the recapitalization transactions. In order to accomplish this transaction, Halliburton effected the reorganization of
various legal entities that comprised the Dresser Equipment Group (DEG) business segment of Halliburton. Simultaneously and contingent upon completion of the recapitalization, the acquisition of certain foreign entities was consummated.
The transaction has been accounted for as a leveraged recapitalization. No adjustments or revaluation of the Companys historical basis of accounting for operations were required.



In connection with the recapitalization in April 2001, Dresser paid Halliburton approximately $1,300 million to redeem our
common equity and acquire the stock of certain foreign subsidiaries from Dresser B.V. The recapitalization transaction and related expenses were financed through the issuance of $300.0 million of senior subordinated notes, $720.0 million of
borrowings under our credit facility, and approximately $400.0 million of common equity contributed by DEG Acquisitions, LLC.



On July 3, 2002, Dresser modified its corporate structure by forming a Delaware holding company and two Bermuda holding companies between the existing
shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc., a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the 100% holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the
100% holder of Dresser Holdings, Ltd. The former direct shareholders of Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to their prior direct ownership interests in Dresser.



The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the financial statements and footnotes
thereto included in our annual report on Form 10-K for the year ended December 31, 2002.



7



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



The Company has concluded that its internal controls for the preparation of interim financial
information during 2001 did not provide an adequate basis for its independent auditors to complete reviews of the 2001 quarterly financial information in accordance with standards established by the American Institute of Certified Public
Accountants. In connection with its restatement of the 2001 financial statements, management recorded adjustments to its financial statements. Certain of the closing and audit adjustments recorded in the fourth quarter, aggregating $7.8 million, may
have related to earlier quarters in the year, but management has been unable to determine the amounts, if any, which may relate to earlier quarters of 2001. As a result, there is a possibility that the results of operations for the three and six
months ended June 30, 2001 are overstated, with related understatement of results of operations for the quarter ended December 31, 2001.



The Company believes that the processes it used for the preparation of its June 30, 2002 interim financial statements has improved. Management believes
the Company has been able to produce reliable interim financial statements as of June 30, 2002 and for the three months then ended.



Certain prior year amounts have been reclassified to conform to the current year presentation. These changes had no impact on previously reported net
income or shareholders deficit.



Our financial statements
for periods presented prior to April 10, 2001 have been prepared on a carve-out basis and reflect the combined financial position, results of operations and cash flows of Dresser in accordance with accounting principles generally accepted in the
United States. The financial statements exclude certain items which were not transferred as a result of the recapitalization transaction and any financial effects from Halliburtons decision to discontinue this business segment. In addition,
certain amounts in the financial statements have been estimated, allocated and pushed down from Halliburton in a consistent manner in order to depict the financial position, results of operations and cash flows of Dresser on a stand-alone basis.
Halliburton allocated the costs for certain services to Dresser based on factors such as number of employees, revenues and assets, or directly charged Dresser for some services on an as-used basis. Management believes the method of allocation was
reasonable. However, certain expenses associated with Dressers participation in Halliburtons single employer post retirement benefit plans were recognized as charged to Dresser by Halliburton.



The carve out financial position, results of operations and cash flows may
not be indicative of what would have been reported if Dresser had been a stand-alone entity or had been operated in accordance with the recapitalization transaction during the periods presented prior to April 10, 2001. Prior to the recapitalization
transaction, the financial statements reflect intercompany amounts with Halliburton as components of divisional equity.



The financial statements subsequent to April 10, 2001 comprise the financial position, results of operations and cash flows of Dresser, Inc. and its
majority-owned subsidiaries on a consolidated basis after the elimination of all significant intercompany accounts and transactions.



The financial statements subsequent to April 10, 2001 include the accounts of the Company, its wholly-owned subsidiaries and entities in which we own a
controlling interest, after the elimination of all significant intercompany accounts and transactions. The condition for control of entities is the ownership of a majority voting interest or exercise significant influence.



Restatement of our Financial Statements



The Company and PwC have discovered errors in our financial statements
affecting the years 1998 through 2000. We concluded that re-audits of the years 1998 through 2000 were impracticable in light of the change in ownership and control of the Company in early 2001 and subsequent changes in personnel, records,
consolidations and operating realignments. Because our then independent auditors have ceased operations, we are unable to give effect to the corrections without rendering fiscal years 1998 through 2000 unaudited, and accordingly, the financial
statements at December 31, 2000 and all earlier periods are presented as unaudited. The following is a summary of



8



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



accounting errors and restatements; the tables reflect the impact as an increase or (decrease) to the financial statement caption:

Errors in carve-out financial statements:



From 1998 to 2001, our carve-out financial statements incorrectly excluded certain restructuring charges, legal settlements
and deferred tax assets that were specifically related to the DEG business unit of Halliburton. The impact of these items on our balance sheets as of June 30, 2002 and December 31, 2001 and on our statement of operations for the three and six months
ended June 30, 2002 and 2001 is as follows:



|                                        |  | June 30,2002  |      |   | December 31,2001 |  
|--------------------------------------- |  | ------------- | ---- | - | ---------------- | -
|                                        |  | (in millions) |     
|Balance sheet impact:                   |  |               |      |   |                  |  
|Long-term assets                        |  | $             | 2.0  |   |                  | $
|Accrued expenses                        |  |               | (1.7 | ) |                  |  
|Other long-term liabilities             |  |               | 12.8 |   |                  |  
|Shareholders deficit/Divisional equity |  | $             | (9.1 | ) |                  | $
|                                        |  |               |      |   |                  |  



|                                                          |  | Three Months Ended June 30, |   |      | Six Months Ended June 30, |     
|--------------------------------------------------------- |  | --------------------------- | - | ---- | ------------------------- | ----
|                                                          |  | 2002                        |   | 2001 |                           |     
|                                                          |  | (in millions)               |  
|Statement of operations impact:                           |  |                             |  
|Selling, engineering, administrative and general expenses |  | $                           |  |      | $                         | 6.2 
|Operating income                                          |  | $                           |  |      | $                         | (6.2
|                                                          |  |                             |   |      |                           |     



Errors in leveraged recapitalization transaction:



As described above, our leveraged recapitalization transaction in April 2001 comprised two interdependent components: the recapitalization of DEG and the acquisition of certain foreign operations of Halliburton. These
related transactions should have been accounted for as a single transaction. We had accounted for the acquisition of the foreign operations incorrectly by applying the principles of purchase accounting to the acquisition. In addition, we incorrectly
valued the pension and postretirement benefit obligations and assets associated with this transaction at purchase accounting values instead of at historical costs. We also did not give recognition to liabilities assumed for our participation in
Halliburtons single employer postretirement obligations, nor did we reflect the retention of certain liabilities for legal exposures and other risk management matters by Halliburton. In addition, we determined a full valuation allowance was
necessary for the domestic deferred tax assets at the date of the leveraged recapitalization based upon the impact of the incurrence of significant indebtedness and associated interest expense on our restated historical financial statements. The
impact of these items on our balance sheets as of June 30, 2002 and December 31, 2001 and on our statement of operations for the three and six months ended June 30, 2002 and 2001 is as follows:



9



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



|                                              |  | June 30,2002  |        |   | December 31,2001 |  
|--------------------------------------------- |  | ------------- | ------ | - | ---------------- | -
|                                              |  | (in millions) |       
|Balance sheet impact:                         |  |               |        |   |                  |  
|Deferred tax asset                            |  | $             | (103.3 | ) |                  | $
|Prepaid and intangible pension assets         |  |               | 59.7   |   |                  |  
|Goodwill                                      |  |               | (113.1 | ) |                  |  
|Accrued expenses                              |  |               | (17.5  | ) |                  |  
|Pension and other retiree benefit obligations |  |               | 80.2   |   |                  |  
|Other long-term liabilities                   |  |               | (1.3   | ) |                  |  
|Shareholders deficit/Divisional equity       |  | $             | (218.1 | ) |                  | $
|                                              |  |               |        |   |                  |  



|                                |  | Three Months Ended June 30, |   |      | Six Months Ended June 30, |      
|------------------------------- |  | --------------------------- | - | ---- | ------------------------- | -----
|                                |  | 2002                        |   | 2001 |                           |      
|                                |  | (in millions)               |  
|Statement of operations impact: |  |                             |  
|Provision for income taxes      |  | $                           |  |      | $                         | 66.6 
|Net income                      |  | $                           |  |      | $                         | (66.6
|                                |  |                             |   |      |                           |      



Errors in reserves:



Reserves were
established in 1999 and prior periods while we were part of Halliburton that were incorrectly included in the 1999 carve-out financial statements. From 1999 through 2001, we inappropriately offset expenses against these reserves. In particular,
certain other expenses were incorrectly accounted for in amount, timing, or business segment. The impact of the restatement of these items on our balance sheets as of June 30, 2002 and December 31, 2001 and on our statement of operations for the
three and six months ended June 30, 2002 and 2001 is as follows:



|                                        |  | June 30,2002  |      |   | December 31,2001 |  
|--------------------------------------- |  | ------------- | ---- | - | ---------------- | -
|                                        |  | (in millions) |     
|Balance sheet impact:                   |  |               |      |   |                  |  
|Long-term liabilities                   |  | $             | (2.9 | ) |                  | $
|Shareholders deficit/Divisional equity |  | $             | 2.9  |   |                  | $
|                                        |  |               |      |   |                  |  



|                                                          |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|--------------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | -
|                                                          |  | 2002                        |      |   | 2001                      |  
|                                                          |  | (in millions)               |     
|Statement of operations impact:                           |  |                             |      |   |                           |  
|Selling, engineering, administrative and general expenses |  | $                           | 4.0  |   |                           | $
|Operating income                                          |  | $                           | (4.0 | ) |                           | $
|                                                          |  |                             |      |   |                           |  





10



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



Other errors:



We made other errors in our 2002 and 2001 financial statements, principally
related to accounting for various accrued liabilities, restructuring charges, revenue recognition, capitalized costs, inventory and deferred financing fees, as well as in our intercompany and equity accounts, the effect of which is as follows:



|                                        |  | June 30, 2002 |       |   | December 31, 2001 |  
|--------------------------------------- |  | ------------- | ----- | - | ----------------- | -
|                                        | 
|                                        |  | (in millions) |      
|Balance sheet impact:                   |  |               |       |   |                   |  
|Current assets                          |  | $             | (13.9 | ) |                   | $
|Long-term assets                        |  |               | (17.1 | ) |                   |  
|Current liabilities                     |  |               | (8.3  | ) |                   |  
|Long-term liabilities                   |  |               | (5.3  | ) |                   |  
|Mandatorily redeemable common stock     |  |               | 7.9   |   |                   |  
|Shareholders deficit/Divisional equity |  | $             | (25.3 | ) |                   | $
|                                        |  |               |       |   |                   |  



|                                                          |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|--------------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | -
|                                                          |  | 2002                        |      |   | 2001                      |  
|                                                          |  | (in millions)               |     
|Statement of operations impact:                           |  |                             |      |   |                           |  
|Revenue                                                   |  | $                           | (1.0 | ) |                           | $
|Cost of revenues                                          |  |                             | 4.7  |   |                           |  
|Selling, engineering, administrative and general expenses |  |                             | 0.5  |   |                           |  
|Operating income                                          |  |                             | (6.2 | ) |                           |  
|Interest expense                                          |  |                             |     |   |                           |  
|Other income (deductions)                                 |  |                             | (0.4 | ) |                           |  
|Income before taxes                                       |  |                             | (5.8 | ) |                           |  
|Provision for income taxes                                |  |                             | (0.5 | ) |                           |  
|Net income                                                |  | $                           | (5.3 | ) |                           | $
|                                                          |  |                             |      |   |                           |  



Errors in the statement of cash flows:



We made errors in our 2001 statement of cash flows for the six months ended June 30, 2001, the correction of which resulted in a net decrease in operating cash flows of $72.9 million, an increase in cash flows from investing activities of
$4.3 million, an increase in cash flows provided by financing activities of $70.3 million and a decrease of $1.7 million on the effects of translation adjustments on cash.



We have also restated our 2001 statement of cash flows to reflect the impact of other errors found in our intercompany
reconciliation process. The impact of these errors was to decrease operating cash flows by $0.1 million for the six months ended June 30, 2001.



11



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



|                                          |  | June 30,2001  |      
|----------------------------------------- |  | ------------- | -----
|                                          |  | (in millions) |      
|Statement of Cash flows:                  |  |               |      
|Cash flows from operating activities      |  | $             | (73.0
|Cash flows from investing activities      |  |               | 4.3  
|Cash flows from financing activities      |  |               | 70.3 
|Effect of translation adjustments on cash |  |               | (1.7 
|                                          |  |               |      
|Net change to cash flows                  |  | $             | (0.1 
|                                          |  |               |      



Reclassifications:



We have also
reclassified equity earnings of unconsolidated subsidiaries from revenues to a separate line item on the financial statements. The impact was to reduce revenues in for the three months ending June 30, 2002 and 2001 by $1.1 million and $0.9 million,
respectively. Revenue was reduced by $1.8 million and $1.0 million for the six months ended June 30, 2002 and 2001, respectively. We have also reclassified progress billings to customers from a reduction of inventory to deferred revenue. The impact
was to increase both inventory and deferred revenue by $6.1 million and $2.0 million as of June 30, 2002 and December 31, 2001, respectively.



12



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



Summary of Restated Items



The following table presents, on a condensed basis, the aggregate impact of
the restatement adjustments on our previously reported balance sheets as of June 30, 2002 and December 31, 2001:



|                                                                                 |  | June 30,2002          |         |   | June 30,2002 |   |         | December 31,2001      |  |   | December 31,2001 |  
|-------------------------------------------------------------------------------- |  | --------------------- | ------- | - | ------------ | - | ------- | --------------------- |  | - | ---------------- | -
|                                                                                 |  | As previouslyreported |         |   | As Restated  |   |         | As previouslyreported |  |   | As Restated      |  
|                                                                                 |  | (in millions)         |        
|Current assets:                                                                  |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Cash and equivalents                                                             |  | $                     | 84.1    |   |              | $ | 84.1    |                       |  | $ | 97.2             |  
|Receivables                                                                      |  |                       | 334.6   |   |              |   | 330.0   |                       |  |   | 316.2            |  
|Inventories                                                                      |  |                       | 327.2   |   |              |   | 324.0   |                       |  |   | 328.3            |  
|Other current assets                                                             |  |                       | 15.6    |   |              |   | 15.6    |                       |  |   | 10.4             |  
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Total current assets                                                             |  |                       | 761.5   |   |              |   | 753.7   |                       |  |   | 752.1            |  
|Property, plant and equipment                                                    |  |                       | 224.9   |   |              |   | 224.9   |                       |  |   | 235.9            |  
|Prepaid and intangible pension assets                                            |  |                       |        |   |              |   | 59.7    |                       |  |   |                 |  
|Goodwill                                                                         |  |                       | 427.4   |   |              |   | 286.8   |                       |  |   | 408.7            |  
|Other long-term assets                                                           |  |                       | 173.9   |   |              |   | 83.0    |                       |  |   | 193.0            |  
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Total assets                                                                     |  | $                     | 1,587.7 |   |              | $ | 1,408.1 |                       |  | $ | 1,589.7          |  
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Current liabilities:                                                             |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Accounts and notes payable                                                       |  | $                     | 226.7   |   |              |   | 226.1   |                       |  | $ | 245.3            |  
|Other accrued expenses                                                           |  |                       | 154.2   |   |              |   | 133.4   |                       |  |   | 147.7            |  
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Total current liabilities                                                        |  |                       | 380.9   |   |              |   | 359.5   |                       |  |   | 393.0            |  
|Pension and other retiree benefit obligations                                    |  |                       | 200.6   |   |              |   | 272.0   |                       |  |   | 214.3            |  
|Long-term debt                                                                   |  |                       | 990.1   |   |              |   | 990.1   |                       |  |   | 1,000.0          |  
|Other liabilities                                                                |  |                       | 33.0    |   |              |   | 45.1    |                       |  |   | 26.0             |  
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Total liabilities                                                                |  |                       | 1,604.6 |   |              |   | 1,666.7 |                       |  |   | 1,633.3          |  
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Mandatorily redeemable common stock                                              |  |                       |        |   |              |   | 7.9     |                       |  |   |                 |  
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Total shareholders deficit                                                      |  |                       | (16.9   | ) |              |   | (266.5  | )                     |  |   | (43.6            | )
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  
|Total liabilities, mandatorily redeemable common stock and shareholders deficit |  | $                     | 1,587.7 |   |              | $ | 1,408.1 |                       |  | $ | 1,589.7          |  
|                                                                                 |  |                       |         |   |              |   |         |                       |  |   |                  |  



The following table
presents the effect of the restatement adjustments on shareholders deficit for the periods ended June 30, 2002 and December 31, 2001:



|                                                 |  | June 30,2002  |        |   | December 31,2001 |  
|------------------------------------------------ |  | ------------- | ------ | - | ---------------- | -
|                                                 |  | (in millions) |       
|Shareholders deficit, as previously reported    |  | $             | (16.9  | ) |                  | $
|Errors in carve-out financial statements         |  |               | (9.1   | ) |                  |  
|Errors in leveraged recapitalization transaction |  |               | (218.1 | ) |                  |  
|Errors in reserves                               |  |               | 2.9    |   |                  |  
|Other errors                                     |  |               | (25.3  | ) |                  |  
|                                                 |  |               |        |   |                  |  
|Shareholders deficit, as restated               |  | $             | (266.5 | ) |                  | $
|                                                 |  |               |        |   |                  |  



The following table
presents, on a condensed basis, the impact of the restatement adjustments on our previously reported statement of operations for the three and six months ended June 30, 2002 and 2001, respectively:



13



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



|                                                          |  | Three Months Ended June 30, |       |   | Three Months Ended June 30, |  
|--------------------------------------------------------- |  | --------------------------- | ----- | - | --------------------------- | -
|                                                          |  | 2002                        |       |   | 2002                        |  
|                                                          |  | As previouslyreported       |       |   | As Restated                 |  
|                                                          |  | (in millions)               |      
|Revenues                                                  |  | $                           | 420.1 |   |                             | $
|Cost of revenues                                          |  |                             | 302.7 |   |                             |  
|                                                          |  |                             |       |   |                             |  
|Gross profit                                              |  |                             | 117.4 |   |                             |  
|Selling, engineering, administrative and general expenses |  |                             | 82.8  |   |                             |  
|                                                          |  |                             |       |   |                             |  
|Operating income                                          |  |                             | 34.6  |   |                             |  
|Equity earnings of unconsolidated subsidiaries            |  |                             |      |   |                             |  
|Interest expense                                          |  |                             | (23.8 | ) |                             |  
|Other income (deductions), net                            |  |                             | 1.9   |   |                             |  
|                                                          |  |                             |       |   |                             |  
|Income before taxes                                       |  |                             | 12.7  |   |                             |  
|Provision for income taxes                                |  |                             | (4.8  | ) |                             |  
|                                                          |  |                             |       |   |                             |  
|Net income (loss)                                         |  | $                           | 7.9   |   |                             | $
|                                                          |  |                             |       |   |                             |  
|                                                          |  |                            
|                                                          |  | Six Months Ended June 30,   |       |   | Six Months Ended June 30,   |  
|                                                          |  | 2002                        |       |   | 2002                        |  
|                                                          |  | As previouslyreported       |       |   | As Restated                 |  
|                                                          |  | (in millions)               |      
|Revenues                                                  |  | $                           | 800.3 |   |                             | $
|Cost of revenues                                          |  |                             | 576.1 |   |                             |  
|                                                          |  |                             |       |   |                             |  
|Gross profit                                              |  |                             | 224.2 |   |                             |  
|Selling, engineering, administrative and general expenses |  |                             | 156.9 |   |                             |  
|                                                          |  |                             |       |   |                             |  
|Operating income                                          |  |                             | 67.3  |   |                             |  
|Equity earnings of unconsolidated subsidiaries            |  |                             |      |   |                             |  
|Interest expense                                          |  |                             | (58.1 | ) |                             |  
|Other income (deductions), net                            |  |                             | 2.9   |   |                             |  
|                                                          |  |                             |       |   |                             |  
|Income before taxes                                       |  |                             | 12.1  |   |                             |  
|Provision for income taxes                                |  |                             | (4.6  | ) |                             |  
|                                                          |  |                             |       |   |                             |  
|Net income (loss)                                         |  | $                           | 7.5   |   |                             | $
|                                                          |  |                             |       |   |                             |  



14



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



The following presents the effect of the restatement adjustment on income for the three and six
months ended June 30, 2002 and 2001, respectively.



|                                                   |  | Three Months ended June 30, |      |   | Six Months ended June 30 |  
|-------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------ | -
|                                                   |  | 2002                        |      |   | 2001                     |  
|                                                   |  | (in millions)               |     
|Income before taxes, as previously reported        |  | $                           | 12.7 |   |                          | $
|Errors in carve out financial statements           |  |                             |     |   |                          |  
|Errors in reserves                                 |  |                             | (4.0 | ) |                          |  
|Other errors                                       |  |                             | (5.8 | ) |                          |  
|                                                   |  |                             |      |   |                          |  
|Income before taxes, as restated                   |  | $                           | 2.9  |   |                          | $
|                                                   |  |                             |      |  
|Provision for income taxes, as previously reported |  | $                           | (4.8 | ) |                          | $
|Errors in leveraged recapitalization transaction   |  |                             |     |   |                          |  
|Other errors                                       |  |                             | (0.5 | ) |                          |  
|                                                   |  |                             |      |   |                          |  
|Provision for income taxes, as restated            |  | $                           | (4.3 | ) |                          | $
|                                                   |  |                             |      |  
|Net income (loss) as restated                      |  | $                           | (1.4 | ) |                          | $
|                                                   |  |                             |      |   |                          |  



Note 2. Business Segment
Information



We operate under three reportable segments:
flow control, measurement systems and compression and power systems. The business segments are organized around the products and services provided to the customers each serves. During the second quarter of 2002, we made changes to our internal
corporate structure with the reorganization of certain of our operating units. We believe these changes will better serve our customers. Although we still report under three reportable segments, the operating units that comprise each reportable
segment have changed. Flow control consists of all of the previous valve and actuator product lines with the addition of the instruments, meters, regulators, and piping specialties product lines. Measurement systems will now only have the results of
the retail fueling product line. Compression and power systems components have not changed and the segment will continue to report the results of the natural gas and blowers product lines.



Flow Control. The flow control segment designs, manufactures and
markets valves and actuators. These products are used to start, stop and control the flow of liquids and gases and to protect process equipment from excessive pressure. In addition, it is a leading supplier of natural gas meters, regulators, digital
and analog pressure and temperature gauges, transducers, and piping specialties such as couplings and conductors. These systems and other products are used to monitor liquids and gases.



Measurement Systems. The measurement systems segment is a leading supplier of fuel dispensers, pumps, peripherals and
point-of-sale systems and software for the retail fueling industry.



Compression and Power Systems. The compression and power systems segment designs, manufactures and markets natural gas fueled engines used primarily in natural gas compression and power generation applications and rotary blowers and
vacuum pumps.



The table below presents revenues and operating
income by segment. The prior period information has been restated to conform to the current year presentation.



15



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



|                                       |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|-------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | -
|                                       |  | 2002                        |       |   | 2001                      |  
|                                       |  | Restated                    |       |   | Restated                  |  
|                                       |  | (in millions)               |      
|Revenues:                              |  |                             |       |   |                           |  
|Flow Control                           |  | $                           | 275.2 |   |                           |  
|Measurement Systems                    |  |                             | 77.9  |   |                           |  
|Compression and Power Systems          |  |                             | 65.9  |   |                           |  
|Reconciling Items, Including Corporate |  |                             | (1.0  | ) |                           |  
|                                       |  |                             |       |   |                           |  
|                                       |  | $                           | 418.0 |   |                           | $
|                                       |  |                             |       |   |                           |  
|Operating income:                      |  |                             |       |   |                           |  
|Flow Control                           |  | $                           | 19.6  |   |                           | $
|Measurement Systems                    |  |                             | 5.6   |   |                           |  
|Compression and Power Systems          |  |                             | 2.6   |   |                           |  
|Reconciling Items, Including Corporate |  |                             | (4.5  | ) |                           |  
|                                       |  |                             |       |   |                           |  
|                                       |  | $                           | 23.3  |   |                           | $
|                                       |  |                             |       |   |                           |  



Note 3. Receivables



Accounts receivable are stated at their estimated net realizable value.
Included in receivables are notes receivable of $7.6 million as of June 30, 2002 and December 31, 2001, respectively. Allowances for doubtful accounts of $6.1 million and $5.4 million as of June 30, 2002 and December 31, 2001, respectively, are
netted in the receivable balance.



Note 4. Inventories



Inventories are stated at the lower of cost or market. A portion of the
United States inventory costs is determined using the last-in, first-out (LIFO) method. All other inventories are valued on a first-in, first-out (FIFO) basis.



Inventories on a LIFO method represented $65.3 million and $86.8 million of our inventories as of June 30, 2002 and December 31, 2001, respectively.
The excess of FIFO over LIFO costs as of June 30, 2002 and December 31, 2001, were $72.2 million and $72.2 million, respectively. Inventories are summarized as follows:



16



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



|                                 |  | June 30,2002  |       |   | December 31,2001 |  
|-------------------------------- |  | ------------- | ----- | - | ---------------- | -
|                                 |  | Restated      |       |   | Restated         |  
|                                 |  | (in millions) |      
|Finished products and parts      |  | $             | 206.5 |   |                  | $
|In-process products and parts    |  |               | 108.2 |   |                  |  
|Raw materials and supplies       |  |               | 75.4  |   |                  |  
|                                 |  |               |       |   |                  |  
|Total inventory                  |  | $             | 390.1 |   |                  | $
|Less:                            |  |               |       |   |                  |  
|LIFO reserve and full absorption |  |               | (66.1 | ) |                  |  
|                                 |  |               |       |   |                  |  
|Inventories                      |  | $             | 324.0 |   |                  | $
|                                 |  |               |       |   |                  |  



Note 5. Acquisitions



On April 5, 2002, we acquired the net assets of Modern
Supply Company, Inc., Ponca Fabricators, Inc. and Quality Fabricators, Inc. (the Modern Acquisition). The results of the operations for the Modern Acquisition have been included in the condensed consolidated financial statements since
that date. The businesses of the Modern Acquisition were principally engaged in the business of distributing, repairing and servicing our small diameter ball valve, gate valve, check valve and actuation products in the United States market. With the
Modern Acquisition, we established a more direct control of the distribution and marketing channel for small valves and spare parts. It is consistent with our strategy of expanding and developing the service and aftermarket business of our flow
control segment. The purchase price was approximately $28.0 million. We paid cash of $21.4 million, including $0.5 million of closing costs, and assumed $7.1 million in debt.



Additionally, we issued 250,000 shares of class B common stock to DEG Acquisitions, LLC for $10.0 million. The proceeds were
used to finance the purchase of the Modern Acquisition.



The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.



|                               |  | April 5,2002  |      
|------------------------------ |  | ------------- | -----
|                               |  | (in millions) |      
|Current assets                 |  | $             | 17.1 
|Property, plant, and equipment |  |               | 0.2  
|Goodwill                       |  |               | 14.9 
|                               |  |               |      
|Total assets acquired          |  | $             | 32.2 
|Current liabilities            |  |               | (3.7 
|Long-term debt                 |  |               | (7.1 
|                               |  |               |      
|Total liabilities assumed      |  |               | (10.8
|                               |  |               |      
|Net assets acquired            |  | $             | 21.4 
|                               |  |               |      



The goodwill was
assigned to our flow control segment. Of the goodwill recorded, the total amount is expected to be deductible for tax purposes.



17



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



Note 6. Debt



In March 2002, we issued an additional $250.0 million of 93/8% senior subordinated notes due 2011 under the indenture that governs the 2001 notes. The notes were issued at 102.5% of their principal amounts plus accrued interest from October 15, 2001. We recorded
a $6.3 million premium, which is amortized over the term of the notes, and recorded as a reduction to interest expense. The net proceeds were used to repay existing indebtedness under the Tranche A term loans of the credit facility. This repayment
significantly reduced the principal balances of the Tranche A term loans. As a result, we recorded a loss of $12.9 million, which represented a write-off of an allocable portion of the unamortized debt issuance costs. This loss has been reflected in
interest expense in our condensed consolidated financial statements.



In March 2002, we also obtained an amendment to the credit facility that among other things increased the amount by which the Tranche B term loan can be increased from $95.0 million to $195.0 million.



Fees paid in connection with the issuance of the notes and the amendment were
$5.5 million and $1.0 million, respectively, at the time of closing. The deferred financing fees are amortized to interest expense using the effective interest method over the terms of the respective debt.



In June 2002, we obtained a second amendment to the credit facility, which
allowed for the modification of our corporate structure. See Note 11.



In June 2002, we also made a voluntary prepayment of $30.0 million on our credit facility, which extinguished our Tranche A term loans. As a result of the early extinguishment of debt we recorded a loss of $0.3 million, which represented
the write-off of the remaining unamortized debt issuance costs associated with the Tranche A term loans. These costs have been reflected as interest expense in our condensed consolidated statements of operations.



In connection with the acquisition of Modern Supply, we assumed $7.1 million
of debt in the form of two notes. The first note has a principal balance of $4.5 million, bears interest at 9.75% and matures August 31, 2002. The second note has a principal balance of $2.6 million, bears interest at the prime rate plus 2.0% and
matures January 2008. The notes are collateralized by the accounts receivable and inventory of Modern Supply Company, Inc.



Note 7. Derivative Instruments



In March 2002, the principal balance of our Euro Tranche A term loan was significantly reduced with the use of proceeds from the note offering.
Subsequently, the loan was extinguished in June 2002. As a result of the principal reduction in March 2002, an interest rate swap, which was designated as a hedge on the Euro Tranche A, became ineffective and no longer eligible to receive accounting
treatment as a hedge. As a result, changes in the fair market value of the interest rate swap were recorded through earnings rather than accumulated other comprehensive income. The unrealized loss was reclassified from accumulated other
comprehensive income and we recorded a charge to earnings of $0.6 million during the first quarter of 2002, which is reflected in interest expense in our condensed consolidated statements of operations. This swap was terminated in April 2002.



In April 2002, we entered into a fair value interest rate
swap, which was not eligible to receive accounting treatment as a hedge. The interest rate swap has a notional amount of $100.0 million and matures in October 2003. We receive a fixed rate of 9.375% and pay a variable rate of LIBOR plus 6.20% (8.06%
at June 30, 2002). At June 30, 2002, the interest rate swap had a fair market value of $0.9 million. This amount has been reflected as a reduction to interest expense in our condensed consolidated statements of operations.



Note 8. Comprehensive Income



The following table sets forth the components of comprehensive income, net
of income tax expense:



18



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



|                                                 |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|------------------------------------------------ |  | --------------------------- | ---- | - | ------------------------- | -
|                                                 |  | 2002                        |      |   | 2001                      |  
|                                                 |  | Restated                    |      |   | Restated                  |  
|                                                 |  | (in millions)               |     
|Net (loss) income                                |  | $                           | (1.4 | ) |                           | $
|Other comprehensive income                       |  |                             |      |   |                           |  
|Foreign currency translation adjustment          |  |                             | 9.7  |   |                           |  
|Unrealized gain (loss) on derivative instruments |  |                             | 4.1  |   |                           |  
|                                                 |  |                             |      |   |                           |  
|Comprehensive income (loss)                      |  | $                           | 12.4 |   |                           | $
|                                                 |  |                             |      |   |                           |  



Note 9. Commitments and
Contingencies



Halliburton Indemnifications



In accordance with the agreement relating to our recapitalization
transaction, Halliburton agreed to indemnify the Company for certain items. Those indemnified items include any product liability claim or product warranty claim arising out of any products relating to any discontinued product or service line of the
Company. In addition, Halliburton has agreed to indemnify the Company for certain other claims and liabilities, including any other product liability claim made on or prior to closing of the Recapitalization, any other loss, liability, damage or
expense resulting from any action, suit or proceeding initiated prior to the closing, any asbestos claims (present or future) based on or arising out of events or occurrences with respect to the Companys businesses prior to the closing,
certain environmental liability claims against the Company, to the extent that notice is given to Halliburton prior to the fifth anniversary of the closing, and any loss, liability, damage or expense relating to workers compensation, general
liability, and automobile liability arising out of events or occurrences prior to the closing as to which the Company notifies Halliburton prior to the third anniversary of the closing date. The maximum aggregate amount of all losses indemnifiable
by Halliburton pursuant to the recapitalization agreement is $950.0 million. In the case of certain general indemnities in the Agreement, other than those described above, there is an aggregate $15.0 million deductible that is applicable prior to
the indemnification obligations. In addition, any single claim for such indemnities is subject to a threshold of $0.5 million in the case where there was no knowledge of such claim by Halliburton and a $0.1 million threshold if there was knowledge.
For purposes of determining the threshold or maximum amount of indemnity and other overall indemnity obligations, such amounts shall be offset by insurance proceeds received by the Company or the amount of tax benefit received by the Company.



Company Indemnifications



Under the agreement relating to our recapitalization transaction, the
Company agreed to indemnify Halliburton for all assumed obligations of the businesses as set forth in the agreement. This includes certain environmental matters including those arising out of acts by the Company which take place after the closing.
The Company has the same aggregate indemnity deductible and maximum indemnity obligation as set forth above in the Halliburton indemnity, but does not have the single claim thresholds described above. In addition, the indemnifiable amounts have the
same offsets as set forth above with regard to insurance proceeds and tax benefits received by Halliburton.



Environmental



The
Companys businesses and some of the Companys products are subject to regulation under various and changing federal, state, local and foreign laws and regulations relating to the environment and to employee safety and health. These
environmental laws and regulations govern the generation, storage, transportation, handling, disposal and emission of various substances.



19



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



These environmental laws also impose liability for personal injury or property damage related to
releases of hazardous substances. Permits are required for operation of the Companys businesses, and these permits are subject to renewal, modification and, in certain circumstances, revocation. The Company believes it is substantially in
compliance with these laws and permitting requirements. The Companys businesses also are subject to regulation under substantial, various and changing federal, state, local and foreign laws and regulations which allow regulatory authorities
and private parties to compel (or seek reimbursement for) cleanup of environmental contamination at sites now or formerly owned or operated by the Companys businesses and at facilities where their waste is or has been disposed. Going forward,
the Company expects to incur ongoing capital and operating costs for investigation and remediation and to maintain compliance with currently applicable environmental laws and regulations; however, the Company does not expect those costs, in the
aggregate, to be material.



In April 2001, the Company
completed the recapitalization transaction. Halliburton originally acquired the Companys businesses as part of its acquisition of Dresser Industries in 1998. Dresser Industries operations consisted of the Companys businesses, as
well as other operating units. As Halliburton has publicly disclosed, it has been subject to numerous lawsuits involving asbestos claims associated with, among other things, the operating units of Dresser Industries that were retained by Halliburton
or disposed of by Dresser Industries or Halliburton prior to the recapitalization transaction. These lawsuits have resulted in significant expense for Halliburton.



The Company has not historically incurred, and in the future the Company does not believe that it will incur, any material
liability as a result of the past use of asbestos in products manufactured by the units of Dresser Industries retained by Halliburton, or as a result of the past use of asbestos in products manufactured by the businesses currently owned by the
Company or any predecessor entities of those businesses.



Pursuant to the recapitalization agreement, all liabilities related to asbestos claims arising out of events occurring prior to the consummation of the recapitalization transaction, are defined to be excluded liabilities,
whether they resulted from activities of Halliburton, Dresser Industries or any predecessor entities of any of the Companys businesses. The recapitalization agreement further provides, subject to certain limitations and exceptions that
Halliburton will indemnify the Company and hold it harmless against losses and liabilities that the Company actually incurs which arise out of or result from excluded liabilities, as well as certain other liabilities in existence as of
the closing of the recapitalization transaction. The maximum aggregate amount of losses indemnifiable by Halliburton pursuant to the recapitalization agreement is $950.0 million. All indemnification claims are subject to notice and procedural
requirements that may result in Halliburton denying indemnification claims for some losses.



The Company is responsible for evaluating and addressing the environmental impact of sites where the Company is operating or has maintained operations. As a result, the Company spends money each year assessing and
remediating contaminated properties to avoid future liabilities, to comply with legal and regulatory requirements, or to respond to claims by third parties.



Note 10. Recent Accounting Pronouncements



Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations and SFAS
No. 142 Goodwill and Other Intangibles.



SFAS No.
141 supersedes Accounting Principles Board Opinion (APB) No. 16, Business Combinations, and eliminates the pooling of interest method of accounting for business combinations and modifies the application of the purchase
accounting method. SFAS No. 141 requires business combinations initiated after June 30, 2001, to be accounted for using the purchase accounting method. SFAS No. 141 also further clarifies the criteria for recognition of intangible assets separately
from goodwill. Our adoption of this standard did not have any effect on our condensed consolidated financial statements.



20



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



SFAS No. 142 supersedes APB No. 17, Intangible Assets, and eliminates the requirement to
amortize goodwill and intangible assets with indefinite useful lives, addresses the amortization of intangible assets with defined lives and requires impairment testing of intangible assets. Accordingly, as of January 1, 2002, we no longer amortize
goodwill. In addition, we performed the transitional impairment test required as of January 1, 2002 and determined there was no impairment of our goodwill. If goodwill amortization was excluded for the three and six months ended June 30, 2001, our
net loss would have decreased by approximately $1.3 million and $2.6 million, respectively. Adjusted net loss for the three and six months ended June 30, 2001, would have been $70.2 million and $48.5 million, respectively.



In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. An entity shall recognize the cumulative effect of
adoption of SFAS No. 143 as a change in accounting principle. We adopted this statement as of January 1, 2003. This statement had no material impact on our results of operations or financial position.



In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment and Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 primarily addresses significant issues
relating to the implementation of SFAS No. 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. SFAS No. 144 also supersedes the accounting and reporting provisions
of Accounting Principles Board No. 30 (APB 30), Reporting the Results of Operations  Reporting the Effects of Disposal of a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events and Transaction, for segments of a
business to be disposed of. SFAS No. 144 retains APB 30s requirement that entities report discontinued operations separately from continuing operations and extends that reporting requirement to a component of an entity that has been disposed
of or is classified as held for sale. The provisions of SFAS No. 144 were effective for fiscal years beginning after December 15, 2001. We adopted this statement on January 1, 2002. There was no impact to our results of operations or
financial position as a result of adopting this standard.



In
April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendments of FASB No. 13 and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4 Reporting Gains and Losses from Extinguishment of
Debt, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item. This statement also amends SFAS No. 13, Accounting for Leases and requires that certain lease modifications that
have the economic effects similar to the sale-leaseback transaction be accounted for in the same manner as a sale-leaseback transaction. This statement also makes technical corrections to existing pronouncements. The statement is effective for
fiscal years beginning after May 15, 2002. We elected early application of this statement. During 2002 and 2003, we extinguished our Tranche A term loans and made optional prepayments on our Tranche B term loan, and as a result, we recorded a loss
for the write-off of unamortized debt issuance costs. These costs have been reflected as interest expense in our condensed consolidated statements of operations, and have not been classified as extraordinary items.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 supersedes guidance provided by EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December 31, 2002.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, which amends FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS
No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting



21



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are in effect for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The transition
guidance provided in the statement had no impact on our results of operations or financial position, as we elected not to change the accounting of our stock based compensation from APB No. 25 Accounting for Stock Issued to Employees. We
have implemented the disclosure provisions of this statement.



In April 2002, the FASB issued SFAS No. 149 Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. The statement amends and clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, the statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed
in SFAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. The statement is effective for contracts entered into or modified after June 30, 2003, except
as stated below and for hedging relationships designated after June 30, 2003. The provisions of this statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing
contracts as well as new contracts entered into after June 30, 2003. SFAS No. 149 should be applied prospectively. Adoption of the provisions of SFAS No. 149 did not have a material effect on our results of operations and financial position.



In May 2003, the FASB issued SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement establishes standards for how an issuer classifies and measures certain financial instruments that are within its scope as a liability. Many
of those instruments were previously classified as equity. SFAS No. 150 is to be implemented by reporting a cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still
existing at the beginning of the interim period of adoption. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. For Dresser, which is considered a nonpublic entity as defined by this statement, mandatorily redeemable financial instruments are subject to the provisions of
SFAS No. 150 for the first fiscal period beginning after December 15, 2003. In November 2003, the FASB issued FASB Staff Position (FSP) 150-3, which deferred indefinitely the effective date of certain provisions of SFAS No. 150. We are
still evaluating the impact this statement may have on our results of operations and financial position.



In November 2002, the FASB issued FASB Interpretation No. (FIN) 45 Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation supercedes FIN 34 Disclosure of Indirect Guarantee of Indebtedness of Others. FIN 45 addresses the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under guarantees. It also requires that a guarantor recognize a liability, at the inception of a guarantee, for the fair value of the obligation undertaken in issuing the guarantee.
The initial measurement and recognition provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for interim or annual periods ending after December 15, 2002. See Note
12. The adoption of the measurement and recognition provisions of this interpretation did not have a material impact on our results of operations or financial position.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN
46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not



22



---

##### Table of Contents

DRESSER, INC

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)



have sufficient equity at risk for the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003. In October 2003, the FASB issued FSP 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. The FSP is effective for
financial statements issued after October 9, 2003 and extends the effective date for applying the provisions of FIN 46 to variable interest entities created or acquired prior to February 1, 2003, to the first interim or annual period beginning after
December 15, 2003. We do not believe that this interpretation will have a material effect on our results of operations and financial position.



Note 11. Subsequent Event



In July 2002, Dresser modified its corporate structure by forming a Delaware holding company and two Bermuda holding companies between the existing
shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc., a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the 100% holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the
100% holder of Dresser Holdings, Ltd. The former direct shareholders of Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to their prior direct ownership interests in Dresser.



These holding companies have no assets or liabilities, other than common
stock holdings of Dresser, Inc., conduct no operations outside of Dresser, Inc. and have no transactions to date other than those incidental to their formation.



Note 12. Supplemental Guarantor Information



In connection with our senior subordinated notes due 2011, our wholly-owned domestic subsidiaries guaranteed, jointly and severally, our obligation to pay
principal and interest on the senior subordinated notes on a full and unconditional basis. The following supplemental condensed consolidating financial information presents the balance sheet as of June 30, 2002 and the statements of operations and
cash flows for the six months ended June 30, 2002 and 2001, respectively. In the condensed consolidating financial statements, the investments in wholly-owned subsidiaries are accounted for using the equity method. Certain prior year amounts have
been reclassified to conform to current year presentation.



23



---

##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2002

(in millions)

(unaudited)

(restated)



|                                                                                          |  | Parent |         |   | SubsidiaryGuarantors |   | Non- GuarantorSubsidiaries |  | Eliminations |       |  | TotalConsolidated |       
|----------------------------------------------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | -------------------------- |  | ------------ | ----- |  | ----------------- | ------
|ASSETS                                                                                    |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Current Assets:                                                                           |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Cash and equivalents                                                                      |  | $      | 31.1    |   |                      | $ | 0.1                        |  | $            | 52.9  |  | $                 |      
|Receivables                                                                               |  |        | 134.3   |   |                      |   | 3.6                        |  |              | 192.1 |  |                   |      
|Inventories                                                                               |  |        | 147.6   |   |                      |   | 14.3                       |  |              | 162.1 |  |                   |      
|Other current assets                                                                      |  |        | 4.2     |   |                      |   |                           |  |              | 11.4  |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total current assets                                                                      |  |        | 317.2   |   |                      |   | 18.0                       |  |              | 418.5 |  |                   |      
|Property, plant and equipment                                                             |  |        | 151.6   |   |                      |   | 0.2                        |  |              | 73.1  |  |                   |      
|Investments in consolidated subsidiaries                                                  |  |        | 417.4   |   |                      |   | 384.1                      |  |              |      |  |                   | (801.5
|Investment in unconsolidated subsidiaries                                                 |  |        |        |   |                      |   |                           |  |              | 6.6   |  |                   |      
|Deferred financing fees and other assets                                                  |  |        | 54.7    |   |                      |   |                           |  |              | 13.7  |  |                   |      
|Prepaid and intangible pension assets                                                     |  |        | 53.7    |   |                      |   |                           |  |              | 6.0   |  |                   |      
|Deferred tax assets                                                                       |  |        |        |   |                      |   |                           |  |              | 2.3   |  |                   |      
|Goodwill                                                                                  |  |        | 106.4   |   |                      |   | 24.2                       |  |              | 156.2 |  |                   |      
|Intangibles                                                                               |  |        | 2.3     |   |                      |   |                           |  |              | 3.4   |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total assets                                                                              |  | $      | 1,103.3 |   |                      | $ | 426.5                      |  | $            | 679.8 |  | $                 | (801.5
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCK AND SHAREHOLDERS (DEFICIT) EQUITY       |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Current liabilities:                                                                      |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Accounts and notes payable                                                                |  | $      | 75.4    |   |                      | $ | 6.5                        |  | $            | 144.2 |  | $                 |      
|Deferred revenue                                                                          |  |        | 7.3     |   |                      |   |                           |  |              | 9.8   |  |                   |      
|Accrued expenses                                                                          |  |        | 18.0    |   |                      |   | 0.6                        |  |              | 97.7  |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total current liabilities                                                                 |  |        | 100.7   |   |                      |   | 7.1                        |  |              | 251.7 |  |                   |      
|Pension and other retiree benefit obligations                                             |  |        | 268.4   |   |                      |   |                           |  |              | 3.6   |  |                   |      
|Long-term debt                                                                            |  |        | 983.1   |   |                      |   | 2.0                        |  |              | 5.0   |  |                   |      
|Other liabilities                                                                         |  |        | 9.7     |   |                      |   |                           |  |              | 35.4  |  |                   |      
|Commitments and contingencies                                                             |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total liabilities                                                                         |  |        | 1,361.9 |   |                      |   | 9.1                        |  |              | 295.7 |  |                   |      
|Mandatorily redeemable common stock                                                       |  |        | 7.9     |   |                      |   |                           |  |              |      |  |                   |      
|Shareholders (deficit) equity:                                                           |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Shareholders (deficit) equity, net                                                       |  |        | (266.5  | ) |                      |   | 417.4                      |  |              | 384.1 |  |                   | (801.5
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total shareholders (deficit) equity                                                      |  |        | (266.5  | ) |                      |   | 417.4                      |  |              | 384.1 |  |                   | (801.5
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total liabilities, mandatorily redeemable Common stock and shareholders (deficit) equity |  | $      | 1,103.3 |   |                      | $ | 426.5                      |  | $            | 679.8 |  | $                 | (801.5
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       



24



---

##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2001

(in millions)

(restated)



|                                                                                          |  | Parent |         |   | SubsidiaryGuarantors |   | Non- GuarantorSubsidiaries |  | Eliminations |       |  | TotalConsolidated |       
|----------------------------------------------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | -------------------------- |  | ------------ | ----- |  | ----------------- | ------
|ASSETS                                                                                    |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Current Assets:                                                                           |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Cash and equivalents                                                                      |  | $      | 35.4    |   |                      | $ |                           |  | $            | 66.3  |  | $                 |      
|Receivables                                                                               |  |        | 127.3   |   |                      |   |                           |  |              | 175.7 |  |                   |      
|Inventories                                                                               |  |        | 167.9   |   |                      |   |                           |  |              | 162.6 |  |                   |      
|Other current assets                                                                      |  |        | 2.7     |   |                      |   |                           |  |              | 7.5   |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total current assets                                                                      |  |        | 333.3   |   |                      |   |                           |  |              | 412.1 |  |                   |      
|                                                                                          |  |        |         |   |                     
|Property, plant and equipment                                                             |  |        | 158.5   |   |                      |   |                           |  |              | 76.5  |  |                   |      
|Investments in consolidated subsidiaries                                                  |  |        | 292.5   |   |                      |   | 283.2                      |  |              |      |  |                   | (575.7
|Investment in unconsolidated subsidiaries                                                 |  |        | 0.4     |   |                      |   |                           |  |              | 4.4   |  |                   |      
|Deferred financing fees and other assets                                                  |  |        | 61.8    |   |                      |   |                           |  |              | 17.4  |  |                   |      
|Prepaid and intangible pension assets                                                     |  |        | 53.7    |   |                      |   |                           |  |              | 6.0   |  |                   |      
|Deferred tax assets                                                                       |  |        |        |   |                      |   |                           |  |              | 2.3   |  |                   |      
|Goodwill                                                                                  |  |        | 106.4   |   |                      |   | 9.3                        |  |              | 148.2 |  |                   |      
|Intangibles                                                                               |  |        | 2.6     |   |                      |   |                           |  |              | 3.2   |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total assets                                                                              |  | $      | 1,009.2 |   |                      | $ | 292.5                      |  | $            | 670.1 |  | $                 | (575.7
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|LIABILITIES, MANDATORILY REEDEMABLE COMMON STOCK AND SHAREHOLDERS (DEFICIT) EQUITY       |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|                                                                                          |  |        |         |   |                     
|Current liabilities:                                                                      |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Accounts and notes payable                                                                |  | $      | 72.9    |   |                      | $ |                           |  | $            | 161.4 |  | $                 |      
|Deferred revenue                                                                          |  |        | 5.2     |   |                      |   |                           |  |              | 7.3   |  |                   |      
|Accrued expenses                                                                          |  |        | 18.9    |   |                      |   |                           |  |              | 95.9  |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total current liabilities                                                                 |  |        | 97.0    |   |                      |   |                           |  |              | 264.6 |  |                   |      
|Pension and other retiree benefit obligations                                             |  |        | 269.1   |   |                      |   |                           |  |              | 10.1  |  |                   |      
|Long-term debt                                                                            |  |        | 905.6   |   |                      |   |                           |  |              | 86.4  |  |                   |      
|Other liabilities                                                                         |  |        | 20.1    |   |                      |   |                           |  |              | 25.8  |  |                   |      
|Commitments and contingencies                                                             |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total liabilities                                                                         |  |        | 1,291.8 |   |                      |   |                           |  |              | 386.9 |  |                   |      
|Mandatorily redeemable common stock                                                       |  |        | 7.9     |   |                      |   |                           |  |              |      |  |                   |      
|Shareholders (deficit) equity:                                                           |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Shareholders (deficit) equity, net                                                       |  |        | (290.5  | ) |                      |   | 292.5                      |  |              | 283.2 |  |                   | (575.7
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total shareholders (deficit) equity                                                      |  |        | (290.5  | ) |                      |   | 292.5                      |  |              | 283.2 |  |                   | (575.7
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       
|Total liabilities, mandatorily redeemable common stock and shareholders (deficit) equity |  | $      | 1,009.2 |   |                      | $ | 292.5                      |  | $            | 670.1 |  | $                 | (575.7
|                                                                                          |  |        |         |   |                      |   |                            |  |              |       |  |                   |       



25



---

##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2002

(in millions)

(unaudited)

(restated)



|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | -------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Revenues                                                  |  | $      | 257.8 |   |                      | $ | 8.1  |                            |  | $ | 190.1        |   |  | $                 | (38.0
|Cost of revenues                                          |  |        | 195.9 |   |                      |   | 6.6  |                            |  |   | 142.8        |   |  |                   | (37.9
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      
|Gross profit                                              |  |        | 61.9  |   |                      |   | 1.5  |                            |  |   | 47.3         |   |  |                   | (0.1 
|Selling, engineering, administrative and general expenses |  |        | 55.5  |   |                      |   | 0.4  |                            |  |   | 31.5         |   |  |                   | (0.1 
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      
|Operating income                                          |  |        | 6.4   |   |                      |   | 1.1  |                            |  |   | 15.8         |   |  |                   |     
|Equity earnings of unconsolidated subsidiaries            |  |        |      |   |                      |   |     |                            |  |   | 1.1          |   |  |                   |     
|Equity income of consolidated subsidiaries                |  |        | 13.3  |   |                      |   | 12.4 |                            |  |   |             |   |  |                   | (25.7
|Interest expense                                          |  |        | (21.0 | ) |                      |   | (0.2 | )                          |  |   | (2.2         | ) |  |                   |     
|Interest income                                           |  |        | 0.4   |   |                      |   |     |                            |  |   |             |   |  |                   |     
|Other (deductions) income, net                            |  |        | (0.3  | ) |                      |   |     |                            |  |   | 1.8          |   |  |                   |     
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      
|(Loss) income before taxes                                |  |        | (1.2  | ) |                      |   | 13.3 |                            |  |   | 16.5         |   |  |                   | (25.7
|Provision for income taxes                                |  |        | (0.2  | ) |                      |   |     |                            |  |   | (4.1         | ) |  |                   |     
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      
|Net (loss) income                                         |  | $      | (1.4  | ) |                      | $ | 13.3 |                            |  | $ | 12.4         |   |  | $                 | (25.7
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      



26



---

##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2001

(in millions)

(unaudited)

(restated)



|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | -------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Revenues                                                  |  | $      | 257.5 |   |                      | $ |                           |  | $ | 141.3        |   |  | $                 | (24.8
|Cost of revenues                                          |  |        | 182.7 |   |                      |   |                           |  |   | 100.3        |   |  |                   | (24.8
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      
|Gross profit                                              |  |        | 74.8  |   |                      |   |                           |  |   | 41.0         |   |  |                   |     
|Selling, engineering, administrative and general expenses |  |        | 66.8  |   |                      |   |                           |  |   | 21.6         |   |  |                   |     
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      
|Operating income                                          |  |        | 8.0   |   |                      |   |                           |  |   | 19.4         |   |  |                   |     
|Equity earnings of unconsolidated subsidiaries            |  |        | 0.7   |   |                      |   |                           |  |   | 0.2          |   |  |                   |     
|Equity earnings of consolidated subsidiaries              |  |        | 9.0   |   |                      |   | 9.0                        |  |   |             |   |  |                   | (18.0
|Interest expense                                          |  |        | (17.4 | ) |                      |   |                           |  |   | (2.4         | ) |  |                   |     
|Interest income                                           |  |        | 0.7   |   |                      |   |                           |  |   | 0.1          |   |  |                   |     
|Other (deductions) income, net                            |  |        | (3.2  | ) |                      |   |                           |  |   | 2.0          |   |  |                   |     
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      
|(Loss) Income before taxes                                |  |        | (2.2  | ) |                      |   | 9.0                        |  |   | 19.3         |   |  |                   | (18.0
|Provision for income taxes                                |  |        | (69.3 | ) |                      |   |                           |  |   | (10.3        | ) |  |                   |     
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      
|Net (loss) income                                         |  | $      | (71.5 | ) |                      | $ | 9.0                        |  | $ | 9.0          |   |  | $                 | (18.0
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      



27



---

##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2002

(in millions)

(unaudited)

(restated)



|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | -------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Revenues                                                  |  | $      | 504.9 |   |                      | $ | 8.1  |                            |  | $ | 355.4        |   |  | $                 | (65.6
|Cost of revenues                                          |  |        | 374.7 |   |                      |   | 6.6  |                            |  |   | 263.7        |   |  |                   | (65.4
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      
|Gross profit                                              |  |        | 130.2 |   |                      |   | 1.5  |                            |  |   | 91.7         |   |  |                   | (0.2 
|Selling, engineering, administrative and general expenses |  |        | 102.8 |   |                      |   | 0.4  |                            |  |   | 57.7         |   |  |                   | (0.2 
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      
|Operating income                                          |  |        | 27.4  |   |                      |   | 1.1  |                            |  |   | 34.0         |   |  |                   |     
|Equity earnings of unconsolidated subsidiaries            |  |        |      |   |                      |   |     |                            |  |   | 1.8          |   |  |                   |     
|Equity earnings of consolidated subsidiaries              |  |        | 25.5  |   |                      |   | 24.6 |                            |  |   |             |   |  |                   | (50.1
|Interest expense                                          |  |        | (52.0 | ) |                      |   | (0.2 | )                          |  |   | (5.0         | ) |  |                   |     
|Interest income                                           |  |        | 0.4   |   |                      |   |     |                            |  |   | 0.7          |   |  |                   |     
|Other income, net                                         |  |        |      |   |                      |   |     |                            |  |   | 1.3          |   |  |                   |     
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      
|Income before taxes                                       |  |        | 1.3   |   |                      |   | 25.5 |                            |  |   | 32.8         |   |  |                   | (50.1
|Provision for income taxes                                |  |        | (0.5  | ) |                      |   |     |                            |  |   | (8.2         | ) |  |                   |     
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      
|Net income                                                |  | $      | 0.8   |   |                      | $ | 25.5 |                            |  | $ | 24.6         |   |  | $                 | (50.1
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                   |      



28



---

##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2001

(in millions)

(unaudited)

(restated)



|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | -------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Revenues                                                  |  | $      | 511.3 |   |                      | $ |                           |  | $ | 277.4        |   |  | $                 | (53.4
|Cost of revenues                                          |  |        | 363.7 |   |                      |   |                           |  |   | 194.8        |   |  |                   | (52.1
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      
|Gross profit                                              |  |        | 147.6 |   |                      |   |                           |  |   | 82.6         |   |  |                   | (1.3 
|Selling, engineering, administrative and general expenses |  |        | 120.9 |   |                      |   |                           |  |   | 46.6         |   |  |                   | (1.3 
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      
|Operating income                                          |  |        | 26.7  |   |                      |   |                           |  |   | 36.0         |   |  |                   |     
|Equity earnings of unconsolidated subsidiaries            |  |        | 0.7   |   |                      |   |                           |  |   | 0.3          |   |  |                   |     
|Equity earnings of consolidated subsidiaries              |  |        | 21.5  |   |                      |   | 21.5                       |  |   |             |   |  |                   | (43.0
|Interest expense                                          |  |        | (17.3 | ) |                      |   |                           |  |   | (3.2         | ) |  |                   |     
|Interest income                                           |  |        | 0.6   |   |                      |   |                           |  |   | 0.8          |   |  |                   |     
|Other (deductions) income, net                            |  |        | (5.0  | ) |                      |   |                           |  |   | 1.5          |   |  |                   |     
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      
|Income before taxes                                       |  |        | 27.2  |   |                      |   | 21.5                       |  |   | 35.4         |   |  |                   | (43.0
|Provision for income taxes                                |  |        | (78.3 | ) |                      |   |                           |  |   | (13.9        | ) |  |                   |     
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      
|Net (loss) income                                         |  | $      | (51.1 | ) |                      | $ | 21.5                       |  | $ | 21.5         |   |  | $                 | (43.0
|                                                          |  |        |       |   |                      |   |                            |  |   |              |   |  |                   |      



29



---

##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2002

(in millions)

(unaudited)

(restated)



|                                                                                           |  | Parent |        |   | SubsidiaryGuarantors |   |       | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|------------------------------------------------------------------------------------------ |  | ------ | ------ | - | -------------------- | - | ----- | -------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Cash flows from operating activities:                                                      |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Net income                                                                                 |  | $      | 0.8    |   |                      | $ | 25.5  |                            |  | $ | 24.6         |   |  | $                 | (50.1
|Adjustments to reconcile net income cash flows provided by (used in) operating activities: |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Depreciation and amortization                                                              |  |        | 14.7   |   |                      |   |      |                            |  |   | 6.6          |   |  |                   |     
|Equity earnings of consolidated affiliates                                                 |  |        | (25.5  | ) |                      |   | (24.6 | )                          |  |   |             |   |  |                   | 50.1 
|Equity earnings of unconsolidated affiliates                                               |  |        |       |   |                      |   |      |                            |  |   | (1.8         | ) |  |                   |     
|Loss on extinguishment of debt                                                             |  |        | 13.2   |   |                      |   |      |                            |  |   |             |   |  |                   |     
|Other, net                                                                                 |  |        | 50.4   |   |                      |   | (0.8  | )                          |  |   | (47.8        | ) |  |                   |     
|                                                                                           |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Net cash provided by (used in) operating activities                                        |  |        | 53.6   |   |                      |   | 0.1   |                            |  |   | (18.4        | ) |  |                   |     
|Cash flows from investing activities:                                                      |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Asset acquisitions                                                                         |  |        | (21.4  | ) |                      |   |      |                            |  |   |             |   |  |                   |     
|Capital expenditures                                                                       |  |        | (6.2   | ) |                      |   |      |                            |  |   | (2.3         | ) |  |                   |     
|                                                                                           |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Net cash used in investing activities                                                      |  |        | (27.6  | ) |                      |   |      |                            |  |   | (2.3         | ) |  |                   |     
|Cash flows from financing activities:                                                      |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Changes in intercompany activity                                                           |  |        | (103.2 | ) |                      |   |      |                            |  |   | 103.2        |   |  |                   |     
|Proceeds from the issuance of long term debt                                               |  |        | 256.3  |   |                      |   |      |                            |  |   |             |   |  |                   |     
|Repayment of debt (including current portion)                                              |  |        | (185.2 | ) |                      |   |      |                            |  |   | (98.3        | ) |  |                   |     
|Increase in short-term notes payable                                                       |  |        |       |   |                      |   |      |                            |  |   | 0.4          |   |  |                   |     
|Payment of deferred financing fees                                                         |  |        | (8.2   | ) |                      |   |      |                            |  |   | (0.1         | ) |  |                   |     
|Proceeds from the issuance of stock                                                        |  |        | 10.0   |   |                      |   |      |                            |  |   |             |   |  |                   |     
|                                                                                           |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Net cash (used in) provided by financing activities                                        |  |        | (30.3  | ) |                      |   |      |                            |  |   | 5.2          |   |  |                   |     
|Effect of translation adjustments on cash                                                  |  |        |       |   |                      |   |      |                            |  |   | 2.1          |   |  |                   |     
|Net (decrease) increase in cash and equivalents                                            |  |        | (4.3   | ) |                      |   | 0.1   |                            |  |   | (13.4        | ) |  |                   |     
|Cash and equivalents, beginning of period                                                  |  |        | 35.4   |   |                      |   |      |                            |  |   | 66.3         |   |  |                   |     
|                                                                                           |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Cash and equivalents, end of period                                                        |  | $      | 31.1   |   |                      | $ | 0.1   |                            |  | $ | 52.9         |   |  | $                 |     
|                                                                                           |  |        |        |   |                      |   |       |                            |  |   |              |   |  |                   |      



30



---

##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2001

(in millions)

(unaudited)

(restated)



|                                                                                        |  | Parent |          |   | SubsidiaryGuarantors |   |       | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|--------------------------------------------------------------------------------------- |  | ------ | -------- | - | -------------------- | - | ----- | -------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Cash flows from operating activities:                                                   |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Net (loss) income                                                                       |  | $      | (51.1    | ) |                      | $ | 21.5  |                            |  | $ | 21.5         |   |  | $                 | (43.0
|Adjustments to reconcile net (loss) income cash flows provided by operating activities: |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Depreciation and amortization                                                           |  |        | 15.2     |   |                      |   |      |                            |  |   | 11.6         |   |  |                   |     
|Equity earnings of consolidated affiliates                                              |  |        | (21.5    | ) |                      |   | (21.5 | )                          |  |   |             |   |  |                   | 43.0 
|Equity earnings of unconsolidated affiliates                                            |  |        | (0.7     | ) |                      |   |      |                            |  |   | (0.3         | ) |  |                   |     
|Deferred tax valuation                                                                  |  |        | 78.0     |   |                      |   |      |                            |  |   |             |   |  |                   |     
|Other, net                                                                              |  |        | 50.6     |   |                      |   |      |                            |  |   | (78.3        | ) |  |                   |     
|                                                                                        |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Net cash provided by (used in) operating activities                                     |  |        | 70.5     |   |                      |   |      |                            |  |   | (45.5        | ) |  |                   |     
|Cash flows from investing activities:                                                   |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Recapitalization transaction                                                            |  |        | (1,267.2 | ) |                      |   |      |                            |  |   |             |   |  |                   |     
|Business acquisitions                                                                   |  |        | (24.6    | ) |                      |   |      |                            |  |   |             |   |  |                   |     
|Capital expenditures                                                                    |  |        | (10.8    | ) |                      |   |      |                            |  |   | (2.0         | ) |  |                   |     
|Proceeds from the sale of assets                                                        |  |        | 4.3      |   |                      |   |      |                            |  |   |             |   |  |                   |     
|                                                                                        |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Net cash used in investing activities                                                   |  |        | (1,298.3 | ) |                      |   |      |                            |  |   | (2.0         | ) |  |                   |     
|                                                                                        |  |        |          |   |                     
|Cash flows from financing activities:                                                   |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Changes equity in intercompany activity                                                 |  |        | (10.5    | ) |                      |   |      |                            |  |   | 6.4          |   |  |                   |     
|Proceeds from the issuance of long-term debt                                            |  |        | 920.0    |   |                      |   |      |                            |  |   | 100.0        |   |  |                   |     
|Increase in short-term notes payable                                                    |  |        |         |   |                      |   |      |                            |  |   | 1.7          |   |  |                   |     
|Payment of deferred financing fees                                                      |  |        | (57.6    | ) |                      |   |      |                            |  |   |             |   |  |                   |     
|Proceeds from the issuance of stock                                                     |  |        | 400.0    |   |                      |   |      |                            |  |   |             |   |  |                   |     
|Equity issuance costs                                                                   |  |        | (8.6     | ) |                      |   |      |                            |  |   |             |   |  |                   |     
|Cash overdrafts                                                                         |  |        | 8.3      |   |                      |   |      |                            |  |   |             |   |  |                   |     
|                                                                                        |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Net cash provided by financing activities:                                              |  |        | 1,251.6  |   |                      |   |      |                            |  |   | 108.1        |   |  |                   |     
|Effect of translation adjustments on cash                                               |  |        |         |   |                      |   |      |                            |  |   | (2.9         | ) |  |                   |     
|Net increase in cash and equivalents                                                    |  |        | 23.8     |   |                      |   |      |                            |  |   | 57.7         |   |  |                   |     
|Cash and equivalents, beginning of period                                               |  |        | 5.6      |   |                      |   |      |                            |  |   | 14.2         |   |  |                   |     
|                                                                                        |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      
|Cash and equivalents, end of period                                                     |  | $      | 29.4     |   |                      | $ |      |                            |  | $ | 71.9         |   |  | $                 |     
|                                                                                        |  |        |          |   |                      |   |       |                            |  |   |              |   |  |                   |      



31



---

##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The Managements Discussion and Analysis of Financial Condition and Results of Operations set forth in this Item 2. reflects the restatement of the
Companys financial statements for the three and six months ended June 30, 2002 and 2001 and certain events occurring subsequent to the original due date for the filing of this Quarterly Report on Form 10Q. All financial information and
discussion within Item 2 reflects the correction of errors and financial statement restatements described in Note 1 to our financial statements.



Certain statements in this report constitute forward-looking statements as that term is defined under §21E of the Securities and Exchange
Act of 1934, as amended (the Exchange Act), and the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, intend, estimate and other
expressions, which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although
forward-looking statements reflect managements good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause our actual results,
performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the impact of general economic conditions in the regions
in which we do business; general industry conditions, including competition and product, raw material and energy prices; changes in exchange rates and currency values; capital expenditure requirements; access to capital markets and the risks and
uncertainties described below under Certain Risk Factors.



Our independent auditors for 1998 through 2001, Arthur Andersen LLP (Andersen) have ceased operations. We engaged new independent auditors, PricewaterhouseCoopers LLP (PwC), in June 2002 to
audit our 2002 financial statements and, upon discovery of errors affecting our 2001 financial statements, also engaged PwC to perform a new audit of our 2001 financial statements. PwC was not engaged to audit, and has not audited any of our
financial statements prior to the year ended December 31, 2001. The Company and PwC have discovered other errors in our financial statements affecting the years 1998 through 2000.



The Company has concluded that its internal controls for the preparation of interim financial information during 2001 did
not provide an adequate basis for its independent auditors to complete reviews of the 2001 quarterly financial information in accordance with standards established by the American Institute of Certified Public Accountants. In connection with its
restatement of the 2001 financial statements, management recorded adjustments to its financial statements. Certain of the closing and audit adjustments recorded in the fourth quarter, aggregating $7.8 million, may have related to earlier quarters in
the year, but the Company has been unable to determine the amounts, if any, which may relate to earlier quarters of 2001. As a result, there is a possibility that the results of operations for the three and six months ended June 30, 2001 are
overstated, with related understatement of results of operations for the quarter ended December 31, 2001.



The Company believes that the processes it used for the preparation of its June 30, 2002 interim financial statements has improved. The Company believes
it has been able to produce reliable interim financial statements as of June 30, 2002 and for the three months and six months then ended.



We have not amended our annual report on Form 10-K for the year ended December 31, 2001 and our quarterly report on Form 10-Q for any period prior to that
date, and the financial statements and related financial information contained in such reports should no longer be relied upon.



A summary of the accounting errors and restatements for the three and six months ended June 30, 2002 and 2001 and the impact to our balance sheet at
December 31, 2001 is included in Note 1 to our financial statements. Please see our annual report on Form 10-K for the year ended December 31, 2002 for a summary of accounting errors and restatements of our financial statements for 1998 through
2001.



32



---

##### Table of Contents

Overview



We design, manufacture and market highly engineered equipment and services sold primarily to customers in the energy industry. Our primary business
segments are flow control, measurement systems and compression and power systems. We sell our products and services to customers including major oil companies, multinational engineering and construction companies and other industrial firms. Our
total revenues by geographic region for the six months ended June 30, 2002, consisted of North America (55.1%), Europe/Africa (23.6%), Latin America (7.0%), Asia (9.6%) and the Middle East (4.7%). We have pursued a strategy of customer, geographic
and product diversity to mitigate the impact of an economic downturn on our business in any one part of the world or in any single business segment.



For the six months ended June 30, 2002, we generated revenue of $802.8 million, operating income of $62.5 million and net income of $0.8 million.



Market Forces



Our product offerings include valves, instruments, meters, natural gas
fueled engines, retail fuel dispensing systems, blowers and natural gas fueled power generation systems. These products are used to produce, transport, process, store and deliver oil and gas and their related by-products.



Long-term demand for energy infrastructure equipment and services is driven
by increases in worldwide energy consumption, which is a function of worldwide population growth and the levels of energy consumption per capita. In the short term, demand for our products is affected by overall worldwide economic conditions and by
fluctuations in the level of activity and capital spending by major, national and independent oil and gas companies, gas distribution companies, pipeline companies, power generation companies and petrochemical processing plants and customers
access to capital. The level of oil and gas prices affects all of these activities and is a significant factor in determining our primary customers level of cash flow. Our customers cash flow and their outlook for future natural gas
prices effects their capital spending which drives demand for our products. Our customers have publicly indicated they intend to reduce their capital spending in 2002, and these reductions will negatively impact our business. In the latter part of
2001, energy demand and oil and natural gas prices declined significantly. Excess capacity in the natural gas compression industry resulted in substantial revenue declines in our power systems segment in the first half of 2002 as compared to the
first half of 2001. We also saw weakness in the retail fueling and instrument business of our measurement systems due to the reduced capital spending on retail fuel equipment and softness in the industrial economy in the first half of 2002.



Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including bad debts, inventories, long-lived tangible and
intangible assets, income taxes, warranty obligations, pensions and other post-retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.



The following critical accounting
policies affect significant judgments and estimates used in the preparation of our financial statements.



Reserve for Uncollectible Accounts Receivable



We make ongoing estimates relating to the collectibility of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining
the



33



---

##### Table of Contents

amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on
ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to
deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determined that a smaller or larger reserve was appropriate, we would record a credit or a charge to selling and administrative expense
in the period in which we made such a determination.



Inventory Reserves



Inventories are stated at the lower of cost or market. A
portion of the United States inventory cost is determined using the last-in, first-out (LIFO) method. All other United States and non-United States inventories are valued on a first-in, first-out (FIFO) basis. Reserves for excess and obsolete
inventories are based on an assessment of slow-moving and obsolete inventories, determined by historical usage and estimated future demand.



We also make ongoing estimates relating to the market value of inventories, based upon our assumptions about future demand and market conditions. If we
estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated market value. This reserve is
recorded as a charge to cost of revenues. If changes in market conditions result in reductions in the estimated market value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a
determination and record a charge to cost of revenues.



Impairment of
Long-Lived Assets and Goodwill



We account for long-lived
assets and goodwill in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset and SFAS No. 142, Goodwill and Other Intangible Assets.



SFAS No. 144 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For long-lived assets to be held and used we evaluate for impairment when indicators of
impairment are present. If indicators are present, we then must determine whether the sum of the estimated undiscounted future cash flows attributable to the long-lived asset in question is less than the carrying amount. If the carrying amount
exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair market value. We estimate future undiscounted cash flows using assumptions about
our expected future operating performance. Our estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, or changes to our business operations.



Assets held for sale are measured at the lower of carrying value or fair
value less costs to sell. Should certain assets meet the criteria as assets held for sale, potential impairment could result if the fair value of the assets less costs to sell result in a value that is lower than the carrying value of the assets.



A long-lived assets value is also dependent upon its
estimated useful life. A change in the useful life of a long-lived asset could result in higher or lower depreciation and amortization expense. If the assets actual life is different than its estimated life, the asset could be over-valued or
under-valued.



With the adoption of SFAS No. 142, goodwill is
no longer amortized. Goodwill is assessed for impairment at least annually and when events or circumstances indicate that the carrying value of the asset may not be recoverable. During 2002, we performed our initial test of impairment and our annual
test of impairment of goodwill. In our tests, we used future cash flows of our reporting units to estimate a fair market value of the reporting unit. In making this assessment, we rely on a number of factors, including operating results, business
plans, economic projections, and anticipated future cash flows. There are inherent uncertainties related to these factors and judgment in applying these factors to our goodwill impairment test.



34



---

##### Table of Contents

Future restructuring activities, unexpected significant declines in operating results of the reporting
units, and protracted economic weakness may result in our having to perform interim impairment tests and could result in charges for goodwill and other asset impairment charges in the future.



Product Warranties



We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product
quality programs and processes, including actively monitoring and evaluating the quality from our suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.



Income Taxes



We determine income taxes based on the recognition of deferred income tax liabilities and assets for the expected future tax consequences of recognition
of events that have been included in the financial statements or tax returns. Deferred income tax liabilities and assets are determined based on differences between financial statement and tax basis of liabilities and assets using enacted tax rates
in effect for the period in which the differences are expected to reverse. We recognize deferred tax assets only if it is more likely than not that the assets will be realized in future years. A full valuation allowance was established in 2001 for
domestic deferred tax assets for which realization is not likely. In assessing the valuation allowance, we considered past operations results and the impact of increased interest expense on our future earnings. As a result, domestic deferred tax
assets were reduced to zero during 2001.



Other Contingencies



In the ordinary course of business, we are involved in
legal proceedings involving contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims against us when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore,
actual losses in future periods are inherently uncertain. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations. However, if actual or
estimated probable future losses exceed our recorded liability for such claims, we would record additional charges as additional selling, engineering, administrative and general expenses during the period in which the actual loss or change in
estimate has occurred.



Pension and Other Post-Retirement Benefits



Our employee pension and other post-retirement benefit
costs and obligations are dependent on our assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, health care cost trends rates, inflation, salary growth, and long-term return on plan assets, retirement
rates, mortality rates and other factors. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in such future periods. While
we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect our pension and other post-retirement benefits costs and obligations. In addition, assumed
healthcare cost trend rates have a significant effect on amounts reported for the healthcare plans.



Stand-Alone Company



Our financial statements for periods presented prior to April 10, 2001 have been prepared on a carve-out basis and reflect the combined financial position, results of operations and cash flows of Dresser in accordance with accounting
principles generally accepted in the United States. The financial statements exclude certain items which were not transferred as a result of the recapitalization transaction and any financial effects from Halliburtons



35



---

##### Table of Contents

decision to discontinue this business segment. In addition, certain amounts in the financial statements have been estimated, allocated and pushed down from
Halliburton in a consistent manner in order to depict the financial position, results of operations and cash flows of Dresser on a stand-alone basis. Halliburton allocated the costs for certain services to Dresser based on factors such as number of
employees, revenues and assets, or directly charged Dresser for some services on an as-used basis. Management believes the method of allocation was reasonable. However, certain expenses associated with Dressers participation in
Halliburtons single employer post retirement benefit plans were recognized as charged to Dresser by Halliburton.



The carve out financial position, results of operations and cash flows may not be indicative of what would have been reported if Dresser had been a
stand-alone entity or had been operated in accordance with the Agreement during the periods presented prior to April 10, 2001. Prior to the recapitalization transaction, the financial statements reflect intercompany amounts with Halliburton as
components of divisional equity.



Effects of Currency Fluctuations and
Inflation



We conduct operations in over 100 countries
around the world. Therefore, our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we or one of our subsidiaries enter into either a purchase or sales
transaction using a currency other than the functional currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant local currency and then
translated into U.S. dollars for inclusion in our historical consolidated financial statements. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the future. The majority of our
revenues and costs are denominated in U.S. dollars, with Euro-related and other currencies also being significant. Historically, we have engaged in hedging strategies from time to time to reduce the effect of currency fluctuations on specific
transactions. We have not, however, sought to hedge currency translation risk. We expect to continue these hedging policies going forward. Significant depreciation in the value of the Euro relative to the U.S. dollar could have a material adverse
effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar denominated debt, including the notes and borrowings under our credit facility, if not offset by pricing in those markets.



Revenues



Our revenues are primarily generated through the sale of new equipment, replacement parts and services. Revenues are
recognized as products are shipped and services are rendered. Revenues have historically been driven by volume, rather than price, and are sensitive to foreign currency fluctuations.



Cost of Revenues



Cost of revenues is comprised of the cost of raw materials, plant and related work force costs and freight and warehousing expense.



Gross Margin



Certain of our products tend to carry higher gross margins than others, and therefore product mix can impact our overall
gross margins. For example, our custom engineered valve products typically carry a significantly higher gross margin than our retail fuel dispensing products. As a result, an increase in custom engineered valve sales will result in a
disproportionately higher increase in our gross profit. In addition, sales of aftermarket parts and services typically carry a significantly higher gross margin than original product sales.



Selling, Engineering, Administrative and General Expenses



Selling expenses consist of costs associated with marketing and sales.
Administrative and general expenses are primarily management, accounting, treasury and legal costs. Engineering expenses are costs attributable to research



36



---

##### Table of Contents

and development and engineering. Selling, general and administrative expenses also include costs associated with health, safety and environmental
administration and retiree medical and pension benefits. Research and development expenses are costs associated with product or customer initiatives or with projects that seek improvements in manufacturing processes. Research and development
expenses are expensed as incurred.



Depreciation and Amortization



Property, plant and equipment are reported at cost less
accumulated depreciation, which is generally provided using the straight-line method over the estimated useful lives of the assets. Expenditures for improvements that extend the life of the asset are generally capitalized. Intangible assets
primarily consist of goodwill and patents. In January 2002, we adopted SFAS No. 142 and stopped amortizing goodwill.



Income Taxes



In connection with the recapitalization transaction, a Section 338(h)(10) election was made to allow the recapitalization of our domestic businesses to be
treated as an acquisition of assets for tax purposes. Accordingly, for tax purposes our U.S. assets were stepped up to their fair market value and we will be able to depreciate those assets using a higher basis than the historical amount.



Interest Expense



As part of Halliburton, no third party debt was allocated to us except for
operational accounts payable. As a result, we did not have any significant interest expense. As part of the recapitalization transactions, we incurred a significant amount of debt. Accordingly, we incurred significant interest expense beginning in
the second quarter of 2001 and will continue to incur significant interest expense going forward.



Bookings and Backlog



Bookings include orders placed during the period whether or not filled. Backlog as of any date represents the value of orders left unfilled as of that date.



Results of Operations



The following table presents selected financial information regarding each of our segments for the three and six months ended June 30, 2002 and 2001,
respectively. During 2002, we made changes to our internal corporate structure with the reorganization of certain of our operating units. We believe these changes will better serve our customers. Although we still report under three reportable
segments, the operating units that comprise each reportable segment have changed. The prior year information has been restated to conform to the current year presentation.



37



---

##### Table of Contents

|                                                                      |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|--------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | -
|                                                                      |  | 2002                        |       |   | 2001                      |  
|                                                                      |  | (in millions)               |      
|Revenues (restated):                                                  |  |                             |       |   |                           |  
|Flow Control                                                          |  | $                           | 275.2 |   |                           | $
|Measurement Systems                                                   |  |                             | 77.9  |   |                           |  
|Compression and Power Systems                                         |  |                             | 65.9  |   |                           |  
|Reconciling Items, Including Corporate                                |  |                             | (1.0  | ) |                           |  
|                                                                      |  |                             |       |   |                           |  
|Total                                                                 |  | $                           | 418.0 |   |                           | $
|                                                                      |  |                             |       |   |                           |  
|Gross profit (restated):                                              |  |                             |       |   |                           |  
|Flow Control                                                          |  | $                           | 75.5  |   |                           | $
|Measurement Systems                                                   |  |                             | 19.6  |   |                           |  
|Compression and Power Systems                                         |  |                             | 15.5  |   |                           |  
|Reconciling Items, Including Corporate                                |  |                             |      |   |                           |  
|                                                                      |  |                             |       |   |                           |  
|Total                                                                 |  | $                           | 110.6 |   |                           | $
|                                                                      |  |                             |       |   |                           |  
|Selling, engineering, administrative and general expenses (restated): |  |                             |       |   |                           |  
|Flow Control                                                          |  | $                           | 55.9  |   |                           | $
|Measurement Systems                                                   |  |                             | 14.0  |   |                           |  
|Compression and Power Systems                                         |  |                             | 12.9  |   |                           |  
|Reconciling Items, Including Corporate                                |  |                             | 4.5   |   |                           |  
|                                                                      |  |                             |       |   |                           |  
|Total                                                                 |  | $                           | 87.3  |   |                           | $
|                                                                      |  |                             |       |   |                           |  
|Operating income (restated):                                          |  |                             |       |   |                           |  
|Flow Control                                                          |  | $                           | 19.6  |   |                           | $
|Measurement Systems                                                   |  |                             | 5.6   |   |                           |  
|Compression and Power Systems                                         |  |                             | 2.6   |   |                           |  
|Reconciling Items, Including Corporate                                |  |                             | (4.5  | ) |                           |  
|                                                                      |  |                             |       |   |                           |  
|Total                                                                 |  | $                           | 23.3  |   |                           | $
|                                                                      |  |                             |       |   |                           |  
|Depreciation and amortization:                                        |  |                             |       |   |                           |  
|Flow Control                                                          |  | $                           | 5.5   |   |                           | $
|Measurement Systems                                                   |  |                             | 1.3   |   |                           |  
|Compression and Power Systems                                         |  |                             | 3.2   |   |                           |  
|Reconciling Items, Including Corporate                                |  |                             | 0.4   |   |                           |  
|                                                                      |  |                             |       |   |                           |  
|Total                                                                 |  | $                           | 10.4  |   |                           | $
|                                                                      |  |                             |       |   |                           |  
|Bookings:                                                             |  |                             |       |   |                           |  
|Flow Control                                                          |  | $                           | 252.3 |   |                           | $
|Measurement Systems                                                   |  |                             | 69.8  |   |                           |  
|Compression and Power Systems                                         |  |                             | 73.9  |   |                           |  
|                                                                      |  |                             |       |   |                           |  
|Total                                                                 |  | $                           | 396.0 |   |                           | $
|                                                                      |  |                             |       |   |                           |  



|                              | 
|----------------------------- | 
|                              | 
|                              | 
|                              | 
|Backlog:                      | 
|Flow Control                  | 
|Measurement Systems           | 
|Compression and Power Systems | 
|Reconciling Items, Including  | 
|                              | 
|Total                         | 
|                              | 



38



---

##### Table of Contents

Three months ended June 30, 2002 as compared to the three months ended June 30, 2001



Consolidated



Revenues.Revenues increased by $44.0 million, or 11.8%, to $418.0 million in 2002 from $374.0 million in 2001. The
increase in revenues was primarily attributable to increases in our flow control segment, which offset decreases in our compression and power system segment. Our flow control segment benefited from acquisitions in 2001 and 2002 as well as increased
sales volume in our valve product lines. Our compression and power systems segment was negatively impacted by declines in demand for natural gas compression, as compared to the second quarter of 2001.



Cost of revenues.Cost of revenues as a percentage of revenues
increased to 73.5% in 2002 from 69.0% in 2001. An unfavorable product mix affected our flow control segment. In addition, our compression and power system segment was negatively impacted by reduced manufacturing volume and resulting inefficiencies
and lower manufacturing absorption as compared to the second quarter of 2001.



Gross Profit.Gross profit decreased by $5.2 million, or 4.5% to $110.6 million in 2002 from $115.8 million in 2001. As a percentage of revenues, gross profit decreased to 26.5% in 2002 from 31.0% in 2001,
primarily as a result of the factors discussed above.



Selling, Engineering, Administrative and General Expenses. Selling, engineering, administrative and general expenses decreased by $1.1 million to $87.3 million in 2002 from $88.4 million in 2001. Selling, engineering, administrative
and general expenses decreased as a percentage of revenues, to 20.9% of revenues in 2002 from 23.6% of revenues in 2001. Increases in selling, engineering, administrative and general expenses primarily related to higher volume and acquisitions were
in part by offset by the suspension of goodwill amortization in 2002. For the three months ended June 30, 2001, selling, engineering, administrative and general expenses included $2.1 million of amortization of goodwill. In addition, in 2001 we
accelerated the restricted stock plan and incurred expenses for retention bonuses assumed as a result of the recapitalization for a total of $6.1 million.



Operating Income.Operating income decreased by $4.1 million, or 15.0%, to $23.3 million in 2002 from $27.4 million in 2001. Operating income was
impacted primarily by declines in our compression and power systems segment. This segment was impacted by the depressed demand for new gas compression engines. Declines in our compression and power system segment were somewhat offset by increases in
our flow control segment, measurement systems segment and a reduction of corporate expenses in part due to the expenses associated with restricted stock plan and retention bonuses incurred in 2001.



Bookings and Backlog.Bookings for the three months ended June 30,
2002 were $396.0 million as compared to $392.0 million during the same period in 2001. Backlog at June 30, 2002 period was $406.4 million compared to $401.9 million at June 30, 2001, a 1.1% increase. Increased bookings and backlog in our flow
control segment were offset by declines in our measurement and compression and power systems segments.



Segment Analysis



Flow Control.Revenues increased by $67.0 million, or 32.2%, to $275.2 million in 2002 from $208.2 million in 2001. Increases in our flow control segment in part were attributable to acquisitions made in 2001 and 2002. Revenues
attributable to these acquisitions were approximately $33.3 million with the remainder of the increase attributable to increased volume in our on/off valve and our control valve product lines, which offset declines in our instrument product lines.



Gross profit increased by $7.5 million, or 11.0%, to $75.5
million in 2002 from $68.0 million in 2001. However, as a percentage of revenue, gross margins decreased to 27.4% in 2002 from 32.7% in 2001. In our on/off valve product line, we had a substantial volume of low margin third-party buyouts associated
with large international projects. In the control valve and pressure relief valve product lines, growth in lower margin original equipment sales for new construction business combined with relatively flat higher margin part sales resulted in overall
lower margins.



39



---

##### Table of Contents

Selling, engineering, administrative, and general expenses increased by $9.6 million or 20.7%, to $55.9
million in 2002 from $46.3 million in 2001. Increases in selling, engineering, administrative and general expenses primarily related to higher volume and acquisitions. This was partially offset by the suspension of goodwill amortization in 2002. As
a percentage of revenue, these costs decreased to 20.3% in 2002 from 22.2% in 2001.



Operating income decreased by $2.1 million, or 9.7%, to $19.6 million in 2002 from $21.7 million in 2001. Increases in operating income due in part to the acquisitions, which represented $3.4 million in the second
quarter of 2002, were offset by declines in our instrument product lines.



Bookings during the 2002 period of $252.3 million were 17.9% above bookings during the 2001 period and 0.3% above the previous quarter. Backlog at June 30, 2002 was $313.8 million, or 26.5% above June 30, 2001 and
7.5% below the previous quarter. Significant increases in demand in our on/off product lines for 2002, particularly associated with large international projects, are primarily responsible for increased bookings and backlog on a year over year
comparison. The decrease in backlog as compared to the first quarter of 2002 can be attributed to the fulfillment of orders for a large offshore project in Brazil, and improved throughput of a manufacturing facility in Italy. Backlog attributable to
the three acquisitions made in 2001 and 2002 was $39.1 million at June 30, 2002.



Measurement Systems.Revenues decreased by $1.7 million, or 2.1%, to $77.9 million in 2002 from $79.6 million in 2001. The decrease in revenues was primarily a result of declines in our U.S. markets due to
weakness in the fuel dispenser market. The declines were partially offset by stronger sales in certain international locations.



Gross profit decreased by $0.2 million, or 1.0%, to $19.6 million in 2002 from $19.8 million in 2001. As a percentage of revenue, gross margins increased
to 25.2% in 2002 from 24.9% in 2001. This increase is primarily attributable the decline in sales in our U.S markets partially offset by manufacturing cost savings resulting from certain cost reduction initiatives implemented in U.S. plants earlier
in the year.



Selling, engineering, administrative, and general
expenses decreased $4.5 million, or 24.3%, to $14.0 million in 2002 from $18.5 million in 2001. Increases in legal expenses and other reserves in 2002 were offset by the reduction in amortization related to goodwill. In addition, in 2001, we
incurred an additional $3.0 million in charges during the quarter, associated with a plant closure. As a percentage of revenue, these costs decreased to 18.0% in 2002 from 23.2% in 2001.



Operating income increased by $4.3 million or 330.8%, to $5.6 million in 2002 from $1.3 million in 2001, primarily a result
of the factors discussed above.



Bookings during the 2002
period of $69.8 million were 15.8% below bookings during the 2001 period and 9.1% above the previous quarter. Backlog at June 30, 2002 was $42.1 million, or 26.9% below June 30, 2001 and 14.8% below the previous quarter. The weak market conditions
in 2002 and the overall decline in the U.S. dispenser market led to lower bookings and backlog in the 2002 period as compared to the prior year. The increase in bookings in the second quarter of 2002 as compared to the first quarter of 2002 was
impacted by seasonality, with bookings in the first quarter typically impacted by the delay in the release of capital funds of major oil companies.



Compression and Power Systems.Revenues decreased by $22.2 million, or 25.2%, to $65.9 million in 2002 from $88.1 million in 2001. Original
equipment sales for the second quarter decreased approximately $16.0 million from the prior year due to sharply lower gas compression engine demand. Aftermarket part sales decreased by approximately $4.9 million primarily attributable to diminished
gas compression fleet utilization.



Gross profit decreased by
$12.5 million, or 44.6%, to $15.5 million in 2002 from $28.0 million in 2001. As a percentage of revenues, gross margins decreased to 23.5% in 2002 from 31.8% in 2001. Margins were impacted by manufacturing efficiency and rate variances associated
with declining production volume, as well as significant price competition on certain of our products.



40



---

##### Table of Contents

Selling, engineering, administrative, and general expenses remained relatively flat, decreasing by $0.9,
or 6.5%, to $12.9 million in 2002 from $13.8 million in 2001. Decreases in selling, engineering, administrative, and general expenses in our natural gas engines business were offset by increases in our blowers business. As a percentage of revenue,
these costs increased to 19.6% in 2002 from 15.7% in 2001. This percentage was impacted by the sharp decrease in revenues, as a result of the factors discussed above, as costs stayed relatively stable between the periods.



Operating income decreased by $11.6 million, or 81.7%, to $2.6 million in
2002 from $14.2 million in 2001, primarily as a result of the factors discussed above.



Bookings during the 2002 period of $73.9 million were 22.3% below bookings during the 2001 period and 6.8% above the previous quarter. Backlog at June 30, 2002 was $55.1 million, or 45.3% below June 30, 2001 and 15.0%
above the previous quarter. The decline in the gas compression demand led to a significant reduction in bookings and backlog on a year over year comparison. In the second quarter of 2002, bookings and backlog benefited from increased orders in the
distributed power generation market and aftermarket parts. These gains were somewhat offset by decreases in bookings and backlog in the gas compression market.



Six months ended June 30, 2002 as compared to the six months ended June 30, 2001



Consolidated



Revenues.Revenues increased by $67.5 million, or 9.2%, to $802.8 million in 2002 from $735.3 million in 2001. The increase in revenues was
attributable to increases in our flow control segment, which offset decreases in both our measurement and compression and power system segments. Our flow control segment benefited from acquisitions in 2001 and 2002 as well as increased sales volume
in our valve product lines. Our compression and power systems segment was negatively impacted by declines in demand for natural gas compression, as compared to 2001. Our measurement systems segment was negatively impacted by reduced capital spending
on retail fuel equipment.



Cost of revenues.Cost of
revenues as a percentage of revenues increased to 72.2% in 2002 from 68.9% in 2001. Higher manufacturing costs and an unfavorable product mix affected our flow control segment. In addition, our compression and power system segment was negatively
impacted by reduced manufacturing volume and resulting inefficiencies and lower manufacturing absorption as compared to 2001.



Gross Profit.Gross profit decreased by $5.7 million, or 2.5% to $223.2 million in 2002 from $228.9 million in 2001. As a percentage of revenues,
gross profit also decreased to 27.2% in 2002 from 31.1% in 2001, primarily as a result of the factors discussed above.



Selling, Engineering, Administrative and General Expenses. Selling, engineering, administrative and general expenses decreased by $5.5 million to
$160.7 million in 2002 from $166.2 million in 2001. Selling, engineering, administrative and general expenses decreased as a percentage of revenues, to 20.0% of revenues in 2002 from 22.6% of revenues in 2001. Increases in selling, engineering,
administrative and general expenses primarily related to higher volume and acquisitions were generally offset by the suspension of goodwill amortization in 2002. For the six months ended June 30, 2001, selling, engineering, administrative and
general expenses included $4.2 million of amortization of goodwill. In addition, in 2001 we accelerated the restricted stock plan and incurred expenses for retention bonuses assumed as a result of the recapitalization for a total of $6.1 million and
incurred $7.0 million of expenses related to the closure of a manufacturing facility.



Operating Income.Operating income decreased by $0.2 million or 0.3%, to $62.5 million in 2002 from $62.7 million in 2001. Increases in our flow control segment and measurement systems segment were offset by
declines in our compression and power systems segment. This segment was impacted by the depressed demand for new gas compression engines.



41



---

##### Table of Contents

Bookings and Backlog.Bookings during the 2002 period of $780.7 million were 0.4% below bookings
during the same period in 2001. Increased bookings in our flow control segment were offset by declines in our measurement and compression and power systems segments. Backlog at June 30, 2002 period was $406.4 million compared to $401.9 million at
June 30, 2001, a 1.1% increase. Increased bookings and backlog in our flow control segment were offset by declines in our measurement and compression and power systems segments.



Segment Analysis



Flow Control.Revenues increased by $112.0 million, or 27.4%, to $520.2 million in 2002 from $408.2 million in 2001. Increases in our flow control
segment in part were attributable to the acquisitions made. Revenues attributable to these acquisitions were approximately $52.8 million, with the remainder of the increase attributable to increased volume in our on/off valve and our control valve
product lines.



Gross profit increased by $15.6 million or
11.4%, to $152.4 million in 2002 from $136.8 million in 2001. However, as a percentage of revenue, gross margins decreased to 29.3% in 2002 from 33.5% in 2001. The earnings associated with favorable volume for certain of our products were negatively
impacted by the margin deterioration with higher manufacturing costs and unfavorable product mix. In our on/off valve product line, we had a substantial volume of low margin third-party buyouts associated with large international projects. Higher
manufacturing costs were impacted by throughput issues in a plant in Italy. In the control valve and pressure relief valve product lines, growth in lower margin original equipment sales for new construction business combined with relatively flat
higher margin part sales resulted in overall lower margins.



Selling, engineering, administrative, and general expenses increased by $11.0 million or 12.5%, to $99.3 million in 2002 from $88.3 million in 2001. Increases in selling, engineering, administrative and general expenses primarily related to
higher volume and acquisitions. This increase was offset somewhat by the suspension of the amortization of goodwill. As a percentage of revenue, these costs decreased to 19.1% in 2002 from 21.6% in 2001.



Operating income increased by $4.6 million, or 9.5%, to $53.1 million in 2002
from $48.5 million in 2001. Increases in operating income were primarily due to the acquisitions, as discussed above, which contributed approximately $4.8 million to the increase.



Bookings during the 2002 period of $503.8 million were 13.9% above bookings during the 2001 period. Backlog at June 30, 2002
was $313.8 million, or 26.5% above backlog at June 30, 2001. Significant increases in demand in our on/off product lines for 2002 particularly associated with large international projects are primarily responsible for increased bookings and backlog
on a year over year comparison. Backlog attributable to the three acquisitions made in 2001 and 2002 was $39.1 million at June 30, 2002.



Measurement Systems.Revenues decreased by $9.1 million, or 5.9%, to $144.6 million in 2002 from $153.7 million in 2001. The decrease in revenues
was in large part due to reduced capital spending on retail fuel equipment.



Gross profit decreased by $2.7 million, or 7.1%, to $35.3 million in 2002 from $38.0 million in 2001. This decrease primarily resulted from lower sales volume. As a percentage of revenue, gross margins were 24.4% and
24.7% for the six months ended June 30, 2002 and 2001, respectively.



Selling, engineering, administrative, and general expenses decreased by $9.6 million or 25.8% to $27.6 million from $37.2 million in 2001. Through the six months ended June 30, 2001, we recorded $7.0 million in expenses related to the
closure and relocation of a retail fuel dispenser facility. In addition, we realized savings from cost reduction measures implemented earlier in the year. As a percentage of revenue, these costs decreased to 19.1% in 2002 from 24.2% in 2001.



Operating income increased by $6.9 million, or 862.5%, to $7.7
million in 2002 from $0.8 million in 2001. This was primarily impacted by the $7.0 million in expenses incurred in 2001 related to a plant closure discussed above. In addition, the segment was impacted by lower sales volume, which was mitigated in
part by certain cost reduction measures implemented earlier in the year.



42



---

##### Table of Contents

Bookings during the 2002 period of $133.8 million were 15.8% below bookings during the 2001 period.
Backlog at June 30, 2002 was $42.1 million, or 26.9% below backlog at June 30, 2001. The weak market conditions in 2002 and the overall decline in the U.S. dispenser market led to lower bookings and backlog in the 2002 period as compared to the
prior year.



Compression and Power Systems.Revenues
decreased by $36.9 million, or 20.9%, to $139.9 million in 2002 from $176.8 million in 2001. Sales for our products in our natural gas engine business for the second quarter decreased approximately $24.1 million from the prior year due to sharply
lower gas compression engine demand and aftermarket part sales decreased by approximately $9.3 million.



Gross profit decreased by $18.4 million or 34.1%, to $35.6 million in 2002 from $54.0 million in 2001. As a percentage of revenues, the gross margin
percentages decreased to 25.4% in 2002 from 30.5% in 2001. This decrease was primarily a result of reduced manufacturing efficiency and rate variances associated with declining production volume.



Selling, engineering, administrative, and general expenses remained
relatively flat decreasing by $0.3 million or 1.2% to $25.3 million in 2002 from $25.6 million in 2001. Decreases in selling, engineering, administrative, and general expenses in our natural gas engines business were offset by increases in our
blowers business. As a percentage of revenue, these costs increased to 18.1% in 2002 from 14.5% in 2001. This percentage was impacted by the sharp decrease in revenues, as a result of the factors discussed above, as costs stayed relatively stable
between the periods.



Operating income decreased by $18.1
million, or 63.7%, to $10.3 million in 2002 from $28.4 million in 2001. Our operating income was primarily impacted by declines in orders for engines used in gas compression, as discussed above.



Bookings during the 2002 period of $143.1 million were 21.7% below bookings
during the 2001 period. Backlog at June 30, 2002 was $55.1 million, or 45.3% below backlog at June 30, 2001. The decline in the gas compression demand led to a significant reduction in booking and backlog on a year over year comparison.



Liquidity and Capital Resources



Prior to the recapitalization transaction, we participated in
Halliburtons centralized treasury management system whereby all of our cash receipts were remitted to Halliburton and Halliburton funded all of our cash disbursements. Our primary cash disbursements were for capital expenditures and working
capital. Following the consummation of the recapitalization transactions, this practice ceased and we have established our own cash management system.



Our primary source of cash is from operations. The primary cash uses are to fund principal and interest payments on our debt, working capital and capital
expenditures. We expect to fund these cash needs with operating cash flow and, if necessary, borrowings under the revolving credit portion of our credit facility.



Cash and equivalents were $84.1 million and $101.3 million as of June 30, 2002 and 2001 respectively. A significant portion
of our cash and equivalents balances is utilized in our international operations and may not be immediately available to service debt in the United States.



Net cash flows generated from operating activities was $35.3 million and $25.0 million for the six months ended June 30, 2002 and 2001, respectively.



Net cash flows used in investing activities was $29.9 million
for the six months ended June 30, 2002. Net cash flows used in investing activities resulted from the Modern Acquisition and capital expenditures. Net cash flows used in investing activities was $1,300.3 million for the six months ended June 30,
2001 resulting primarily from cash used to complete the recapitalization transaction of $1,267.2 million and capital expenditures of $12.8 million.



43



---

##### Table of Contents

Net cash flows used in financing activities was $25.1 million for the six months ended June 30, 2002,
resulting primarily from the repayment of debt with the use of the proceeds from the issuance of additional senior subordinated notes and the payment of deferred financing fees. In addition, we issued an additional 250,000 shares of class B common
stock for proceeds of $10.0 million. Net cash flows provided by financing activities was $1,359.7 million for the six months ended June 30, 2001 resulting from the proceeds of the 2001 notes and borrowings under the credit facility, along with cash
from the investors, which were used to complete the recapitalization transaction.



In March 2002, we issued an additional $250.0 million of 93/8% senior
subordinated notes due 2011 under the indenture that governs the 2001 notes. The notes were issued at 102.5% of their principal amounts plus accrued interest from October 15, 2001. We recorded a $6.3 million premium that is amortized over the term
of the notes, and be recorded as a reduction to interest expense. The net proceeds were used to repay existing indebtedness under the Tranche A term loans of the credit facility. Fees paid at closing in connection with the issuance were
approximately $5.5 million. These fees are included in deferred financing fees and other assets on our balance sheet. The net proceeds of the offering were used to repay existing indebtedness under the Tranche A term loans of the credit facility.
This repayment significantly reduced the principal balances of the Tranche A term loans. As a result, we recorded a loss of $12.9 million, which represented the write-off of a portion of the unamortized deferred financing fees. This loss has been
reflected as interest expense in our condensed consolidated financial statements.



In March 2002, we also obtained an amendment to our credit facility that among other things increased the amount by which the Tranche B term loan can be increased from $95.0 million to $195.0 million. Fees paid in
connection with the amendment were approximately $1.0 million.



In June 2002, we made a voluntary prepayment on our credit facility of $30.0 million, which extinguished our Tranche A term loans. As a result of the early extinguishment of debt we recorded a loss of $0.3 million, which represented the
write-off of the remaining unamortized debt issuance costs associated with the Tranche A term loans. These costs have been reflected as interest expense in our condensed consolidated statements of operations.



As of June 30, 2002, we had $556.1 of senior subordinated notes, including a
$6.1 million premium, $427.1 million of debt consisting of the Tranche B term loan under the credit facility, and $12.0 million of other long-term debt. In addition, we have a $100.0 million revolving credit facility, subject to certain conditions,
of which $59.3 million was available and $40.7 million was reserved for letters of credit as of June 30, 2002.



The following tables set forth the contractual cash commitments for debt and lease obligations as well as commitments for the next several years:



|                                   |  | Remainder of 2002 |      | 2003 |   | 2004 |  | 2005 |      | 2006 |   | 2007 and Thereafter |  | Total
|---------------------------------- |  | ----------------- | ---- | ---- | - | ---- |  | ---- | ---- | ---- | - | ------------------- |  | -----
|                                   |  | (in millions)    
|Contractual Cash Obligations       |  |                   |      |      |   |      |  |      |      |      |   |                     |  |      
|Long-Term Debt1                    |  | $                 | 5.5  |      | $ | 3.6  |  | $    | 5.7  |      | $ | 5.7                 |  | $    
|Capital Lease Obligations          |  |                   | 1.0  |      |   | 0.6  |  |      | 0.5  |      |   | 0.4                 |  |      
|Operating Leases                   |  |                   | 7.6  |      |   | 11.1 |  |      | 9.3  |      |   | 7.6                 |  |      
|                                   |  |                   |      |      |   |      |  |      |      |      |   |                     |  |      
|Total Contractual Cash Obligations |  | $                 | 14.1 |      | $ | 15.3 |  | $    | 15.5 |      | $ | 13.7                |  | $    
|                                   |  |                   |      |      |   |      |  |      |      |      |   |                     |  |      



44



---

##### Table of Contents

|                  |  | Remainderof 2002 |      | 2003 |   | 2004 |  | 2005 |     | 2006 |   | 2007 andThereafter |  | Total
|----------------- |  | ---------------- | ---- | ---- | - | ---- |  | ---- | --- | ---- | - | ------------------ |  | -----
|                  |  | (in millions)   
|Commitments       |  |                  |      |      |   |      |  |      |     |      |   |                    |  |      
|Letters of Credit |  | $                | 14.7 |      | $ | 25.2 |  | $    | 0.8 |      | $ |                   |  | $    
|                  |  |                  |      |      |   |      |  |      |     |      |   |                    |  |      
|Total Commitments |  | $                | 14.7 |      | $ | 25.2 |  | $    | 0.8 |      | $ |                   |  | $    
|                  |  |                  |      |      |   |      |  |      |     |      |   |                    |  |      

---

|1 | Excludes a $6.1 premium, which is being amortized over the term of the notes.
|- | -----------------------------------------------------------------------------



Our ability to make payments on and to refinance our indebtedness, including our senior subordinated notes, to achieve
specified ratios required under our credit agreement, and to fund planned capital expenditures and research and development efforts will depend on our ability to achieve cost savings and generate cash in the future. This, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, we have recently experienced weakness in demand for some of our products as a result of general economic
conditions. However, based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flows from operations and available cash will allow us to achieve our required financial ratios, and together
with available borrowings under the credit facility will be adequate to meet our future liquidity needs for at least the next few years. We cannot assure you, however, that our business will generate sufficient cash flows from operations, that
currently anticipated cost savings and operating improvements will be realized on schedule or that future borrowings will be available to us under the revolving credit portion of our credit facility in an amount sufficient to enable us to achieve
our financial ratios or to pay our indebtedness, including the notes, or to fund our other liquidity needs. If general economic conditions do not improve and we are unable to achieve the financial ratios specified in our credit facility, we expect
that we would be required to seek approval from our senior lenders to modify these ratios. In the past, we have had to seek approval for the modification of these financial ratios. In addition, if we consummate an acquisition, our debt service
requirements could increase. We may need to refinance all or a portion of our indebtedness, including the notes on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the credit facility and
the notes, on commercially reasonable terms or at all. See Certain Risk Factors.



Recent Accounting Pronouncements



Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations and SFAS No. 142 Goodwill and Other Intangibles.



SFAS No. 141 supersedes Accounting Principles Board Opinion
(APB) No. 16, Business Combinations, and eliminates the pooling of interest method of accounting for business combinations and modifies the application of the purchase accounting method. SFAS No. 141 requires business
combinations initiated after June 30, 2001, to be accounted for using the purchase accounting method. SFAS No. 141 also further clarifies the criteria for recognition of intangible assets separately from goodwill. Our adoption of this standard did
not have any effect on our consolidated financial statements.



SFAS No. 142 supersedes APB No. 17, Intangible Assets, and eliminates the requirement to amortize goodwill and intangible assets with indefinite lives, addresses the amortization of intangible assets with defined lives and
requires impairment testing of intangible assets. Accordingly, as of January 1, 2002, we no longer amortize goodwill. In addition, we performed the transitional impairment test required as of January 1, 2002 and determined there was no impairment of
our goodwill. If goodwill amortization was excluded for the three and six months ended June 30, 2001, our net income would have increased by approximately $1.3 million and $2.6 million, respectively. Adjusted net loss for the three and six
months ended June 30, 2001, would have been $70.2 million and $48.5 million, respectively.



In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. An entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a change in accounting principle. We adopted this statement as of January 1, 2003. This statement had no material
impact on our results of operations or financial position.



45



---

##### Table of Contents

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment and Disposal of
Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 primarily addresses significant issues relating to the
implementation of SFAS No. 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting
Principles Board No. 30 (APB 30), Reporting the Results of Operations  Reporting the Effects of Disposal of a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events and Transaction, for segments of a business to be
disposed of. SFAS No. 144 retains APB 30s requirement that entities report discontinued operations separately from continuing operations and extends that reporting requirement to a component of an entity that has been disposed of or is
classified as held for sale. The provisions of SFAS No. 144 were effective for fiscal years beginning after December 15, 2001. We adopted this statement on January 1, 2002. There was no impact to our results of operations or financial
position as a result of adopting this standard.



In April 2002,
the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendments of FASB No. 13 and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4 Reporting Gains and Losses from Extinguishment of Debt, which
required all gains and losses from the extinguishment of debt to be classified as an extraordinary item. This statement also amends SFAS No. 13, Accounting for Leases and requires that certain lease modifications that have the economic
effects similar to the sale-leaseback transaction be accounted for in the same manner as a sale-leaseback transaction. This statement also makes technical corrections to existing pronouncements. The statement is effective for fiscal years beginning
after May 15, 2002. We elected early application of this statement. During 2002 and 2003, we extinguished our Tranche A term loans and made optional prepayments on our Tranche B term loan, and as a result, we recorded a loss for the write-off of
unamortized debt issuance costs. These costs have been reflected as interest expense in our condensed consolidated statements of operations, and have not been classified as extraordinary items.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 supersedes guidance provided by EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December 31, 2002.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, which amends FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS
No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are in effect for fiscal years ending after December 15, 2002,
with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The transition guidance
provided in the statement had no impact on our results of operations or financial position, as we elected not to change the accounting of our stock based compensation from APB No. 25 Accounting for Stock Issued to Employees. We have
implemented the disclosure provisions of this statement.



In
April 2002, the FASB issued SFAS No. 149 Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, the statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No.
133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. The statement is effective for contracts entered into or modified after June 30, 2003, except as stated
below and for hedging relationships designated after



46



---

##### Table of Contents

June 30, 2003. The provisions of this statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS No. 149 should be applied prospectively. Adoption of the provisions of SFAS No. 149 did not have a material effect on our results of operations
and financial position.



In May 2003, the FASB issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement establishes standards for how an issuer classifies and measures certain financial instruments that are within its scope
as a liability. Many of those instruments were previously classified as equity. SFAS No. 150 is to be implemented by reporting a cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. For Dresser, which is considered a nonpublic entity as defined by this statement, mandatorily redeemable financial instruments are subject
to the provisions of SFAS No. 150 for the first fiscal period beginning after December 15, 2003. In November 2003, the FASB issued FASB Staff Position (FSP) 150-3, which deferred indefinitely the effective date of certain provisions of
SFAS No. 150. We are still evaluating the impact this statement may have on our results of operations and financial position.



In November 2002, the FASB issued FASB Interpretation No. (FIN) 45 Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation supercedes FIN 34 Disclosure of Indirect Guarantee of Indebtedness of Others. FIN 45 addresses the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under guarantees. It also requires that a guarantor recognize a liability, at the inception of a guarantee, for the fair value of the obligation undertaken in issuing the guarantee.
The initial measurement and recognition provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for interim or annual periods ending after December 15, 2002. See Note 11
to our condensed consolidated financial statements. The adoption of the measurement and recognition provisions of this interpretation did not have a material impact on our results of operations or financial position.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003, the FASB issued FSP
46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. The FSP is effective for financial statements issued after October 9, 2003 and extends the effective date for applying the provisions of FIN
46 to variable interest entities created or acquired prior to February 1, 2003, to the first interim or annual period beginning after December 15, 2003. We do not believe that this interpretation will have a material effect on our results of
operations and financial position.



Certain Risk Factors



Set forth below are important risks and uncertainties that could adversely
affect our results of operations or financial condition and cause our actual results to differ materially from those expressed in forward-looking statements made by our management.



47



---

##### Table of Contents

Our independent auditors have reported to our audit committee material weaknesses and reportable conditions
regarding various elements of our system of internal controls.



Our independent auditors have reported to our audit committee material weaknesses and reportable conditions regarding various elements of our system of internal controls. Reportable conditions are matters coming to
the auditors attention that, in its judgment, should be communicated to the audit committee because they represent significant deficiencies in the design or operation of internal controls, which could adversely affect the organizations
ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements. A material weakness in internal controls is a reportable condition in which the design or operation of one or
more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be
detected within a timely period by employees in the normal course of performing their assigned functions.



Our independent auditors noted material weaknesses with respect to our review and oversight of the financial reporting process (including corporate
accounting of reserves and accruals) and with respect to accounting for pension and postretirement benefits obligations, and they cited reportable conditions with respect to broad areas of concern regarding internal controls over financial reporting
as it relates to the operation of our finance organization, revenue recognition practices relating to bill and hold transactions, multiple element transactions and actual or de facto FOB destination transactions, specially designated charges
(restructuring and exit activities), and intercompany accounting (balances, confirmation and elimination) and consolidation. Their observations related as well to more general matters, including exposures related to our decentralized accounting
organization, the size of our corporate accounting staff relative to the size of our company, variety of systems used for operating and financial reporting, outdated finance policies and lack of internal training for business unit financial
personnel.



Certain of the matters described above contributed
to accounting errors in our financial statements, which necessitated the restatements described elsewhere in this report and/or resulted in adjustments to our 2002 financial statements upon audit.



We have taken and continue to take steps to correct these internal control
deficiencies. For more information regarding the steps we have taken or are in the process of taking, see Item 4. Controls and Procedures. The efficacy of the steps we have taken to date and the steps we are still in the process of
taking to improve the reliability of our interim financial statements is subject to continued management review supported by confirmation and testing by our internal auditors and external auditors.



We have restated our financial statements for fiscal years 1998 through
2001 as a result of accounting errors, and our financial statements for fiscal year 2000 and earlier periods are unaudited.



Since Andersen, our independent auditors for the years 1998 through 2001, have ceased operations, we are unable to give effect to the corrections of the
errors contained in the financial statements for the years 1998 through 2000 without rendering those fiscal years unaudited and, accordingly, the financial statements at December 31, 2000 and all earlier periods are unaudited. Unaudited annual
financial information will not be in compliance with the rules and regulations of the Securities and Exchange Commission for filing reports.



Our operating results could be harmed during economic or industry downturns.



The businesses of most of our customers, particularly oil, gas and chemical companies, are, to varying degrees, cyclical and
have historically experienced periodic downturns. Profitability in those industries is highly sensitive to supply and demand cycles and volatile product prices, and our customers in those industries historically have tended to delay large capital
projects, including expensive maintenance and upgrades, during industry downturns. For example, due to the recent downturn in the energy industry and overall industrial economy, many of our key customers have reduced their capital spending, which
has resulted in reduced demand for our products. These industry downturns have been characterized by diminished product demand, excess manufacturing capacity and subsequent accelerated erosion of average selling prices. In addition, certain of our
customers may experience reduced access to capital during economic downturns. Therefore, any significant downturn in our customers markets or in general economic conditions could result in a reduction in demand for our products and services
and could harm our business. In addition, because we only compete in some segments of the energy infrastructure industry, a downturn in the specific segments we serve may affect us more severely than our competitors who compete in the industry as a
whole. See Market Forces.



48



---

##### Table of Contents

The loss of one of our large customers, or failure to win national, regional and global contracts from an existing
customer, could significantly reduce our cash flow, market share and profits.



Some of our customers contribute a substantial amount to our revenues. For the six months ended June 30, 2002, our largest customer represented approximately 3.5% of total revenues, and our top ten customers
collectively represented approximately 16.4% of total revenues. The loss of any of these customers, or class of customers, or decreases in these customers capital expenditures, could decrease our cash flow, market share and profits. As a
result of industry consolidation, especially among natural gas compression and major oil companies, our largest customers have become larger and, as a result, account for a larger percentage of our sales. We could lose a large customer as a result
of a merger or consolidation. Major oil companies and national oil companies have moved toward creating alliances and preferred supplier relationships with suppliers. In addition, these customers are increasingly pursuing arrangements with suppliers
that can meet a larger portion of their needs on a more global basis. Typically, a customer can terminate these arrangements at any time. The loss of a customer, or the award of a contract to a competitor, could significantly reduce our cash flow,
market share and profits.



Economic, political and other risks associated
with international sales and operations could adversely affect our business.



Since we manufacture and sell our products worldwide, our business is subject to risks associated with doing business internationally. Our sales outside North America, as a percentage of our total sales, was 44.9% for
the six months ended June 30, 2002. Accordingly, our future results could be harmed by a variety of factors, including:



| | changes in foreign currency exchange rates;
|- | -------------------------------------------



| | exchange controls;
|- | ------------------



| | changes in a specific countrys or regions political or economic conditions, particularly in emerging markets;
|- | ---------------------------------------------------------------------------------------------------------------



| | hyperinflation;
|- | ---------------



| | tariffs, other trade protection measures and import or export licensing requirements;
|- | -------------------------------------------------------------------------------------



| | potentially negative consequences from changes in tax laws;
|- | -----------------------------------------------------------



| | difficulty in staffing and managing widespread operations;
|- | ----------------------------------------------------------



| | changing labor regulations;
|- | ---------------------------



| | requirements relating to withholding taxes on remittances and other payments by subsidiaries;
|- | ---------------------------------------------------------------------------------------------



| | different regimes controlling the protection of our intellectual property;
|- | --------------------------------------------------------------------------



| | restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions;
|- | ------------------------------------------------------------------------------------------------------------------------------



| | restrictions on our ability to repatriate dividends from our subsidiaries; and
|- | ------------------------------------------------------------------------------



| | unexpected changes in regulatory requirements.
|- | ----------------------------------------------



49



---

##### Table of Contents

Our international operations are affected by global economic and political conditions. Changes in
economic or political conditions in any of the countries in which we operate could result in exchange rate movement, new currency or exchange controls or other restrictions being imposed on our operations or expropriation. In addition, the financial
condition of foreign customers may not be as strong as that of our current domestic customers.



Fluctuations in the value of the U.S. dollar may adversely affect our results of operations. Because our consolidated financial results are reported in dollars, if we generate sales or earnings in other currencies,
the translation of those results into dollars can result in a significant increase or decrease in the amount of those sales or earnings. In addition, our debt service requirements are primarily in U.S. dollars even though a significant percentage of
our cash flow is generated in euros or other foreign currencies. Significant changes in the value of the euro relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal
payments on U.S. dollar denominated debt, including the notes and borrowings under the credit facility.



In addition to currency translation risks, we incur currency transaction risk whenever we or one of our subsidiaries enter into either a purchase or a
sales transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, we cannot assure you that we will be able to effectively manage our currency transaction and/or translation risks. It
is possible that volatility in currency exchange rates will have a material adverse effect on our financial condition or results of operations. We have in the past experienced and expect to continue to experience economic losses and gains and
negative and positive impacts on earnings as a result of foreign currency exchange rate fluctuations. We expect that the portion of our revenues denominated in non-dollar currencies will continue to increase in future periods.



Our expansion in emerging markets requires us to respond to rapid changes in
market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. We cannot assure you that we will continue to succeed in developing
and implementing policies and strategies that are effective in each location where we do business.



Disruptions and uncertainties caused by war or terrorism could adversely affect our business.



Acts of war and/or acts of terrorism could have a material adverse impact on our business, results of operations and financial condition. The threat of
terrorism and war and heightened security and military response to this threat, or any future acts of terrorism, may cause further disruption to our economy and create further uncertainties. To the extent that such disruptions or uncertainties
result in delays or cancellations of orders or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.



If we are not able to apply new technology and software in our products or develop new
products, we may not be able to generate new sales.



Our success depends, in significant part, on our ability to develop products and services that customers will accept. We may not be able to develop successful new products in a timely fashion. Our commitment to customizing products to
address particular needs of our customers could burden our resources or delay the delivery or installation of products. If there is a fundamental change in the energy industry, some of our products could become obsolete and we may need to develop
new products rapidly. Our products may not be marketed properly or satisfy the needs of the worldwide market.



In addition, there is intense competition to establish proprietary rights to these new products and the related technologies. The technology and software
in our products, including electronic components, point-of-sale systems and related products, is growing increasingly sophisticated and expensive. Several of our competitors have significantly greater financial, technical and marketing resources
than we do. These competitors may develop proprietary products that are superior to ours or integrate new technologies more quickly than we do. We may not be able to obtain rights to this technology. We may also face claims that our products
infringe patents that our competitors hold. Any of these factors could harm our relationship with customers and reduce our sales and profits.



50



---

##### Table of Contents

Issued patents that cover our proprietary technology may not provide us with substantial protection or be
commercially beneficial to us.



Any issued patents
that cover our proprietary technology may not provide us with substantial protection or be commercially beneficial to us. The issuance of a patent is not conclusive as to its validity or its enforceability. Competitors may also be able to design
around our patents. If we are unable to protect our patented technologies, our competitors could commercialize our technologies.



We face intense competition.



We encounter intense competition in all areas of our business. Competition in our primary business segments is based on a number of considerations
including product performance, customer service, product lead times, global reach, brand reputation, breadth of product line, quality of aftermarket service and support and price. Additionally, customers for our products are attempting to reduce the
number of vendors from which they purchase in order to increase their efficiency. Our customers increasingly demand more technologically advanced and integrated products and we must continue to develop our expertise and technical capabilities in
order to manufacture and market these products successfully. To remain competitive, we will need to invest continuously in research and development, manufacturing, marketing, customer service and support and our distribution networks. We believe
that in order to maintain our competitiveness, we need to continue to focus on increasing operational efficiency and cash flow. This focus includes our on-going initiatives to increase manufacturing efficiencies, consolidate raw material sources,
increase global procurement and improve working capital efficiency. We believe these initiatives offer us opportunities to improve our profitability and cash flow. The continuation of re-engineering, plant consolidations, and the implementation of a
new enterprise-wide reporting, or ERP, system is critical to achieving these improvements. We may have to adjust the prices of some of our products to stay competitive. We cannot assure you that we will have sufficient resources to continue to make
such investments, we will achieve our stated objectives or that we will maintain our competitive position. Some of our competitors have greater financial and other resources than we do.



If we lose our senior management, our business may be adversely affected.



The success of our business is largely dependent on our senior managers, as
well as on our ability to attract and retain other qualified personnel. We cannot assure you that we will be able to attract and retain the personnel necessary for the development of our business. The loss of the services of key personnel or the
failure to attract additional personnel as required could have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain key person life insurance on any of our key employees.



Environmental compliance costs and liabilities could adversely affect
our financial condition.



Our operations and
properties are subject to stringent laws and regulations relating to environmental protection, including laws and regulations governing the investigation and clean up of contaminated properties as well as air emissions, water discharges, waste
management, and workplace health and safety. Such laws and regulations affect a significant percentage of our operations, are constantly changing, are different in every jurisdiction and can impose substantial fines and sanctions for violations.
Further, they may require substantial expenditures for the installation of costly pollution control equipment or operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases. We must
conform our operations and properties to these laws, and adapt to regulatory requirements in all jurisdictions as these requirements change.



We have experienced, and expect to continue to experience, both operating and capital costs to comply with environmental laws and regulations, including
potentially substantial costs for remediation and investigation of some of our properties (many of which are sites of long-standing manufacturing operations). In addition, although we believe our operations are substantially in compliance and that
we will be indemnified by Halliburton for certain contamination and compliance costs (subject to certain exceptions and limitations), new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously
unknown contamination, the imposition of new clean-up requirements, new claims for property damage or personal injury arising from environmental matters, or the refusal and/or inability of Halliburton to meet its indemnification obligations could
require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations.



51



---

##### Table of Contents

Our business could suffer if we are unsuccessful in negotiating new collective bargaining agreements.



As of the sixth months ended June 30, 2002, we had
approximately 8,300 employees. Approximately 40% of our U.S. workforce and 41% of our global workforce is represented by labor unions. Currently, of our material collective bargaining agreements, one will expire in May 2004, three will expire in
2005, two will expire in 2006 and two will expire in 2008. Two of our labor contracts will expire at the time the respective plants are closed. Although we believe that our relations with our employees are good, we cannot assure you that we will be
successful in negotiating new collective bargaining agreements, that such negotiations will not result in significant increases in the cost of labor or that a breakdown in such negotiations will not result in the disruption of our operations.



In May 2003, one of our collective bargaining agreements
expired. The bargaining unit responded by voting in favor of a strike that commenced on May 2, 2003. In July 2003, we announced the signing of a new three year labor agreement, and our union shop employees resumed work on July 28, 2003. The effect
of the strike negatively impacted our results of operations for the second and third quarters of 2003. One of our bargaining agreements expired in November 2003. On November 7, 2003 bargaining unit members voted in favor of a strike that commenced
on that date. On November 9, 2003, a new labor agreement was signed, and employees returned to work on November 10, 2003.



We rely on a limited number of third party suppliers and subcontractors for specific components and sub-assemblies and we may not be able to expediently obtain
substitute suppliers and subcontractors if our supplies are interrupted.



We rely on non-affiliated suppliers and subcontractors for the supply of components and sub-assemblies that are incorporated in our products. If these suppliers or manufacturers experience financial, operational,
manufacturing capacity or quality assurance difficulties, or if there is any other disruption in our relationships, we may be required to locate alternative sources of supply. Our inability to obtain sufficient quantities of these components and
sub-assemblies and the relatively long lead time needed to qualify new subcontractors may result in delays in delivery, interruption or delays in manufacturing and the cancellation of orders for our products.



We are dependent on the availability of raw materials and components.



We require substantial amounts of raw materials that
we purchase from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, the supply of, and demand for, such raw materials, new laws or regulations, suppliers
allocations to other purchasers, interruptions in production by raw materials or component parts suppliers, changes in exchange rates and worldwide price levels. Any change in the supply of, or price for, these raw materials and components could
materially affect our operating results.



We rely on independent
distributors.



In addition to our own direct sales
force, we depend on the services of independent distributors to sell our products and provide service and aftermarket support to our customers. Many of these independent distributors are not bound to us by exclusive distribution contracts and may
offer products and services that compete with ours to our customers. In addition, the majority of the distribution contracts we have with these independent distributors are cancelable by the distributor after a short notice period. The loss of a
substantial number of these distributors or the decision by many of these distributors to offer competitors products to our customers could materially reduce our sales and profits.



52



---

##### Table of Contents

We are controlled by First Reserve and Odyssey, whose interest may not be aligned with investors interest.



A holding company controlled by First Reserve,
Odyssey and their affiliates owns approximately 92.5% of the outstanding voting stock of our indirect parent company and, therefore, has the power, subject to certain exceptions, to control our affairs and policies. They also control the election of
directors, appointment of management, entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. The directors so elected will have authority, subject to the terms of our debt, to issue additional stock,
implement stock repurchase programs, declare dividends and make other decisions about our capital stock.



The interests of First Reserve, Odyssey and their affiliates could conflict with your interests. For example, if we encounter financial difficulties or
are unable to pay our debts as they mature, the interests of First Reserve and Odyssey as equity holders might conflict with interests of holders of our debt securities. Affiliates of First Reserve and Odyssey may also have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to investors. In addition, our sponsors or their affiliates currently
own, and may in the future own, businesses that directly compete with ours.



Our historical financial information may not be comparable to future periods.



The historical financial information included herein for periods prior to the consummation of the recapitalization transaction may not necessarily reflect
our results of operations, financial position and cash flows in the future or the results of operations, financial position and cash flows that would have occurred if we had been a separate, independent entity during the periods presented. The
historical financial information included in this report for those periods does not fully reflect the many significant changes that occurred in our capital structure, funding and operations as a result of the recapitalization, the credit facility,
the notes offering or the additional costs we expect to incur in operating as an independent company. For example, funds required for working capital and other cash needs for those periods were obtained from Halliburton on an interest-free
intercompany basis without any debt service requirement.



We may be faced
with unexpected product claims or regulations.



Because some of our products are used in systems that handle toxic or hazardous substances, a failure of any of our products could have material adverse consequences, and alleged failures of certain of our products have resulted in, and in
the future could result in, claims against us for product liability, including property damage, personal injury damage and consequential damages. Further, we may be subject to potentially material liabilities relating to claims alleging personal
injury as a result of hazardous substances incorporated into our products.



Our substantial indebtedness could adversely affect our financial condition.



We are a highly leveraged company. As of the six months ended June 30, 2002, we had $995.2 million of outstanding long-term indebtedness, including the
current portion of our long-term debt, $41.6 million of short-term notes and $3.5 million of capital lease obligations and a stockholders deficit of $266.5 million. This level of indebtedness could have important consequences, including the
following:



| | it may limit our ability to borrow money or sell stock to fund our working capital, capital expenditures and debt service requirements;
|- | ---------------------------------------------------------------------------------------------------------------------------------------



| | it may limit our flexibility in planning for, or reacting to, changes in our business;
|- | --------------------------------------------------------------------------------------



| | we may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;
|- | ---------------------------------------------------------------------------------------------------------------



| | it may make us more vulnerable to a downturn in our business or the economy;
|- | ----------------------------------------------------------------------------



53



---

##### Table of Contents

| | a substantial portion of our cash flows from operations could be dedicated to the repayment of our indebtedness and would not be available for other purposes; and
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Despite our substantial indebtedness, we may still incur
significantly more debt. This could intensify the risks described above.



The terms of the indenture governing the notes do not prohibit us from incurring significant additional indebtedness in the future. As of the six months ended June 30, 2002, we had $59.3 million available for
additional borrowing under the revolving credit facility, subject to certain conditions. All borrowings under the credit facility are senior to the notes.



Your right to receive payments on the notes will be junior to the borrowings under the credit facility and possibly all future borrowings.



The notes and the subsidiary guarantees rank behind all of our and the
subsidiary guarantors existing senior indebtedness including the credit facilities and will rank behind all of our and their future senior indebtedness, except any future indebtedness that expressly provides that it ranks equal with, or
subordinated in right of payment to, the notes and the guarantees. As a result, upon any distribution to our creditors or the creditors of the subsidiary guarantors in a bankruptcy, liquidation or reorganization or similar proceeding relating to us
or the subsidiary guarantors or our or their property, the holders of our senior indebtedness and senior indebtedness of the subsidiary guarantors will be entitled to be paid in full in cash before any payment may be made with respect to the notes
or the subsidiary guarantees. In addition, the credit facility is secured by substantially all of our assets and the assets of our wholly-owned domestic subsidiaries.



In addition, all payments on the notes and the subsidiary guarantees will be blocked in the event of a payment default on
senior debt and may be blocked for up to 179 consecutive days in the event of certain nonpayment defaults on senior indebtedness.



In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to us or the subsidiary guarantors, holders of the notes will
participate with trade creditors and all other holders of our senior subordinated indebtedness and the subsidiary guarantors in the assets remaining after we and the subsidiary guarantors have paid all of the senior indebtedness. However, because
the indenture requires that amounts otherwise payable to holders of the notes in a bankruptcy or similar proceeding be paid to holders of senior indebtedness instead, holders of the notes may receive less, ratably, than holders of trade payables in
any such proceeding. In any of these cases, we and the subsidiary guarantors may not have sufficient funds to pay all of our creditors and holders of notes may receive less, ratably, than the holders of senior indebtedness.



As of June 30, 2002, the notes and the subsidiary guarantees would have been
subordinated to $439.1 million of long-term indebtedness, including the current portion, $41.6 million of short-term notes and $3.5 million of capital lease obligations and approximately $59.3 million would have been available for borrowing as
additional senior indebtedness under the credit facility, subject to certain conditions. We will be permitted to borrow substantial additional indebtedness, including senior indebtedness, in the future under the terms of the indenture.



Restrictive covenants in the credit facility and the indenture may restrict our
ability to pursue our business strategies.



The credit
facility and the indenture limit our ability, among other things, to:



| | incur additional indebtedness or contingent obligations;
|- | --------------------------------------------------------



| | pay dividends or make distributions to our stockholders;
|- | --------------------------------------------------------



54



---

##### Table of Contents

| | repurchase or redeem our stock;
|- | -------------------------------



| | make investments;
|- | -----------------



| | grant liens;
|- | ------------



| | make capital expenditures;
|- | --------------------------



| | enter into transactions with our stockholders and affiliates;
|- | -------------------------------------------------------------



| | sell assets; and
|- | ----------------



| | acquire the assets of, or merge or consolidate with, other companies.
|- | ---------------------------------------------------------------------



In addition, the credit facility requires us to maintain certain financial ratios. We may not be able to maintain these ratios. Covenants in the credit
facility may also impair our ability to finance future operations or capital needs or to enter into acquisitions or joint ventures or engage in other favorable business activities. See Liquidity and Capital Resources.



To service our indebtedness will require a significant amount of cash. The ability
to generate cash depends on many factors beyond our control.



Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject
to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.



Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flows from operations, available
cash and available borrowings under the credit facility will be adequate to meet our future liquidity needs for at least the next few years.



We cannot assure you, however, that our business will generate sufficient cash flows from operations, or that currently anticipated cost savings and
operating improvements will be realized on schedule or that future borrowings will be available to us under the credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Future borrowings
under our credit facility are conditioned on our continuing compliance with our financial covenants. If we consummate an acquisition, our debt service requirements could increase. We may need to refinance all or a portion of our indebtedness on or
before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.



Material litigation or changes in legislation or regulations may affect our profitability



During the ordinary course of our business, we are from time to time threatened with, or may become a party to, legal
actions and other proceedings. While we are currently involved in a number of legal proceedings, we believe the results of these proceedings will not have a material effect on our business, financial condition or results of operations. In addition,
pursuant to the recapitalization agreement, we are indemnified by Halliburton for up to $950.0 million (in aggregate with all other losses) of losses arising out of all legal actions initiated prior to the closing of the recapitalization transaction
and certain legal actions arising after the closing. However, material litigation or litigation that is material in the aggregate, and for which we are not indemnified, may impact our results of operations.



Our businesses and some of our products are subject to regulation under
various and changing federal, state, local and foreign laws and regulations relating to the environment and to employee safety and health. Changes in legislation and regulations could increase our costs and make it more difficult to achieve our
business plan.



55



---

##### Table of Contents

Certain subsidiaries are not included as subsidiary guarantors.



The guarantors of the notes include our wholly-owned domestic subsidiaries.
However, our financial statements include both our wholly-owned and non-wholly-owned domestic subsidiaries and our foreign subsidiaries. The aggregate revenues for the six months ended June 30, 2002 of our subsidiaries that are not guarantors were
$355.4 million. As of the six months ended June 30, 2002, those subsidiaries held 48.3% of our total assets. Each of the subsidiary guarantors would be released from its guarantee of the notes if we transfer 5% or more of its voting stock to a third
party so that it is no longer wholly-owned. The indenture does not restrict our ability to do so.



Because a substantial portion of our operations are conducted by foreign and non-wholly-owned subsidiaries, our cash flows and our ability to service
debt, including our and the subsidiary guarantors ability to pay the interest on and principal of the notes when due, are dependent to a significant extent on interest payments, cash dividends and distributions and other transfers of cash from
our foreign and non-wholly-owned subsidiaries. In addition, any payment of interest, dividends, distributions, loans or advances by our foreign and non-wholly-owned subsidiaries to us and the subsidiary guarantors, as applicable, could be subject to
taxation or other restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdiction in which our foreign subsidiaries operate. Moreover,
payments to us and the subsidiary guarantors by the foreign and non-wholly-owned subsidiaries will be contingent upon these subsidiaries earnings.



Our foreign and non-wholly-owned subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts
due pursuant to the notes, or to make any funds available therefore, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive any assets of any of the foreign subsidiaries upon the
liquidation or reorganization of those subsidiaries, and the consequent rights of holders of notes to realize proceeds from the sale of any of those subsidiaries assets, will be effectively subordinated to the claims of that subsidiarys
creditors, including trade creditors and holders of debt of that subsidiary.



Federal and state laws permit a court to void the subsidiary guarantees under certain circumstances.



Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims with respect to a
guarantee could be subordinated to all other debts of that subsidiary guarantor under certain circumstances. While the relevant laws may vary from state to state, under such laws, the issuance of a guarantee will be a fraudulent conveyance if (1)
any of our subsidiaries issued subsidiary guarantees with the intent of hindering, delaying or defrauding creditors or (2) any of the subsidiary guarantors received less than reasonably equivalent value or fair consideration in return for issuing
their respective guarantees, and, in the case of (2) only, one of the following is also true:



| | any of the subsidiary guarantors were insolvent, or became insolvent, when they issued the guarantee;
|- | -----------------------------------------------------------------------------------------------------



| | issuing the guarantees left the applicable subsidiary guarantor with an unreasonably small amount of capital; or
|- | ----------------------------------------------------------------------------------------------------------------



| | the applicable subsidiary guarantor intended to, or believed that it would, be unable to pay debts as they matured.
|- | -------------------------------------------------------------------------------------------------------------------



If the issuance of any guarantee were a fraudulent conveyance, a court could,
among other things, void any of the subsidiary guarantors obligations under their respective guarantees and require the repayment of any amounts paid thereunder.



Generally, an entity will be considered insolvent if:



| | the sum of its debts is greater than the fair value of its property;
|- | --------------------------------------------------------------------



56



---

##### Table of Contents

| | the present fair value of its assets is less than the amount that it will be required to pay on its existing debts as they become due; or
|- | -----------------------------------------------------------------------------------------------------------------------------------------



| | it cannot pay its debts as they become due.
|- | -------------------------------------------



We believe, however, that immediately after issuance of the notes and the subsidiary guarantees, we and each of the subsidiary guarantors were solvent,
had sufficient capital to carry on our respective businesses and were able to pay our respective debts as they matured. We cannot be sure, however, as to what standard a court would apply in making such determinations or that a court would reach the
same conclusions with regard to these issues.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



In the normal course of business, we use forward exchange contracts to manage our exposures to movements in the value of foreign currencies and interest
rates. It is our policy to utilize these financial instruments only where necessary to manage such exposures. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk and variability to the
Company. We do not enter into these transactions for speculative purposes.



We are exposed to foreign currency fluctuation as a result of our international sales, production and investment activities. Our foreign currency risk management objective is to reduce the variability in the amount of
expected future cash flows from sales and purchases that are the result of changes in exchange rates relative to the business units functional currency. We use forward exchange contracts to hedge certain firm commitments and the related
receivables and payables. Generally, all firmly committed and anticipated transactions that are hedged are to be recognized within twelve months.



Our financial performance is also exposed to movements in short-term floating market interest rates. Our objective in managing this interest rate exposure
is to limit the impact of interest rate changes on earnings and cash flows, and to reduce overall borrowing costs.



The following tables provide information about our derivative instruments and other financial instruments that are sensitive to foreign currency exchange
rates and changes in interest rates. For foreign currency forward exchange agreements, the table presents the notional amounts and weighted-average exchange rates by expected (contractual) maturity dates. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on the implied forward rate in the yield curve. For interest rates swaps, the table presents notional amounts and
weighted average interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract.



57



---

##### Table of Contents

|                                      |  | 2002          |        |   | 2003 |   |          | 2004 |  |   | 2005 |   |  | 2006 |      |   | Thereafter |   |      | Total |  | Fair Value |      
|------------------------------------- |  | ------------- | ------ | - | ---- | - | -------- | ---- |  | - | ---- | - |  | ---- | ---- | - | ---------- | - | ---- | ----- |  | ---------- | -----
|                                      |  | (in millions) |       
|Related forward contracts to sell USD |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|British Pound                         |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Notional Amount                       |  | $             | 2.8    |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 1.4481 |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Euro                                  |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Notional Amount                       |  | $             | 8.8    |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 0.9078 |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Related forward contracts to sell JPY |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|United States Dollar                  |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Notional Amount                       |  | $             |       |   |      | $ | 0.4      |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               |       |   |      |   | 133.7439 |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Related forward contracts to sell ZAR |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|United States Dollar                  |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Notional Amount                       |  | $             | 0.7    |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 11.429 |   |      |   | 12.682   |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Euro                                  |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Notional Amount                       |  | $             | 0.5    |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 10.213 |   |      |   | 10.343   |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Related forward contracts to buy EUR  |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|United States Dollar                  |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Notional Amount                       |  | $             | 54.3   |   |      | $ | 1.0      |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 0.8968 |   |      |   | 0.8940   |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|British Pound                         |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Notional Amount                       |  | $             | 2.5    |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 0.6377 |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Long-term debt                        |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|U.S. Dollar Functional Currency       |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Fixed Rate                            |  | $             | 4.8    |   |      | $ | 0.7      |      |  | $ | 0.7  |   |  | $    | 0.7  |   |            | $ | 0.7  |       |  | $          | 553.0
|Average Interest Rate                 |  |               | 9.28   | % |      |   | 9.29     | %    |  |   | 9.30 | % |  |      | 9.31 | % |            |   | 9.31 | %     |  |            | 9.35 
|Variable Rate                         |  | $             | 0.3    |   |      | $ | 2.7      |      |  | $ | 4.8  |   |  | $    | 4.8  |   |            | $ | 4.8  |       |  | $          | 412.2
|Average Interest Rate                 |  |               | 5.71   | % |      |   | 7.76     | %    |  |   | 8.67 | % |  |      | 9.11 | % |            |   | 8.67 | %     |  |            | 9.48 
|Euro Functional Currency              |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Variable Rate                         |  | $             | 0.1    |   |      | $ | 0.2      |      |  | $ | 0.2  |   |  | $    | 0.2  |   |            | $ | 0.1  |       |  | $          | 0.1  
|Average Interest Rate                 |  |               | 3.41   | % |      |   | 4.33     | %    |  |   | 4.96 | % |  |      | 5.38 | % |            |   | 5.59 | %     |  |            | 6.01 
|Fixed Rate                            |  | $             | 0.7    |   |      | $ | 0.8      |      |  | $ | 0.7  |   |  | $    | 0.7  |   |            | $ | 0.6  |       |  | $          | 0.6  
|Average Interest Rate                 |  |               | 4.21   | % |      |   | 4.30     | %    |  |   | 4.33 | % |  |      | 4.38 | % |            |   | 4.50 | %     |  |            | 4.50 
|Interest rate swaps                   |  |               |        |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Pay Fixed/Receive Variable            |  | $             |       |   |      | $ | 115.0    |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Average Pay Rate                      |  |               | 4.49   | % |      |   | 4.49     | %    |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Average Receive                       |  |               | 1.94   | % |      |   | 2.30     | %    |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Pay Variable/Receive Fixed            |  | $             |       |   |      | $ | 100.0    |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Average Pay Rate                      |  |               | 8.14   | % |      |   | 8.76     | %    |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Average Receive                       |  |               | 9.38   | % |      |   | 9.38     | %    |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     



Item 4. Controls and Procedures



We strive to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



Our independent auditors, PwC, have reported to our audit committee material weaknesses and reportable conditions under standards
established by the American Institute of Certified Public Accountants regarding various elements of our system of internal controls. They noted material weaknesses with respect to our review and oversight of the financial reporting process
(including corporate accounting of reserves and accruals) and with respect to accounting for pension and postretirement benefits obligations, and they cited reportable conditions with respect to broad areas of concern regarding internal controls
over financial reporting as it relates to the operation of



58



---

##### Table of Contents

our finance organization, revenue recognition practices relating to bill and hold transactions, multiple element transactions and actual or de facto FOB
destination transactions, specially designated charges (restructuring and exit activities), and intercompany accounting (balances, confirmation and elimination) and consolidation. Their observations related as well to more general matters, including
exposures related to our decentralized accounting organization, the size of our corporate accounting staff relative to the size of our company, variety of systems used for operating and financial reporting, general management oversight of
operations, outdated finance policies and lack of internal training for business unit financial personnel.



Certain of the matters described above contributed to accounting errors in our financial statements, which necessitated the restatements described
elsewhere in this report and/or resulted in adjustments to our 2002 financial statements upon audit. We have conducted a review of the errors requiring restatement, including a separate review by our audit committee to determine what, if any,
remedial measures were necessary. We believe our management has taken or is in the process of taking the steps necessary to correct the errors and avoid similar errors in the future.



As required by SEC Rule 13a-15(b), we have carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The evaluation examined those disclosure controls and procedures both
as of June 30, 2002, the end of the period covered by this report, and, because of the late filing of this report, during the weeks preceding the filing of this report. Based upon the foregoing, our chief executive officer and chief financial
officer concluded that, as of December 31, 2002, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure and that the following initiatives with respect to our disclosure
controls and procedures were required:



| |  | We have reviewed the adequacy of our accounting personnel. Our former chief accounting officer and vice president of finance, as well as a member of his staff, have left our
company. We have appointed a new chief accounting officer and significantly increased the number of management and staff personnel in our corporate accounting department to increase our depth of experience in accounting and SEC reporting matters. We
have appointed new controllers at two of our operating units. We are continuing to monitor and review the overall adequacy of our accounting personnel and expect to make additional changes in certain of our operating units and at our corporate
accounting department, including recruiting an experienced director of accounting;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We, with the assistance of outside consultants, have undertaken a review and revision of, and continue to review and revise, a number of our disclosure and accounting policies and
procedures to address specific control weaknesses, including policies and procedures to:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | ensure that resources and closing processes are adequate to achieve complete and accurate financial reporting;
| | - | --------------------------------------------------------------------------------------------------------------



| |  | require deliberative and objective consideration of the effect on financial reporting and disclosure of unusual and/or nonrecurring transactions, among other things, to ensure that
we adhere to our reporting obligations;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | require regular reporting to our chief financial officer by our corporate accounting department of its adherence to closing schedules and processes, transactions that impact
reported results of operations deriving other than from business operations (e.g., income arising from estimate changes as compared to from actual economic events) and transactions that are individually material to our company;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | require additional periodic reporting to our audit committee of significant matters affecting income and that bear on the quality of our reported earnings; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



59



---

##### Table of Contents

| |  | reflect current accounting and reporting guidance, financial pronouncements and regulations;
| | - | --------------------------------------------------------------------------------------------



| |  | We have modified our processes for periodic review of operating and financial results with our operating units as well as our procedures for monthly business management reviews, and
expanded the data provided by our operating units to our corporate finance group;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have commenced a project to inventory, assess and strengthen our internal controls over financial reporting, including establishing an internal project team to accomplish this
task;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have undertaken a plan to adopt an enterprise-wide reporting system (ERP) solution to replace the current variety of systems we used for operating and financial reporting
throughout our global organization. We have installed this system at our corporate accounting department and have begun design and configuration of the system for deployment in our various operating units, which we expect to be completed during
2005; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have begun to conduct training sessions for our financial personnel on key accounting matters, including current accounting and reporting guidelines and regulations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



While we have taken or are in the process of
taking the foregoing steps in order to address the adequacy of our disclosure controls and procedures, and, in addition, to develop and implement a formal set of internal controls and procedures for financial reporting in accordance with the
SECs proposed rules to adopt the internal control report requirements included in Section 404 of the Sarbanes-Oxley Act of 2002, the efficacy of the steps we have taken to date and the steps we are still in the process of completing is subject
to continued management review supported by confirmation and testing by our internal and external auditors. As a result, it is likely that additional changes will be made to our internal controls and procedures.



Other than the foregoing initiatives and the re-audit of our 2001 financial
statements, since the date of the evaluation supervised by our management, there have been no changes in our disclosure controls and procedures, including our internal controls over financial reporting, that have materially affected, or are
reasonably likely to materially affect, our disclosure controls and procedures, including our internal controls over financial reporting.



PART II. OTHER INFORMATION



Item 1. Legal Proceeding



The
Company is involved in various legal proceedings, none of which is deemed material for reporting purposes. Information relating to various commitments and contingencies is described in Note 8 of the financial statements in this Form 10-Q.



Item 2. Change in Securities and Use of Proceeds



On April 3, 2002, we issued 250,000 shares of class B common stock, par value $0.001, to DEG Acquisitions LLC, for proceeds of $10 million.



60



---

##### Table of Contents

Item 6. Exhibits and Reports on Form 8-K



|a.) | Exhibits
|--- | --------



|ExhibitNo. |  | Description of Exhibit                                                                                                                                                           
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1        |  | Amendment No. 2 to the Credit Agreement dated June 17, 2002 among Dresser, Inc. as U.S. Borrower and D.I. Luxembourg S.A.R.L. as the Euro Borrower and the Lenders named
therein.
|           | 
|*31.1      |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                          
|           | 
|*31.2      |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                          
|           | 
|*32.1      |  | Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                        
|           | 
|*32.2      |  | Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                        

---

|* | Filed herewith
|- | --------------



|b.) | Reports on Form 8-K
|--- | -------------------



Current Report on Form 8-K of Dresser dated May 15, 2002 reporting under Item 9. Regulation FD Disclosure announcing its financial results for the quarter
ended March 31, 2002.



Current Report on Form 8-K of Dresser
dated June 10, 2002 reporting under Item 4. Changes in Registrants Certifying Accountant regarding the dismissal of Arthur Andersen LLP and the appointment of PricewaterhouseCoopers LLP.



Current Report on Form 8-K of Dresser dated July 3, 2002 reporting under Item
5. Other Events and FD Disclosure announcing a modification of its corporate structure.



61



---

##### Table of Contents

SIGNATURES



As required by the
Securities and Exchange Act of 1934, the registrant has authorized this report to be signed on behalf of the registrant by the undersigned authorized individuals.



|                        |  |     |  | DRESSER, INC.                                       
|----------------------- |  | --- |  | ----------------------------------------------------
|                        |  |    
|Date: December 11, 2003 |  | By: |  | /s/    Patrick M. Murray                            
|                        |  |     |  | Patrick M. Murray                                   
|                        |  |     |  | Chief Executive Officer                             
|                        |  |    
|                        |  |     |  | /s/    James A. Nattier                             
|                        |  |     |  | James A. Nattier                                    
|                        |  |     |  | Executive Vice President
and Chief Financial Officer
|                        |  |    
|                        |  |     |  | /s/    Thomas J. Kanuk                              
|                        |  |     |  | Thomas J. Kanuk                                     
|                        |  |     |  | Corporate Controller
and Chief Accounting Officer   



62