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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q

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



For the quarterly period ended June 30, 2004



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



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DRESSER, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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(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  x    No ̈



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



The number of shares outstanding of common stock (par value $0.01 per share)
as of August 12, 2004 was 1,000.



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DRESSER, INC.



INDEX



|           |  |                                                                                                                       |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --
|           |  | PART I. FINANCIAL INFORMATION                                                                                         |  |   
|Item 1.    |  | Financial Statements                                                                                                  |  |   
|           |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 (unaudited) |  | 3 
|           |  |                                                                                                                      
|           |  | Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 (unaudited)                           |  | 4 
|           |  |                                                                                                                      
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)           |  | 5 
|           |  |                                                                                                                      
|           |  | Notes to Condensed Consolidated Financial Statements as of June 30, 2004 (unaudited)                                  |  | 6 
|           |  |                                                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 26
|           |  |                                                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                            |  | 49
|           |  |                                                                                                                      
|Item 4.    |  | Controls and Procedures                                                                                               |  | 51
|           |  |                                                                                                                      
|           |  | PART II. OTHER INFORMATION                                                                                            |  |   
|           |  |                                                                                                                      
|Item 1.    |  | Legal Proceedings                                                                                                     |  | 53
|           |  |                                                                                                                      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                      |  | 53
|           |  |                                                                                                                      
|           |  | Exhibits                                                                                                              |  | 53
|           |  |                                                                                                                      
|           |  | Reports on Form 8-K                                                                                                   |  | 53
|           | 
|Signatures |  | 54                                                                                                                   



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



DRESSER, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions)

(unaudited)



|                                                          |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                          |  | Three MonthsEnded June 30, |       |   | Six MonthsEnded June 30, |  
|                                                          |  | 2004                       |       |   | 2003                     |   |       | 2004 |  |   | 2003  |  
|Revenues                                                  |  | $                          | 495.9 |   |                          | $ | 394.9 |      |  | $ | 932.1 |   |  | $ | 766.3 |  
|Cost of revenues                                          |  |                            | 352.5 |   |                          |   | 293.8 |      |  |   | 664.3 |   |  |   | 565.3 |  
|                                                          |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Gross profit                                              |  |                            | 143.4 |   |                          |   | 101.1 |      |  |   | 267.8 |   |  |   | 201.0 |  
|Selling, engineering, administrative and general expenses |  |                            | 103.7 |   |                          |   | 95.1  |      |  |   | 208.4 |   |  |   | 183.7 |  
|                                                          |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Operating income                                          |  |                            | 39.7  |   |                          |   | 6.0   |      |  |   | 59.4  |   |  |   | 17.3  |  
|Interest expense                                          |  |                            | (18.5 | ) |                          |   | (21.3 | )    |  |   | (54.5 | ) |  |   | (41.7 | )
|Interest income                                           |  |                            | 0.2   |   |                          |   | 0.6   |      |  |   | 0.5   |   |  |   | 1.9   |  
|Other income (expense), net                               |  |                            | 0.2   |   |                          |   | 5.1   |      |  |   |      |   |  |   | 8.2   |  
|                                                          |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |                            | 21.6  |   |                          |   | (9.6  | )    |  |   | 5.4   |   |  |   | (14.3 | )
|Provision for income taxes                                |  |                            | (4.0  | ) |                          |   | (8.0  | )    |  |   | (7.2  | ) |  |   | (10.2 | )
|                                                          |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |                            | 17.6  |   |                          |   | (17.6 | )    |  |   | (1.8  | ) |  |   | (24.5 | )
|Equity in earnings of unconsolidated subsidiaries         |  |                            | 0.7   |   |                          |   | 0.7   |      |  |   | 1.6   |   |  |   | 1.5   |  
|Minority owners share of consolidated subsidiaries       |  |                            | (0.2  | ) |                          |   |      |      |  |   | (0.1  | ) |  |   |      |  
|                                                          |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Net income (loss)                                         |  | $                          | 18.1  |   |                          | $ | (16.9 | )    |  | $ | (0.3  | ) |  | $ | (23.0 | )
|                                                          |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  



See accompanying notes
to condensed consolidated financial statements



3



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##### Table of Contents

DRESSER, INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(in millions, except share information)

(unaudited)

|                                                                               |  |              |         |   |                  |   |         |  
|------------------------------------------------------------------------------ |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                               |  | June 30,2004 |         |   | December 31,2003 |  
|ASSETS                                                                         |  |              |         |   |                  |   |         |  
|Current assets:                                                                |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                      |  | $            | 90.4    |   |                  | $ | 148.9   |  
|Restricted cash                                                                |  |              | 2.0     |   |                  |   | 0.7     |  
|Accounts receivable, net of allowance for doubtful accounts of $15.7 and $15.1 |  |              | 386.5   |   |                  |   | 276.2   |  
|Notes receivable                                                               |  |              | 6.5     |   |                  |   | 4.4     |  
|Inventories                                                                    |  |              | 326.2   |   |                  |   | 290.3   |  
|Other current assets                                                           |  |              | 21.7    |   |                  |   | 20.5    |  
|                                                                               |  |              |         |   |                  |   |         |  
|Total current assets                                                           |  |              | 833.3   |   |                  |   | 741.0   |  
|                                                                               |  |             
|Property, plant and equipment, net                                             |  |              | 236.7   |   |                  |   | 208.1   |  
|Investments in unconsolidated subsidiaries                                     |  |              | 8.4     |   |                  |   | 7.3     |  
|Deferred financing fees                                                        |  |              | 26.8    |   |                  |   | 40.2    |  
|Goodwill                                                                       |  |              | 394.7   |   |                  |   | 315.2   |  
|Other assets                                                                   |  |              | 112.7   |   |                  |   | 92.4    |  
|                                                                               |  |              |         |   |                  |   |         |  
|Total assets                                                                   |  | $            | 1,612.6 |   |                  | $ | 1,404.2 |  
|                                                                               |  |              |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                          |  |              |         |   |                  |   |         |  
|Current liabilities:                                                           |  |              |         |   |                  |   |         |  
|Accounts payable                                                               |  | $            | 250.2   |   |                  | $ | 198.4   |  
|Notes payable                                                                  |  |              | 6.5     |   |                  |   | 2.9     |  
|Current maturities of long-term debt                                           |  |              | 5.0     |   |                  |   | 2.7     |  
|Payroll and other compensation                                                 |  |              | 61.1    |   |                  |   | 47.6    |  
|Accrued expenses                                                               |  |              | 139.7   |   |                  |   | 145.2   |  
|                                                                               |  |              |         |   |                  |   |         |  
|Total current liabilities                                                      |  |              | 462.5   |   |                  |   | 396.8   |  
|                                                                               |  |             
|Pension and other retiree benefit obligations                                  |  |              | 344.9   |   |                  |   | 340.1   |  
|Long-term debt, net of current maturities                                      |  |              | 1,091.5 |   |                  |   | 941.4   |  
|Other liabilities                                                              |  |              | 21.7    |   |                  |   | 25.2    |  
|                                                                               |  |              |         |   |                  |   |         |  
|Total liabilities                                                              |  |              | 1,920.6 |   |                  |   | 1,703.5 |  
|                                                                               |  |             
|Commitments and contingencies                                                  |  |              |        |   |                  |   |        |  
|Minority interest                                                              |  |              | 2.9     |   |                  |   | 0.4     |  
|Mandatorily redeemable common stock of Dresser, Ltd.                           |  |              | 7.4     |   |                  |   | 12.9    |  
|                                                                               |  |             
|Shareholders deficit:                                                         |  |              |         |   |                  |   |         |  
|Common stock $0.01 par value; issued and outstanding: 1,000 shares             |  |              |        |   |                  |   |        |  
|Additional paid in capital                                                     |  |              | 448.4   |   |                  |   | 442.5   |  
|Loan to Dresser, Ltd                                                           |  |              | (1.6    | ) |                  |   |        |  
|Dividends in excess of net book value                                          |  |              | (595.8  | ) |                  |   | (595.8  | )
|Accumulated deficit                                                            |  |              | (113.0  | ) |                  |   | (112.7  | )
|Accumulated other comprehensive loss                                           |  |              | (56.3   | ) |                  |   | (46.6   | )
|                                                                               |  |              |         |   |                  |   |         |  
|Total shareholders deficit                                                    |  |              | (318.3  | ) |                  |   | (312.6  | )
|                                                                               |  |              |         |   |                  |   |         |  
|Total liabilities and shareholders deficit                                    |  | $            | 1,612.6 |   |                  | $ | 1,404.2 |  
|                                                                               |  |              |         |   |                  |   |         |  



See accompanying notes
to condensed consolidated financial statements



4



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##### Table of Contents

DRESSER, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)



|                                                                                           |  |                          |        |   |      |   |       |  
|------------------------------------------------------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ----- | -
|                                                                                           |  | Six Months EndedJune 30, |       
|                                                                                           |  | 2004                     |        |   | 2003 |  
|Cash flows from operating activities:                                                      |  |                          |        |   |      |   |       |  
|Net loss                                                                                   |  | $                        | (0.3   | ) |      | $ | (23.0 | )
|Adjustments to reconcile net loss to cash flow (used in) provided by operating activities: |  |                          |        |   |      |   |       |  
|Depreciation and amortization                                                              |  |                          | 22.0   |   |      |   | 21.3  |  
|Equity in earnings of unconsolidated subsidiaries                                          |  |                          | (1.6   | ) |      |   | (1.5  | )
|Loss on repayment of debt                                                                  |  |                          | 16.9   |   |      |   | 0.1   |  
|Loss on foreign currency exchange                                                          |  |                          | 0.8    |   |      |   | 7.9   |  
|Amortization of deferred financing fees, net of amortization of bond premium               |  |                          | 0.8    |   |      |   | 3.0   |  
|Impairment of assets                                                                       |  |                          | 1.0    |   |      |   | 5.0   |  
|Changes in operating assets and liabilities, net of acquisition of business:               |  |                          |        |   |      |   |       |  
|Receivables                                                                                |  |                          | (47.8  | ) |      |   | (14.8 | )
|Inventories                                                                                |  |                          | (6.7   | ) |      |   | 11.4  |  
|Accounts payable                                                                           |  |                          | 14.5   |   |      |   | 2.1   |  
|Accrued expenses                                                                           |  |                          | 5.2    |   |      |   | 10.5  |  
|Pension and other retiree benefit obligations                                              |  |                          | 3.7    |   |      |   | 8.9   |  
|Other                                                                                      |  |                          | (14.2  | ) |      |   | (27.5 | )
|                                                                                           |  |                          |        |   |      |   |       |  
|Net cash (used in) provided by operating activities                                        |  |                          | (5.7   | ) |      |   | 3.4   |  
|                                                                                           |  |                          |        |   |      |   |       |  
|                                                                                           |  |                         
|Cash flows from investing activities:                                                      |  |                          |        |   |      |   |       |  
|Acquisition of business                                                                    |  |                          | (171.5 | ) |      |   |      |  
|Acquisition of assets                                                                      |  |                          |       |   |      |   | (15.4 | )
|Capital expenditures                                                                       |  |                          | (28.5  | ) |      |   | (7.4  | )
|Proceeds from sale of assets                                                               |  |                          | 0.3    |   |      |   |      |  
|                                                                                           |  |                          |        |   |      |   |       |  
|Net cash used in investing activities                                                      |  |                          | (199.7 | ) |      |   | (22.8 | )
|                                                                                           |  |                          |        |   |      |   |       |  
|                                                                                           |  |                         
|Cash flows from financing activities:                                                      |  |                          |        |   |      |   |       |  
|Proceeds from issuance of long-term debt                                                   |  |                          | (172.4 | ) |      |   |      |  
|Repayment of long-term debt (including current portion)                                    |  |                          | (25.2  | ) |      |   | (7.5  | )
|Net increase (decrease) in short-term notes payable                                        |  |                          | 3.7    |   |      |   | (1.1  | )
|Payment of deferred financing fees                                                         |  |                          |       |   |      |   | (1.3  | )
|Purchase of shares, net of proceeds from escrow and exercise of stock options              |  |                          | (1.9   | ) |      |   |      |  
|Changes in restricted cash                                                                 |  |                          | (1.3   | ) |      |   | 5.3   |  
|                                                                                           |  |                          |        |   |      |   |       |  
|Net cash provided by (used in) financing activities                                        |  |                          | 147.7  |   |      |   | (4.6  | )
|                                                                                           |  |                         
|Effect of translation adjustments on cash                                                  |  |                          | (0.8   | ) |      |   | 4.9   |  
|                                                                                           |  |                          |        |   |      |   |       |  
|                                                                                           |  |                         
|Net decrease in cash and cash equivalents                                                  |  |                          | (58.5  | ) |      |   | (19.1 | )
|Cash and cash equivalents, beginning of period                                             |  |                          | 148.9  |   |      |   | 112.0 |  
|                                                                                           |  |                          |        |   |      |   |       |  
|Cash and cash equivalents, end of period                                                   |  |                          | 90.4   |   |      | $ | 92.9  |  
|                                                                                           |  |                          |        |   |      |   |       |  
|                                                                                           |  |                         
|Non-cash financing activity:                                                               |  |                          |        |   |      |   |       |  
|Refinancing of long-term debt, net of transaction fees                                     |  | $                        | 381.6  |   |      | $ |      |  
|Deferred financing fees related to acquisition of Nuovo Pignone                            |  |                          | 3.2    |   |      |   |      |  
|Reclassification of mandatorily redeemable common stock to additional paid-in-capital      |  |                          | 5.5    |   |      |   |      |  
|Supplemental disclosure of cash flow information:                                          |  |                          |        |   |      |   |       |  
|Cash payments during the period for:                                                       |  |                          |        |   |      |   |       |  
|Interest                                                                                   |  |                          | 37.6   |   |      | $ | 38.6  |  
|Income taxes                                                                               |  |                          | 7.1    |   |      |   | 4.7   |  



See accompanying notes
to condensed consolidated financial statements



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##### 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 Companys certificate of incorporation was amended and restated on April 9, 2001. As used in this report, the terms Dresser, the Company, we, our or us refer to
Dresser, Inc. and its predecessors, 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 transaction.
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 million of senior subordinated notes, $720 million of borrowings under our credit facility, and approximately $400 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 sole
shareholder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the sole shareholder 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. Certain transactions conducted through Dresser Holdings, Ltd. (the parent) are reflected in the accounts of Dresser, Inc., in as much as the parent has no assets other than its investment in Dresser, Inc,



The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. 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 U.S. 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, 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. 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, 2003.



Significant Fourth Quarter Adjustment



We had significant adjustments to results of operations reported in the fourth calendar quarter of 2003, aggregating a $10.0 million decrease to pre-tax
income and a $2.4 million decrease to income tax expense, which may affect comparability among quarters and between 2003 and 2004. We evaluated the effect of these adjustments and concluded the quarter to which the adjustments apply are
indeterminate or the effect of the adjustments to prior quarters where determinable was not significant to the Company, as a whole or within any segment, in any quarter.



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 2.    Acquisitions



Nuovo Pignone



On June 4, 2004, we completed
the purchase of the distribution business of Nuovo Pignone S.p.A., a subsidiary of General Electric Company, for approximately $170 million and approximately $1.5 million in direct acquisition costs. The purchased business includes a retail fueling
distribution operation, comprised of gasoline, liquefied petroleum gas and compressed natural gas dispenser products and services, and a gas meters operation, which manufactures and markets certain natural gas meters. This business generated $151.4
million of revenues in the year ended December 31, 2003. The acquisition is expected to substantially improve our market share in retail fueling, be complementary from a customer, product and geographical perspective and provide us with substantial
cost saving opportunities. To finance the cash consideration related to the acquisition, we obtained additional borrowings under our existing credit facility in the amount of $175 million, which included $3.2 million of capitalized financing fees.
The results of operations for this business are reflected in our measurement systems segment as of the beginning of June 2004.



We have accounted for the acquisition under the purchase method of accounting for business combinations and have preliminarily allocated the
purchase price to the assets acquired and liabilities assumed based on the estimated fair values as of the acquisition date. We have determined the existence of certain patents, trademarks, trade names and other intangibles and have assessed a
preliminary value of approximately $13.7 million. We are in the process of obtaining third party valuations for certain assets and assessing certain liabilities and income taxes attributed to the transaction. We expect to complete our assessment by
the end of 2004. The results of these valuations may impact our preliminary allocation of the purchase price. In addition, the purchase and sale agreement we entered into related to the acquisition allows for a post-closing adjustment period of no
more than 165 days after the closing date to calculate and finalize any net working capital adjustments. While the allocation of the purchase price may be impacted by the net working capital calculation and other valuation analysis, we do not
believe any resulting adjustments will have a material impact on the purchase price allocation or on the Company as a whole.



The following table summarizes our preliminary allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition.



|                                                                        |  |               |       |  
|----------------------------------------------------------------------- |  | ------------- | ----- | -
|                                                                        |  | (in millions) |      
|Accounts receivable                                                     |  | $             | 67.3  |  
|Inventory                                                               |  |               | 33.4  |  
|Other                                                                   |  |               | 0.7   |  
|                                                                        |  |               |       |  
|Total current assets                                                    |  |               | 101.4 |  
|Property, plant and equipment                                           |  |               | 22.1  |  
|Goodwill, deferred income taxes and intangible assets                   |  |               | 98.2  |  
|                                                                        |  |               |       |  
|Total assets acquired                                                   |  | $             | 221.7 |  
|                                                                        |  |               |       |  
|Accounts payable                                                        |  | $             | (39.9 | )
|Accrued expenses                                                        |  |               | (7.2  | )
|                                                                        |  |               |       |  
|Total current liabilities                                               |  |               | (47.1 | )
|Employee benefits                                                       |  |               | (3.1  | )
|                                                                        |  |               |       |  
|Total liabilities                                                       |  | $             | (50.2 | )
|                                                                        |  |               |       |  
|Net assets acquired, including direct acquisition costs of $1.5 million |  | $             | 171.5 |  
|                                                                        |  |               |       |  



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The following selected unaudited pro forma information represents our consolidated results of operations on a pro forma basis for the three and six months ended June 30, 2004 and 2003, as if we acquired the Nuovo
Pignone distribution business as of the beginning of each period presented:



|                  |  |                            |       |      |                          |       |      |  |   |       |   |  |   |       |  
|----------------- |  | -------------------------- | ----- | ---- | ------------------------ | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                  |  | Three Months EndedJune 30, |       |      | Six Months EndedJune 30, |      
|                  |  | 2004                       |       | 2003 |                          |       | 2004 |  |   | 2003  |  
|                  |  | (in millions)              |      
|Revenues          |  | $                          | 528.6 |      | $                        | 439.1 |      |  | $ | 999.3 |   |  | $ | 847.0 |  
|Net income (loss) |  |                            | 15.7  |      |                          | (18.8 | )    |  |   | (5.8  | ) |  |   | (29.4 | )



Note
3.    Stock-based compensation



Prior
to 2004, we applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and the related interpretations in accounting for our stock-based plans. No stock-based compensation was
reflected in our 2003 net loss, as all options granted under our stock-based compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2004, we adopted the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under the modified prospective method of adoption as provided by SFAS No. 148, Accounting
for Stock-Based CompensationTransition and Disclosure, compensation cost recognized in 2004 is the same as that which would have been recognized had the recognition provisions of SFAS No. 123 been applied from their original effective
date. Results for prior years have not been restated. The following table illustrates the effect on net income (loss) if the fair value based method had been applied to all outstanding and unvested awards in each period.



|                                                                                                                  |  |                            |      |   |                          |   |       |      |  |   |      |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | ----- | ---- |  | - | ---- | - |  | - | ----- | -
|                                                                                                                  |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|                                                                                                                  |  | 2004                       |      |   | 2003                     |   |       | 2004 |  |   | 2003 |  
|                                                                                                                  |  | (in millions)              |     
|Net income (loss)                                                                                                 |  | $                          | 18.1 |   |                          | $ | (16.9 | )    |  | $ | (0.3 | ) |  | $ | (23.0 | )
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects |  |                            | 0.2  |   |                          |   |      |      |  |   | 0.4  |   |  |   |      |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards   |  |                            | (0.2 | ) |                          |   | (0.4  | )    |  |   | (0.4 | ) |  |   | (0.7  | )
|                                                                                                                  |  |                            |      |   |                          |   |       |      |  |   |      |   |  |   |       |  
|Pro forma net income (loss)                                                                                       |  | $                          | 18.1 |   |                          | $ | (17.3 | )    |  | $ | (0.3 | ) |  | $ | (23.7 | )
|                                                                                                                  |  |                            |      |   |                          |   |       |      |  |   |      |   |  |   |       |  



In July 2004, the
Company implemented a program allowing employee option holders the opportunity to surrender their current performance and home run options (and for one employee a portion of his time options) in exchange for some combination of new time and
performance options. The replacement options will be issued with the same exercise price as the original options ($40) and will vest and expire as if issued on the original issuance date of the surrendered options. The performance component of the
performance options has been modified to increase the likelihood for achievement of the performance conditions, and therefore acceleration of vesting of those options, through lower thresholds than the original performance criteria. Performance
options automatically vest nine and one half years from the original issuance date, however vesting can be accelerated whereby 25% of these options can vest annually, should performance criteria be met in calendar years 2004 through 2007. Management
expects substantially all of the option holders to exchange their options, however the final determination will not be known until notice has been received from all option holders or August 23, 2004, the last day for option holders to communicate
their desire to exchange their options. Should all of the option holders exchange their options, 1,667; 174,500; and 58,166 time, performance and home run options, respectively, will be surrendered, and 35,208 and 149,875 time and performance
options, respectively, will be issued in replacement. The incremental value associated with the cancellation and reissuance of all eligible options is not expected to have a significant impact on our stock-based compensation expense.



Additionally, in July 2004, the Company issued 258,750 new time options and
258,750 new performance options to certain employees. All options were issued with an exercise price of $40 per share, and expire ten years from the issuance date. The time



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DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



options generally vest 20% after one year then one sixtieth per month over the remaining 48 months, and the performance options vest automatically in nine and one half years, with vesting accelerated, up to 25% per year, should performance
criteria be met in calendar years 2004 through 2007. The options are estimated to have five to six year expected lives, and the value of the options will be expensed over the expected vesting period of the respective options.



Note 4.    Restructuring and Other Exit Activities



We have initiated restructuring programs affecting several business units in
an effort to obtain manufacturing efficiencies and cost savings. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities we recognize costs associated with exit or disposal activities as incurred
rather than at the date of a commitment to an exit or disposal plan.



We incurred $1.3 million and $4.8 million of restructuring charges for the three and six months ended June 30, 2004, respectively. Restructuring charges of $0.3 million and $4.5 million have been reflected in cost of revenues and selling,
engineering, general and administrative expenses, respectively, for the six months ended June 30, 2004, in our condensed consolidated statements of operations. During the first six months of 2004, we incurred costs in connection with the
continuation of (1) a consolidation of an instrument operation in Berea, Kentucky with existing operations in Brazil into a new facility in Sao Caetano, Brazil, (2) a consolidation of a control valve operation in Burlington, Canada into existing
facilities, (3) a consolidation of certain flow control operations in Houston, Texas into a single new facility, and (4) a decision to outsource the manufacturing of certain blowers. The costs associated with these actions were incurred primarily by
our flow control segment and are as follows:



|                                               |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|---------------------------------------------- |  | ------------------- | --- | ------------ | - | ---- | --------------- |  | - | ------------------- | - |  | - | ---
|Description                                    |  | RestructuringCharge |     | CashPayments |   |      | Non-CashCharges |  |   | Accrued at6/30/2004
|                                               |  | (in millions)      
|Consolidate Berea operations                   |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|Other exit activities                          |  | $                   | 0.3 |              | $ | (0.1 | )               |  | $ | (0.2                | ) |  | $ |   
|Consolidate Burlington operations              |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|Termination benefits                           |  |                     | 2.3 |              |   | (0.9 | )               |  |   |                    |   |  |   | 1.4
|Consolidate Houston operations                 |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|Termination benefits                           |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                    |   |  |   |   
|Other exit activities                          |  |                     | 2.0 |              |   | (1.9 | )               |  |   |                    |   |  |   | 0.1
|Outsource the manufacturing of certain blowers |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|Termination benefits                           |  |                     | 0.1 |              |   |     |                 |  |   |                    |   |  |   | 0.1
|                                               |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|Total                                          |  | $                   | 4.8 |              | $ | (3.0 | )               |  | $ | (0.2                | ) |  | $ | 1.6
|                                               |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    



In 2003, we incurred
approximately $21.4 million in charges as a result of a decision to (1) consolidate a valve operation in Germany (EDG) into an existing facility in Italy, (2) consolidate an instrument operation in Shelton, Connecticut into an existing facility in
Stratford, Connecticut, (3) consolidate an instrument operation in Berea, Kentucky with existing operations in Brazil into a new facility in Sao Caetano, Brazil, (4) consolidate a retail fueling dispenser manufacturing operation in Germany into an
existing facility in Sweden, (5) consolidate two Canadian retail fueling dispenser plant operations, (6) consolidate certain flow control operations in Houston, Texas into a new facility, (7) outsource the manufacturing of certain blowers, (8)
consolidate a control valve operation in Burlington, Canada into existing facilities and (9) continue a reduction in our workforce. Accrued liabilities at June 30, 2004, related to the 2003 restructuring initiatives are as follows:



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



|                                               |  |                      |     |              |   |      |                     |  |   |    
|---------------------------------------------- |  | -------------------- | --- | ------------ | - | ---- | ------------------- |  | - | ---
|Description                                    |  | Accrued at12/31/2003 |     | CashPayments |   |      | Accrued at6/30/2004
|                                               |  | (in millions)       
|Consolidate Berea operations                   |  |                      |     |              |   |      |                     |  |   |    
|Termination benefits                           |  | $                    | 1.5 |              | $ | (1.5 | )                   |  | $ |   
|Consolidate German retail fueling operations   |  |                      |     |              |   |      |                     |  |   |    
|Termination benefits                           |  |                      | 3.2 |              |   | (2.6 | )                   |  |   | 0.6
|Outsource the manufacturing of certain blowers |  |                      |     |              |   |      |                     |  |   |    
|Termination benefits                           |  |                      | 1.7 |              |   | (0.1 | )                   |  |   | 1.6
|Other exit activities                          |  |                      | 0.1 |              |   | (0.1 | )                   |  |   |   
|Consolidate Burlington operations              |  |                      |     |              |   |      |                     |  |   |    
|Termination benefits                           |  |                      | 0.8 |              |   | (0.8 | )                   |  |   |   
|Consolidate Houston operations                 |  |                      |     |              |   |      |                     |  |   |    
|Termination benefits                           |  |                      | 1.3 |              |   | (1.0 | )                   |  |   | 0.3
|Company wide reduction in force                |  |                      |     |              |   |      |                     |  |   |    
|Termination benefits                           |  |                      | 0.2 |              |   |     |                     |  |   | 0.2
|                                               |  |                      |     |              |   |      |                     |  |   |    
|Total                                          |  | $                    | 8.8 |              | $ | (6.1 | )                   |  | $ | 2.7
|                                               |  |                      |     |              |   |      |                     |  |   |    



Note
5.    Business Segment Information



We
aggregate our business units reported to our chief operating decision maker into 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. The business units within each segment share like businesses and operational and economic features.



Flow Control.Operations of the flow control segment include the design, manufacture and marketing of 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, this segment also includes the design, manufacture and marketing of natural gas meters,
regulators, digital and analog pressure and temperature gauges, transducers, and piping specialties such as couplings and pipe fabrications.



Measurement Systems.Operations of the measurement systems segment consist of the design, manufacture and marketing of fuel
dispensers, pumps, peripherals and point-of-sale systems and software for the retail fueling industry.



Compression and Power Systems.Operations of the compression and power systems segment consist of the design, manufacture
and marketing of natural gas fueled engines used primarily in natural gas compression and power generation applications and rotary blowers and vacuum pumps.



We evaluate performance based on the operating income or loss from each business segment that excludes interest, other income (expense) and income taxes.



10



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)

The table below presents revenues and operating income by segment.



|                                       |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                       |  | Three MonthsEnded June 30, |       |   | Six MonthsEnded June 30, |  
|                                       |  | 2004                       |       |   | 2003                     |   |       | 2004 |  |   | 2003  |  
|                                       |  | (in millions)              |      
|Revenues:                              |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Flow control                           |  | $                          | 295.7 |   |                          | $ | 248.0 |      |  | $ | 551.5 |   |  | $ | 475.5 |  
|Measurement systems                    |  |                            | 129.8 |   |                          |   | 92.0  |      |  |   | 227.5 |   |  |   | 167.0 |  
|Compression and power systems          |  |                            | 71.9  |   |                          |   | 55.9  |      |  |   | 156.3 |   |  |   | 126.1 |  
|Reconciling items, including corporate |  |                            | (1.5  | ) |                          |   | (1.0  | )    |  |   | (3.2  | ) |  |   | (2.3  | )
|                                       |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Total                                  |  | $                          | 495.9 |   |                          | $ | 394.9 |      |  | $ | 932.1 |   |  | $ | 766.3 |  
|                                       |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Operating income:                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Flow control                           |  | $                          | 21.4  |   |                          | $ | 19.1  |      |  | $ | 31.8  |   |  | $ | 30.1  |  
|Measurement systems                    |  |                            | 18.2  |   |                          |   | 4.8   |      |  |   | 30.3  |   |  |   | 4.1   |  
|Compression and power systems          |  |                            | 7.8   |   |                          |   | (4.3  | )    |  |   | 16.9  |   |  |   | 3.3   |  
|Reconciling items, including corporate |  |                            | (7.7  | ) |                          |   | (13.6 | )    |  |   | (19.6 | ) |  |   | (20.2 | )
|                                       |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Total                                  |  | $                          | 39.7  |   |                          | $ | 6.0   |      |  | $ | 59.4  |   |  | $ | 17.3  |  
|                                       |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  



Note
6.    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) or weighted
average cost basis.



Inventories on the LIFO method represented
$64.0 million and $59.8 million of our inventories as of June 30, 2004 and December 31, 2003, respectively. The excess of FIFO over LIFO costs as of June 30, 2004 and December 31, 2003, was $69.9 million and $69.9 million, respectively. Inventories
are summarized as follows:



|                              |  |               |       |   |                  |   |       |  
|----------------------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                              |  | June 30,2004  |       |   | December 31,2003 |  
|                              |  | (in millions) |      
|Finished products and parts   |  | $             | 190.6 |   |                  | $ | 167.7 |  
|In-process products and parts |  |               | 129.3 |   |                  |   | 111.2 |  
|Raw materials and supplies    |  |               | 76.2  |   |                  |   | 81.3  |  
|                              |  |               |       |   |                  |   |       |  
|Inventories                   |  |               | 396.1 |   |                  |   | 360.2 |  
|Less:                         |  |               |       |   |                  |   |       |  
|LIFO reserve                  |  |               | (69.9 | ) |                  |   | (69.9 | )
|                              |  |               |       |   |                  |   |       |  
|Total inventories             |  | $             | 326.2 |   |                  | $ | 290.3 |  
|                              |  |               |       |   |                  |   |       |  



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 7. Pension and Other Retiree Benefit Obligations



We sponsor several qualified and nonqualified pension plans and other postretirement benefit plans that cover a significant number of our employees. The following tables provide information related to our net periodic benefit cost for the
three and six months ended June 30, 2004 and 2003:



|                                   |  |                             |      |   |                            |   |      |                       |  |   |                            |   |  |      |      |   |      |   |      |      |  |   |      |   |  |   |      |   |  |   |      |  
|---------------------------------- |  | --------------------------- | ---- | - | -------------------------- | - | ---- | --------------------- |  | - | -------------------------- | - |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                   |  | Defined Benefit Plans       |      |   | Other Postretirement Plans |   |      | Defined Benefit Plans |  |   | Other Postretirement Plans |  
|                                   |  | Three Months Ended June 30, |      |   | Six Months Ended June 30,  |  
|                                   |  | 2004                        |      |   | 2003                       |   |      | 2004                  |  |   | 2003                       |   |  | 2004 |      |   | 2003 |   |      | 2004 |  |   | 2003 |  
|                                   |  | (in millions)               |      |   | (in millions)              |  
|Service cost                       |  | $                           | 1.8  |   |                            | $ | 1.8  |                       |  | $ | 0.5                        |   |  | $    | 0.6  |   |      | $ | 3.5  |      |  | $ | 3.5  |   |  | $ | 1.0  |   |  | $ | 1.2  |  
|Interest cost                      |  |                             | 4.5  |   |                            |   | 3.8  |                       |  |   | 2.1                        |   |  |      | 3.1  |   |      |   | 8.9  |      |  |   | 7.7  |   |  |   | 4.8  |   |  |   | 6.2  |  
|Amortization of prior service cost |  |                             | 0.5  |   |                            |   | 0.5  |                       |  |   | (1.8                       | ) |  |      | (1.4 | ) |      |   | 1.1  |      |  |   | 1.1  |   |  |   | (3.6 | ) |  |   | (2.9 | )
|Amortization of net loss           |  |                             | 1.3  |   |                            |   | 0.5  |                       |  |   | (0.3                       | ) |  |      | 0.4  |   |      |   | 2.7  |      |  |   | 0.9  |   |  |   | 0.4  |   |  |   | 0.8  |  
|Transition obligation              |  |                             | 0.4  |   |                            |   | 0.5  |                       |  |   |                           |   |  |      |     |   |      |   | 0.9  |      |  |   | 0.9  |   |  |   |     |   |  |   |     |  
|Expected return on assets          |  |                             | (4.2 | ) |                            |   | (4.0 | )                     |  |   |                           |   |  |      |     |   |      |   | (8.5 | )    |  |   | (8.1 | ) |  |   |     |   |  |   |     |  
|                                   |  |                             |      |   |                            |   |      |                       |  |   |                            |   |  |      |      |   |      |   |      |      |  |   |      |   |  |   |      |   |  |   |      |  
|Net periodic benefit cost          |  | $                           | 4.3  |   |                            | $ | 3.1  |                       |  | $ | 0.5                        |   |  | $    | 2.7  |   |      | $ | 8.6  |      |  | $ | 6.0  |   |  | $ | 2.6  |   |  | $ | 5.3  |  
|                                   |  |                             |      |   |                            |   |      |                       |  |   |                            |   |  |      |      |   |      |   |      |      |  |   |      |   |  |   |      |   |  |   |      |  



We made cash
contributions of approximately $2.9 million to our domestic pension benefit plans as of June 30, 2004. We expect to make additional cash contributions of $1.8 million throughout the remainder of 2004 and $6.2 million in January 2005.



In January 2004, the FASB issued FASB Staff Position No. 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-1). FSP 106-1 was amended by FSP 106-2 in May 2004 and is effective as of the first interim
or annual period beginning after June 15, 2004. We have elected to early adopt FSP 106-2 as of April 2004. FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers who provide
prescription drug coverage for retirees eligible for Medicare. We recognized the effect of the new retiree prescription drug benefit coverage by Medicare, and as a result, recorded a net benefit of $1.6 million related to the first six months of
2004 in the second quarter which was reflected as a reduction of selling, engineering, administrative and general expense. The availability of the new Medicare drug coverage decreased our accumulated postretirement benefit obligation by
approximately $ 27.7 million. We have elected not to apply for federal subsidies eligible under the Act.



Note 8. Debt



In March
2004, we completed a refinancing of approximately $382 million of our Tranche B term loan under our senior secured credit facility with a new six-year $125 million senior unsecured term loan and a new $260 million Tranche C term loan under our
senior secured credit facility. The Tranche B term loan was paid in full with the completion of the refinancing. The $125 million senior unsecured term loan bears an interest rate of LIBOR (1.61% at June 30, 2004) plus 3.5%, and the Tranche C term
loan bears an interest rate of LIBOR plus 2.5%. We elected to prepay $25 million of our Tranche C term loan at the time the refinancing was completed. The covenants contained in the agreement governing our new senior unsecured term loan are similar
to the indenture governing our senior subordinated notes. In connection with the refinancing, we expensed approximately $16.9 million in deferred financing costs associated with the Tranche B term loan, which was reflected in interest expense in our
condensed consolidated statements of operations.



In June 2004,
in conjunction with our acquisition of the Nuovo Pignone distribution business, we obtained additional Tranche C term loan borrowings in the amount of $175 million, which included approximately $3.2 million in capitalized financing fees. In July
2004, we made an optional prepayment of $10 million on our Tranche C term loan. As a result of the optional prepayment, no mandatory principal payments are due on our Tranche C term loan until March 31, 2006.



12



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 9. Comprehensive Income (loss)



The
following table sets forth the components of comprehensive income (loss), net of income tax effects:



|                                                 |  |                             |      |   |                           |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------------ |  | --------------------------- | ---- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                 |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                 |  | 2004                        |      |   | 2003                      |   |       | 2004 |  |   | 2003  |  
|                                                 |  | (in millions)               |      |   | (in millions)             |  
|Net income (loss)                                |  | $                           | 18.1 |   |                           | $ | (16.9 | )    |  | $ | (0.3  | ) |  | $ | (23.0 | )
|Other comprehensive (loss) income                |  |                             |      |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Foreign currency translation adjustment          |  |                             | (3.9 | ) |                           |   | 21.0  |      |  |   | (5.9  | ) |  |   | 35.1  |  
|Unrealized gain (loss) on derivative instruments |  |                             | (1.5 | ) |                           |   | 1.5   |      |  |   | (3.9  | ) |  |   | 2.0   |  
|                                                 |  |                             |      |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Comprehensive income (loss)                      |  | $                           | 12.7 |   |                           | $ | 5.6   |      |  | $ | (10.1 | ) |  | $ | 14.1  |  
|                                                 |  |                             |      |   |                           |   |       |      |  |   |       |   |  |   |       |  



Note 10. 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, and
certain environmental liability claims against the Company, to the extent that notice is given to Halliburton prior to the fifth anniversary of the closing. Halliburton had also agreed to indemnify the Company against 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, but such rights with respect to those claims expired on April 10, 2004. 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. All indemnification claims are subject to notice and procedural requirements that may result in Halliburton denying indemnification claims for some losses.



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. In December 2003, certain affiliates of Halliburton filed a petition for relief under the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Pennsylvania. In
connection with the petition, the bankruptcy judge issued an order enjoining asbestos claims against the debtors and Halliburton, as well as asbestos claims against us, pending confirmation and effectiveness of a definitive plan of reorganization
for the Halliburton affiliates subject to the bankruptcy petition. On July 16, 2004, the plan of reorganization was confirmed by the bankruptcy judge, and on July 26, 2004 the confirmation order was affirmed by the U.S. District Court for the
Western District of Pennsylvania. On August 4, 2004, the District Court entered an order that, among other things, extended the period by which certain insurers could appeal the affirmation order of the District Court, stayed the effect of the
confirmation order and the affirmation order until September 24, 2004 and delayed the occurrence of the effective date of the plan of reorganization until September 24, 2004 as well.



Our right to indemnification under the recapitalization agreement with Halliburton as it relates to asbestos claims based on
events occurring prior to the closing of the recapitalization has also been enjoined pending effectiveness of the definitive plan of reorganization referred to above. However, this indemnification right is unnecessary as long as we are also
protected by the injunction, as we are. We expect that our indemnity rights against Halliburton relating to asbestos claims based on events occurring prior to the



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DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



closing of the recapitalization would terminate if the plan of reorganization was confirmed and became effective; however, such rights would no longer be necessary because the plan would require asbestos plaintiffs with claims against us or
Halliburton to look for relief exclusively to a trust to be established in the bankruptcy. If the plan of reorganization described does not become effective, or if the injunction of asbestos claims against us is otherwise terminated and asbestos
claimants are again permitted to proceed against us, we would immediately seek to terminate the injunction of our exercise of indemnification rights against Halliburton. Although we believe that in such a circumstance we would be able to terminate
the injunction of our exercise of indemnification rights against Halliburton, we cannot be assured that we would succeed in doing so. SeeEnvironmental.



Although we have been named in certain asbestos lawsuits, we have not historically incurred, and in the future we do not
believe that we 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.



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 that 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



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. These environmental laws and regulations govern the generation, storage, transportation, handling, disposal and emission of various regulated substances. These environmental laws also
impose liability for personal injury or property damage related to releases of hazardous substances. Under environmental laws, permits are required for operation of our businesses, and these permits are subject to renewal, modification and, in
certain circumstances, revocation. We believe we are substantially in compliance with these laws and permitting requirements. Various and changing environmental laws 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 our businesses and at facilities where our waste is or has been disposed. As a result, we spend 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. Several such sites are currently being investigated and/or remediated under applicable environmental law. While we do
not expect the costs for such activities will be, in the aggregate, material, and also believe that the Halliburton indemnity (described above) will adequately cover our reserves for exposure to these costs, we have set aside reserves for these
costs. However, in the event that we were to incur these costs ourselves, these reserves may not fully cover the costs of such investigation and/or remediation. We recognized a charge of $1 million in the second quarter of 2004 related to disputed
recoveries from Halliburton under the indemnification. Going forward, we expect to incur ongoing capital and operating costs for investigation and remediation and to maintain compliance with currently applicable environmental laws and regulations;
however, we do not expect those costs, in the aggregate, to be material.



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. Pursuant to the recapitalization agreement with Halliburton, 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 our businesses. The recapitalization agreement provides for certain indemnification obligations of Halliburton for losses and liabilities that we incur arising out of, among others, such
excluded liabilities. Pursuant to a proposed bankruptcy plan of reorganization related to certain affiliates of Halliburton, our indemnification rights with respect to asbestos claims arising out of events occurring prior to the
recapitalization may be replaced a with permanent injunction that would prevent asbestos claimants from proceeding against us. See Halliburton Indemnifications, and Note 1. Organization and Basis of Presentation.



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DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



We have not, and do not believe that we 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 us or any predecessor entities of our businesses.



Other Contingencies



We are involved in various litigation, claims and administrative proceedings and product liability matters. Amounts recorded for identified contingent
liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, we believe that the
liability which may result from these legal matters would not have a material adverse effect on our financial condition, results of operations, liquidity or cash flows.



In April 2004, we received allegations that the Dubai branch of one of our U.S. subsidiaries may have engaged in
transactions involving the sale of control valves and related parts to Iraq without required authorization. Upon initial investigation, we found transactions by the branch relating to Iraq, Iran and Sudan that appeared to have been undertaken
without the required prior U.S. governmental authorizations. With the assistance of outside counsel, we commenced a full investigation of the Dubai branchs transactions and whether our other foreign offices may have engaged in transactions
relating to U.S.-sanctioned countries in violation of U.S. laws related to export controls and economic sanctions. On July 9, 2004, we submitted preliminary voluntary disclosures of the Dubai branch transactions to the Commerce and Treasury
Departments under their voluntary disclosure programs. In addition, we have committed to submit to them a comprehensive report concerning the results of our investigation when it is concluded. Initial remedial actions we have adopted include
issuance of directives not to make any unauthorized sales, distribution of clarified summaries concerning U.S. regulatory requirements and additional training of our employees concerning compliance with these requirements. Violations of the
applicable Commerce and Treasury Department regulations restricting dealings with Iraq, Iran and Sudan may result in civil or criminal penalties, including fines and/or suspension of the privilege to engage in export trading or to receive
U.S.-origin goods, software or technology. While we are unable to determine at this time the exact nature of any penalties to which we may be subjected as a result of any unauthorized dealings with U.S.-sanctioned countries, we do not expect that
the ultimate resolution of this matter will materially adversely affect our business or our ability to do business outside the United States.



Note 11. Accrued Warranties



We offer warranties on the sale of certain of our products and we record an accrual for estimated future claims. Such accruals are based upon historical
experience and managements estimate of the level of future claims. In conjunction with our acquisition of the Nuovo Pignone distribution business, we assumed approximately $1.7 million of accrued warranties. The following shows the activity of
our warranty accrual:



|                                                        |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                        |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                        |  | 2004                        |      |   | 2003                      |   |      | 2004 |  |   | 2003 |  
|                                                        |  | (in millions)               |     
|Balance at the beginning of the period                  |  | $                           | 26.3 |   |                           | $ | 20.4 |      |  | $ | 26.9 |   |  | $ | 18.9 |  
|Accruals for warranties issued during the period        |  |                             | 4.3  |   |                           |   | 4.7  |      |  |   | 9.4  |   |  |   | 8.2  |  
|Changes in accruals related to pre-existing warranties  |  |                             | 0.6  |   |                           |   | 0.4  |      |  |   | (0.8 | ) |  |   | 2.4  |  
|Settlements made (in cash or in kind) during the period |  |                             | (4.2 | ) |                           |   | (4.7 | )    |  |   | (8.5 | ) |  |   | (8.7 | )
|                                                        |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Balance at the end of the period                        |  | $                           | 27.0 |   |                           | $ | 20.8 |      |  | $ | 27.0 |   |  | $ | 20.8 |  
|                                                        |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  



Note 12. Recent Accounting
Pronouncements



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



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DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



15,
2003. We adopted the statement as of June 1, 2003. The statement had no 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 No. 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. In December 2003, the FASB issued FIN No. 46 (revised December 2003) Consolidation of Variable Interest Entities (Fin
46-R) to address certain FIN No. 46 implementation issues. Fin 46-R is effective for Dresser, a nonpublic entity as defined, immediately for any variable interest entity created after December 31, 2003, and by the beginning of the first annual
period beginning after December 15, 2004, for all variable interest entities subject to FIN 46-R. We are in the process of assessing the effect Fin 46-R may have on our reported assets, liabilities or operations, however, we believe Fin 46-R will
not have a material effect on our results of operations or net assets. The effect, if any, would most likely be a gross up of assets and liabilities arising from consolidation of certain previously unconsolidated entities.



In January 2004, the FASB issued FSP No. 106-1, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-1 was amended by FSP 106-2 in May 2004 and is effective as of the first interm or annual period beginning after June 15,
2004. We have elected to early adopt FSP 106-2 as of April 2004. FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers who provide prescription drug coverage for retirees eligible
for Medicare. We recognized the effect of the new retiree prescription drug benefit covered by Medicare, and as a result, recorded a net benefit of $1.6 million related to the first six months of 2004 in the second quarter which was reflected as a
reduction of selling, engineering, administrative and general expense. The availability of the new Medicare drug coverage decreased our accumulated postretirement benefit obligation by approximately $27.7 million. We have elected not to apply for
federal subsidies eligible under the Act.



Note 13. Related Party
Transactions



For the three and six months ended June 30,
2004, we sold approximately $1.1 million and $2.8 million, respectively, of products and services to affiliates of Halliburton. Accounts receivable related to these affiliates of Halliburton totaled approximately $1.9 million at June 30, 2004.
Approximately $0.2 million of accounts receivable due from Halliburton affiliates at June 30, 2004 comprise trade and other receivables due from Halliburton operating units that entered into plans of bankruptcy during 2003. We have evaluated the
likelihood of collectibility of the amounts due and have concluded that our exposure to nonpayment is not significant.



In connection with our 2001 acquisition of Entech Industries, Inc. from funds managed by First Reserve and the other Entech shareholders, our
consideration included issuing shares of our common stock in exchange for each outstanding share of Entech common stock. At the time we purchased Entech, certain former Entech shareholders had a put right with respect to their 27,908 shares of
Entech common stock, which we assumed by giving them a similar put right with respect to the shares of our common stock they received in the acquisition. This put right allowed them to require us to purchase their shares of our common stock at a
purchase price of 107.49 British Pounds per share, which represented an aggregate of approximately $5.3 million at December 31, 2003. In connection with the modification of our corporate structure in 2002, the shares subject to the put right became
class A common shares of Dresser, Ltd. Due to Dresser, Ltd.s having no substantive operations, the obligation relating to the put rights was reflected as mandatorily redeemable common stock in the Companys financial statements. In April
2004, those former Entech stockholders exercised their put right. To facilitate the redemption of the shares, we purchased the shares on Dresser, Ltd.s behalf, and established a loan to Dresser, Ltd. which is reflected as contra-equity in our
financial statements. Accordingly, the shares were transferred from mandatorily redeemable stock to additional paid in capital to reflect the settlement of the put rights. The advance to Dresser, Ltd. is to be reduced by proceeds received by us on
behalf of Dresser, Ltd. from the escrow account (discussed below) or from the exercise of stock options of Dresser, Ltd. common shares stock.



At the time of the Entech acquisition, the First Reserve funds invested in Entech and certain other Entech shareholders deposited into an escrow account
shares of our common stock equal to the then aggregate value of certain known liabilities of Entech, including the value of the put right in excess of $40 per share, for us to use to satisfy those liabilities as they became due. In connection with
the modification of our corporate structure in 2002, the shares deposited in the escrow account became common shares of Dresser, Ltd. Each First Reserve fund and the other two shareholders that deposited shares in the escrow account had the right to
remove its shares from the escrow account upon substituting cash into the escrow account in an amount equal to $40 per share or a greater fair market determined by us, and either the shareholders or we could challenge the valuation used for any cash
substitution. By June, 2004, the shares in the escrow account held by First Reserve Funds and not previously used to satisfy other known Entech liabilities had been replaced with approximately $2.9 million in cash at a rate of $40 per share, which
valuation was not challenged. The proceeds



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DRESSER, INC.



CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



received from the escrow account were used to reduce the advance to Dresser, Ltd. We understand that the holders of the remaining 9,134 escrowed shares intend to replace their shares with cash in August 2004, following which we intend to
liquidate the escrow account. Accordingly, the remaining approximately $0.3 million has been offset against the advance to Dresser, Ltd. The difference between the amount we paid to the putting shareholders and the amount of funds in the escrow
account at the time the put right was exercised, in excess of $40 per share repurchased, reflects the decreased value of the U.S. dollar against the British Pound since the closing of the Entech acquisition, when the dollar value of the put right
and the other known liabilities addressed by the escrow account was estimated.



Cash received by us from the exercise of stock options in the three months ended June 30, 2004, totaling approximately $.5 million has also reduced the advance to Dresser, Ltd., resulting in a loan receivable balance
at June 30, 2004 of $1.6 million. The loan bears interest at LIBOR plus 2.75% and is payable on demand.



Note 14. Income Taxes



Our provision for income taxes differs from the statutory U.S. federal income tax rate due to the distribution of pre-tax income across geographical jurisdictions and use of net operating losses in certain foreign jurisdictions for which a
valuation allowance had been previously recorded. Additionally, we have provided a full valuation allowance against our U.S. deferred tax assets, and therefore have not provided any tax expense or benefit related to our U.S. operations for the
periods presented.



Note 15. Supplemental Guarantor Information



In connection with our senior subordinated notes due
2011, certain of 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 sheets as of June 30, 2004 and December 31, 2003, and the statements of operations and cash flows for the three and six months ended June 30, 2004 and 2003, respectively. In the condensed
consolidating financial statements, 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.



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS



June 30, 2004

(in millions)

(unaudited)



|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|---------------------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | ----- | ------------------------- |  | - | ------------ | - |  | ----------------- | -------- | - |  | - | ------- | -
|                                                                 |  | Parent |         |   | SubsidiaryGuarantors |   |       | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |         
|ASSETS                                                           |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Current assets:                                                  |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Cash and cash equivalents                                        |  | $      | 43.6    |   |                      | $ | 0.1   |                           |  | $ | 46.7         |   |  | $                 |         |   |  | $ | 90.4    |  
|Restricted cash                                                  |  |        |        |   |                      |   |      |                           |  |   | 2.0          |   |  |                   |         |   |  |   | 2.0     |  
|Accounts receivable, net                                         |  |        | 145.2   |   |                      |   | 4.0   |                           |  |   | 237.3        |   |  |                   |         |   |  |   | 386.5   |  
|Notes receivable                                                 |  |        | 1.2     |   |                      |   |      |                           |  |   | 5.3          |   |  |                   |         |   |  |   | 6.5     |  
|Inventories                                                      |  |        | 111.6   |   |                      |   | 14.7  |                           |  |   | 199.9        |   |  |                   |         |   |  |   | 326.2   |  
|Other current assets                                             |  |        | 11.7    |   |                      |   |      |                           |  |   | 10.0         |   |  |                   |         |   |  |   | 21.7    |  
|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Total current assets                                             |  |        | 313.3   |   |                      |   | 18.8  |                           |  |   | 501.2        |   |  |                   |         |   |  |   | 833.3   |  
|                                                                 |  |        |         |   |                     
|Property, plant and equipment, net                               |  |        | 140.3   |   |                      |   | 0.1   |                           |  |   | 96.3         |   |  |                   |         |   |  |   | 236.7   |  
|Investments in and advances with consolidated subsidiaries       |  |        | 590.3   |   |                      |   | 548.7 |                           |  |   |             |   |  |                   | (1,139.0 | ) |  |   |        |  
|Investments in unconsolidated subsidiaries                       |  |        |        |   |                      |   |      |                           |  |   | 8.4          |   |  |                   |         |   |  |   | 8.4     |  
|Deferred financing fees                                          |  |        | 26.8    |   |                      |   |      |                           |  |   |             |   |  |                   |         |   |  |   | 26.8    |  
|Goodwill                                                         |  |        | 113.9   |   |                      |   | 23.8  |                           |  |   | 257.0        |   |  |                   |         |   |  |   | 394.7   |  
|Other assets                                                     |  |        | 69.5    |   |                      |   |      |                           |  |   | 43.2         |   |  |                   |         |   |  |   | 112.7   |  
|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Total assets                                                     |  | $      | 1,254.1 |   |                      | $ | 591.4 |                           |  | $ | 906.1        |   |  | $                 | (1,139.0 | ) |  | $ | 1,612.6 |  
|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY                   |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Current liabilities:                                             |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Accounts payable                                                 |  | $      | 80.3    |   |                      | $ | 0.9   |                           |  | $ | 169.0        |   |  | $                 |         |   |  | $ | 250.2   |  
|Notes payable                                                    |  |        |        |   |                      |   |      |                           |  |   | 6.5          |   |  |                   |         |   |  |   | 6.5     |  
|Current maturities of long-term debt                             |  |        | 4.0     |   |                      |   |      |                           |  |   | 1.0          |   |  |                   |         |   |  |   | 5.0     |  
|Payroll and other compensation                                   |  |        | 25.5    |   |                      |   | 0.2   |                           |  |   | 35.4         |   |  |                   |         |   |  |   | 61.1    |  
|Accrued expenses                                                 |  |        | 57.5    |   |                      |   |      |                           |  |   | 82.2         |   |  |                   |         |   |  |   | 139.7   |  
|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Total current liabilities                                        |  |        | 167.3   |   |                      |   | 1.1   |                           |  |   | 294.1        |   |  |                   |         |   |  |   | 462.5   |  
|                                                                 |  |        |         |   |                     
|Pension and other retiree benefits obligations                   |  |        | 290.7   |   |                      |   |      |                           |  |   | 54.2         |   |  |                   |         |   |  |   | 344.9   |  
|Long-term debt, net of current maturities                        |  |        | 1,088.8 |   |                      |   |      |                           |  |   | 2.7          |   |  |                   |         |   |  |   | 1,091.5 |  
|Other liabilities                                                |  |        | 18.2    |   |                      |   |      |                           |  |   | 3.5          |   |  |                   |         |   |  |   | 21.7    |  
|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Total liabilities                                                |  |        | 1,565.0 |   |                      |   | 1.1   |                           |  |   | 354.5        |   |  |                   |         |   |  |   | 1,920.6 |  
|                                                                 |  |        |         |   |                     
|Commitments and contingencies                                    |  |        |        |   |                      |   |      |                           |  |   |             |   |  |                   |         |   |  |   |        |  
|Minority interest                                                |  |        |        |   |                      |   |      |                           |  |   | 2.9          |   |  |                   |         |   |  |   | 2.9     |  
|Mandatorily redeemable common stock of Dresser, Ltd.             |  |        | 7.4     |   |                      |   |      |                           |  |   |             |   |  |                   |         |   |  |   | 7.4     |  
|                                                                 |  |        |         |   |                     
|Shareholders (deficit) equity:                                  |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Shareholders (deficit) equity and advances with affiliates, net |  |        | (310.8  | ) |                      |   | 593.5 |                           |  |   | 594.4        |   |  |                   | (1,139.1 | ) |  |   | (262.0  | )
|Accumulated other comprehensive loss                             |  |        | (7.5    | ) |                      |   | (3.2  | )                         |  |   | (45.7        | ) |  |                   | 0.1      |   |  |   | (56.3   | )
|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Total shareholders (deficit) equity                             |  |        | (318.3  | ) |                      |   | 590.3 |                           |  |   | 548.7        |   |  |                   | (1,139.0 | ) |  |   | (318.3  | )
|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  
|Total liabilities and shareholders (deficit) equity             |  | $      | 1,254.1 |   |                      | $ | 591.4 |                           |  | $ | 906.1        |   |  | $                 | (1,139.0 | ) |  | $ | 1,612.6 |  
|                                                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |          |   |  |   |         |  



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2003

(in millions)

(unaudited)



|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|---------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | ----- | ------------------------- |  | - | ------------ | - |  | ----------------- | ------ | - |  | - | ------- | -
|                                                     |  | Parent |         |   | SubsidiaryGuarantors |   |       | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |       
|ASSETS                                               |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Current assets:                                      |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Cash and cash equivalents                            |  | $      | 80.0    |   |                      | $ |      |                           |  | $ | 68.9         |   |  | $                 |       |   |  | $ | 148.9   |  
|Restricted cash                                      |  |        |        |   |                      |   |      |                           |  |   | 0.7          |   |  |                   |       |   |  |   | 0.7     |  
|Accounts receivable, net                             |  |        | 91.5    |   |                      |   | 2.3   |                           |  |   | 182.4        |   |  |                   |       |   |  |   | 276.2   |  
|Notes receivable                                     |  |        | 1.5     |   |                      |   |      |                           |  |   | 2.9          |   |  |                   |       |   |  |   | 4.4     |  
|Inventories                                          |  |        | 106.8   |   |                      |   | 18.5  |                           |  |   | 165.0        |   |  |                   |       |   |  |   | 290.3   |  
|Other current assets                                 |  |        | 11.8    |   |                      |   |      |                           |  |   | 8.7          |   |  |                   |       |   |  |   | 20.5    |  
|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Total current assets                                 |  |        | 291.6   |   |                      |   | 20.8  |                           |  |   | 428.6        |   |  |                   |       |   |  |   | 741.0   |  
|                                                     |  |        |         |   |                     
|Property, plant and equipment, net                   |  |        | 134.6   |   |                      |   | 0.1   |                           |  |   | 73.4         |   |  |                   |       |   |  |   | 208.1   |  
|Investments in consolidated subsidiaries             |  |        | 466.2   |   |                      |   | 422.8 |                           |  |   |             |   |  |                   | (889.0 | ) |  |   |        |  
|Investments in unconsolidated subsidiaries           |  |        | 0.2     |   |                      |   |      |                           |  |   | 7.1          |   |  |                   |       |   |  |   | 7.3     |  
|Deferred financing fees                              |  |        | 40.2    |   |                      |   |      |                           |  |   |             |   |  |                   |       |   |  |   | 40.2    |  
|Goodwill                                             |  |        | 113.9   |   |                      |   | 23.8  |                           |  |   | 177.5        |   |  |                   |       |   |  |   | 315.2   |  
|Other assets                                         |  |        | 57.7    |   |                      |   |      |                           |  |   | 34.7         |   |  |                   |       |   |  |   | 92.4    |  
|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Total assets                                         |  | $      | 1,104.4 |   |                      | $ | 467.5 |                           |  | $ | 721.3        |   |  | $                 | (889.0 | ) |  | $ | 1,404.2 |  
|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY       |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Current liabilities:                                 |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Accounts payable                                     |  | $      | 75.8    |   |                      | $ | 1.1   |                           |  | $ | 121.5        |   |  | $                 |       |   |  | $ | 198.4   |  
|Notes payable                                        |  |        | 0.5     |   |                      |   |      |                           |  |   | 2.4          |   |  |                   |       |   |  |   | 2.9     |  
|Current maturities of long-term debt                 |  |        | 1.9     |   |                      |   |      |                           |  |   | 0.8          |   |  |                   |       |   |  |   | 2.7     |  
|Payroll and other compensation                       |  |        | 20.8    |   |                      |   |      |                           |  |   | 26.8         |   |  |                   |       |   |  |   | 47.6    |  
|Accrued expenses                                     |  |        | 59.3    |   |                      |   | 0.2   |                           |  |   | 85.7         |   |  |                   |       |   |  |   | 145.2   |  
|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Total current liabilities                            |  |        | 158.3   |   |                      |   | 1.3   |                           |  |   | 237.2        |   |  |                   |       |   |  |   | 396.8   |  
|                                                     |  |        |         |   |                     
|Pension and other retiree benefits obligations       |  |        | 290.8   |   |                      |   |      |                           |  |   | 49.3         |   |  |                   |       |   |  |   | 340.1   |  
|Long-term debt, net of current maturities            |  |        | 938.9   |   |                      |   |      |                           |  |   | 2.5          |   |  |                   |       |   |  |   | 941.4   |  
|Other liabilities                                    |  |        | 21.1    |   |                      |   |      |                           |  |   | 4.1          |   |  |                   |       |   |  |   | 25.2    |  
|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Total liabilities                                    |  |        | 1,409.1 |   |                      |   | 1.3   |                           |  |   | 293.1        |   |  |                   |       |   |  |   | 1,703.5 |  
|                                                     |  |        |         |   |                     
|Commitments and contingencies                        |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Minority interest                                    |  |        |        |   |                      |   |      |                           |  |   | 0.4          |   |  |                   |       |   |  |   | 0.4     |  
|Mandatorily redeemable common stock of Dresser, Ltd. |  |        | 7.9     |   |                      |   |      |                           |  |   | 5.0          |   |  |                   |       |   |  |   | 12.9    |  
|                                                     |  |        |         |   |                     
|Shareholders (deficit) equity:                      |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Shareholders (deficit) equity, net                  |  |        | (292.8  | ) |                      |   | 471.3 |                           |  |   | 444.5        |   |  |                   | (889.0 | ) |  |   | (266.0  | )
|Accumulated other comprehensive loss                 |  |        | (19.8   | ) |                      |   | (5.1  | )                         |  |   | (21.7        | ) |  |                   |       |   |  |   | (46.6   | )
|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Total shareholders (deficit) equity                 |  |        | (312.6  | ) |                      |   | 466.2 |                           |  |   | 422.8        |   |  |                   | (889.0 | ) |  |   | (312.6  | )
|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  
|Total liabilities and shareholders (deficit) equity |  | $      | 1,104.4 |   |                      | $ | 467.5 |                           |  | $ | 721.3        |   |  | $                 | (889.0 | ) |  | $ | 1,404.2 |  
|                                                     |  |        |         |   |                      |   |       |                           |  |   |              |   |  |                   |        |   |  |   |         |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2004

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                    |       |   |  |   |       |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | -------------------------- |  | - | ------------ | - |  | ------------------ | ----- | - |  | - | ----- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | Total Consolidated |      
|Revenues                                                  |  | $      | 275.2 |   |                      | $ | 9.3  |                            |  | $ | 255.5        |   |  | $                  | (44.1 | ) |  | $ | 495.9 |  
|Cost of revenues                                          |  |        | 203.6 |   |                      |   | 7.9  |                            |  |   | 184.7        |   |  |                    | (43.7 | ) |  |   | 352.5 |  
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                    |       |   |  |   |       |  
|Gross profit                                              |  |        | 71.6  |   |                      |   | 1.4  |                            |  |   | 70.8         |   |  |                    | (0.4  | ) |  |   | 143.4 |  
|Selling, engineering, administrative and general expenses |  |        | 57.3  |   |                      |   | 0.6  |                            |  |   | 46.2         |   |  |                    | (0.4  | ) |  |   | 103.7 |  
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                    |       |   |  |   |       |  
|Operating income                                          |  |        | 14.3  |   |                      |   | 0.8  |                            |  |   | 24.6         |   |  |                    |      |   |  |   | 39.7  |  
|Interest expense                                          |  |        | (8.0  | ) |                      |   | (0.1 | )                          |  |   | (10.4        | ) |  |                    |      |   |  |   | (18.5 | )
|Interest income                                           |  |        |      |   |                      |   |     |                            |  |   | 0.2          |   |  |                    |      |   |  |   | 0.2   |  
|Other income (expense), net                               |  |        | 1.0   |   |                      |   | (0.1 | )                          |  |   | (0.7         | ) |  |                    |      |   |  |   | 0.2   |  
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                    |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |        | 7.3   |   |                      |   | 0.6  |                            |  |   | 13.7         |   |  |                    |      |   |  |   | 21.6  |  
|Provision for income taxes                                |  |        | (0.4  | ) |                      |   | (0.1 | )                          |  |   | (3.5         | ) |  |                    |      |   |  |   | (4.0  | )
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                    |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |        | 6.9   |   |                      |   | 0.5  |                            |  |   | 10.2         |   |  |                    |      |   |  |   | 17.6  |  
|Euity in earnings of unconsolidated subsidiaries          |  |        |      |   |                      |   |     |                            |  |   | 0.7          |   |  |                    |      |   |  |   | 0.7   |  
|Equity in earnings of consolidated subsidiaries           |  |        | 11.2  |   |                      |   | 10.7 |                            |  |   |             |   |  |                    | (21.9 | ) |  |   |      |  
|Minority owners share of consolidated subsidiaries       |  |        |      |   |                      |   |     |                            |  |   | (0.2         | ) |  |                    |      |   |  |   | (0.2  | )
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                    |       |   |  |   |       |  
|Net income (loss)                                         |  | $      | 18.1  |   |                      | $ | 11.2 |                            |  | $ | 10.7         |   |  | $                  | (21.9 | ) |  | $ | 18.1  |  
|                                                          |  |        |       |   |                      |   |      |                            |  |   |              |   |  |                    |       |   |  |   |       |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2003

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | ------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 225.8 |   |                      | $ | 9.1  |                           |  | $ | 183.9        |   |  | $                 | (23.9 | ) |  | $ | 394.9 |  
|Cost of revenues                                          |  |        | 174.4 |   |                      |   | 7.2  |                           |  |   | 136.0        |   |  |                   | (23.8 | ) |  |   | 293.8 |  
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Gross profit                                              |  |        | 51.4  |   |                      |   | 1.9  |                           |  |   | 47.9         |   |  |                   | (0.1  | ) |  |   | 101.1 |  
|Selling, engineering, administrative and general expenses |  |        | 59.2  |   |                      |   | (0.4 | )                         |  |   | 36.4         |   |  |                   | (0.1  | ) |  |   | 95.1  |  
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Operating Income                                          |  |        | (7.8  | ) |                      |   | 2.3  |                           |  |   | 11.5         |   |  |                   |      |   |  |   | 6.0   |  
|Interest expense                                          |  |        | (21.0 | ) |                      |   |     |                           |  |   | (0.3         | ) |  |                   |      |   |  |   | (21.3 | )
|Interest income                                           |  |        | 0.1   |   |                      |   |     |                           |  |   | 0.5          |   |  |                   |      |   |  |   | 0.6   |  
|Other income (expense), net                               |  |        | (0.2  | ) |                      |   |     |                           |  |   | 5.3          |   |  |                   |      |   |  |   | 5.1   |  
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |        | (28.9 | ) |                      |   | 2.3  |                           |  |   | 17.0         |   |  |                   |      |   |  |   | (9.6  | )
|Provision for income taxes                                |  |        |      |   |                      |   |     |                           |  |   | (8.0         | ) |  |                   |      |   |  |   | (8.0  | )
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |        | (28.9 | ) |                      |   | 2.3  |                           |  |   | 9.0          |   |  |                   |      |   |  |   | (17.6 | )
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |     |                           |  |   | 0.7          |   |  |                   |      |   |  |   | 0.7   |  
|Equity in earnings of consolidated subsidiaries           |  |        | 12.0  |   |                      |   | 9.7  |                           |  |   |             |   |  |                   | (21.7 | ) |  |   |      |  
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income (loss)                                         |  | $      | (16.9 | ) |                      | $ | 12.0 |                           |  | $ | 9.7          |   |  | $                 | (21.7 | ) |  | $ | (16.9 | )
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2004

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | ------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 531.1 |   |                      | $ | 14.7 |                           |  | $ | 456.9        |   |  | $                 | (70.6 | ) |  | $ | 932.1 |  
|Cost of revenues                                          |  |        | 389.8 |   |                      |   | 12.5 |                           |  |   | 332.4        |   |  |                   | (70.4 | ) |  |   | 664.3 |  
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Gross profit                                              |  |        | 141.3 |   |                      |   | 2.2  |                           |  |   | 124.5        |   |  |                   | (0.2  | ) |  |   | 267.8 |  
|Selling, engineering, administrative and general expenses |  |        | 118.8 |   |                      |   | 1.2  |                           |  |   | 88.6         |   |  |                   | (0.2  | ) |  |   | 208.4 |  
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Operating Income                                          |  |        | 22.5  |   |                      |   | 1.0  |                           |  |   | 35.9         |   |  |                   |      |   |  |   | 59.4  |  
|Interest expense                                          |  |        | (43.5 | ) |                      |   | (0.1 | )                         |  |   | (10.9        | ) |  |                   |      |   |  |   | (54.5 | )
|Interest income                                           |  |        |      |   |                      |   |     |                           |  |   | 0.5          |   |  |                   |      |   |  |   | 0.5   |  
|Other income (expense), net                               |  |        | 0.7   |   |                      |   | (0.1 | )                         |  |   | (0.6         | ) |  |                   |      |   |  |   |      |  
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |        | (20.3 | ) |                      |   | 0.8  |                           |  |   | 24.9         |   |  |                   |      |   |  |   | 5.4   |  
|Provision for income taxes                                |  |        | (0.5  | ) |                      |   | (0.1 | )                         |  |   | (6.6         | ) |  |                   |      |   |  |   | (7.2  | )
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |        | (20.8 | ) |                      |   | 0.7  |                           |  |   | 18.3         |   |  |                   |      |   |  |   | (1.8  | )
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |     |                           |  |   | 1.6          |   |  |                   |      |   |  |   | 1.6   |  
|Equity in earnings of consolidated subsidiaries           |  |        | 20.5  |   |                      |   | 19.8 |                           |  |   |             |   |  |                   | (40.3 | ) |  |   |      |  
|Minority owners share of consolidated subsidiaries       |  |        |      |   |                      |   |     |                           |  |   | (0.1         | ) |  |                   |      |   |  |   | (0.1  | )
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income                                                |  | $      | (0.3  | ) |                      | $ | 20.5 |                           |  | $ | 19.8         |   |  | $                 | (40.3 | ) |  | $ | (0.3  | )
|                                                          |  |        |       |   |                      |   |      |                           |  |   |              |   |  |                   |       |   |  |   |       |  



22



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2003

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 455.2 |   |                      | $ | 17.1                      |  | $ | 341.2        |   |  | $                 | (47.2 | ) |  | $ | 766.3 |  
|Cost of revenues                                          |  |        | 347.6 |   |                      |   | 13.8                      |  |   | 250.9        |   |  |                   | (47.0 | ) |  |   | 565.3 |  
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Gross profit                                              |  |        | 107.6 |   |                      |   | 3.3                       |  |   | 90.3         |   |  |                   | (0.2  | ) |  |   | 201.0 |  
|Selling, engineering, administrative and general expenses |  |        | 120.2 |   |                      |   | 0.1                       |  |   | 63.6         |   |  |                   | (0.2  | ) |  |   | 183.7 |  
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Operating Income                                          |  |        | (12.6 | ) |                      |   | 3.2                       |  |   | 26.7         |   |  |                   |      |   |  |   | 17.3  |  
|Interest expense                                          |  |        | (41.3 | ) |                      |   |                          |  |   | (0.4         | ) |  |                   |      |   |  |   | (41.7 | )
|Interest income                                           |  |        | 0.1   |   |                      |   |                          |  |   | 1.8          |   |  |                   |      |   |  |   | 1.9   |  
|Other income (expense), net                               |  |        | 0.2   |   |                      |   |                          |  |   | 8.0          |   |  |                   |      |   |  |   | 8.2   |  
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |        | (53.6 | ) |                      |   | 3.2                       |  |   | 36.1         |   |  |                   |      |   |  |   | (14.3 | )
|Provision for income taxes                                |  |        | (0.1  | ) |                      |   |                          |  |   | (10.1        | ) |  |                   |      |   |  |   | (10.2 | )
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |        | (53.7 | ) |                      |   | 3.2                       |  |   | 26.0         |   |  |                   |      |   |  |   | (24.5 | )
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |                          |  |   | 1.5          |   |  |                   |      |   |  |   | 1.5   |  
|Equity in earnings of consolidated subsidiaries           |  |        | 30.7  |   |                      |   | 27.5                      |  |   |             |   |  |                   | (58.2 | ) |  |   |      |  
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income (loss)                                         |  | $      | (23.0 | ) |                      | $ | 30.7                      |  | $ | 27.5         |   |  | $                 | (58.2 | ) |  | $ | (23.0 | )
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |       |   |  |   |       |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2004

(in millions)

(unaudited)



|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ------ | ------ | - | -------------------- | - | ----- | ------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ------ | -
|                                                                                                    |  | Parent |        |   | SubsidiaryGuarantors |   |       | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Cash flows from operating activities:                                                               |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Net income                                                                                          |  | $      | (0.3   | ) |                      | $ | 20.5  |                           |  | $ | 19.8         |   |  | $                 | (40.3 | ) |  | $ | (0.3   | )
|Adjustments to reconcile net income (loss) to cash flow (used in) provided by operating activities: |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Depreciation and amortization                                                                       |  |        | 2.9    |   |                      |   |      |                           |  |   | 19.1         |   |  |                   |      |   |  |   | 22.0   |  
|Equity earnings of unconsolidated and consolidated subsidiaries                                     |  |        | (20.5  | ) |                      |   | (19.8 | )                         |  |   | (1.6         | ) |  |                   | 40.3  |   |  |   | (1.6   | )
|Loss on repayment of debt                                                                           |  |        | 16.9   |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 16.9   |  
|Impairment of assets                                                                                |  |        | 1.0    |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 1.0    |  
|Loss on foreign currency exchange                                                                   |  |        | 0.8    |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 0.8    |  
|Amortization of deferred financing fees, net of amortization                                        |  |        | 0.8    |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 0.8    |  
|Other changes, net                                                                                  |  |        | (68.7  | ) |                      |   | (0.6  | )                         |  |   | 24.0         |   |  |                   |      |   |  |   | (45.3  | )
|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Net cash provided by (used in) operating activities                                                 |  |        | (67.1  | ) |                      |   | 0.1   |                           |  |   | 61.3         |   |  |                   |      |   |  |   | (5.7   | )
|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Cash flows from investing activities:                                                               |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Acquisition of business                                                                             |  |        |       |   |                      |   |      |                           |  |   | (171.5       | ) |  |                   |      |   |  |   | (171.5 | )
|Capital expenditures                                                                                |  |        | (9.8   | ) |                      |   |      |                           |  |   | (18.7        | ) |  |                   |      |   |  |   | (28.5  | )
|Proceeds from sale of assets                                                                        |  |        |       |   |                      |   |      |                           |  |   | 0.3          |   |  |                   |      |   |  |   | 0.3    |  
|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Net cash used in investing activities                                                               |  |        | (9.8   | ) |                      |   |      |                           |  |   | (189.9       | ) |  |                   |      |   |  |   | (199.7 | )
|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Cash flows from financing activities:                                                               |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Advances (to) from affiliates:                                                                      |  |        | (106.0 | ) |                      |   |       |                           |  |   | 106.0        |   |  |                   |       |   |  |   |       |  
|Payment of deferred financing fees                                                                  |  |        |       |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   |       |  
|Increase in short term notes payable                                                                |  |        | 1.6    |   |                      |   |      |                           |  |   | 2.1          |   |  |                   |      |   |  |   | 3.7    |  
|Proceeds from the issuance of long-term debt                                                        |  |        | 171.8  |   |                      |   |      |                           |  |   | 0.6          |   |  |                   |      |   |  |   | 172.4  |  
|Repayment of long-term debt (including current portion)                                             |  |        | (25.0  | ) |                      |   |      |                           |  |   | (0.2         | ) |  |                   |      |   |  |   | (25.2  | )
|Purchase of shares, net of escrow and stock options                                                 |  |        | (1.9   | ) |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | (1.9   | )
|Proceeds from exercise of stock options                                                             |  |        |       |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   |       |  
|Changes in restricted cash                                                                          |  |        |       |   |                      |   |      |                           |  |   | (1.3         | ) |  |                   |      |   |  |   | (1.3   | )
|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Net cash provided by financing activities                                                           |  |        | 40.5   |   |                      |   |      |                           |  |   | 107.2        |   |  |                   |      |   |  |   | 147.7  |  
|Effect of translation adjustments on cash                                                           |  |        |       |   |                      |   |      |                           |  |   | (0.8         | ) |  |                   |      |   |  |   | (0.8   | )
|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                |  |        | (36.4  | ) |                      |   | 0.1   |                           |  |   | (22.2        | ) |  |                   |      |   |  |   | (58.5  | )
|Cash and cash equivalents, beginning of period                                                      |  |        | 80.0   |   |                      |   |      |                           |  |   | 68.9         |   |  |                   |      |   |  |   | 148.9  |  
|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Cash and cash equivalents, end of period                                                            |  | $      | 43.6   |   |                      | $ | 0.1   |                           |  | $ | 46.7         |   |  | $                 |      |   |  | $ | 90.4   |  
|                                                                                                    |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Non-cash financing activity                                                                         |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |        |  
|Refinancing of long-term debt, net of transaction fees                                              |  | $      | 381.6  |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  | $ | 381.6  |  
|Deferred financing fees related to acquisition of Nuovo Pignone                                     |  |        | 3.2    |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 3.2    |  
|Reclassification of mandatorily redeemable stock to paid-in-capital                                 |  |        | 5.5    |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 5.5    |  



24



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2003

(in millions)

(unaudited)



|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|--------------------------------------------------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ----- | ------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                                                                    |  | Parent |       |   | SubsidiaryGuarantors |   |       | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Cash flows from operating activities:                                                               |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income (loss)                                                                                   |  | $      | (23.0 | ) |                      | $ | 30.7  |                           |  | $ | 27.5         |   |  | $                 | (58.2 | ) |  | $ | (23.0 | )
|                                                                                                    |  |        |       |   |                     
|Adjustments to reconcile net income (loss) to cash flow (used in) provided by operating activities: |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Depreciation and amortization                                                                       |  |        | 13.0  |   |                      |   |      |                           |  |   | 8.3          |   |  |                   |      |   |  |   | 21.3  |  
|Equity earnings of unconsolidated and consolidated subsidiaries                                     |  |        | (30.7 | ) |                      |   | (27.5 | )                         |  |   | (1.5         | ) |  |                   | 58.2  |   |  |   | (1.5  | )
|Loss on repayment of debt                                                                           |  |        | 0.1   |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 0.1   |  
|Loss on foreign currency exchange                                                                   |  |        | 7.9   |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 7.9   |  
|Amortization of deferred financing fees, net of amortization                                        |  |        | 3.0   |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 3.0   |  
|Impairment of assets                                                                                |  |        | 2.0   |   |                      |   |      |                           |  |   | 3.0          |   |  |                   |      |   |  |   | 5.0   |  
|Other changes, net                                                                                  |  |        | 31.2  |   |                      |   | (3.5  | )                         |  |   | (37.1        | ) |  |                   |      |   |  |   | (9.4  | )
|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Net cash provided by (used in) operating activities                                                 |  |        | 3.5   |   |                      |   | (0.3  | )                         |  |   | 0.2          |   |  |                   |      |   |  |   | 3.4   |  
|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Cash flows from investing activities:                                                               |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Acquisition of assets                                                                               |  |        | (15.4 | ) |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | (15.4 | )
|Capital expenditures                                                                                |  |        | (3.3  | ) |                      |   |      |                           |  |   | (4.1         | ) |  |                   |      |   |  |   | (7.4  | )
|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Net cash used in investing activities                                                               |  |        | (18.7 | ) |                      |   |      |                           |  |   | (4.1         | ) |  |                   |      |   |  |   | (22.8 | )
|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Cash flows from financing activities:                                                               |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Changes in intercompany activity                                                                    |  |        | (3.5  | ) |                      |   |      |                           |  |   | 3.5          |   |  |                   |      |   |  |   |      |  
|Repayment of long-term debt (including current portion)                                             |  |        | (7.5  | ) |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | (7.5  | )
|Net decrease in short-term notes payable                                                            |  |        |      |   |                      |   |      |                           |  |   | (1.1         | ) |  |                   |      |   |  |   | (1.1  | )
|Payment of deferred financing fees                                                                  |  |        | (1.3  | ) |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | (1.3  | )
|Changes in restricted cash                                                                          |  |        | 5.3   |   |                      |   |      |                           |  |   |             |   |  |                   |      |   |  |   | 5.3   |  
|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Net cash (used in) provided by financing activities                                                 |  |        | (7.0  | ) |                      |   |      |                           |  |   | 2.4          |   |  |                   |      |   |  |   | (4.6  | )
|Effect of translation adjustments on cash                                                           |  |        |      |   |                      |   |      |                           |  |   | 4.9          |   |  |                   |      |   |  |   | 4.9   |  
|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Net increase (decrease) in cash and cash equivalents                                                |  |        | (22.2 | ) |                      |   | (0.3  | )                         |  |   | 3.4          |   |  |                   |      |   |  |   | (19.1 | )
|Cash and cash equivalents, beginning of period                                                      |  |        | 55.9  |   |                      |   | 0.5   |                           |  |   | 55.6         |   |  |                   |      |   |  |   | 112.0 |  
|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  
|Cash and cash equivalent, end of period                                                             |  | $      | 33.7  |   |                      | $ | 0.2   |                           |  | $ | 59.0         |   |  | $                 |      |   |  | $ | 92.9  |  
|                                                                                                    |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |       |   |  |   |       |  



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



Certain statements in this report constitute forward-looking statements as that term is defined under Section
21E of the Securities and Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words believe, expect, anticipate, intend, estimate,
plan and other expressions, that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Although forward-looking statements reflect managements good
faith beliefs, you should not place undue reliance 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; the purchasing plans or decisions
of our customers; 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.



Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States of America.
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 disclosures of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including our allowance for uncollectible accounts, inventory valuation and obsolescence, long-lived tangible and intangible assets, income taxes, reserve for 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. In our annual report on Form 10-K for the year ended December
31, 2003, we identified and disclosed critical accounting policies, which included reserves of uncollectible accounts receivable, inventory reserves, impairment of long-lived assets and goodwill, product warranties, income taxes, other contingencies
and pension and other post retirement benefit obligations. These critical accounting policies affect significant judgments and estimates used in the preparation of our financial statements. We reviewed our policies in conjunction with the
preparation of this report and have determined that those critical policies remain and have not changed since December 31, 2003.



Overview



We are a leading worldwide manufacturer and marketer of highly engineered energy infrastructure and oilfield products and services. In 2003, approximately
85% of our revenues were generated from energy infrastructure and oilfield equipment spending. Our customers use our products for the exploration and production, transportation, and processing, storage and distribution of oil and gas and their
by-products. Our principal business segments are flow control, measurement systems and compression and power systems. We serve the energy industry globally, with an established sales presence in over 100 countries and manufacturing or customer
support facilities in over 22 countries. In the six months ended June 30, 2004, approximately 57% of our revenues were generated from our operations outside of the United States, and we expect this percentage to increase going forward.



On June 4, 2004, we completed the purchase of the distribution business of
Nuovo Pignone S.p.A., a subsidiary of General Electric Company, for approximately $170 million and approximately $1.5 million in direct acquisition costs. The purchased business includes the retail fueling systems operation, comprised of gasoline,
liquefied petroleum gas and compressed natural gas dispenser products and services, and a gas meters operation, which manufactures and markets certain natural gas meters. This business generated $151.4 of revenues in the year ended December 31,
2003. The acquisition is expected to substantially improve our market share in retail fueling, be complementary from a customer, product and geographical perspective and provide us with substantial cost saving opportunities. To finance the cash
consideration related to the acquisition, we obtained additional borrowings under our existing credit facility in the amount of $175 million, which included $3.2 million of capitalized financing fees. The results of operations for this business are
reflected in our measurement systems segment as of the beginning of June 2004.



Market Forces; Outlook



Our product offerings
include valves, instruments, meters, 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.



There are several key indicators that drive our business. Over
the long term, demand for energy infrastructure and oilfield equipment is driven by fluctuations in worldwide economic activity and energy consumption, which is a function of global population, industrial growth, the levels of energy consumption per
capita and changes in energy usage patterns. In the short term, demand for our



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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, as well as our customers access to capital. Activity levels can
vary substantially in different geographic regions throughout the world. For example, in recent years U.S. markets have been relatively weak while international markets have been relatively strong. 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. Currently, oil and gas prices are high and our oil company customers are experiencing increased cash flow. Our business is subject to
cyclicality and periodic downturns, which have caused revenue and earnings to decline in the past. Our customers perception of oil and gas prices in the near-to-long-term will impact our business, and as such, continued expectation of higher
prices will correspond to strengthening in our business. See Certain Risk FactorsOur operating results could be harmed during economic or industry downturns.



We believe that in order to maintain our competitiveness, we need to continue to focus on operational efficiency and cash
flow. This focus includes our on-going other initiatives to increase manufacturing efficiencies, consolidate raw material sources, increase global procurement and improve working capital efficiency. We have improved global procurement through
increased coordination among our business units and increased outsourcing of non-core manufacturing functions. In addition, we are implementing firm-wide lean manufacturing initiatives, a new enterprise resource planning, or ERP, system and a highly
disciplined company-wide quality management and process optimization methodology, known as Six Sigma. See Restructuring and Other Exit Activities below for information related to specific restructuring programs.



Flow Control. Demand for our on/off valves is generally driven by
development of oil and natural gas reserves as well as pipeline construction. In recent years, the U.S. experienced a slowdown in both of these areas which has affected our on/off valves business. There continues to be strong development activity in
international areas such as offshore Brazil, onshore and offshore West Africa, the Middle East, Asia, and Russia. We have been successful in winning many international tenders and have seen a corresponding shift in our on/off valves business. Some
of these projects, such as the $49.0 million Barracuda-Caratinga project in 2002, are substantial in size and may cause our revenues to fluctuate significantly from period to period. The market environment in 2004 is relatively weak in the U.S., but
relatively strong internationally.



There is a significant
component of aftermarket sales associated with the control valve product line. In the first half of 2004, we have seen indications of improving demand for aftermarket parts. In the last several years leading up to 2003, there was a slowdown in
aftermarket sales in the U.S. and, to a lesser extent, in Europe. In 2003, these aftermarket sales stabilized, but did not show much, if any, rebound as industry activity began to pick up. International demand for new valve construction projects is
strong while the U.S. market is stable. We have also been successful in expanding our control valve business in certain new markets such as power generation and floating production systems.



In the first half of 2004, we have seen indications of improving market
conditions in our pressure relief, natural gas solutions and instruments product lines. In the pressure relief product line, aftermarket sales have been relatively weak in the U.S. and Europe, partially offset by growth in other international sales
In the natural gas solutions product line (formerly the metering and piping specialties product line) in 2003, relatively weak demand in the U.S. business was offset by growing international sales in Asia, Europe, and South America. A substantial
part of the instrument product line has exposure to industries outside of energy. In 2003, a weak manufacturing economy in the U.S. negatively affected product sales, partially offset by the introduction of new products.



Measurement Systems In the second quarter of 2004, new
equipment sales to independents and high volume retailers are strong, although we continue to experience low spending levels from the major oil companies. Internationally, we see increased market activity from the national oil companies in Latin
America, Eastern Europe and Asia and we have been successful in a number of recent tenders. In North America, we continue to benefit from increased sales volume and incremental margins from the acquisition of certain assets of Tokheim North America
and its MSI business unit, which we purchased in a bankruptcy court auction in 2003. The rollout of several point-of-sale systems to major oil companies in the U.S. continued in the second quarter and is expected to continue through 2004.



On June 4, 2004, we completed the purchase of the Nuovo
Pignone distribution business for approximately $170 million and approximately $1.5 million in direct acquisition costs. The purchased business includes a retail fueling systems operation, comprised of gasoline, liquefied petroleum gas and
compressed natural gas dispenser products and services, and a gas meters operation, which manufactures and markets certain natural gas meters. This business generated $151.4 million of revenues in the year ended December 31, 2003. The acquisition is
expected to substantially improve our market share in retail fueling, be complementary from a customer, product and geographical perspective and provide us with substantial cost saving opportunities.



Compression and Power Systems. In the second quarter of 2004, gas
compression-related engine and parts sales have begun to recover from last years depressed level. U.S. activity is expected to strengthen throughout the remainder of the year, while recent strong Canadian activity is expected to slow down in
the next few months. Engine sales into power generation applications remains relatively strong, although competition based upon price and engine efficiency remains intense in this segment. The domestic power



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generation market is expected to remain flat while international markets for engines and parts are relatively strong,
especially in Pakistan, Bangladesh and South America.



Restructuring and
Other Exit Activities



We have initiated restructuring
programs affecting several business units in an effort to obtain manufacturing efficiencies and cost savings. In 2003, we eliminated five of our manufacturing facilities through consolidations and outsourced manufacturing at one additional site. We
plan to continue to seek opportunities to improve our manufacturing operations. As a result, we expect to incur additional restructuring charges in the second half of 2004, although we expect these expenses to be substantially lower than the charges
in the second half of 2003. In accordance with SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities we recognize costs associated with exit or disposal activities as incurred rather than at the date of a
commitment to an exit or disposal plan.



We incurred $1.3
million and $4.8 million of restructuring charges for the three and six months ended June 30, 2004. Restructuring charges of $0.3 million and $4.5 million have been reflected in cost of revenues and selling, engineering, general and administrative
expenses, respectively for the six months ended June 30, 2004. In our condensed consolidated statements of operations. During the first six months of 2004, we incurred costs in connection with the continuation of (1) a consolidation of an instrument
operation in Berea, Kentucky with existing operations in Brazil into a new facility in Sao Caetano, Brazil, (2) a consolidation of a control valve operation in Burlington, Canada into existing facilities, (3) a consolidation of certain flow control
operations in Houston, Texas into a single new facility, and (4) a decision to outsource the manufacturing of certain blowers. The costs associated with these actions were incurred primarily by our Flow Control segment and are as follows:



|                                               |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|---------------------------------------------- |  | ------------------- | --- | ------------ | - | ---- | --------------- |  | - | ------------------- | - |  | - | ---
|Description                                    |  | RestructuringCharge |     | CashPayments |   |      | Non-CashCharges |  |   | Accrued at6/30/2004
|                                               |  | (in millions)      
|Consolidate Berea operations                   |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|Other exit activities                          |  | $                   | 0.3 |              | $ | (0.1 | )               |  | $ | (0.2                | ) |  | $ |   
|Consolidate Burlington operations              |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|Termination benefits                           |  |                     | 2.3 |              |   | (0.9 | )               |  |   |                    |   |  |   | 1.4
|Consolidate Houston operations                 |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |   
|Termination benefits                           |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                    |   |  |   |   
|Other exit activities                          |  |                     | 2.0 |              |   | (1.9 | )               |  |   |                    |   |  |   | 0.1
|Outsource the manufacturing of certain blowers |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |   
|Termination benefits                           |  |                     | 0.1 |              |   |     |                 |  |   |                    |   |  |   | 0.1
|                                               |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    
|Total                                          |  | $                   | 4.8 |              | $ | (3.0 | )               |  | $ | (0.2                | ) |  | $ | 1.6
|                                               |  |                     |     |              |   |      |                 |  |   |                     |   |  |   |    



In 2003, we incurred
approximately $21.4 million in charges as a result of a decision to (1) consolidate a valve operation in Germany (EDG) into an existing facility in Italy, (2) consolidate an instrument operation in Shelton, Connecticut into an existing facility in
Stratford, Connecticut, (3) consolidate an instrument operation in Berea, Kentucky with existing operations in Brazil into a new facility in Sao Caetano, Brazil, (4) consolidate a retail fueling dispenser manufacturing operation in Germany into an
existing facility in Sweden, (5) consolidate two Canadian retail fueling dispenser plant operations, (6) consolidate certain flow control operations in Houston, Texas into a new facility, (7) outsource the manufacturing of certain blowers, (8)
consolidate a control valve operation in Burlington, Canada into existing facilities and (9) continue a reduction in our workforce. Accrued liabilities at June 30, 2004 related to the 2003 restructuring initiatives are as follows:



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|                                               |  |                       |     |               |   |      |                    |  |                     |   |  |   |    
|---------------------------------------------- |  | --------------------- | --- | ------------- | - | ---- | ------------------ |  | ------------------- | - |  | - | ---
|Description                                    |  | Accrued at 12/31/2003 |     | Cash Payments |   |      | Change in Estimate |  | Accrued at6/30/2004
|                                               |  | (in millions)        
|Consolidate Berea operations                   |  |                       |     |               |   |      |                    |  |                     |   |  |   |    
|Termination benefits                           |  | $                     | 1.5 |               | $ | (1.5 | )                  |  | $                   |  |  | $ |   
|Consolidate German retail fueling operations   |  |                       |     |               |   |      |                    |  |                     |   |  |   |    
|Termination benefits                           |  |                       | 3.2 |               |   | (2.6 | )                  |  |                     |  |  |   | 0.6
|Outsource the manufacturing of certain blowers |  |                       |     |               |   |      |                    |  |                     |   |  |   |    
|Termination benefits                           |  |                       | 1.7 |               |   | (0.1 | )                  |  |                     |  |  |   | 1.6
|Other exit activities                          |  |                       | 0.1 |               |   | (0.1 | )                  |  |                     |  |  |   |   
|Consolidate Burlington operations              |  |                       |     |               |   |      |                    |  |                     |   |  |   |    
|Termination benefits                           |  |                       | 0.8 |               |   | (0.8 | )                  |  |                     |  |  |   |   
|Consolidate Houston operations                 |  |                       |     |               |   |      |                    |  |                     |   |  |   |    
|Termination benefits                           |  |                       | 1.3 |               |   | (1.0 | )                  |  |                     |  |  |   | 0.3
|Company wide reduction in force                |  |                       |     |               |   |      |                    |  |                     |   |  |   |    
|Termination benefits                           |  |                       | 0.2 |               |   |     |                    |  |                     |  |  |   | 0.2
|                                               |  |                       |     |               |   |      |                    |  |                     |   |  |   |    
|Total                                          |  | $                     | 8.8 |               | $ | (6.1 | )                  |  | $                   |  |  | $ | 2.7
|                                               |  |                       |     |               |   |      |                    |  |                     |   |  |   |    



Results of Operations



Three months ended June 30, 2004 compared to the
three months ended June 30, 2003



The following table
presents selected financial information regarding consolidated results for the three months ended June 30, 2004 and 2003, respectively.



|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | --------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Three months ended June 30, |      
|                                                          |  | 2004                        |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | ($ in millions)             |      
|Revenue                                                   |  | $                           | 495.9 |             | 100.0 | % |      | $ | 394.9       |  | 100.0 | %        |  | $ | 101.0    |   |  | 25.6  | %
|Cost of revenue                                           |  |                             | 352.5 |             | 71.1  |   |      |   | 293.8       |  | 74.4  |          |  |   | 58.7     |   |  | 20.0  |  
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                             | 143.4 |             | 28.9  |   |      |   | 101.1       |  | 25.6  |          |  |   | 42.3     |   |  | 41.8  |  
|Selling, engineering, administrative and general expenses |  |                             | 103.7 |             | 20.9  |   |      |   | 95.1        |  | 24.1  |          |  |   | 8.6      |   |  | 9.0   |  
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                           | 39.7  |             | 8.0   | % |      | $ | 6.0         |  | 1.5   | %        |  | $ | 33.7     |   |  | NM    | %
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|                                                          |  |                             |       |             |       |  
|Other items:                                              |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                           | 11.4  |             |       |   |      | $ | 10.8        |  |       |          |  | $ | 0.6      |   |  | 5.6   | %
|Restructuring charges                                     |  |                             | 1.3   |             |       |   |      |   | 2.2         |  |       |          |  |   | (0.9     | ) |  | (40.9 | )
|Bookings                                                  |  |                             | 507.7 |             |       |   |      |   | 448.4       |  |       |          |  |   | 59.3     |   |  | 13.2  |  
|Backlog                                                   |  |                             | 559.7 |             |       |   |      |   | 458.7       |  |       |          |  |   | 101.0    |   |  | 22.0  |  



Revenues.
Revenues from our flow control segment increased due to strengthening U.S. and international demand in our natural gas solutions, control valves and pressure relief product lines. Revenues from our measurement segment increased due to strengthening
U.S. demand for dispensers and the acquisition of the Nuovo Pignone distribution business in June 2004. Revenues from our compression and power systems segment experienced strengthening demand for natural gas engines and power generation related
products. All of our segments experienced the favorable impact of changes in foreign currency exchange rates.



Gross Profit. As a percentage of revenues, gross profit increased to 28.9% in the three months ended June 30, 2004 from 25.6% in the comparable
2003 period. The increase was primarily due to volume increases and the impact of cost reduction efforts across our segments. Gross profit in 2003 was negatively impacted by the effect of the strike at our Waukesha facility.



Selling, engineering, administrative, and general expenses. Selling,
engineering, administrative, and general expenses increased due to higher commissions and marketing expenses related to volume growth, incremental expenses related to the acquisition of the Nuovo Pignone distribution business in June 2004 and the
unfavorable impact of changes in foreign currency exchange rates. These increases were partially offset by lower salaries and employee expenses resulting from workforce reductions in late 2003 and early 2004.



Operating income. Operating income increased due to the factors
discussed above.



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Bookings and Backlog. Bookings increased across all of our segments due to increased demand and
improved market conditions. Backlog increased due to the acquisition of the Nuovo Pignone distribution business in June 2004 and strengthening demand in our control valves and pressure relief product lines. Also contributing to the increase was
higher demand for blowers in waste water treatment in China and the Middle East.



Flow Control



The
following table presents selected financial information regarding results for our Flow Control segment for the three months ended June 30, 2004 and 2003, respectively.



|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|--------------------------------------------------------- |  | --------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ---- | --
|                                                          |  | Three months ended June 30, |      
|                                                          |  | 2004                        |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | ($ in millions)             |      
|Revenue                                                   |  | $                           | 295.7 |             | 100.0 | % |      | $ | 248.0       |  | 100.0 | %        |  | $ | 47.7     |   |  | 19.2 | % 
|Cost of revenue                                           |  |                             | 208.4 |             | 70.5  |   |      |   | 176.1       |  | 71.0  |          |  |   | 32.3     |   |  | 18.3 |   
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|Gross profit                                              |  |                             | 87.3  |             | 29.5  |   |      |   | 71.9        |  | 29.0  |          |  |   | 15.4     |   |  | 21.4 |   
|Selling, engineering, administrative and general expenses |  |                             | 65.9  |             | 22.3  |   |      |   | 52.8        |  | 21.3  |          |  |   | 13.1     |   |  | 24.8 |   
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|Operating income                                          |  | $                           | 21.4  |             | 7.2   | % |      | $ | 19.1        |  | 7.7   | %        |  | $ | 2.3      |   |  | 12.0 | % 
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|                                                          |  |                             |       |             |       |  
|Other items:                                              |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|Depreciation and amortization                             |  | $                           | 5.7   |             |       |   |      | $ | 6.1         |  |       |          |  | $ | (0.4     | ) |  | (6.6 | )%
|Restructuring charges                                     |  |                             | 1.2   |             |       |   |      |   | 1.2         |  |       |          |  |   |         |   |  |     |   
|Bookings                                                  |  |                             | 273.9 |             |       |   |      |   | 270.6       |  |       |          |  |   | 3.3      |   |  | 1.2  |   
|Backlog                                                   |  |                             | 356.0 |             |       |   |      |   | 348.6       |  |       |          |  |   | 7.4      |   |  | 2.1  |   



Revenues.Higher sales volume in our on/off product line was partially offset by the sale of our LVF unit, a small valves unit in Italy in late 2003, which contributed approximately $5.8 million of revenue in the second quarter of 2003. Our natural gas
solutions product line experienced an increase due to higher sales volume as a result of improvement in the U.S. market. Our control valves and pressure relief product lines both experienced an increase driven by strengthening international demand
in Europe and Asia Pacific. Overall, our Flow Control segment has benefited from increased international demand and the favorable impact of changes in foreign currency exchange rates.



Gross profit.As a percentage of revenues, gross profit increased to 29.5% in the three months ended June 30, 2004
compared to 29.0% in the comparable 2003 period. The increase was primarily due to volume increases across our product lines.



Selling, engineering, administrative, and general expenses.Selling engineering, administrative and general expenses increased due to higher
commissions and marketing expenses related to volume growth, consulting fees at our Houston and Italian locations and the unfavorable impact of changes in foreign currency exchange rates.



Operating income. Operating income increased due to the factors discussed above.



Bookings and Backlog. Bookings increased in our control valves and
pressure relief product lines due to improved market conditions, partially offset by delayed project awards and a decrease in bookings from our on/off product line attributed to the sale of LVF, which had $ 7.4 million in bookings during the second
quarter of 2003. Backlog increased due to higher demand in our control valves and pressure relief product lines partially offset by a decrease from our on/off product line attributed to lower bookings, manufacturing throughput improvements and the
sale of LVF, which had $12.1 million in backlog at June 30, 2003.



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Measurement Systems



The following table presents selected financial information regarding results for our Measurement Systems segment for the
three months ended June 30, 2004 and 2003, respectively.



|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|--------------------------------------------------------- |  | --------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ------ | -
|                                                          |  | Three months ended June 30, |      
|                                                          |  | 2004                        |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | ($ in millions)             |      
|Revenue                                                   |  | $                           | 129.8 |             | 100.0 | % |      | $ | 92.0        |  | 100.0 | %        |  | $ | 37.8     |   |  | 41.1   | %
|Cost of revenue                                           |  |                             | 92.8  |             | 71.5  |   |      |   | 71.1        |  | 77.3  |          |  |   | 21.7     |   |  | 30.5   |  
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|Gross profit                                              |  |                             | 37.0  |             | 28.5  |   |      |   | 20.9        |  | 22.7  |          |  |   | 16.1     |   |  | 77.0   |  
|Selling, engineering, administrative and general expenses |  |                             | 18.8  |             | 14.5  |   |      |   | 16.1        |  | 17.5  |          |  |   | 2.7      |   |  | 16.8   |  
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|Operating income                                          |  | $                           | 18.2  |             | 14.0  | % |      | $ | 4.8         |  | 5.2   | %        |  | $ | 13.4     |   |  | NM     | %
|                                                          |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|                                                          |  |                             |       |             |       |  
|Other items:                                              |  |                             |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|Depreciation and amortization                             |  | $                           | 1.8   |             |       |   |      | $ | 1.3         |  |       |          |  | $ | 0.5      |   |  | 38.5   | %
|Restructuring charges                                     |  |                             |      |             |       |   |      |   | 0.8         |  |       |          |  |   | (0.8     | ) |  | (100.0 | )
|Bookings                                                  |  |                             | 143.5 |             |       |   |      |   | 102.7       |  |       |          |  |   | 40.8     |   |  | 39.7   |  
|Backlog                                                   |  |                             | 128.4 |             |       |   |      |   | 50.5        |  |       |          |  |   | 77.9     |   |  | 154.3  |  



Revenues.The
increase in revenues was primarily attributed to the acquisition of the Nuovo Pignone distribution business in June 2004 which contributed $13.5 million. Also contributing to the increase was higher sales volume in the United States related to
dispensers, parts and services, higher customer shipments in Europe and Brazil, and the favorable impact of changes in foreign currency exchange rates.



Gross Profit.As a percentage of revenues, gross profit increased to 28.5% in the three months ended June 30, 2004 compared to 22.7% in the
comparable 2003 period. Gross profit was positively impacted by cost reduction efforts in North America and Europe and the increase in sales volume. In addition, gross profit in the three months ended June 30, 2003 was negatively impacted by
transition services costs associated with our acquisition of certain assets of Tokheim North America in March 2003.



Selling, Engineering, Administrative and General Expenses.The increase in selling, engineering, administrative, and general expense was primarily
a result of the acquisition of the Nuovo Pignone distribution business in June 2004, which contributed $1.7 million in incremental expenses, and to a lesser extent, the unfavorable impact of changes in foreign currency exchange rates.



Operating Income.The increase in operating income was a result of
higher margins due to increased sales volume, productivity improvements, and the acquisition of the Nuovo Pignone distribution business in June 2004, which contributed $0.6 million in operating income. Also contributing to the increase were
non-recurring transition services costs related to the Tokheim acquisition in 2003.



Bookings and Backlog.Bookings increased due to strong demand for dispensers, systems and parts in both the United States and international markets and the acquisition of the Nuovo Pignone distribution
business, which contributed $12.4 million in June 2004. Backlog increased primarily due to the acquisition of the Nuovo Pignone distribution business which contributed $53.9 million at June 30, 2004, as well as a record booking month in June for
dispensers in North America.



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Compression and Power Systems



The following table presents selected financial information regarding results for our Compression and Power Systems segment
for the three months ended June 30, 2004 and 2003, respectively.



|                                                          |  |                             |      |             |       |   |      |   |      |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | --------------------------- | ---- | ----------- | ----- | - | ---- | - | ---- | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Three months ended June 30, |     
|                                                          |  | 2004                        |      | % ofRevenue |       |   | 2003 |   |      | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | ($ in millions)             |     
|Revenue                                                   |  | $                           | 71.9 |             | 100.0 | % |      | $ | 55.9 |             |  | 100.0 | %        |  | $ | 16.0     |   |  | 28.6  | %
|Cost of revenue                                           |  |                             | 52.8 |             | 73.4  |   |      |   | 47.5 |             |  | 85.0  |          |  |   | 5.3      |   |  | 11.2  |  
|                                                          |  |                             |      |             |       |   |      |   |      |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                             | 19.1 |             | 26.6  |   |      |   | 8.4  |             |  | 15.0  |          |  |   | 10.7     |   |  | 127.4 |  
|Selling, engineering, administrative and general expenses |  |                             | 11.3 |             | 15.7  |   |      |   | 12.7 |             |  | 22.7  |          |  |   | (1.4     | ) |  | (11.0 | )
|                                                          |  |                             |      |             |       |   |      |   |      |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                           | 7.8  |             | 10.9  | % |      | $ | (4.3 | )           |  | (7.7  | )%       |  | $ | 12.1     |   |  | NM    | %
|                                                          |  |                             |      |             |       |   |      |   |      |             |  |       |          |  |   |          |   |  |       |  
|                                                          |  |                             |      |             |       |  
|Other items:                                              |  |                             |      |             |       |   |      |   |      |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                           | 3.4  |             |       |   |      | $ | 2.7  |             |  |       |          |  | $ | 0.7      |   |  | 25.9  | %
|Restructuring charges                                     |  |                             | 0.1  |             |       |   |      |   | 0.2  |             |  |       |          |  |   | (0.1     | ) |  | (50.0 | )
|Bookings                                                  |  |                             | 90.3 |             |       |   |      |   | 74.9 |             |  |       |          |  |   | 15.4     |   |  | 20.6  |  
|Backlog                                                   |  |                             | 75.3 |             |       |   |      |   | 61.0 |             |  |       |          |  |   | 14.3     |   |  | 23.4  |  



Revenues.Revenues increased primarily due to higher sales of natural gas engines and parts, both of which were adversely impacted by strike related delays at our Waukesha, Wisconsin manufacturing plant beginning in May 2003. Power generation related
products also experienced improvement due to strengthening economic conditions and increased customer demand.



Gross Profit.As a percentage of revenues, gross profit increased to 26.6% in the three months ended June 30, 2004 from 15.0% in the comparable
2003 period. Gross profit in 2003 was negatively impacted by the effect of the strike at our Waukesha facility.



Selling, Engineering, Administrative and General Expenses.Selling, engineering, administrative and general expenses decreased due to a gain of $
1.7 million recorded on the sale of land and decreased salaries and employee expenses resulting from workforce reductions in late 2003 and early 2004.



Operating Income.Operating income increased primarily due to strike-related production delays that negatively impacted the three months ended June
30, 2003.



Bookings and Backlog.Bookings increased due
to higher demand for engines in our power systems business and parts in our international markets. Backlog increased primarily due to higher demand in blowers for waste water treatment in China and in the Middle East.



Reconciling Items, Including Corporate Expenses



Operating loss related to corporate and other expenses, net for the three
months ended June 30, 2004 was $7.7 million, or $5.9 million lower than in the same period in 2003. During the second quarter of 2003, we incurred approximately $5.8 million in expenses associated with the restatement and re-audit of our financial
statements.



Interest Expense



Interest expense for the three months ended June 30, 2004 was $18.5 million,
or $2.8 million lower than in the same period in 2003. The decrease was due to a reduction in interest rates and lower amortization of financing fees. During the first quarter of 2004, we wrote off $16.9 million of unamortized deferred financing
fees related to the early extinguishment of our Tranche B term loan.



Provision for Income Taxes



Provision for
income taxes for the three months ended June 30, 2004 was $4.0 million, or $4.0 million lower than in the same period in 2003. The decrease was due to the distribution of pretax income across geographical jurisdictions and use of net operating
losses in certain foreign jurisdictions for which a valuation allowance was recorded in prior periods. We have provided a full valuation allowance against our U.S. deferred tax assets and therefore, we have not provided any tax expense or benefit
related to our U.S. operations during the period.



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##### Table of Contents

Six months ended June 30, 2004 compared to the six months ended June 30, 2003



The following table presents selected financial information regarding
consolidated results for the six months ended June 30, 2004 and 2003, respectively



|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | ------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Six months ended June 30, |      
|                                                          |  | 2004                      |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | ($ in millions)           |      
|Revenue                                                   |  | $                         | 932.1 |             | 100.0 | % |      | $ | 766.3       |  | 100.0 | %        |  | $ | 165.8    |   |  | 21.6  | %
|Cost of revenue                                           |  |                           | 664.3 |             | 71.3  |   |      |   | 565.3       |  | 73.8  |          |  |   | 99.0     |   |  | 17.5  |  
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                           | 267.8 |             | 28.7  |   |      |   | 201.0       |  | 26.2  |          |  |   | 66.8     |   |  | 33.2  |  
|Selling, engineering, administrative and general expenses |  |                           | 208.4 |             | 22.4  |   |      |   | 183.7       |  | 24.0  |          |  |   | 24.7     |   |  | 13.4  |  
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                         | 59.4  |             | 6.3   | % |      | $ | 17.3        |  | 2.2   | %        |  | $ | 42.1     |   |  | NM    | %
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|                                                          |  |                           |       |             |       |  
|Other items:                                              |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                         | 22.6  |             |       |   |      | $ | 21.3        |  |       |          |  | $ | 1.3      |   |  | 6.1   | %
|Restructuring charges                                     |  |                           | 4.8   |             |       |   |      |   | 9.4         |  |       |          |  |   | (4.6     | ) |  | (48.9 | )
|Bookings                                                  |  |                           | 954.1 |             |       |   |      |   | 863.4       |  |       |          |  |   | 90.7     |   |  | 10.5  |  
|Backlog                                                   |  |                           | 559.7 |             |       |   |      |   | 458.7       |  |       |          |  |   | 101.0    |   |  | 22.0  |  



Revenues.Revenues in our flow control segment increased due to strengthening U.S. and international demand in our natural gas solutions, control valves and pressure relief product lines. Revenues from our measurement systems segment increased due to
strengthening U.S. demand for dispensers and the acquisition of the Nuovo Pignone distribution business in June 2004. Revenues from our compression and power systems segment experienced strengthening demand for natural gas engines and power
generation related products. All of our segments experienced the favorable impact of foreign currency exchange rates.



Gross Profit.As a percentage of revenues, gross profit increased to 28.7% in the six months ended June 30, 2004 from 26.2% in the comparable 2003
period. The increase was primarily due to volume increases across our segments and cost reduction efforts in North America and Europe. Gross profit in 2003 was negatively impacted by the effect of the strike at our Waukesha facility.



Selling, engineering, administrative, and general expenses. Selling,
engineering, administrative, and general expenses increased due to higher commissions and marketing expenses related to volume growth and incremental expenses related to the Nuovo Pignone distribution business acquisition. In addition, all of our
segments were negatively impacted by the effect of foreign currency exchange rates.



Operating income. Operating income increased due to the factors discussed above.



Bookings and Backlog. Bookings increased across all of our segments due to increased demand, improved market conditions and the acquisition of the
Nuovo Pignone distribution business in June 2004, partially offset by a decrease from our on/off product line attributed to the sale of LVF in 2003. Backlog increased due to the acquisition of the Nuovo Pignone distribution business in June 2004 and
strengthening demand in our control valves and pressure relief product lines. Also contributing to the increase was higher demand in blowers for waste water treatment in China and the Middle East.



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Flow Control



The following table presents selected financial information regarding results for our Flow Control segment for the six
months ended June 30, 2004 and 2003, respectively.



|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|--------------------------------------------------------- |  | ------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ---- | --
|                                                          |  | Six months ended June 30, |      
|                                                          |  | 2004                      |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | ($ in millions)           |      
|Revenue                                                   |  | $                         | 551.5 |             | 100.0 | % |      | $ | 475.5       |  | 100.0 | %        |  | $ | 76.0     |   |  | 16.0 | % 
|Cost of revenue                                           |  |                           | 391.0 |             | 70.9  |   |      |   | 338.6       |  | 71.2  |          |  |   | 52.4     |   |  | 15.5 |   
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|Gross profit                                              |  |                           | 160.5 |             | 29.1  |   |      |   | 136.9       |  | 28.8  |          |  |   | 23.6     |   |  | 17.2 |   
|Selling, engineering, administrative and general expenses |  |                           | 128.7 |             | 23.3  |   |      |   | 106.8       |  | 22.5  |          |  |   | 21.9     |   |  | 20.5 |   
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|Operating income                                          |  | $                         | 31.8  |             | 5.8   | % |      | $ | 30.1        |  | 6.3   | %        |  | $ | 1.7      |   |  | 5.6  | % 
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|                                                          |  |                           |       |             |       |  
|Other items:                                              |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |      |   
|Depreciation and amortization                             |  | $                         | 11.4  |             |       |   |      | $ | 12.0        |  |       |          |  | $ | (0.6     | ) |  | (5.0 | )%
|Restructuring charges                                     |  |                           | 4.7   |             |       |   |      |   | 3.4         |  |       |          |  |   | 1.3      |   |  | 38.2 |   
|Bookings                                                  |  |                           | 549.8 |             |       |   |      |   | 547.1       |  |       |          |  |   | 2.7      |   |  | 0.5  |   
|Backlog                                                   |  |                           | 356.0 |             |       |   |      |   | 348.6       |  |       |          |  |   | 7.4      |   |  | 2.1  |   



Revenues.Higher sales volume in our on/off product line was partially offset by the sale of our LVF unit in late 2003, which contributed approximately $11.8 million of revenue in the first six months of 2003. Our natural gas solutions product line
experienced an increase due to higher sales volume resulting from improvements in our domestic markets. Our control valves product line and pressure relief product line both experienced an increase driven by strengthening international demand in
Europe and Asia Pacific. Overall, our Flow Control segment has benefited from increased international demand and the favorable impact of changes in foreign currency exchange rates.



Gross Profit.As a percentage of revenues, gross profit increased slightly to 29.1% in the six months ended June 30,
2004 compared to 28.8% in the comparable 2003 period. The increase was primarily due to volume increases across our product lines.



Selling, Engineering, Administrative and General Expenses.Selling, engineering, administrative and general expenses increased due to higher
commissions and marketing expenses related to volume growth, consulting fees at our Houston and Italian locations and restructuring charges incurred primarily by our on/off and control valves product lines. Also contributing to the increase was the
unfavorable impact of changes in foreign currency exchange rates.



Operating Income.Operating income increased due to the factors discussed above.



Bookings and Backlog.Bookings were flat resulting from increases in our control valves and pressure relief product lines due to improved market
conditions offset by a decrease from our on/off product line attributed to the sale of LVF in 2003, which had $11.5 million in bookings for the six months ended June 30, 2003. Backlog increased due to higher demand in our control valves and pressure
relief product lines, partially offset by a decrease from our on/off product line attributed to the sale of LVF, which had $12.1 million in backlog at June 30, 2003.



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Measurement Systems



The following table presents selected financial information regarding results for our Measurement Systems segment for the
six months ended June 30, 2004 and 2003, respectively.



|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|--------------------------------------------------------- |  | ------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ------ | -
|                                                          |  | Six months ended June 30, |      
|                                                          |  | 2004                      |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | ($ in millions)           |      
|Revenue                                                   |  | $                         | 227.5 |             | 100.0 | % |      | $ | 167.0       |  | 100.0 | %        |  | $ | 60.5     |   |  | 36.2   | %
|Cost of revenue                                           |  |                           | 162.6 |             | 71.5  |   |      |   | 129.8       |  | 77.7  |          |  |   | 32.8     |   |  | 25.3   |  
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|Gross profit                                              |  |                           | 64.9  |             | 28.5  |   |      |   | 37.2        |  | 22.3  |          |  |   | 27.7     |   |  | 74.5   |  
|Selling, engineering, administrative and general expenses |  |                           | 34.6  |             | 15.2  |   |      |   | 33.1        |  | 19.8  |          |  |   | 1.5      |   |  | 4.5    |  
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|Operating income                                          |  | $                         | 30.3  |             | 13.3  | % |      | $ | 4.1         |  | 2.5   | %        |  | $ | 26.2     |   |  | NM     | %
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|                                                          |  |                           |       |             |       |  
|Other items:                                              |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |        |  
|Depreciation and amortization                             |  | $                         | 3.0   |             |       |   |      | $ | 2.8         |  |       |          |  | $ | 0.2      |   |  | 7.1    | %
|Restructuring charges                                     |  |                           |      |             |       |   |      |   | 5.7         |  |       |          |  |   | (5.7     | ) |  | (100.0 | )
|Bookings                                                  |  |                           | 240.9 |             |       |   |      |   | 170.0       |  |       |          |  |   | 70.9     |   |  | 41.7   |  
|Backlog                                                   |  |                           | 128.4 |             |       |   |      |   | 50.5        |  |       |          |  |   | 77.9     |   |  | 154.3  |  



Revenues.Increased dispenser sales were related to independent and high volume retailers. Also contributing to the increase were the acquisition of the Nuovo Pignone distribution business in June 2004, which contributed $13.5 million, the acquisition of
certain assets of Tokheim North America in March 2003, higher customer shipments in Europe and Brazil, and the favorable impact of changes in foreign currency exchange rates.



Gross Profit.As a percentage of revenues, gross profit increased to 28.5% in the six months ended June 30, 2004
compared to 22.3% in the comparable 2003 period. Gross profit in 2004 was positively impacted by cost reduction efforts in North America and Europe, the increase in sales volume and the favorable impact of changes in foreign currency exchange rates.
In addition, gross profit in the six months ended June 30, 2003 was negatively impacted by transition services costs associated with our acquisition of certain assets of Tokheim North America in March 2003.



Selling, Engineering, Administrative and General Expenses.Selling,
engineering, administrative, and general expenses were comparable to 2003 despite higher expenses due to the acquisition of the Nuovo Pignone distribution business, the unfavorable impact of changes in foreign currency exchange rates and six months
of expenses related to Tokheim in 2004, which was acquired in March 2003. Expenses for the six months ended June 30, 2003 included restructuring charges related to the consolidation of retail fueling dispenser operations in Germany and Canada.



Operating Income.The increase in operating income was
a result of higher margins due to increased sales volume, productivity improvements, and the Nuovo Pignone distribution business acquisition in June 2004, which contributed $0.6 million in operating income. Also contributing to the increase were
non-recurring transition services costs related to the Tokheim acquisition in 2003.



Bookings and Backlog.Bookings increased due to strong demand for dispensers, systems and parts in both the United States and international markets and the acquisition of the Nuovo Pignone distribution business
which contributed $12.4 million in June 2004. Backlog increased primarily due to the acquisition of the Nuovo Pignone distribution business, which contributed $53.9 million at June 30, 2004, as well as a record booking month in June for dispensers
in North America.



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Compression and Power Systems



The following table presents selected financial information regarding results for our Compression and Power Systems segment
for the six months ended June 30, 2004 and 2003, respectively.



|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | ------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Six months ended June 30, |      
|                                                          |  | 2004                      |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | ($ in millions)           |      
|Revenue                                                   |  | $                         | 156.3 |             | 100.0 | % |      | $ | 126.1       |  | 100.0 | %        |  | $ | 30.2     |   |  | 23.9  | %
|Cost of revenue                                           |  |                           | 113.9 |             | 72.9  |   |      |   | 99.1        |  | 78.6  |          |  |   | 14.8     |   |  | 14.9  |  
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                           | 42.4  |             | 27.1  |   |      |   | 27.0        |  | 21.4  |          |  |   | 15.4     |   |  | 57.0  |  
|Selling, engineering, administrative and general expenses |  |                           | 25.5  |             | 16.3  |   |      |   | 23.7        |  | 18.8  |          |  |   | 1.8      |   |  | 7.6   |  
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                         | 16.9  |             | 10.8  | % |      | $ | 3.3         |  | 2.6   | %        |  | $ | 13.6     |   |  | NM    | %
|                                                          |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|                                                          |  |                           |       |             |       |  
|Other items:                                              |  |                           |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                         | 6.9   |             |       |   |      | $ | 5.5         |  |       |          |  | $ | 1.4      |   |  | 25.5  | %
|Restructuring charges                                     |  |                           | 0.1   |             |       |   |      |   | 0.3         |  |       |          |  |   | (0.2     | ) |  | (66.7 | )
|Bookings                                                  |  |                           | 163.4 |             |       |   |      |   | 146.3       |  |       |          |  |   | 17.1     |   |  | 11.7  |  
|Backlog                                                   |  |                           | 75.3  |             |       |   |      |   | 61.0        |  |       |          |  |   | 14.3     |   |  | 23.4  |  



Revenues.Revenues increased primarily due to higher sales of natural gas engines and parts which were driven by strike related delays at our Waukesha, Wisconsin manufacturing plant and natural gas compression production delays in 2003. Power generation
and natural gas compression related products also improved due to stronger customer orders during the first half of 2004 and overall strengthening customer demand.



Gross Profit.As a percentage of revenues, gross profit increased to 27.1% in the six months ended June 30, 2004 from
21.4% in the comparable 2003 period. Gross profit in the 2004 period was positively impacted by higher volume and favorable production efficiency. Gross profit in the six months ended June 30, 2003 was negatively impacted by the effect of the strike
at our Waukesha plant.



Selling, Engineering, Administrative
and General Expenses.The slight increase in selling, engineering, administrative and general expenses was primarily due to higher employee separation costs resulting from a reduction in workforce and the replacement of senior management,
partially offset by a gain of $1.7 million recorded on the sale of land.



Operating Income.Operating income increased primarily due to overall stronger customer demand, the gain recorded on the sale of land in 2004 and the negative effects of strike-related production delays in
2003.



Bookings and Backlog.Bookings increased due to
higher demand for engines in our power systems business and parts in our international markets. Backlog increased primarily due to higher demand in blowers for waste water treatment in China and the Middle East.



Reconciling Items, Including Corporate Expenses



Operating loss related to corporate and other expenses, net for the six
months ended June 30, 2004 was $19.6 million, or $0.6 million lower than in the same period in 2003. The 2003 period included consulting, auditing and legal fees associated with the reaudit of our 2001 and 2002 financial statements. The 2004 period
includes fees incurred in connection with the audit of our financial statements, costs associated with the retirement of senior management and the retirement of our former chief executive officer.



Interest Expense



Interest expense for the six months ended June 30, 2004 was $54.5 million,
or $12.8 million higher than in the same period in 2003. The increase was due to the write-off of $16.9 million of unamortized deferred financing fees in March 2003 partially offset by a reduction in interest rates.



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Provision for Income Taxes



Provision for income taxes for the six months ended June 30, 2004 was $7.2 million, or $3.0 million lower than in the same
period in 2003. The decrease was due to the distribution of pretax income across geographical jurisdictions and use of net operating losses in certain foreign jurisdictions for which a valuation allowance was recorded in prior periods. We have
provided a full valuation allowance against our U.S. deferred tax assets and therefore, we have not provided any tax expense or benefit related to our U.S. operations during the period.



Liquidity and Capital Resources



Our primary source of cash is from operations. The primary cash uses are to fund principal and interest payments on our debt, provide working capital and
fund 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 $90.4 million and $92.9 million as of June 30, 2004 and 2003, respectively. A significant portion
of our cash and equivalents is utilized in our international operations and may not be immediately available to service debt in the United States.



Net cash flows used in operating activities were $5.7 million for the six months ended June 30, 2004, primarily due to an increase in receivables
associated with higher sales volume.



Net cash flows used in
investing activities were $199.7 million for the six months ended June 30, 2004, resulting from capital expenditures and the acquisition of the Nuovo Pignone distribution business in June 2004 for $170 million.



Net cash flows from financing activities were $147.7 million for the six
months ended June 30, 2004, resulting primarily from a $25 million prepayment of our Tranche C term loan and the $175 million add-on to our Tranche C term loan in June 2004.



|                                                                                 |  |   |        
|-------------------------------------------------------------------------------- |  | - | -------
|Total long-term debt, including current maturities outstanding at June 30, 2004: |  |   |        
|Tranche C term loan                                                              |  | $ | 410.0  
|Senior unsecured term loan                                                       |  |   | 125.0  
|9 3/8% senior subordinated notes                                                 |  |   | 554.7  
|Other debt                                                                       |  |   | 6.8    
|                                                                                 |  |   |        
|Total long-term debt, including current maturities                               |  | $ | 1,096.5
|                                                                                 |  |   |        



In March 2004, we
completed a refinancing of approximately $382 million of our Tranche B term loan under our existing senior secured credit facility with a new six-year $125 million senior unsecured term loan, and a new $260 million Tranche C term loan under our
senior secured credit facility. The Tranche B term loan was paid in full with the completion of the refinancing. The $125 million senior unsecured term loan bears an interest rate of LIBOR (1.61% at June 30, 2004) plus 3.5% and the Tranche C term
loan bears an interest rate of LIBOR plus 2.5%. We elected to prepay $25 million of our Tranche C term loan at the time the refinancing was completed. The covenants contained in the agreement governing our new senior unsecured term loan are similar
to those included in the indenture governing our senior subordinated notes. In connection with the refinancing, we expensed approximately $16.9 million in deferred financing costs associated with the Tranche B term loan, which was reflected in
interest expense on our existing condensed consolidated statement of operations.



In June 2004, in conjunction with the Nuovo Pignone distribution business acquisition we obtained an additional $175 million of borrowings under our Tranche C term loan, which included approximately $3.2 million in
capitalized financing fees. On July 30,



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2004, we made an optional prepayment of $10.0 million to the Tranche C term loan under our existing credit facility. As a
result of the optional prepayment, no mandatory principal payments are due on our Tranche C term loan until March 31, 2006.



As of June 30, 2004, we had $554.7 million of senior subordinated notes, including a $4.7 million premium, $410.0 million of debt under the Tranche C term
loan, $125.0 million under the senior unsecured term loan and $6.8 million of other long-term debt. In addition, we have a $100.0 million revolving credit facility, of which $55.4 million was available subject to certain conditions, and $44.6
million was utilized for letters of credit as of June 30, 2004.



Required payments of outstanding debt consist of $1.7 million in 2004, $7.9 million in 2005, $6.1 million in 2006, $5.4 million in 2007, $200.9 million in 2008 and $874.5 million thereafter.



We believe cash flow from operating activities combined with availability
under our senior secured credit facility will be sufficient to enable us to meet our cash flow needs for the next twelve months.



Our long-term ability to make payments and to refinance our indebtedness, including our existing credit facility and our senior subordinated notes, to
achieve specified ratios required under our credit agreement, and to fund future acquisitions, 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 our new credit facility will be adequate to meet our future liquidity needs for at least the next few years. We cannot be assured, 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 new credit facility in an amount
sufficient to enable us to achieve our financial ratios or to pay or refinance our indebtedness, including our existing credit facility or our senior subordinated notes, or to fund our acquisition strategy or meet our other liquidity needs. If we
are unable to achieve the financial ratios specified in our new credit facility, we could 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, which could adversely impact our future earnings. We may need to refinance all or a portion of our indebtedness, including our senior subordinated
notes on or before maturity. We cannot be assured that we will be able to refinance any of our indebtedness, including our new credit facility and our senior subordinated notes, on commercially reasonable terms or at all. See Certain
Risk FactorsRestrictive covenants in our senior secured credit facility, the indenture governing our senior subordinated notes and our senior unsecured term loan may restrict our ability to pursue our business strategies.



We may from time to time seek to retire our outstanding debt through cash
purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material.



Recent Accounting Pronouncements



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. We adopted the statement as of June 1, 2003. The statement had no material impact on our results of operations or financial condition.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN No. 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. In December 2003, the FASB issued FIN No. 46 (revised December
2003) Consolidation of Variable Interest Entities (FIN 46-R) to address certain FIN No. 46 implementation issues. FIN 46-R is effective for Dresser, a nonpublic entity as defined, immediately for any variable interest entity



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created after December 31, 2003 and by the beginning of the first annual period beginning after December 15, 2004 for all
variable interest entities subject to FIN 46-R. We are in the process of assessing the effect FIN 46-R may have on our reported assets, liabilities or operations, however we believe FIN 46-R will not have a material effect on our results of
operations or net assets. The effect, if any, would most likely be a gross up of assets and liabilities arising from consolidation of certain previously unconsolidated entities.



In January 2004, the FASB issued FSP 106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug Improvement and Modernization Act of 2003. FSP 106-1 was amended by FSP 106-2 in May 2004 and is effective as of the first interim or annual period beginning after June 15, 2004. We have elected to early adopt FSP 106-2 as of
April 2004. FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers who provide prescription drug coverage for retirees eligible for Medicare. We amended our other postretirement
benefit plans to encompass the new retiree prescription drug benefit coverage by Medicare, and as a result, recorded a net benefit of $1.6 million related to the first six months of 2004 in the second quarter which was reflected as a reduction of
selling, engineering, administrative and general expense. The plan amendments decreased our accumulated postretirement benefit obligation by approximately $27.7 million. We have elected not to apply for federal subsidies eligible under the Act.



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.



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



The businesses of most of our customers, particularly oil, gas and
engineering and construction 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. These industry downturns have been characterized by diminished product demand, excess
manufacturing capacity and subsequent accelerated erosion of average selling prices. 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. For example, in 2001 and 2002 we experienced the effects of a contracting global economy, which resulted in lower capital expenditure budgets of our customers, which in turn, adversely affected demand for and
pricing of our products and services. In addition, because we only compete in some segments of the energy infrastructure and oil field equipment industries, a downturn in the specific segments we serve may affect us more severely than our
competitors who compete in the industry as a whole.



Currently,
oil and gas prices are high and our oil company customers are experiencing increased profitability, resulting in a high level of demand for our products. The current level of oil and gas prices may not continue, and the results of any future
industry downturns may materially adversely affect our business, results of operations and financial condition.



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



For the six months ended June 30,
2004, our largest customer represented approximately 2.1% of our total revenues, and our top ten customers collectively represented approximately 14.5% of our 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 greater percentage of our sales. We could also 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.



We face intense competition.



We encounter intense competition in all areas of our business. Some of our competitors have greater financial and other resources than we do. 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



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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. This focus includes our on-going initiatives to increase manufacturing efficiencies, improve supply chain capabilities, reduce scrap and rework, consolidate raw material sources,
increase global procurement and improve working capital efficiency. We may have to adjust the prices of some of our products to stay competitive, which could have a material adverse effect on our revenues and profitability. We cannot assure you that
we will have sufficient resources to continue to make such investments, achieve our stated objectives or maintain our competitive position.



We have experienced material weaknesses in our internal controls. If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results.



During the past two
years, we have identified a number of material weaknesses and reportable conditions in our internal financial controls. Some of these weaknesses resulted in errors in our historical financial statements, which in turn
resulted in a restatement of our financial statements for 1999 through 2001 and our financial statements for periods prior to 2001 became unaudited.



Although we have taken significant steps to correct the internal control deficiencies that resulted in the restatement of our financial statements, during
the audit of our 2003 financial statements we noted a material weakness with respect to our on/off valve operations located in Houston, Texas, including general accounting, inventory reconciliation and correction and accounting for large project
contracts. We also noted a reportable condition with respect to the operation of our finance organization, including our consolidation process, and inconsistency and lack of rigor in the application of company policy.



In June 2004, the Public Company Accounting Oversight Board, or PCAOB,
adopted rules for purposes of implementing Section 404 of the Sarbanes-Oxley Act, which include revised definitions of material weaknesses and significant deficiencies in internal control over financial reporting. The PCAOB defined a material
weakness as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or
detected. Although we are not currently subject to Section 404, we have examined the definitions contained in PCAOB pronouncement. The new rules describe certain circumstances as being both significant deficiencies and strong indicators that a
material weakness in internal control over financial reporting exists. In reviewing our internal control over financial reporting, we have identified a number of these specific circumstances, including (a) identification by our auditors of material
misstatements in internal drafts of our financial statements that were not initially identified by our internal control process, (b) an ineffective internal audit function, and (c) an ineffective control environment. We have evaluated these
deficiencies and determined that an additional material weakness in our internal control over financial reporting exists with respect to our ability to properly monitor and account for non-routine transactions and to apply U.S. GAAP in transactions
subject to new or complex accounting pronouncements.



We have
taken and continue to take steps to correct these internal control deficiencies. 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, as well as audit committee oversight. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over
our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting
obligations. In addition, we cannot assure you that we will not in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date. Beginning with the
year ending December 31, 2005, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, our management will be required to deliver a report that assesses the effectiveness of our internal control over financial
reporting, and we will be required to deliver an attestation report of our auditors on our managements assessment. We have substantial effort ahead of us to complete documentation of our internal control system and financial processes,
information systems, assessment of their design, remediation of any control deficiencies identified in these efforts and management testing of the design and operation of internal controls. We cannot assure you that we will be able to complete the
required management assessment by our reporting deadline. An inability to complete and document this assessment could result in a scope limitation qualification or a scope limitation disclaimer by our auditors on their attestation of our internal
controls. In addition, if a material weakness was identified with respect to our internal control over financial reporting, we would not be able to conclude that our internal controls over financial reporting were effective, which could result in
the inability of our external auditors to deliver an unqualified report, or any report, on our financial statements. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a
negative effect on the trading price of our securities.



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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 the United States for the year ended December 31, 2003, were 57% of our total sales for that year. Since 2001, our
sales outside the United States as a percentage of our total sales has increased, and we expect this percentage to continue to increase in the foreseeable future. Accordingly, significant negative events affecting the markets where we operate, or
other international markets, could jeopardize or limit our ability to transact business in the manner we expect, which could adversely affect our business, revenues and operating results. Some of these factors include:



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



| |  | exchange controls or other currency restrictions;
| | - | -------------------------------------------------



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



| |  | hyperinflation and adverse economic conditions stemming from governmental attempts to reduce inflation, or deflation;
| | - | ---------------------------------------------------------------------------------------------------------------------



| |  | 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 non-U.S. 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.
| | - | ----------------------------------------------



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 affect our results of operations. Because our financial results are reported in U.S. 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 U.S. dollars. 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. In
2003, foreign currency appreciation (particularly the value of the Euro relative to the U.S. dollar) significantly increased our revenues and backlog. In the future, any foreign currency depreciation relative to the U.S. dollar would decrease our
revenues and backlog.



In addition to currency translation
risks, we incur currency transaction risks whenever we or one of our subsidiaries enter into a purchase or 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, particularly as a result of changes
in the value of the Euro. We expect that the portion of our revenues denominated in non-U.S. dollar currencies will continue to increase in future periods.



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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.



In addition, as a U.S. company, we are subject to the Foreign Corrupt Practices Act, or the FCPA, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials
for the purpose of obtaining or keeping business. Although we make every effort to comply with the FCPA and to ensure that our employees comply with the FCPA, we cannot assure you that such precautions will protect us against liability under the
FCPA, particularly as a result of actions taken in the past, or which may be taken in the future by our agents, employees and intermediaries for whom we may have exposure under the FCPA. Certain of our non-U.S. subsidiaries and joint ventures have
operations in, manufacture goods destined for, or render services to, countries that are currently subject to trade restrictions and economic embargoes that prohibit U.S. incorporated entities, U.S. citizens and residents from engaging in
commercial, financial or trade transactions with such countries, unless authorized by the Office of Foreign Assets Control, or OFAC, or exempted by statute. If we are not in compliance with such laws and regulations, we may be subject to criminal
and civil penalties, which may have an adverse effect on our business, financial condition and results of operations.



We may not be able to achieve all of our expected cost savings.



Our business plan anticipates significant cost savings. We may not be able to achieve all of our expected cost savings. A variety of risks could cause us
not to achieve the benefits of the expected cost savings, including, among others, the following:



| |  | higher than expected costs relating to facility consolidations;
| | - | ---------------------------------------------------------------



| |  | higher than expected severance costs related to headcount reductions;
| | - | ---------------------------------------------------------------------



| |  | delays in the anticipated timing of activities related to our cost-saving plan; and
| | - | -----------------------------------------------------------------------------------



| |  | other unexpected costs associated with operating our 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, war, heightened security and military response to this threat, or any future acts of terrorism, may cause further disruption to the economies of the countries in which we do business 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. We may be unable to meet our customers needs or their performance standards. Our products may not be marketed properly or satisfy the needs of the worldwide market in the future.



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, are growing increasingly sophisticated and expensive. Several of our
competitors have significantly greater financial, technical and marketing resources than we do, and have a lower debt burden. 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.



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. Protecting our intellectual property can be



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expensive and may not be cost effective. 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, which could materially adversely affect our business, results of operations and financial condition.



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 cleanup of contaminated properties as well as air emissions, water discharges, waste management and workplace
health and safety. Such laws and regulations 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
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 relevant jurisdictions in which we operate as these requirements change.



We have incurred, and expect to continue to incur, 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, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination, the imposition of
new clean-up requirements or new claims for property damage or personal injury arising from environmental matters 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.



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



As of June 30, 2004, we had approximately 8,900 employees. Approximately 30% of our workforce in the United States (14% of our global workforce) is
represented by labor unions. Currently, of our eight material collective bargaining agreements, three will expire in 2005, two will expire in 2006, two will expire in 2008 and one will expire in 2009. Although we believe that our relations with our
employees are generally good, we cannot assure you that we will be successful in negotiating new collective bargaining agreements. The renegotiation of our existing collective bargaining agreements could result in significant increases in our labor
costs. In addition, a breakdown in such negotiations could result in the disruption of our operations, which could materially adversely affect our business, financial condition and results of operations. For example, in May 2003, our labor agreement
with the International Association of Machinists & Aerospace Workers, AFL-CIO District 10 at our Waukesha, Wisconsin manufacturing plant expired and we failed to reach agreement on a new labor contract at that time. The bargaining unit voted in
favor of a strike on May 2, 2003. On July 23, 2003, we announced the signing of a new three-year labor agreement, and our union shop employees resumed work on July 28, 2003. The strike adversely affected our operating results for 2003.



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 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.



We rely on a limited number of third party suppliers
and subcontractors for many 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
many specific components and sub-assemblies that are incorporated into our products. If these suppliers or manufacturers experience financial, operational, manufacturing capacity or quality assurance difficulties, or if there is any 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, any of which could materially adversely affect our business, financial condition and results of operations.



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



We require substantial amounts of raw materials that
we purchase from outside sources. Raw materials comprised approximately 48% of our total costs for the year ended December 31, 2003 and 41% for the six months ended June 30, 2004. The availability and prices



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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 adversely affect our operating results.



Steel and steel related products, for example, account for a significant portion of our raw materials. We have recently experienced significant price
increases and may experience short-term supply disruptions in our supply of steel and steel related products in the future. Fluctuations in steel prices may result from relatively minimal changes in the supply of and demand for steel, market
uncertainties and other factors beyond our control.



In
addition, contracts with certain of our suppliers are short-term contracts. We cannot assure you that these suppliers will continue to provide raw materials to us at attractive prices, or at all, or that we will be able to obtain such raw materials
in the future from these or other providers on the scale and within the time frames we require. Any failure to obtain such raw materials on a timely basis at an affordable cost, or any significant delays or interruptions of raw materials, could have
a material adverse effect on our business, financial condition and results of operations.



In addition, certain of our suppliers, in turn, rely on sole or limited sources of supply for components included in their products. Failure of our suppliers to adjust to meet such increasing demand may prevent them
from continuing to supply components in the quantities and the quality and at the times we require, or at all. Our inability to obtain sufficient quantities of sole or limited source components or to develop alternative sources if required could
result in delays and increased costs in the expansion of our operations or our inability to properly maintain our existing level of operations. Such occurrences would have a material adverse effect on our business, financial condition and results of
operations.



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.



We are controlled by First Reserve and Odyssey, whose interests may not be aligned with your interests.



A holding company controlled by First Reserve, Odyssey and their affiliates
own 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 of Dresser Ltd.,
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 other investors 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 the holders of our notes. In addition, our sponsors or their affiliates currently own, and may in the future own,
businesses that directly compete with ours.



Our business strategy
includes the evaluation of selective acquisition opportunities, which may place significant demands on our resources. We may not be successful in identifying suitable acquisition opportunities, and, if we do identify such opportunities, we may not
be able to obtain acceptable financing for the acquisition, reach agreeable terms with acquisition candidates or successfully integrate acquired businesses.



An element of our business strategy is the acquisition and integration of complementary businesses. We will not be able to
acquire other businesses if we cannot identify suitable acquisition opportunities, obtain financing on acceptable terms or reach mutually agreeable terms with acquisition candidates. In addition, to the extent that consolidation becomes more
prevalent in our industry, the prices for suitable acquisition candidates may increase to unacceptable levels thereby limiting our ability to grow.



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We have entered into, and may in the future enter into, joint venture transactions. These transactions
present many of the same risks involved in acquisitions and may also involve the risk that our joint venture partners have economic, business or legal interests that are inconsistent with ours.



Our growth through selective acquisitions may place significant demands on
our management and our operational and financial resources. Acquisitions involve numerous risks, including the diversion of our managements attention from other business concerns, the possibility that current operating and financial systems
and controls may be inadequate to deal with our growth, the possibility of increased leverage or equity dilution and the potential loss of key employees.



We also may encounter difficulties in integrating any businesses we may acquire, or have recently acquired, with our existing operations. The success of
these transactions depends on our ability to:



| |  | successfully merge corporate cultures and operational and financial systems and controls;
| | - | -----------------------------------------------------------------------------------------



| |  | realize marketing and cost reduction synergies; and
| | - | ---------------------------------------------------



| |  | as necessary, retain key management members and technical personnel of acquired companies.
| | - | ------------------------------------------------------------------------------------------



If we fail to integrate acquired businesses successfully, or to manage our growth, that failure could have a material
adverse effect on our business. Further, we may be unable to maintain or enhance the profitability of any acquired business, consolidate its operations to achieve cost savings or maintain or renew any of its contracts.



In addition, there may be liabilities that we fail, or are unable, to
discover in the course of performing due diligence investigations on any company that we may acquire or have recently acquired. Also, there may be additional costs relating to acquisitions including, but not limited to, possible purchase price
adjustments. Any of our rights to indemnification from sellers to us, even if obtained, may not be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property
acquired. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business.



Our substantial indebtedness could adversely affect our financial condition.



We are a highly leveraged company. As of June 30, 2004, we had $1,096.5 million of outstanding long-term indebtedness,
including the current portion, $6.5 million of short-term notes and shareholders deficit of $318.3 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;
| | - | ----------------------------------------------------------------------------



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



| |  | there may 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; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a substantial portion of our indebtedness has variable interest rates and increased interest rates could significantly increase our interest cost and reduce our liquidity.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The terms of our credit facility, the indenture governing our subordinated notes and our new $125 million senior unsecured term loan facility do not prohibit us from incurring significant additional indebtedness in
the future, including indebtedness for



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acquisitions. As of June 30, 2004, we had $55.4 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 our credit facility, our senior unsecured term loan facility and possibly all future borrowings.



Payments on the notes and the subsidiary guarantees rank behind all of our
and the subsidiary guarantors existing senior indebtedness, including the credit facilities and our senior unsecured term loan facility, and will also 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 related to the notes 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, 2004, the
notes and the subsidiary guarantees are subordinated to $535 million of long-term indebtedness, including the current portion, and approximately $55.4 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 our senior secured credit facility, the indenture governing
our senior subordinated notes and our senior unsecured term loan facility may restrict our ability to pursue our business strategies.



Our senior secured credit facility, the indenture governing our senior subordinated notes and our senior unsecured term loan facility limit our ability,
among other things, to:



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



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



| |  | repurchase or redeem our common 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.
| | - | ---------------------------------------------------------------------



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In addition, our existing credit facility requires us to maintain certain financial ratios. We may not be
able to maintain these ratios. We have in the past sought and obtained a number of amendments to our existing credit facility to allow us greater flexibility to maintain these ratios. Covenants in our existing 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. Our new credit facility may contain similar restrictions and covenants to those in our existing
credit facility, and may restrict our ability to pursue business strategies.



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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 or refinance 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. However, any material litigation or litigations
that are material in the aggregate, and for which we are not indemnified, may materially adversely impact our future 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.



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.



Certain subsidiaries are not included as subsidiary guarantors.



The guarantors of our outstanding notes include our wholly-owned domestic
subsidiaries. However, the 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, 2004 of our subsidiaries that are not
guarantors were $456.9 million. As of June 30, 2004, those subsidiaries held 56.2% 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.



48



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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 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 there under.



Generally, an entity will be considered insolvent if:



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



| |  | 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 employ financial instruments to manage exposure to fluctuations 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 table provides 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.



49



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##### Table of Contents

|                                      |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|------------------------------------- |  | ------------- | -------- | - | ---- | - | -------- | ---- |  | - | ---- | - |  | ---- | ---- | - | ---------- | - | ----- | ----- |  | ---------- | ----- | - |  | - | ----- |  | - | ----- | -
|                                      |  | 2004          |          |   | 2005 |   |          | 2006 |  |   | 2007 |   |  | 2008 |      |   | Thereafter |   |       | Total |  | Fair Value |      
|                                      |  | (in millions) |         
|Related forward contracts to sell USD |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Japanese Yen                          |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 3.1      |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 3.1   |  | $ | 0.1   |  
|Avg. Contract Rate                    |  |               | 110.4896 |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|Euro                                  |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 43.8     |   |      | $ | 19.4     |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 63.2  |  | $ | (0.2  | )
|Avg. Contract Rate                    |  |               | 1.2085   |   |      |   | 1.2146   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|Related forward contracts to buy GBP  |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Euro                                  |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 0.9      |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 0.9   |  | $ |      |  
|Avg. Contract Rate                    |  |               | 0.6705   |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|Related forward contracts to buy USD  |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|South African Rand                    |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 1.2      |   |      | $ | 0.2      |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 1.4   |  | $ | (0.1  | )
|Avg. Contract Rate                    |  |               | 7.0157   |   |      |   | 6.8310   |      |  |   |      |   |  |      |     |   |            |   |       |       |  |            |      |   |  |   |       |  |   |      |  
|Euro                                  |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 2.8      |   |      | $ | 3.4      |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 6.2   |  | $ |      |  
|Avg. Contract Rate                    |  |               | 1.1764   |   |      |   | 1.1459   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|Japanese Yen                          |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 4.0      |   |      | $ | 17.0     |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 21.0  |  | $ | (0.1  | )
|Avg. Contract Rate                    |  |               | 107.6833 |   |      |   | 107.3250 |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|British Pound                         |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 4.2      |   |      | $ | 2.6      |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 6.8   |  | $ |      |  
|Avg. Contract Rate                    |  |               | 1.6734   |   |      |   | 1.4900   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|Canadian Dollar                       |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 6.1      |   |      | $ | 21.2     |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 27.3  |  | $ | (0.1  | )
|Avg. Contract Rate                    |  |               | 1.3344   |   |      |   | 1.3415   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|Related forward contracts to buy EUR  |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|South African Rand                    |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 0.3      |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 0.3   |  | $ |      |  
|Avg. Contract Rate                    |  |               | 8.4184   |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|British Pound                         |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 0.2      |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 0.2   |  | $ |      |  
|Avg. Contract Rate                    |  |               | 0.6890   |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|Japanese Yen                          |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $             | 0.1      |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |  | $ | 0.1   |  | $ |      |  
|Avg. Contract Rate                    |  |               | 131.3400 |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |  |   |      |  |   |      |  
|Long-term debt                        |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|U.S. Dollar Functional Currency       |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Fixed Rate                            |  |               | 1.3      |   |      |   | 2.7      |      |  |   | 0.9  |   |  |      | 0.7  |   |            |   | 0.7   |       |  |            | 551.7 |   |  |   | 558.0 |  |   | 592.0 |  
|Average Interest Rate                 |  |               | 9.30     | % |      |   | 9.31     | %    |  |   | 9.32 | % |  |      | 9.34 | % |            |   | 9.34  | %     |  |            | 9.36  | % |  |   |       |  |   |       |  
|Variable Rate                         |  |               |         |   |      |   | 4.1      |      |  |   | 4.1  |   |  |      | 4.1  |   |            |   | 199.8 |       |  |            | 322.8 |   |  |   | 534.9 |  |   | 541.2 |  
|Average Interest Rate                 |  |               |         |   |      |   | 4.85     | %    |  |   | 5.57 | % |  |      | 6.04 | % |            |   | 6.45  | %     |  |            | 7.13  | % |  |   |       |  |   |       |  
|Euro Functional Currency              |  |               |          |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |  |   |       |  |   |       |  
|Fixed Rate                            |  |               | 0.4      |   |      |   | 1.1      |      |  |   | 1.1  |   |  |      | 0.6  |   |            |   | 0.4   |       |  |            |      |   |  |   | 3.6   |  |   | 3.9   |  
|Average Interest Rate                 |  |               | 4.17     | % |      |   | 4.20     | %    |  |   | 4.26 | % |  |      | 4.44 | % |            |   | 4.50  | %     |  |            |      |   |  |   |       |  |   |       |  



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|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.



In the course of the audit of our financial statements for the
year ended December 31, 2003, we identified a material weakness and a reportable condition regarding various elements of our system of internal controls. We noted a material weakness with respect to our on/off valve operations located in Houston,
Texas, including general accounting, inventory reconciliation and correction and contract accounting for large projects. We also noted a reportable condition with respect to the operation of our finance organization, including our consolidation
process, and inconsistency and lack of rigor in the application of company policy.



In June 2004, the Public Company Accounting Oversight Board, or PCAOB, adopted rules for purposes of implementing Section 404 of the Sarbanes-Oxley Act, which include revised definitions of material weaknesses and
significant deficiencies in internal control over financial reporting. The PCAOB defined a material weakness as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or detected. Although we are not currently subject to Section 404, we have examined the definitions contained in the PCAOB pronouncement. The new rules
describe certain circumstances as being both significant deficiencies and strong indicators that a material weakness in internal control over financial reporting exists. In reviewing our internal control over financial reporting in connection with
the preparation of this Quarterly Report on Form 10-Q, we have identified a number of these specified circumstances, including (a) identification by our auditors of material misstatements in internal drafts of our financial statements that were not
initially identified by our internal control process, (b) an ineffective internal audit function and (c) an ineffective control environment. We have evaluated these deficiencies and determined that an additional material weakness in our internal
control over financial reporting exists with respect to our ability to properly monitor and account for non-routine transactions and to apply U.S. GAAP in transactions subject to new or complex accounting pronouncements.



In addition, in April 2004, we received allegations that the Dubai branch of
one of our U.S. subsidiaries may have engaged in transactions involving the sale of control valves and related parts to Iraq without required authorization. Upon initial investigation, we found transactions by the branch relating to Iraq, Iran and
Sudan that appeared to have been undertaken without the required prior U.S. governmental authorizations. See Note 10 to the financial statements included elsewhere in this report.



As required by SEC Rule 13a-15(b), management conducted an evaluation with the participation of our chief executive officer
and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and
procedures were not effective at a reasonable assurance level as of June 30, 2004. Management has undertaken the following initiatives with respect to our disclosure controls and procedures:



| |  | We have appointed new controllers for both the on/off product line and its North American operations, and hired additional personnel to increase the depth of accounting experience
in our Houston on/off valve operations. We have also hired an experienced controller to oversee contract accounting.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have established enhanced corporate oversight of the accounting at our Houston on/off valve operation, and expect to continue this oversight throughout 2004. Additionally, we
have conducted quarterly physical inventories at this location and expect to do so until we determine that an adequate control environment exists.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have significantly increased the number and skills of management and staff personnel in our accounting and finance organization to increase our depth of experience in accounting,
SEC reporting matters and internal audit. We have appointed new controllers at six of our eight principal operating units, and expect to be adequately staffed within the third quarter with the hiring of an additional Director of Accounting in our
corporate office. Additionally, we have recently hired a new Director of Internal Audit from outside the Company. He reports to our Chief Executive Officer and the Audit Committee, and will work with management to enhance the effectiveness of our
internal audit function. We are continuing to monitor and review the overall adequacy of our personnel and expect to make additional changes, including implementation of processes to identify and review all significant or non-routine issues.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We continue to review and revise a number of our disclosure and accounting policies and procedures, including internal employee training, in order to strengthen and establish
greater uniformity in their application.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | We have undertaken a plan to adopt an enterprise resource planning system 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 completed the global design of the system for our operating units. We expect to complete an initial pilot implementation of this system in our
U.S. retail fueling operation in 2004.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have undertaken a separate project to install new data collection, consolidation and reporting process and systems company wide to significantly increase the consistency and
transparency of our consolidation and financial reporting.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although we have undertaken the foregoing initiatives, the existence of a material weakness is an indication that there is more than a remote likelihood that a material misstatement of our financial statements will
not be prevented or detected in a future period. In addition, we cannot assure you that we will not in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not
discovered to date. We are taking steps to refine our internal controls and procedures to meet the internal control reporting requirements included in Section 404 of the Sarbanes-Oxley Act, and 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 management and by our internal auditors, as well as audit committee oversight. As a result, additional changes will be
made to our internal controls and procedures. Other than the foregoing initiatives since the date of the evaluation supervised by our management, there have been no material 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.



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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



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 10 of the financial statements in this Form 10-Q.



|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



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



|           |  |                                                                                                                                                                                                                                                            
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description of Exhibit                                                                                                                                                                                                                                     
|           | 
|2.1        |  | Purchase and Sale Agreement dated May 21, 2004 by and among Dresser, Inc. DEG Italia S.p.A, as buyers, and Nuovo Pignone S.p.A, as seller (incorporated by reference to Exhibit 2.1 to our
Current Report on Form 8-K, filed with the SEC on June 18, 2004)
|           | 
|*31.1      |  | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                
|           | 
|*31.2      |  | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                
|           | 
|*32.1      |  | Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                                                                                        
|           | 
|*32.2      |  | Certification of the Principal 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 dated May 13, 2004 reporting under Item 12. Results of Operations and Financial Condition announcing the Companys
financial results for the first quarter of 2004.



Current
Report on Form 8-K dated May 21, 2004 reporting under Item 9. Regulation FD Disclosure announcing the Companys agreement to purchase the distribution business of Nuovo Pignone, S.p.A.



Current Report on Form 8-K dated June 18, 2004 reporting under Item 2.
Acquisition and Disposition of Assets announcing the Companys acquisition of the distribution business of Nuovo Pignone, S.p.A.



Current Report on Form 8-K dated July 30, 2004 reporting under Item 9. Regulation FD Disclosure announcing the Company made an optional prepayment on its
senior secured term C loan.



Current Report on Form 8-K/A dated
June 4, 2004 reporting under Item 2. Acquisition and Disposition of Assets and Item 7. Financial Statements and Exhibits reporting audited financial statements of the distribution business of Nuovo Pignone S.p.A for the three years ended December
31, 2003, unaudited financial statements for the three months ended March 31, 2004 and 2003, and pro forma financial statements.



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SIGNATURES



Pursuant to the
requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                      |  |  |  |               |  |                    |  |                                                                                          
|--------------------- |  |  |  | ------------- |  | ------------------ |  | -----------------------------------------------------------------------------------------
|                      |  |  |  | DRESSER, INC.
|                      |  |  | 
|Date: August 12, 2004 |  |  |  | By:           |  | /S/ STEVEN G. LAMB
|                      |  |  |  |               |  |                    |  | Steven G. Lamb Chief Executive Officer and President                                     
|                      |  |  |  |              
|                      |  |  |  |               |  |                    |  | /S/ JAMES A. NATTIERJames A. Nattier Executive Vice
President and Chief Financial Officer
|                      |  |  |  |              
|                      |  |  |  |               |  |                    |  | /S/ THOMAS J. KANUKThomas J. Kanuk Corporate Controller
and Chief Accounting Officer     



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