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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 March 31, 2003



OR



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



For the transition period from
 to



Commission File Number 333-60778



DRESSER, INC.

(Exact name of
registrant as specified in its charter)



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



15455 Dallas
Parkway, Suite 1100

Addison, Texas 75001

(Address of principal executive offices) (zip code)



(972) 361-9800

(Registrants telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes ̈No  x



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 December 4, 2003 was 1,000.



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DRESSER, INC.



INDEX



|                              |  |                                                                                                                |  | PageNo.
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | -------
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                               
|Item 1.                       |  | Financial Statements                                                                                           |  |        
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 (unaudited) |  | 3      
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002                   |  | 4      
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 (unaudited) |  | 5      
|                              |  |                                                                                                               
|                              |  | Notes to Condensed Consolidated Financial Statements as of March 31, 2003 (unaudited)                          |  | 6      
|                              |  |                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 24     
|                              |  |                                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                     |  | 45     
|                              |  |                                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                                        |  | 48     
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                                               
|Item 1.                       |  | Legal Proceedings                                                                                              |  | 50     
|                              |  |                                                                                                               
|Item 2.                       |  | Defaults Upon Senior Securities                                                                                |  | 50     
|                              |  |                                                                                                               
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                               |  |        
|                              |  |                                                                                                               
|                              |  | Exhibits                                                                                                       |  | 50     
|                              |  |                                                                                                               
|                              |  | Reports on Form 8-K                                                                                            |  | 51     
|                              | 
|Signatures                    |  | 52                                                                                                            



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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 March 31, |      
|--------------------------------------------------------- |  | --------------------------- | -----
|                                                          |  | 2003                        |      
|Revenues                                                  |  | $                           | 371.4
|Cost of revenues                                          |  |                             | 271.5
|                                                          |  |                             |      
|Gross profit                                              |  |                             | 99.9 
|                                                          |  |                            
|Selling, engineering, administrative and general expenses |  |                             | 88.6 
|                                                          |  |                             |      
|Operating income                                          |  |                             | 11.3 
|                                                          |  |                            
|Equity earnings of unconsolidated subsidiaries            |  |                             | 0.8  
|Interest expense                                          |  |                             | (20.4
|Interest income                                           |  |                             | 1.3  
|Other income (deductions), net                            |  |                             | 3.1  
|                                                          |  |                             |      
|(Loss) income before taxes                                |  |                             | (3.9 
|                                                          |  |                            
|Provision for income taxes                                |  |                             | (2.2 
|                                                          |  |                             |      
|Net (loss) income                                         |  | $                           | (6.1 
|                                                          |  |                             |      





See accompanying notes to condensed consolidated financial statements



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DRESSER, INC.



Condensed
Consolidated Balance Sheets

(in millions, except share information)



|                                                                                 |  | March 31,2003 |         |   | December 31,2002 |  
|-------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | -
|                                                                                 |  | (unaudited)   |         |   |                  |  
|ASSETS                                                                           |  |               |         |   |                  |  
|Current assets:                                                                  |  |               |         |   |                  |  
|Cash and equivalents                                                             |  | $             | 123.9   |   |                  | $
|Restricted cash                                                                  |  |               |        |   |                  |  
|Receivables                                                                      |  |               | 284.3   |   |                  |  
|Inventories                                                                      |  |               | 299.5   |   |                  |  
|Other current assets                                                             |  |               | 16.3    |   |                  |  
|                                                                                 |  |               |         |   |                  |  
|Total current assets                                                             |  |               | 724.0   |   |                  |  
|                                                                                 |  |              
|Property, plant and equipment                                                    |  |               | 202.0   |   |                  |  
|Investments in unconsolidated subsidiaries                                       |  |               | 8.8     |   |                  |  
|Deferred financing fees and other assets                                         |  |               | 60.7    |   |                  |  
|Prepaid and intangible pension assets                                            |  |               | 60.7    |   |                  |  
|Deferred tax assets                                                              |  |               | 4.7     |   |                  |  
|Goodwill                                                                         |  |               | 302.8   |   |                  |  
|Intangibles                                                                      |  |               | 12.6    |   |                  |  
|                                                                                 |  |               |         |   |                  |  
|Total assets                                                                     |  | $             | 1,376.3 |   |                  | $
|                                                                                 |  |               |         |   |                  |  
|LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCKAND SHAREHOLDERS DEFICIT        |  |               |         |   |                  |  
|Current liabilities:                                                             |  |               |         |   |                  |  
|Accounts and notes payable                                                       |  | $             | 186.8   |   |                  | $
|Deferred revenue                                                                 |  |               | 23.6    |   |                  |  
|Accrued expenses                                                                 |  |               | 144.8   |   |                  |  
|                                                                                 |  |               |         |   |                  |  
|Total current liabilities                                                        |  |               | 355.2   |   |                  |  
|                                                                                 |  |              
|Pension and other retiree benefit obligations                                    |  |               | 321.3   |   |                  |  
|Long-term debt                                                                   |  |               | 960.2   |   |                  |  
|Other liabilities                                                                |  |               | 28.7    |   |                  |  
|                                                                                 |  |              
|Commitments and contingencies                                                    |  |               |         |   |                  |  
|                                                                                 |  |               |         |   |                  |  
|Total liabilities                                                                |  |               | 1,665.4 |   |                  |  
|                                                                                 |  |               |         |   |                  |  
|Mandatorily redeemable common stock                                              |  |               | 7.9     |   |                  |  
|                                                                                 |  |               |         |   |                  |  
|Shareholders deficit:                                                           |  |               |         |   |                  |  
|Common stock, $0.01 par value; issued and outstanding: 1,000 in 2003 and 2002    |  |               |        |   |                  |  
|Capital in excess of par value                                                   |  |               | 447.5   |   |                  |  
|Dividends in excess of net book value                                            |  |               | (595.8  | ) |                  |  
|Accumulated deficit                                                              |  |               | (74.1   | ) |                  |  
|Accumulated other comprehensive loss                                             |  |               | (74.6   | ) |                  |  
|                                                                                 |  |               |         |   |                  |  
|Total shareholders deficit                                                      |  |               | (297.0  | ) |                  |  
|                                                                                 |  |               |         |   |                  |  
|Total liabilities, mandatorily redeemable common stock and shareholders deficit |  | $             | 1,376.3 |   |                  | $
|                                                                                 |  |               |         |   |                  |  



See accompanying notes
to condensed consolidated financial statements



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DRESSER, INC.



Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)



|                                                                                          |  | Three MonthsEnded March 31, |      
|----------------------------------------------------------------------------------------- |  | --------------------------- | -----
|                                                                                          |  | 2003                        |      
|Cash flows from operating activities:                                                     |  |                             |      
|Net (loss) income                                                                         |  | $                           | (6.1 
|Adjustments to reconcile net (loss) income to cash flow provided by operating activities: |  |                             |      
|Depreciation and amortization                                                             |  |                             | 10.5 
|Equity earnings of unconsolidated affiliates                                              |  |                             | (0.8 
|Loss on repayment of debt                                                                 |  |                             | 0.1  
|Impairment of assets                                                                      |  |                             | 4.4  
|Other changes, net:                                                                       |  |                             |      
|Receivables                                                                               |  |                             | (15.4
|Inventories                                                                               |  |                             | 9.5  
|Accounts payable                                                                          |  |                             | (3.5 
|Other                                                                                     |  |                             | 25.6 
|                                                                                          |  |                             |      
|Net cash provided by operating activities                                                 |  |                             | 24.3 
|                                                                                          |  |                             |      
|Cash flows from investing activities:                                                     |  |                             |      
|Asset acquisitions                                                                        |  |                             | (15.4
|Capital expenditures                                                                      |  |                             | (1.9 
|                                                                                          |  |                             |      
|Net cash used in investing activities                                                     |  |                             | (17.3
|Cash flow from financing activities:                                                      |  |                             |      
|Proceeds from the issuance of long-term debt                                              |  |                             |     
|Repayment of long-term debt (including current portion)                                   |  |                             | (7.5 
|Decrease in short-term notes payable                                                      |  |                             | (2.5 
|Payment of deferred financing fees                                                        |  |                             |     
|Decrease in restricted cash                                                               |  |                             | 7.5  
|                                                                                          |  |                             |      
|Net cash used in financing activities                                                     |  |                             | (2.5 
|                                                                                          |  |                             |      
|Effect of translation adjustments on cash                                                 |  |                             | 0.6  
|                                                                                          |  |                             |      
|Net increase (decrease) in cash and equivalents                                           |  |                             | 5.1  
|Cash and equivalents, beginning of period                                                 |  |                             | 118.8
|                                                                                          |  |                             |      
|Cash and equivalents, end of period                                                       |  | $                           | 123.9
|                                                                                          |  |                             |      
|Supplemental disclosure of cash flow information:                                         |  |                             |      
|Cash payments during the period for:                                                      |  |                             |      
|Interest                                                                                  |  | $                           | 7.0  
|Income taxes                                                                              |  |                             | 3.0  



See accompanying notes
to condensed consolidated financial statements



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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. Its certificate of incorporation was amended and restated on April 9, 2001 and again on July 3, 2002. As used in this report, the terms Dresser, the Company, we or us refer to
Dresser, Inc. and its subsidiaries and affiliates unless the context indicates otherwise.



In January 2001, Halliburton Company (Halliburton), together with its wholly-owned subsidiary Dresser B.V., signed an Agreement and Plan of Recapitalization with DEG Acquisitions, LLC, an entity owned by
affiliates of First Reserve Corporation (First Reserve) and Odyssey Investment Partners, LLC (Odyssey), to effect the recapitalization of its businesses relating to, among other things, the design, manufacture and marketing
of flow control, measurement systems and compression and power systems for customers primarily in the energy industry. Halliburton originally acquired the businesses as part of its acquisition of Dresser Industries, Inc. in 1998. Dresser
Industries operations consisted of the Companys businesses and certain other operating units retained by Halliburton following the consummation of the recapitalization 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
$300.0 million of senior subordinated notes, $720.0 million of borrowings under our credit facility, and approximately $400.0 million of common equity contributed by DEG Acquisitions, LLC.



On July 3, 2002, Dresser modified its corporate structure by forming a
Delaware holding company and two Bermuda holding companies between the existing shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc., a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the 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. Dresser Holdings, Inc. and Dresser Holdings, Ltd., have no assets or liabilities, other than common stock holdings of Dresser and Dresser Holdings, Inc., respectively, conduct no operations outside of
Dresser and have no transactions to date other than those incidental to their formation.



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2003, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2002.



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DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



Note 2. Stock-based compensation



We apply 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 has been reflected in net income. The following table illustrates the effect on net income (loss) if we had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure,
which amends SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the three months ended March 31, 2003 and 2002, respectively.



|                                                                                                                |  | March 31,2003 |      |   | March 31,2002 |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------- | ---- | - | ------------- | -
|                                                                                                                |  | (in millions) |     
|Net (loss) income as reported                                                                                   |  | $             | (6.1 | ) |               | $
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects      |  |               |     |   |               |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |               | (0.3 | ) |               |  
|                                                                                                                |  |               |      |   |               |  
|Pro forma net (loss) income                                                                                     |  | $             | (6.4 | ) |               | $
|                                                                                                                |  |               |      |   |               |  



Note 3. Restructuring and Other
Exit Activities



During 2002 and 2003, we initiated
restructuring programs affecting several business units in an effort to obtain manufacturing efficiencies and cost savings. We adopted SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities in 2002 and have
recognized 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 $7.2 million of restructuring charges for the three months ended March 31, 2003. Restructuring charges of $0.1 million and $7.1 million have
been reflected in cost of revenues and selling, engineering, general and administrative expenses, respectively, in our condensed consolidated statement of operations.



In the first quarter of 2003, we decided 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 a retail fueling dispenser manufacturing operation in Germany into an



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DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



existing facility in Sweden, (4) consolidate certain flow control operations in Houston, Texas into a new facility, and (5) continue a reduction in our
workforce. The costs incurred associated with these actions are as follows:



|Description                                 |  | RestructuringCharge |     | CashPayments |   |      | Non-CashCharges |  |   | Accrued at3/31/2003
|------------------------------------------- |  | ------------------- | --- | ------------ | - | ---- | --------------- |  | - | -------------------
|                                            |  | (in millions)      
|Consolidate EDG operations                  |  |                     |     |              |   |      |                 |  |   |                    
|Termination benefits                        |  | $                   | 0.4 |              | $ |     |                 |  | $ |                   
|Write-down of fixed assets                  |  |                     | 0.1 |              |   |     |                 |  |   | (0.1               
|Other exit activities                       |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                   
|Consolidate Shelton operations              |  |                     |     |              |   |      |                 |  |   |                    
|Termination benefits                        |  |                     | 0.2 |              |   | (0.1 | )               |  |   |                   
|Other exit activities                       |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                   
|Consolidate German manufacturing operations |  |                     |     |              |   |      |                 |  |   |                    
|Termination benefits                        |  |                     | 3.9 |              |   |     |                 |  |   |                   
|Write-down of fixed assets                  |  |                     | 0.6 |              |   |     |                 |  |   | (0.6               
|Houston Consolidation                       |  |                     |     |              |   |      |                 |  |   |                    
|Write-down of fixed assets                  |  |                     | 1.3 |              |   |     |                 |  |   | (1.3               
|Company wide reduction in force             |  |                     |     |              |   |      |                 |  |   |                    
|Termination benefits                        |  |                     | 0.5 |              |   | (0.1 | )               |  |   |                   
|                                            |  |                     |     |              |   |      |                 |  |   |                    
|Total                                       |  | $                   | 7.2 |              | $ | (0.4 | )               |  | $ | (2.0               
|                                            |  |                     |     |              |   |      |                 |  |   |                    



The following table
details the 2003 restructuring charges by segment.



|Segment                       |  | RestructuringCharge |     | CashPayments |   |      | Non-CashCharges |  |   | Accrued at3/31/2003
|----------------------------- |  | ------------------- | --- | ------------ | - | ---- | --------------- |  | - | -------------------
|                              |  | (in millions)      
|Flow Control                  |  | $                   | 2.2 |              | $ | (0.3 | )               |  | $ | (1.4               
|Measurement Systems           |  |                     | 4.9 |              |   |     |                 |  |   | (0.6               
|Compression and Power Systems |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                   
|                              |  |                     |     |              |   |      |                 |  |   |                    
|Total                         |  | $                   | 7.2 |              | $ | (0.4 | )               |  | $ | (2.0               
|                              |  |                     |     |              |   |      |                 |  |   |                    



In connection with the
activities in the first quarter of 2003, we incurred certain restructuring charges related to termination benefits. We anticipate a workforce reduction of approximately 771 employees, of which approximately 100 had been terminated through March 31,
2003. During the remainder of 2003, we expect to incur approximately $9.1 million in additional expenses for these 2003 initiatives.



During 2002, we decided to: (1) consolidate manufacturing of our standard design rotary blower products at our Houston, Texas manufacturing plant and
downsize our Connersville, Indiana facility; (2) cease manufacturing fuel dispensers at a Canadian manufacturing facility and consolidate North American fuel dispenser manufacturing in our Austin, Texas facility; (3) discontinue several small
product lines; and (4) initialize a company wide reduction in our workforce. In 2002, we incurred $6.0 million in expenses related to these activities. During 2003, we revised these costs by $0.1 million. In connection with these 2002
activities,



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DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



we incurred certain restructuring charges related to termination benefits for approximately 295 employees. Accrued liabilities at March 31, 2003 related to
the 2002 restructuring initiatives are as follows:



|Description                              |  | Accrued at12/31/2002 |     | CashPayments |   |      | Changes inEstimates |  | Accrued at3/31/03
|---------------------------------------- |  | -------------------- | --- | ------------ | - | ---- | ------------------- |  | -----------------
|                                         |  | (in millions)       
|Discontinuation of several product lines |  |                      |     |              |   |      |                     |  |                  
|Termination benefits                     |  | $                    | 0.4 |              | $ | (0.4 | )                   |  | $                
|Company wide reduction in force          |  |                      |     |              |   |      |                     |  |                  
|Termination benefits                     |  |                      | 1.9 |              |   | (1.4 | )                   |  |                  
|                                         |  |                      |     |              |   |      |                     |  |                  
|Total                                    |  | $                    | 2.3 |              | $ | (1.8 | )                   |  | $                
|                                         |  |                      |     |              |   |      |                     |  |                  



Note 4. Business Segment
Information



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



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



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



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



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DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



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



|                                       |  | Three Months EndedMarch 31, |      
|-------------------------------------- |  | --------------------------- | -----
|                                       |  | 2003                        |      
|                                       |  | (in millions)               |      
|Revenues:                              |  |                             |      
|Flow Control                           |  | $                           | 227.5
|Measurement Systems                    |  |                             | 75.0 
|Compression and Power Systems          |  |                             | 70.2 
|Reconciling Items, Including Corporate |  |                             | (1.3 
|                                       |  |                             |      
|Total                                  |  | $                           | 371.4
|                                       |  |                             |      
|Operating income:                      |  |                             |      
|Flow Control                           |  | $                           | 11.0 
|Measurement Systems                    |  |                             | (0.7 
|Compression and Power Systems          |  |                             | 7.6  
|Reconciling Items, Including Corporate |  |                             | (6.6 
|                                       |  |                             |      
|Total                                  |  | $                           | 11.3 
|                                       |  |                             |      



Note 5. Receivables



Accounts receivable are stated at their estimated net realizable value.
Included in receivables are notes receivable of $3.4 million and $7.9 million as of March 31, 2003 and December 31, 2002, respectively. Allowances for doubtful accounts of $10.5 million and $8.9 million as of March 31, 2003 and December 31, 2002,
respectively, are netted in the receivable balance.



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) basis.



Inventories on a LIFO method represented $37.0 million and $49.3 million of our inventories as of March 31, 2003 and
December 31, 2002, respectively. The excess of FIFO over LIFO costs as of March 31, 2003 and December 31, 2002, were $70.2 million and $70.2 million, respectively. Inventories are summarized as follows:



|                                 |  | March 31,2003 |       |   | December 31,2002 |  
|-------------------------------- |  | ------------- | ----- | - | ---------------- | -
|                                 |  | (in millions) |      
|Finished products and parts      |  | $             | 200.2 |   |                  | $
|In-process products and parts    |  |               | 97.8  |   |                  |  
|Raw materials and supplies       |  |               | 68.1  |   |                  |  
|                                 |  |               |       |   |                  |  
|Total inventory                  |  | $             | 366.1 |   |                  | $
|Less:                            |  |               |       |   |                  |  
|LIFO reserve and full absorption |  |               | (66.6 | ) |                  |  
|                                 |  |               |       |   |                  |  
|Inventories                      |  | $             | 299.5 |   |                  | $
|                                 |  |               |       |   |                  |  



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##### Table of Contents

DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



Note 7. Acquisitions



In March 2003, we acquired certain assets of Tokheim North America and its MSI business unit for cash consideration of $15.0 million and assumed
liabilities; as a result, we recorded approximately $6.0 million in intangible assets. The intangible assets are amortized over five years on an accelerated basis and are included in our measurement systems segment. In addition, we incurred
approximately $3.4 million of acquisition costs related to the portions of the business not acquired.



Note 8. Debt



In March
2002, we issued an additional $250 million of 9 3/8% senior subordinated notes due 2011 under the indenture that governs the 2001 notes. The notes were issued at 102.5% and accrued interest from October 15, 2001. We recorded a $6.3 million
premium which is amortized over the term of the notes, and recorded as a reduction to interest expense. The net proceeds were used to repay existing indebtedness under the Tranche A term loans of the credit facility. This repayment
significantly reduced the principal balances of the Tranche A term loans. As a result, we recorded a loss of $12.9 million, which represented a write-off of an allocable portion of the unamortized debt issuance costs. This loss has been reflected in
interest expense in our condensed consolidated financial statements.



In March 2002, we also obtained an amendment to the credit facility that among other things increased the amount by which the Tranche B term loan can be increased from $95 million to $195 million.



As a condition of the third amendment to our credit facility in December
2002, we deposited $7.5 million in a segregated account with the administrative agent of our credit facility during 2002. Those funds were applied, at our option, to our Tranche B term loan on January 10, 2003. As a result of this prepayment, we
wrote off an allocable portion of unamortized deferred financing charges of approximately $0.1 million in the first quarter of 2003.



We entered into a sixth amendment and waiver to our credit agreement on August 5, 2003, which extended to December 15, 2003 our deadline for providing our
senior lenders with audited financial statements for the fiscal years ended December 31, 2001 and December 31, 2002. This amendment also waived, among other things, any default or event of default relating in any respect to the 2001 re-audit,
revision or restatement of any financial statement delivered to the senior lenders prior to August 5, 2003, including any default or event of default relating in any respect to any errors contained in such financial statements. The amendment grants
a suspension period to deliver audited financials with respect to the waiver, which began on March 31, 2003 and ends on the earlier of (1) December 15, 2003 and (2) the date on which the administrative agent receives the audited annual financial
statements for the years ended December 31, 2002 and 2001.



Effective January 1, 2003, the applicable margin on our Tranche B term loan was increased from 3.50% to 3.75%. In addition, effective March 31, 2003, the applicable margin on our Tranche B term loan was increased by an additional 0.50% per
annum and, effective August 5, 2003, the applicable margin on our Tranche B term loan was further increased by an additional 0.50% per annum. The aggregate 1.00% per annum increase will remain in effect during the suspension period referred to
above.



Total deferred financing fees incurred in connection
with obtaining all of the amendments to the credit facility to date were $6.1 million.



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DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



Under the indenture that governs our senior subordinated notes, certain covenants require that we
furnish to all holders of the notes all quarterly and annual financial information required to be contained in a filing with the SEC on Forms 10-Q and 10-K within the time period specified in the SECs rules and regulations. In 2002, we
determined that our 2001 financial statements, which had been previously been audited by Arthur Andersen LLP (Andersen), needed to be restated and re-audited, which resulted in a delay in the filing of our annual report on Form 10-K for
2002 and our quarterly reports on Form 10-Q for the periods ended March 31, 2003, June 30, 2003 and September 30, 2003.



The failure to perform under this covenant would constitute an event of default if the default continues for a period of 30 days after we receive a
written notice specifying the default (and demanding that the default be remedied) from the trustee or holders of at least 25% of the outstanding principal amount of the notes. On December 4, 2003 we completed a consent solicitation to amend
the indenture of our senior subordinated notes to provide that Dresser will only be obligated to furnish to the holders of the senior subordinated notes a report by Dressers certified independent accountants with respect to annual information
for fiscal years beginning after December 31, 2000. Each holder that consented also waived all events of default with respect to breaches of the reporting provision of the indenture and all rights to cause the principal and accrued interest on the
senior subordinated notes to be immediately due and payable. We entered into a supplemental indenture with the trustee for the holders and the guarantors of the senior subordinated notes on December 4, 2003 to put into effect the amendment.



Capital leases



In March 2003, we entered into a lease for certain software licenses related
to our enterprise-wide reporting, or ERP, system, and as a result, we incurred a capital lease obligation of $5.5 million which is included in our total debt.



Interest Rate Swaps



In March 2003, we terminated a fair value interest rate swap; this swap was not eligible to receive accounting treatment as a hedge. The interest rate
swap had a notional amount of $100.0 million and was scheduled to mature in October 2003. Under the interest rate swap agreement, we received a fixed interest rate of 9.375% and paid a variable rate of LIBOR plus 6.20%. As a result of the
termination, we received cash proceeds of $1.6 million



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##### Table of Contents

DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



Note 9. Comprehensive Income



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



|                                                 |  | Three MonthsEndedMarch 31, |     
|------------------------------------------------ |  | -------------------------- | ----
|                                                 |  | 2003                       |     
|                                                 |  | (in millions)              |     
|Net (loss) income                                |  | $                          | (6.1
|Other comprehensive income                       |  |                            |     
|Foreign currency translation adjustment          |  |                            | 3.9 
|Unrealized gain (loss) on derivative instruments |  |                            | 0.5 
|                                                 |  |                            |     
|Comprehensive (loss) income                      |  | $                          | (1.7
|                                                 |  |                            |     



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,
certain environmental liability claims against the Company, to the extent that notice is given to Halliburton prior to the fifth anniversary of the closing, and any loss, liability, damage or expense relating to workers compensation, general
liability, and automobile liability arising out of events or occurrences prior to the closing as to which the Company notifies Halliburton prior to the third anniversary of the closing date. The maximum aggregate amount of all losses indemnifiable
by Halliburton pursuant to the recapitalization agreement is $950.0 million. In the case of certain general indemnities in the Agreement, other than those described above, there is an aggregate $15.0 million deductible that is applicable prior to
the indemnification obligations. In addition, any single claim for such indemnities is subject to a threshold of $0.5 million in the case where there was no knowledge of such claim by Halliburton and a $0.1 million threshold if there was knowledge.
For purposes of determining the threshold or maximum amount of indemnity and other overall indemnity obligations, such amounts shall be offset by insurance proceeds received by the Company or the amount of tax benefit received by the Company.



Company Indemnifications



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



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DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



Environmental



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



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



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



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



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



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



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##### Table of Contents

DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



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. The following shows the activity of our warranty accrual for the three months ended March 31, 2003:



|                                                        |  | Three MonthsEndedMarch 31, 2003 |     
|------------------------------------------------------- |  | ------------------------------- | ----
|                                                        |  | (in millions)                   |     
|Balance at the beginning of the period                  |  | $                               | 18.9
|Accruals for warranties issued during the period        |  |                                 | 3.5 
|Accruals related to pre-existing warranties             |  |                                 | 2.0 
|Settlements made (in cash or in kind) during the period |  |                                 | (4.0
|                                                        |  |                                 |     
|Balance at the end of the period                        |  | $                               | 20.4
|                                                        |  |                                 |     



Note 12. Recent Accounting
Pronouncements



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



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



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



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##### Table of Contents

DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, which amends FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation.
The transition guidance and annual disclosure provisions of SFAS No. 148 are in effect for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning after December 15, 2002. The transition guidance provided in the statement had no impact on our results of operations or financial position, as we elected not to change
the accounting of our stock based compensation from APB No. 25 Accounting for Stock Issued to Employees. We have implemented the disclosure provisions of this statement, see Note 2.



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



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



In November 2002, the FASB
issued FASB Interpretation No. (FIN) 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation supercedes FIN 34 Disclosure
of Indirect Guarantee of Indebtedness of Others. FIN 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations



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##### Table of Contents

DRESSER, INC.



Notes to Condensed Consolidated Financial Statements(Continued)

(unaudited)



under guarantees. It also requires that a guarantor recognize a liability, at the inception of a guarantee, for the fair value of the obligation undertaken
in issuing the guarantee. The initial measurement and recognition provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for interim or annual periods ending after
December 15, 2002. See Note 14. The adoption of the measurement and recognition provisions of this interpretation did not have a material impact on our results of operations or financial position.



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



Note 13. Subsequent Events



We have entered into an agreement relating to the
divestiture of a valve manufacturing operation located in Italy. Among other things, the divestiture is conditioned upon the approval of our board of directors and the ability of the purchaser to obtain financing. We expect to receive approximately
$23.5 million in cash (plus the assumption of approximately $4.6 million in debt) and recognize a loss of approximately $4 million as a result of the transaction.



Note 14. 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 March 31, 2003 and December 31,
2002 and the statements of operations and cash flows for the three months ended March 31, 2003 and 2002, 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 CONSOLIDATING BALANCE SHEETS



March 31, 2003

(in millions)

(unaudited)



|                                                                                          |  | Parent |         |   | SubsidiaryGuarantors |   |       | Non-GuarantorSubsidiaries |  | Eliminations |       |  | TotalConsolidated |       
|----------------------------------------------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | ----- | ------------------------- |  | ------------ | ----- |  | ----------------- | ------
|ASSETS                                                                                    |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Current Assets:                                                                           |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Cash and equivalents                                                                      |  | $      | 72.4    |   |                      | $ | (0.1  | )                         |  | $            | 51.6  |  | $                 |      
|Receivables                                                                               |  |        | 122.5   |   |                      |   | 2.7   |                           |  |              | 159.1 |  |                   |      
|Inventories                                                                               |  |        | 141.3   |   |                      |   | 14.5  |                           |  |              | 143.7 |  |                   |      
|Other current assets                                                                      |  |        | 7.8     |   |                      |   | 0.1   |                           |  |              | 8.4   |  |                   |      
|                                                                                          |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Total current assets                                                                      |  |        | 344.0   |   |                      |   | 17.2  |                           |  |              | 362.8 |  |                   |      
|                                                                                          |  |        |         |   |                     
|Property, plant and equipment                                                             |  |        | 131.1   |   |                      |   | 0.2   |                           |  |              | 70.7  |  |                   |      
|Investments in consolidated subsidiaries                                                  |  |        | 439.3   |   |                      |   | 399.3 |                           |  |              |      |  |                   | (838.6
|Investment in unconsolidated subsidiaries                                                 |  |        | 0.5     |   |                      |   |      |                           |  |              | 8.3   |  |                   |      
|Deferred financing fees and other assets                                                  |  |        | 41.4    |   |                      |   |      |                           |  |              | 19.3  |  |                   |      
|Prepaid and intangible pension assets                                                     |  |        | 50.3    |   |                      |   |      |                           |  |              | 10.4  |  |                   |      
|Deferred tax assets                                                                       |  |        |        |   |                      |   |      |                           |  |              | 4.7   |  |                   |      
|Goodwill                                                                                  |  |        | 105.0   |   |                      |   | 23.8  |                           |  |              | 174.0 |  |                   |      
|Intangibles                                                                               |  |        | 7.6     |   |                      |   |      |                           |  |              | 5.0   |  |                   |      
|                                                                                          |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Total assets                                                                              |  | $      | 1,119.2 |   |                      | $ | 440.5 |                           |  | $            | 655.2 |  | $                 | (838.6
|                                                                                          |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|                                                                                          |  |        |         |   |                     
|LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCK AND SHAREHOLDERS (DEFICIT) EQUITY       |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Current liabilities:                                                                      |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Accounts and notes payable                                                                |  | $      | 74.8    |   |                      | $ | 0.9   |                           |  | $            | 111.1 |  | $                 |      
|Deferred revenue                                                                          |  |        | 13.6    |   |                      |   |      |                           |  |              | 10.0  |  |                   |      
|Accrued expenses                                                                          |  |        | 66.3    |   |                      |   | 0.3   |                           |  |              | 78.2  |  |                   |      
|                                                                                          |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Total current liabilities                                                                 |  |        | 154.7   |   |                      |   | 1.2   |                           |  |              | 199.3 |  |                   |      
|                                                                                          |  |        |         |   |                     
|Pension and other retiree benefit obligations                                             |  |        | 296.0   |   |                      |   |      |                           |  |              | 25.3  |  |                   |      
|Long-term debt                                                                            |  |        | 955.7   |   |                      |   |      |                           |  |              | 4.5   |  |                   |      
|Other liabilities                                                                         |  |        | 1.9     |   |                      |   |      |                           |  |              | 26.8  |  |                   |      
|Commitments and contingencies                                                             |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|                                                                                          |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Total liabilities                                                                         |  |        | 1,408.3 |   |                      |   | 1.2   |                           |  |              | 255.9 |  |                   |      
|                                                                                          |  |        |         |   |                     
|Mandatorily redeemable common stock                                                       |  |        | 7.9     |   |                      |   |      |                           |  |              |      |  |                   |      
|                                                                                          |  |        |         |   |                     
|Shareholders (deficit) equity:                                                           |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Shareholders (deficit) equity, net                                                       |  |        | (297.0  | ) |                      |   | 439.3 |                           |  |              | 399.3 |  |                   | (838.6
|                                                                                          |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Total shareholders (deficit) equity                                                      |  |        | (297.0  | ) |                      |   | 439.3 |                           |  |              | 399.3 |  |                   | (838.6
|                                                                                          |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       
|Total liabilities, mandatorily redeemable common stock and shareholders (deficit) equity |  | $      | 1,119.2 |   |                      | $ | 440.5 |                           |  | $            | 655.2 |  | $                 | (838.6
|                                                                                          |  |        |         |   |                      |   |       |                           |  |              |       |  |                   |       



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATING BALANCE SHEETS



December 31, 2002

(in millions)



|                                                                                          |  | Parent |         |   | SubsidiaryGuarantors |   | Non-GuarantorSubsidiaries |  | Eliminations |       |  | TotalConsolidated |       
|----------------------------------------------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | ------------------------- |  | ------------ | ----- |  | ----------------- | ------
|ASSETS                                                                                    |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Current Assets:                                                                           |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Cash and equivalents                                                                      |  | $      | 62.7    |   |                      | $ | 0.5                       |  | $            | 55.6  |  | $                 |      
|Restricted cash                                                                           |  |        | 7.5     |   |                      |   |                          |  |              |      |  |                   |      
|Receivables                                                                               |  |        | 85.6    |   |                      |   | 2.4                       |  |              | 167.6 |  |                   |      
|Inventories                                                                               |  |        | 135.3   |   |                      |   | 15.1                      |  |              | 149.6 |  |                   |      
|Other current assets                                                                      |  |        | 8.0     |   |                      |   | 0.1                       |  |              | 7.2   |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Total current assets                                                                      |  |        | 299.1   |   |                      |   | 18.1                      |  |              | 380.0 |  |                   |      
|                                                                                          |  |        |         |   |                     
|Property, plant and equipment                                                             |  |        | 137.0   |   |                      |   | 0.2                       |  |              | 71.7  |  |                   |      
|Investments in consolidated subsidiaries                                                  |  |        | 438.8   |   |                      |   | 399.3                     |  |              |      |  |                   | (838.1
|Investment in unconsolidated subsidiaries                                                 |  |        | 0.1     |   |                      |   |                          |  |              | 7.2   |  |                   |      
|Deferred financing fees and other assets                                                  |  |        | 53.4    |   |                      |   |                          |  |              | 19.8  |  |                   |      
|Prepaid and intangible pension assets                                                     |  |        | 50.3    |   |                      |   |                          |  |              | 10.4  |  |                   |      
|Deferred tax assets                                                                       |  |        |        |   |                      |   |                          |  |              | 4.7   |  |                   |      
|Goodwill                                                                                  |  |        | 112.8   |   |                      |   | 23.8                      |  |              | 163.9 |  |                   |      
|Intangibles                                                                               |  |        | 2.0     |   |                      |   |                          |  |              | 4.2   |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Total assets                                                                              |  | $      | 1,093.5 |   |                      | $ | 441.4                     |  | $            | 661.9 |  | $                 | (838.1
|                                                                                          |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|                                                                                          |  |        |         |   |                     
|LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCK AND SHAREHOLDERS (DEFICIT) EQUITY       |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Current liabilities:                                                                      |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Accounts and notes payable                                                                |  | $      | 68.8    |   |                      | $ | 0.8                       |  | $            | 118.9 |  | $                 |      
|Deferred revenue                                                                          |  |        | 11.8    |   |                      |   |                          |  |              | 7.1   |  |                   |      
|Accrued expenses                                                                          |  |        | 43.9    |   |                      |   | 1.8                       |  |              | 74.6  |  |                   |      
|                                                                                          |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Total current liabilities                                                                 |  |        | 124.5   |   |                      |   | 2.6                       |  |              | 200.6 |  |                   |      
|                                                                                          |  |        |         |   |                     
|Pension and other retiree benefit obligations                                             |  |        | 290.2   |   |                      |   |                          |  |              | 24.1  |  |                   |      
|Long-term debt                                                                            |  |        | 959.8   |   |                      |   |                          |  |              | 3.5   |  |                   |      
|Other liabilities                                                                         |  |        | 6.7     |   |                      |   |                          |  |              | 34.4  |  |                   |      
|Commitments and contingencies                                                             |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|                                                                                          |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Total liabilities                                                                         |  |        | 1,381.2 |   |                      |   | 2.6                       |  |              | 262.6 |  |                   |      
|                                                                                          |  |        |         |   |                     
|Mandatorily redeemable common stock                                                       |  |        | 7.9     |   |                      |   |                          |  |              |      |  |                   |      
|                                                                                          |  |        |         |   |                     
|Shareholders (deficit) equity:                                                           |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Shareholders (deficit) equity, net                                                       |  |        | (295.6  | ) |                      |   | 438.8                     |  |              | 399.3 |  |                   | (838.1
|                                                                                          |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Total shareholders (deficit) equity                                                      |  |        | (295.6  | ) |                      |   | 438.8                     |  |              | 399.3 |  |                   | (838.1
|                                                                                          |  |        |         |   |                      |   |                           |  |              |       |  |                   |       
|Total liabilities, mandatorily redeemable common stock and shareholders (deficit) equity |  | $      | 1,093.5 |   |                      | $ | 441.4                     |  | $            | 661.9 |  | $                 | (838.1
|                                                                                          |  |        |         |   |                      |   |                           |  |              |       |  |                   |       



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DRESSER, INC.



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS



For the Three Months Ended March 31, 2003

(in millions)

(unaudited)



|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Revenues                                                  |  | $      | 229.4 |   |                      | $ | 8.0                       |  | $ | 157.3        |   |  | $                 | (23.3
|Cost of revenues                                          |  |        | 173.2 |   |                      |   | 6.6                       |  |   | 114.9        |   |  |                   | (23.2
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      
|Gross profit                                              |  |        | 56.2  |   |                      |   | 1.4                       |  |   | 42.4         |   |  |                   | (0.1 
|Selling, engineering, administrative and general expenses |  |        | 61.0  |   |                      |   | 0.5                       |  |   | 27.2         |   |  |                   | (0.1 
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      
|Operating (loss) income                                   |  |        | (4.8  | ) |                      |   | 0.9                       |  |   | 15.2         |   |  |                   |     
|Equity earnings of unconsolidated subsidiaries            |  |        |      |   |                      |   |                          |  |   | 0.8          |   |  |                   |     
|Equity earnings of consolidated subsidiaries              |  |        | 18.7  |   |                      |   | 17.8                      |  |   |             |   |  |                   | (36.5
|Interest expense                                          |  |        | (20.3 | ) |                      |   |                          |  |   | (0.1         | ) |  |                   |     
|Interest income                                           |  |        |      |   |                      |   |                          |  |   | 1.3          |   |  |                   |     
|Other income, net                                         |  |        | 0.4   |   |                      |   |                          |  |   | 2.7          |   |  |                   |     
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      
|(Loss) income before taxes                                |  |        | (6.0  | ) |                      |   | 18.7                      |  |   | 19.9         |   |  |                   | (36.5
|Provision for income taxes                                |  |        | (0.1  | ) |                      |   |                          |  |   | (2.1         | ) |  |                   |     
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      
|Net (loss) income                                         |  | $      | (6.1  | ) |                      | $ | 18.7                      |  | $ | 17.8         |   |  | $                 | (36.5
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      



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DRESSER, INC.



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS



For the Three Months Ended March 31, 2002

(in millions)

(unaudited)



|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Revenues                                                  |  | $      | 247.1 |   |                      | $ |                          |  | $ | 165.3        |   |  | $                 | (27.6
|Cost of revenues                                          |  |        | 178.8 |   |                      |   |                          |  |   | 120.9        |   |  |                   | (27.5
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      
|Gross profit                                              |  |        | 68.3  |   |                      |   |                          |  |   | 44.4         |   |  |                   | (0.1 
|Selling, engineering, administrative and general expenses |  |        | 47.3  |   |                      |   |                          |  |   | 26.2         |   |  |                   | (0.1 
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      
|Operating income                                          |  |        | 21.0  |   |                      |   |                          |  |   | 18.2         |   |  |                   |     
|Equity earnings of unconsolidated subsidiaries            |  |        |      |   |                      |   |                          |  |   | 0.7          |   |  |                   |     
|Equity earnings of consolidated subsidiaries              |  |        | 12.2  |   |                      |   | 12.2                      |  |   |             |   |  |                   | (24.4
|Interest expense                                          |  |        | (31.0 | ) |                      |   |                          |  |   | (2.8         | ) |  |                   |     
|Interest income                                           |  |        | 0.2   |   |                      |   |                          |  |   | 0.5          |   |  |                   |     
|Other income, net                                         |  |        | 0.1   |   |                      |   |                          |  |   | (0.3         | ) |  |                   |     
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      
|Income (loss) before taxes                                |  |        | 2.5   |   |                      |   | 12.2                      |  |   | 16.3         |   |  |                   | (24.4
|Provision for income taxes                                |  |        | (0.3  | ) |                      |   |                          |  |   | (4.1         | ) |  |                   |     
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      
|Net income (loss)                                         |  | $      | 2.2   |   |                      | $ | 12.2                      |  | $ | 12.2         |   |  | $                 | (24.4
|                                                          |  |        |       |   |                      |   |                           |  |   |              |   |  |                   |      



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DRESSER, INC.



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS



For the Three Months Ended March 31, 2003

(in millions)

(unaudited)



|                                                                                                     |  | Parent |       |   | SubsidiaryGuarantors |   |       | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|---------------------------------------------------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ----- | ------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Cash flows from operating activities:                                                                |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Net (loss) income                                                                                    |  | $      | (6.1  | ) |                      | $ | 18.7  |                           |  | $ | 17.8         |   |  | $                 | (36.5
|Adjustments to reconcile net (loss) income to cash flows provided by (used in) operating activities: |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Depreciation and amortization                                                                        |  |        | 6.8   |   |                      |   |      |                           |  |   | 3.7          |   |  |                   |     
|Equity earnings of unconsolidated affiliates                                                         |  |        |      |   |                      |   |      |                           |  |   | (0.8         | ) |  |                   |     
|Equity earnings of consolidated affiliates                                                           |  |        | (18.7 | ) |                      |   | (17.8 | )                         |  |   |             |   |  |                   | 36.5 
|Loss on repayment of debt                                                                            |  |        | 0.1   |   |                      |   |      |                           |  |   |             |   |  |                   |     
|Impairment of assets                                                                                 |  |        | 1.5   |   |                      |   |      |                           |  |   | 2.9          |   |  |                   |     
|Other changes, net                                                                                   |  |        | 24.4  |   |                      |   | (1.5  | )                         |  |   | (6.7         | ) |  |                   |     
|                                                                                                     |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Net cash provided by (used in) operating activities                                                  |  |        | 8.0   |   |                      |   | (0.6  | )                         |  |   | 16.9         |   |  |                   |     
|Cash flows from investing activities:                                                                |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Asset acquisitions                                                                                   |  |        | (15.4 | ) |                      |   |      |                           |  |   |             |   |  |                   |     
|Capital expenditures                                                                                 |  |        | (0.8  | ) |                      |   |      |                           |  |   | (1.1         | ) |  |                   |     
|                                                                                                     |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Net cash used in investing activities                                                                |  |        | (16.2 | ) |                      |   |      |                           |  |   | (1.1         | ) |  |                   |     
|Cash flows from financing activities:                                                                |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Changes in intercompany activity                                                                     |  |        | 17.9  |   |                      |   |      |                           |  |   | (17.9        | ) |  |                   |     
|Proceeds from the issuance of long-term debt                                                         |  |        |      |   |                      |   |      |                           |  |   |             |   |  |                   |     
|Repayment of debt (including current portion)                                                        |  |        | (7.5  | ) |                      |   |      |                           |  |   |             |   |  |                   |     
|Decrease in short-term notes payable                                                                 |  |        |      |   |                      |   |      |                           |  |   | (2.5         | ) |  |                   |     
|Payment of deferred financing fees                                                                   |  |        |      |   |                      |   |      |                           |  |   |             |   |  |                   |     
|Decrease in restricted cash                                                                          |  |        | 7.5   |   |                      |   |      |                           |  |   |             |   |  |                   |     
|                                                                                                     |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Net cash provided by (used in) financing activities:                                                 |  |        | 17.9  |   |                      |   |      |                           |  |   | (20.4        | ) |  |                   |     
|Effect of translation adjustments on cash                                                            |  |        |      |   |                      |   |      |                           |  |   | 0.6          |   |  |                   |     
|Net increase (decrease) in cash and equivalents                                                      |  |        | 9.7   |   |                      |   | (0.6  | )                         |  |   | (4.0         | ) |  |                   |     
|Cash and equivalents, beginning of period                                                            |  |        | 62.7  |   |                      |   | 0.5   |                           |  |   | 55.6         |   |  |                   |     
|                                                                                                     |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Cash and equivalents, end of period                                                                  |  | $      | 72.4  |   |                      | $ | (0.1  | )                         |  | $ | 51.6         |   |  | $                 |     
|                                                                                                     |  |        |       |   |                      |   |       |                           |  |   |              |   |  |                   |      



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DRESSER, INC.



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS



For the Three Months Ended March 31, 2002

(in millions)

(unaudited)



|                                                                                                     |  | Parent |        |   | SubsidiaryGuarantors |   |       | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|---------------------------------------------------------------------------------------------------- |  | ------ | ------ | - | -------------------- | - | ----- | ------------------------- |  | - | ------------ | - |  | ----------------- | -----
|Cash flows from operating activities:                                                                |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Net income (loss)                                                                                    |  | $      | 2.2    |   |                      | $ | 12.2  |                           |  | $ | 12.2         |   |  | $                 | (24.4
|Adjustments to reconcile net income (loss) to cash flows provided by (used in) operating activities: |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Depreciation and amortization                                                                        |  |        | 7.2    |   |                      |   |      |                           |  |   | 3.7          |   |  |                   |     
|Loss on repayment of debt                                                                            |  |        | 12.9   |   |                      |   |      |                           |  |   |             |   |  |                   |     
|Equity earnings of unconsolidated affiliates                                                         |  |        |       |   |                      |   |      |                           |  |   | (0.7         | ) |  |                   |     
|Equity earnings of consolidated affiliates                                                           |  |        | (12.2  | ) |                      |   | (12.2 | )                         |  |   |             |   |  |                   | 24.4 
|Other changes, net                                                                                   |  |        | (3.2   | ) |                      |   |      |                           |  |   | (16.4        | ) |  |                   |     
|                                                                                                     |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Net cash provided by (used in) operating activities                                                  |  |        | 6.9    |   |                      |   |      |                           |  |   | (1.2         | ) |  |                   |     
|Cash flows from investing activities:                                                                |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Capital expenditures                                                                                 |  |        | (3.8   | ) |                      |   |      |                           |  |   | (1.0         | ) |  |                   |     
|                                                                                                     |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Net cash used in investing activities                                                                |  |        | (3.8   | ) |                      |   |      |                           |  |   | (1.0         | ) |  |                   |     
|Cash flows from financing activities:                                                                |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Changes in intercompany activity                                                                     |  |        | (74.8  | ) |                      |   |      |                           |  |   | 74.8         |   |  |                   |     
|Proceeds from the issuance of long term debt                                                         |  |        | 256.3  |   |                      |   |      |                           |  |   |             |   |  |                   |     
|Repayment of debt (including current portion)                                                        |  |        | (158.0 | ) |                      |   |      |                           |  |   | (96.0        | ) |  |                   |     
|Decrease in short-term notes payable                                                                 |  |        |       |   |                      |   |      |                           |  |   | (0.9         | ) |  |                   |     
|Payment of deferred financing fees                                                                   |  |        | (6.3   | ) |                      |   |      |                           |  |   | (0.2         | ) |  |                   |     
|                                                                                                     |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Net cash provided by (used in) financing activities                                                  |  |        | 17.2   |   |                      |   |      |                           |  |   | (22.3        | ) |  |                   |     
|Effect of translation adjustments on cash                                                            |  |        |       |   |                      |   |      |                           |  |   | (0.5         | ) |  |                   |     
|Net increase (decrease) in cash and equivalents                                                      |  |        | 20.3   |   |                      |   |      |                           |  |   | (25.0        | ) |  |                   |     
|Cash and equivalents, beginning of period                                                            |  |        | 35.4   |   |                      |   |      |                           |  |   | 66.3         |   |  |                   |     
|                                                                                                     |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      
|Cash and equivalents, end of period                                                                  |  | $      | 55.7   |   |                      | $ |      |                           |  | $ | 41.3         |   |  | $                 |     
|                                                                                                     |  |        |        |   |                      |   |       |                           |  |   |              |   |  |                   |      



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



Critical Accounting Policies and
Estimates



Our discussion and analysis of our financial
condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. 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 liabilities. On an on-going basis, we evaluate our estimates, including bad debts, inventories, long-lived tangible and intangible assets,
income taxes, warranty obligations, pensions and other post-retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions. In our annual report on Form 10-K for the year ended December 31, 2002, 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 and have determined that those critical policies remain and have not changed since December 31, 2002.



Overview



We design, manufacture and market highly engineered equipment and services sold primarily to customers in the energy industry. Our primary business
segments are flow control, measurement systems and compression and power systems. We sell our products and services to customers including major oil companies, multinational engineering and construction companies and other industrial firms. Our
total revenues by geographic region for the three months ended March 31, 2003, consisted of North America (52.7%), Europe/Africa (26.0%), Latin America (5.2%), Asia (10.6%) and the Middle East (5.5%). We have pursued a strategy of customer,
geographic and product diversity to mitigate the impact of an economic downturn on our business in any one part of the world or in any single business segment.



For the three months ended March 31, 2003, we generated revenues of $371.4 million, operating income of $11.3 million and net loss of $6.1 million.



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##### Table of Contents

Market Forces; Outlook



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



Long-term demand for energy infrastructure equipment and services is driven
by increases in worldwide energy consumption, which is a function of worldwide population growth, rate of industrialization and the levels of energy consumption per capita. In the short term, demand for our products is affected by overall worldwide
economic conditions and by fluctuations in the level of activity and capital spending by major, national and independent oil and gas companies, gas distribution companies, gas compression companies, pipeline companies, power generation companies and
petrochemical processing plants and customers access to capital. Energy demand and the level of oil and gas prices affect all of these activities and is a significant factor in determining our primary customers level of cash flow.



Flow ControlThe first quarter of 2003 was impacted by
reduced volume in our on/off valves product line, a weak natural gas distribution market, a slowdown in new construction and aftermarket sales in our pressure relief valve business and soft market conditions in our non-energy related business; all
of which negatively impacted our results in this segment. However we did see increased international project activity in our on/off product line resulting in increased bookings for the first quarter of 2003 as compared to 2002.



Measurement SystemsThe segment was positively impacted in the first
quarter of 2003, by the acquisition of the North American assets of Tokheim in March 2003. In the second quarter we will continue the integration of these assets in our retail fueling business and anticipate seeing improved results.



Compression and Power SystemsThe first quarter of 2003 was impacted by
the continued decline in demand for our gas compression equipment, but we were able to negate the impact that the reduced sales volume had on our operating income by reducing costs. However, on May 1, 2003, our collective bargaining agreement at our
Waukesha, Wisconsin manufacturing plant expired, and a labor strike commenced on May 2, 2003 which resulted in a negative impact in our results of operations in the second and third quarter of 2003.



We believe that in order to maintain our competitiveness, we need to continue
to focus on increasing operational efficiency and cash flow. This focus includes our on-going initiatives to increase manufacturing efficiencies, consolidate raw material sources, increase global procurement and improve working capital efficiency.
We believe these initiatives offer us opportunities to improve our profitability and cash flow. The continuation of re-engineering, plant consolidations and the implementation of a new enterprise-wide reporting, or ERP, system is critical to
achieving these improvements. We have incurred and may continue to incur significant costs to implement these initiatives. See Restructuring and Other Exit Activities for a detail of these activities.



Restructuring and Other Exit Activities



During 2002 and 2003, we initiated restructuring programs affecting several
business units in an effort to obtain manufacturing efficiencies and cost savings. We adopted SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities in 2002 and have recognized 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 $7.2 million of restructuring charges for the three months ended March 31, 2003. Restructuring charges of $0.1 million and $7.1 million have
been reflected in cost of revenues and selling, engineering, general and administrative expenses, respectively, in our condensed consolidated statement of operations.



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In the first quarter of 2003, we decided 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 a retail fueling dispenser manufacturing operation in Germany
into an existing facility in Sweden; (4) consolidate certain flow control operations in Houston, Texas into a new facility; and (5) continue a reduction in our workforce. The costs incurred associated with these actions are as follows:



|Description                                 |  | RestructuringCharge |     | CashPayments |   |      | Non-CashCharges |  |   | Accruedat3/31/2003
|------------------------------------------- |  | ------------------- | --- | ------------ | - | ---- | --------------- |  | - | ------------------
|                                            |  | (in millions)      
|Consolidate EDG operations                  |  |                     |     |              |   |      |                 |  |   |                   
|Termination benefits                        |  | $                   | 0.4 |              | $ |     |                 |  | $ |                  
|Write-down of fixed assets                  |  |                     | 0.1 |              |   |     |                 |  |   | (0.1              
|Other exit activities                       |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                  
|Consolidate Shelton operations              |  |                     |     |              |   |      |                 |  |   |                   
|Termination benefits                        |  |                     | 0.2 |              |   | (0.1 | )               |  |   |                  
|Other exit activities                       |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                  
|Consolidate German manufacturing operations |  |                     |     |              |   |      |                 |  |   |                   
|Termination benefits                        |  |                     | 3.9 |              |   |     |                 |  |   |                  
|Write-down of fixed assets                  |  |                     | 0.6 |              |   |     |                 |  |   | (0.6              
|Houston Consolidation                       |  |                     |     |              |   |      |                 |  |   |                   
|Write-down of fixed assets                  |  |                     | 1.3 |              |   |     |                 |  |   | (1.3              
|Company wide reduction in force             |  |                     |     |              |   |      |                 |  |   |                   
|Termination benefits                        |  |                     | 0.5 |              |   | (0.1 | )               |  |   |                  
|                                            |  |                     |     |              |   |      |                 |  |   |                   
|Total                                       |  | $                   | 7.2 |              | $ | (0.4 | )               |  | $ | (2.0              
|                                            |  |                     |     |              |   |      |                 |  |   |                   



The following table
details the 2003 restructuring charges by segment.



|Segment                       |  | RestructuringCharge |     | CashPayments |   |      | Non-CashCharges |  |   | Accruedat3/31/03
|----------------------------- |  | ------------------- | --- | ------------ | - | ---- | --------------- |  | - | ----------------
|                              |  | (in millions)      
|Flow Control                  |  | $                   | 2.2 |              | $ | (0.3 | )               |  | $ | (1.4            
|Measurement Systems           |  |                     | 4.9 |              |   |     |                 |  |   | (0.6            
|Compression and Power Systems |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                
|                              |  |                     |     |              |   |      |                 |  |   |                 
|Total                         |  | $                   | 7.2 |              | $ | (0.4 | )               |  | $ | (2.0            
|                              |  |                     |     |              |   |      |                 |  |   |                 



In connection with the
activities in the first quarter of 2003, we incurred certain restructuring charges related to termination benefits. We anticipate a workforce reduction of approximately 771 employees, of which approximately 100 had been terminated through March 31,
2003. During the remainder of 2003, we expect to incur approximately $9.1 million in additional expenses for these 2003 initiatives.



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During 2002, we decided to: (1) consolidate manufacturing of our standard design rotary blower products
at our Houston, Texas manufacturing plant and downsize our Connersville, Indiana facility; (2) cease manufacturing fuel dispensers at a Canadian manufacturing facility and consolidate North American fuel dispenser manufacturing in our Austin, Texas
facility; (3) discontinue several small product lines; and (4) initialize a company wide reduction in our workforce. In 2002, we incurred $6.0 million in expenses related to these activities. During 2003, we revised these costs by $0.1 million.
In connection with these 2002 activities, we incurred certain restructuring charges related to termination benefits for approximately 295 employees. Accrued liabilities at March 31, 2003 related to the 2002 restructuring initiatives are as follows:



|Description                              |  | Accruedat12/31/2002 |     | CashPayments |   |      | ChangesinEstimates |  | Accruedat3/31/2003
|---------------------------------------- |  | ------------------- | --- | ------------ | - | ---- | ------------------ |  | ------------------
|                                         |  | (in millions)      
|Discontinuation of several product lines |  |                     |     |              |   |      |                    |  |                   
|Termination benefits                     |  | $                   | 0.4 |              | $ | (0.4 | )                  |  | $                 
|Company wide reduction in force          |  |                     |     |              |   |      |                    |  |                   
|Termination benefits                     |  |                     | 1.9 |              |   | (1.4 | )                  |  |                   
|                                         |  |                     |     |              |   |      |                    |  |                   
|Total                                    |  | $                   | 2.3 |              | $ | (1.8 | )                  |  | $                 
|                                         |  |                     |     |              |   |      |                    |  |                   



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##### Table of Contents

Results of Operations



The following table presents selected financial information regarding each of our segments for the three months ended March 31, 2003 and 2002,
respectively. During the second quarter of 2002, we made changes to our internal corporate structure with the reorganization of certain of our operating units. We believe these changes will better serve our customers. Although we still report under
three reportable segments, the operating units that comprise each reportable segment have changed. The prior year information has been restated to conform to the current year presentation.



|                                                           |  | Three MonthsEnded March 31, |       |   | Three MonthsEnded March 31, |  
|---------------------------------------------------------- |  | --------------------------- | ----- | - | --------------------------- | -
|                                                           |  | 2003                        |       |   | 2002                        |  
|                                                           |  | (in millions)               |      
|Revenues:                                                  |  |                             |       |   |                             |  
|Flow Control                                               |  | $                           | 227.5 |   |                             | $
|Measurement Systems                                        |  |                             | 75.0  |   |                             |  
|Compression and Power Systems                              |  |                             | 70.2  |   |                             |  
|Reconciling Items, Including Corporate                     |  |                             | (1.3  | ) |                             |  
|                                                           |  |                             |       |   |                             |  
|Total                                                      |  | $                           | 371.4 |   |                             | $
|                                                           |  |                             |       |   |                             |  
|Gross profit:                                              |  |                             |       |   |                             |  
|Flow Control                                               |  | $                           | 65.0  |   |                             | $
|Measurement Systems                                        |  |                             | 16.3  |   |                             |  
|Compression and Power Systems                              |  |                             | 18.6  |   |                             |  
|Reconciling Items, Including Corporate                     |  |                             |      |   |                             |  
|                                                           |  |                             |       |   |                             |  
|Total                                                      |  | $                           | 99.9  |   |                             | $
|                                                           |  |                             |       |   |                             |  
|Selling, engineering, administrative and general expenses: |  |                             |       |   |                             |  
|Flow Control                                               |  | $                           | 54.0  |   |                             | $
|Measurement Systems                                        |  |                             | 17.0  |   |                             |  
|Compression and Power Systems                              |  |                             | 11.0  |   |                             |  
|Reconciling Items, Including Corporate                     |  |                             | 6.6   |   |                             |  
|                                                           |  |                             |       |   |                             |  
|Total                                                      |  | $                           | 88.6  |   |                             | $
|                                                           |  |                             |       |   |                             |  
|Operating income:                                          |  |                             |       |   |                             |  
|Flow Control                                               |  | $                           | 11.0  |   |                             | $
|Measurement Systems                                        |  |                             | (0.7  | ) |                             |  
|Compression and Power Systems                              |  |                             | 7.6   |   |                             |  
|Reconciling Items, Including Corporate                     |  |                             | (6.6  | ) |                             |  
|                                                           |  |                             |       |   |                             |  
|Total                                                      |  | $                           | 11.3  |   |                             | $
|                                                           |  |                             |       |   |                             |  
|Depreciation and amortization:                             |  |                             |       |   |                             |  
|Flow Control                                               |  | $                           | 5.9   |   |                             | $
|Measurement Systems                                        |  |                             | 1.5   |   |                             |  
|Compression and Power Systems                              |  |                             | 2.8   |   |                             |  
|Reconciling Items, Including Corporate                     |  |                             | 0.3   |   |                             |  
|                                                           |  |                             |       |   |                             |  
|Total                                                      |  | $                           | 10.5  |   |                             | $
|                                                           |  |                             |       |   |                             |  
|Bookings:                                                  |  |                             |       |   |                             |  
|Flow Control                                               |  | $                           | 276.5 |   |                             | $
|Measurement Systems                                        |  |                             | 67.3  |   |                             |  
|Compression and Power Systems                              |  |                             | 71.4  |   |                             |  
|                                                           |  |                             |       |   |                             |  
|Total                                                      |  | $                           | 415.2 |   |                             | $
|                                                           |  |                             |       |   |                             |  



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|                                       |  | March 31,     |      
|-------------------------------------- |  | ------------- | -----
|                                       |  | 2003          |      
|                                       |  | (in millions) |      
|Backlog:                               |  |               |      
|Flow Control                           |  | $             | 309.8
|Measurement Systems                    |  |               | 40.3 
|Compression and Power Systems          |  |               | 41.4 
|Reconciling Items, Including Corporate |  |               |     
|                                       |  |               |      
|Total                                  |  | $             | 391.5
|                                       |  |               |      



Three months ended March 31, 2003
as compared to the three months ended March 31, 2002



Consolidated



Revenues.Revenues were
$371.4 million and $384.8 million for the three months ended March 31, 2003 and 2002, respectively. This was a decrease of $13.4 million, or 3.5%. Positive increases from our measurement segment due to the Tokheim asset purchase were offset by
decreases in our flow control segment and our compression and power systems segment. The decline in our flow control segment was impacted by lower sales volume in our on/off product line and reduced demand in our piping specialties and metering
business. The decline in this segment was somewhat offset by positive growth from our control valve product line. The decline in our compression and power systems segment was driven by decreased sales of gas compression equipment.



Cost of revenues.Cost of revenues as a percentage of revenues were
73.1% and 70.7% for the three months ended March 31, 2003 and 2002 respectively. Our cost of revenues was impacted by a reduction in sales of our high margin gas compression equipment. In addition, a reduction in sales volume and demand impacted all
of our product lines in our flow control segment, except for our control valve product line. Our control valve product line was positively impacted by a more favorable mix with an increase of higher margin sales for maintenance and repair
operations.



Gross Profit.Gross profit was
$99.9 million and $112.6 million for the three months ended March 31, 2003 and 2002, respectively. As a percentage of revenues, gross profit decreased to 26.9% in 2003 from 29.3% in 2002, primarily as a result of the factors discussed above.



Selling, Engineering, Administrative and General
Expenses. Selling, engineering, administrative and general expenses were $88.6 million and $73.4 million for the three months ended March 31, 2003 and 2002, respectively. This was an increase of $15.2 million or 20.7%. During the first quarter,
we incurred approximately $7.1 million in restructuring charges, as previously discussed. In addition, we incurred approximately $3.4 million of acquisition costs associated with parts of the Tokheim businesses not acquired and $2.4 million in
software costs which were impaired as a result of our decision to implement a new ERP system. As a percentage of revenues, these costs rose to 23.9% of revenues in 2003 from 19.1% of revenues in 2002.



Operating Income.Operating income was $11.3 million and $39.2 million
for the three months ended March 31, 2003 and 2002, respectively. This was a decrease of $27.9 million or 71.2%. As discussed above, our operating income was impacted primarily by reduced sales volume particularly in our high margin gas compression
equipment, restructuring expenses, impairment of certain assets as a result of the restructuring, costs related to acquisitions, and the impairment of software.



Interest Expense.Interest expense was $20.4 million and $33.8 million for the three months ended March 31, 2003 and 2002, respectively.
This is was a decrease of $13.4 million or 39.6%. This variance was primarily a result of a charge taken in the first quarter of 2002 for the write-off of unamortized deferred financing fees. In the first quarter of 2002, we made a substantial
prepayment on our Tranche A term loan. As a result, we



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wrote off $12.9 million of unamortized deferred financing fees. During 2003, we recorded a $0.1 million charge related to unamortized deferred financing fees
as a result of the optional prepayment on our Tranche B term loan.



Provision for income taxes.Provision for income taxes was $2.2 million and $4.4 million for the three months ended March 31, 2003 and 2002, respectively. The provision for income taxes was impacted by changes in the geographical
distribution of taxable income in various foreign jurisdictions. We have provided a full valuation allowance against domestic deferred tax assets. Therefore, no deferred income tax expense or benefit has been recorded during the periods indicated
above for our U.S. operations.



Bookings and Backlog.Bookings were $415.2 million and $384.7 million for the three months ended March 31, 2003 and 2002, respectively. This was an increase of $30.5 million or 7.9%. The increase in bookings is primarily attributable to strong increases in our
on/off product line which increased on the strength of international project activity. This was offset in part by declines in our other product lines within our flow control segment. Backlog at March 31, 2003 was $391.5 million compared to $433.3
million at March 31, 2002.



Segment Analysis



Flow Control.Revenues were $227.5 million and $245.3 million for
the three months ended March 31, 2003 and 2002, respectively. This was a decrease of $17.8 million or 7.3%. The decrease was primarily a result of lower sales volume in our on/off product line. We also experienced a reduction in revenue from our
metering and piping specialty product lines. The impact of severe winter weather, particularly in the Midwest and Northeast United States markets, reduced demand for industrial and commercial construction, and delays and cancellation of systems
upgrades led to the decline in this product line. These declines were in part offset by an increase in revenue in our control valve product line which benefited from stronger international markets and a more favorable mix of maintenance versus new
construction spending from our customers in the U.S. market.



Gross profit was $65.0 million and $77.1 million for the three months ended March 31, 2003 and 2002, respectively. This was a decline of $12.1 million or 15.7%. Gross profit was impacted by a loss in sales volume in all of our product lines
in this segment, except for control valves. Our control valve product line was positively impacted by a favorable product mix. As a percentage of revenues, gross profit declined to 28.6% in 2003 from 31.4% in 2002.



Selling, engineering, administrative, and general expenses were $54.0 million
and $43.2 million for the three months ended March 31, 2003 and 2002, respectively. This was an increase of $10.8 million or 25.0%. The increase in our selling, engineering, administrative and general expenses was impacted by increases in our on/off
valves and control valves product lines. We experienced higher selling expenses in our on/off valves and control valves product lines due to commissions associated with increased commissionable project and international sales. We also incurred $2.1
million in restructuring charges and the write-off of certain software costs of $2.4 million. As a percentage of revenue, these costs increased to 23.7% in 2003 from 17.6% in 2002.



Operating income was $11.0 million and $33.9 million for the three months ended March 31, 2003 and 2002, respectively. This
was a decrease of $22.9 million or 67.6% as a result of the factors discussed above.



Bookings were $276.5 million and $251.5 million for the three months ended March 31, 2003 and 2002, respectively, an increase of $25.0 million or 9.9%. The increase is primarily attributable to our on/off product
line, which benefited from significant increases in international project activity. This was offset in part by reductions in our other product lines, such as our piping specialties and metering, which saw a decline in bookings of $6.8 million as
compared to the prior year. Backlog at March 31, 2003 was $309.8 million compared to $339.1 million at March 31, 2002, a decrease of $29.3 million or 8.6%.



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Measurement Systems.Revenues were $75.0 million and $66.6 million for the three months ended
March 31, 2003 and 2002, respectively. This was an increase of $8.4 million or 12.6%. The increases in revenue can primarily be attributed to sales of $4.1 million related to the Tokheim asset purchase. In addition, equipment sales and service
revenue increased in the U.S. market.



Gross profit was $16.3
million and $15.7 million for the three months ended March 31, 2003 and 2002, respectively. This was an increase of $0.6 million or 3.8%. Although gross profit was positively impacted by increased volume as a result of the Tokheim asset purchase, it
was negatively impacted by several other factors, including $1.6 million in transition services costs associated with the Tokheim transaction and higher manufacturing costs associated with the introduction of a new model of fuel dispensers. As a
percentage of revenue, gross margins decreased to 21.7% in 2003 from 23.6% in 2002.



Selling, engineering, administrative, and general expenses were $17.0 million and $13.9 million for the three months ended March 31, 2003 and 2002, respectively. This was an increase of $3.1 million or 22.3%. The
increase was a result of certain restructuring activities undertaken resulting in a charge in the first quarter of approximately $4.9 million, which was offset in part by certain cost savings of $0.5 million. As a percentage of revenue, these costs
increased to 22.7% in 2003 from 20.9% in 2002.



Operating
(loss) income was $(0.7) million and $1.8 million for the three months ended March 31, 2003 and 2002, respectively. The decrease of $2.5 million or 138.9% was primarily a result of the factors discussed above.



Bookings were $67.3 million and $64.0 million for the three months ended
March 31, 2003 and 2002, respectively, an increase of 5.2%. Increases in bookings from U.S. distributors were partially offset by declines from our major oil customers and high volume retailers. Backlog at March 31, 2003 was $40.3 million compared
to $49.4 million at March 31, 2002, a decrease of 18.4%.



Compression and Power Systems.Revenues were $70.2 million and $74.0 million for the three months ended March 31, 2003 and 2002 respectively. This was a decrease of $3.8 million or 5.1%. The decrease in sales reflects the depressed
gas compression market and a decline in demand for our principal gas compression related product line; sales of this product declined approximately $14.4 million. This decrease was offset in part by increases in our other engine lines of $5.2
million and an increase in aftermarket service parts sales volume of $4.7 million. Our blower product line also showed positive growth of $0.7 million due to improved U.S. market demand.



Gross profit was $18.6 million and $20.1 million for the three months ended March 31, 2003 and 2002, respectively. This was
a decrease of $1.5 million or 7.5%. As a percentage of revenues, gross margins decreased to 26.5% in 2003 from 27.2% in 2002. Margins for the segment were positively impacted by improved margin performance in our blower product line which offset the
declines in our natural gas compression product line.



Selling,
engineering, administrative, and general expenses were $11.0 million and $12.3 million for the three months ended March 31, 2003 and 2002, respectively. This was a decrease of $1.3 million or 10.6%. The reduction in expenses is primarily a result of
certain restructuring and cost savings initiatives undertaken in 2002, which have resulted in savings in payroll as a result of head count reductions, as well as technical engineering services, maintenance, travel, supplies, and advertising
expenses. As a percentage of revenue, these costs decreased to 15.7% in 2003 from 16.6% in 2002.



Operating income was $7.6 million and $7.8 million for the three months ended March 31, 2003 and 2002, respectively. The decrease of $0.2 million or 2.6%
was primarily a result of the factors discussed above.



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Bookings were $71.4 million and $69.2 million for the three months ended March 31, 2003 and 2002,
respectively. Bookings were positively impacted by increases in our gas compression and services market. Backlog was $41.4 million and $47.9 million at March 31, 2003 and 2002, respectively. This was a decrease of $6.5 million or 13.6%.



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, working capital and capital expenditures. We expect to fund these cash needs with operating cash flow and, if necessary, borrowings under the revolving credit portion of our credit facility.



Cash and equivalents were $123.9 million and $97.0 million as
of March 31, 2003 and 2002, 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 generated from operating activities was $24.3 million and $5.7
million for the three months ended March 31, 2003 and 2002, respectively.



Net cash flows used in investing activities was $17.3 million for the three months ended March 31, 2003. Net cash flows used in investing activities resulted from the acquisition of certain assets of Tokheim North
America of approximately $15.4 million and capital expenditures of $1.9 million. Net cash flows used in investing activities was $4.8 million for the three months ended March 31, 2002, resulting from cash used from capital expenditures.



Net cash flows used in financing activities was $2.5 million for the three
months ended March 31, 2003 resulting primarily from the repayment of short term debt. Net cash flows used in financing activities was $5.1 million for the three months ended March 31, 2002, resulting primarily from the issuance of the
additional senior subordinated notes, offset by the repayment of debt with the use of proceeds from the notes and the payment of deferred financing fees.



As a condition of the third amendment to our credit facility in December 2002, we deposited $7.5 million in a segregated account with the administrative
agent of our credit facility in December 2002. Those funds were applied, at our option, to our Tranche B term loan on January 10, 2003. As a result of this prepayment, we wrote off an allocable portion of unamortized deferred financing charges of
approximately $0.1 million in the first quarter of 2003. These costs are included in interest expense.



We entered into a sixth amendment and waiver to our credit agreement on August 5, 2003, which extended our deadline to December 15, 2003 for providing our
senior lenders with audited financial statements for the fiscal years ended December 31, 2001 and December 31, 2002. This amendment also waived, among other things, any default or event of default relating in any respect to the 2001 re-audit,
revision or restatement of any financial statement delivered to the senior lenders prior to August 5, 2003, including any default or event of default relating in any respect to any errors contained in such financial statements. The amendment grants
a suspension period to deliver audited financials with respect to the waiver, which began on March 31, 2003 and ends on the earlier of (1) December 15, 2003 and (2) the date on which the administrative agent receives the audited annual financial
statements for the years ended December 31, 2002 and 2001.



Effective January 1, 2003, the applicable margin on our Tranche B term loan was increased from 3.50% to 3.75%. In addition, effective March 31, 2003, the applicable margin on our Tranche B term loan was increased by an additional 0.50% per
annum and, effective August 5, 2003, the applicable margin on our Tranche B term loan was further increased by an additional 0.50% per annum. The aggregate 1.00% per annum increase will remain in effect during the suspension period referred to
above.



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Total deferred financing fees incurred in connection with obtaining all of the amendments to the credit
facility to date were $6.1 million.



Under the indenture that
governs our senior subordinated notes, certain covenants require that we furnish to all holders of the notes all quarterly and annual financial information required to be contained in a filing with the SEC on Forms 10-Q and 10-K within the time
period specified in the SECs rules and regulations. In 2002, we determined that our 2001 financial statements, which had been previously been audited by Andersen, needed to be restated and re-audited, which resulted in a delay in the filing of
our annual report on Form 10-K for 2002 and our quarterly reports on Form 10-Q for the periods ended March 31, 2003, June 30, 2003 and September 30, 2003. Please see our annual report on Form 10-K for the year ended December 31, 2002 for a summary
of accounting errors and restatements of our financial statements for 1998 through 2001.



The failure to perform under this covenant would constitute an event of default if the default continues for a period of 30 days after we receive a written notice specifying the default (and demanding that the default
be remedied) from the trustee or holders of at least 25% of the outstanding principal amount of the notes. On December 4, 2003 we completed a consent solicitation to amend the indenture of our senior subordinated notes to provide that Dresser
will only be obligated to furnish to the holders of the senior subordinated notes a report by Dressers certified independent accountants with respect to annual information for fiscal years beginning after December 31, 2000. Each holder that
consented also waived all events of default with respect to breaches of the reporting provision of the indenture and all rights to cause the principal and accrued interest on the senior subordinated notes to be immediately due and payable. We
entered into a supplemental indenture with the trustee for the holders and the guarantors of the senior subordinated notes on December 4, 2003 to put into effect the amendment.



As of March 31, 2003, we had $555.6 million of senior subordinated notes, including a $5.6 million premium, $396.6 million
of debt consisting of the Tranche B term loan under the credit facility, $3.1 million of other long-term debt and $6.9 million in capital leases. In addition, we have a $100.0 million revolving credit facility, subject to certain conditions, of
which $68.5 million was available and $31.5 million was utilized for letters of credit as of March 31, 2003.



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



|                                   |  | Remainderof 2003 |      | 2004 |   | 2005 |  | 2006 |      | 2007 |   | 2008 andThereafter |  | Total
|---------------------------------- |  | ---------------- | ---- | ---- | - | ---- |  | ---- | ---- | ---- | - | ------------------ |  | -----
|                                   |  | (in millions)   
|Contractual Cash Obligations       |  |                  |      |      |   |      |  |      |      |      |   |                    |  |      
|Long-Term Debt(1)                  |  | $                | 0.6  |      | $ | 0.6  |  | $    | 2.7  |      | $ | 4.8                |  | $    
|Capital Lease Obligations          |  |                  | 1.8  |      |   | 2.2  |  |      | 2.5  |      |   | 0.2                |  |      
|Operating Leases                   |  |                  | 9.8  |      |   | 11.1 |  |      | 9.8  |      |   | 8.2                |  |      
|                                   |  |                  |      |      |   |      |  |      |      |      |   |                    |  |      
|Total Contractual Cash Obligations |  | $                | 12.2 |      | $ | 13.9 |  | $    | 15.0 |      | $ | 13.2               |  | $    
|                                   |  |                  |      |      |   |      |  |      |      |      |   |                    |  |      

---

|(1) |  | Excludes a $5.6 premium, which is being amortized over the term of the notes.
|--- |  | -----------------------------------------------------------------------------



|                  |  | Remainderof 2003 |      | 2004 |   | 2005 |  | 2006 |     | 2007 |   | 2008 andThereafter |  | Total
|----------------- |  | ---------------- | ---- | ---- | - | ---- |  | ---- | --- | ---- | - | ------------------ |  | -----
|                  |  | (in millions)   
|Commitments       |  |                  |      |      |   |      |  |      |     |      |   |                    |  |      
|Letters of Credit |  | $                | 29.2 |      | $ | 2.1  |  | $    | 0.1 |      | $ |                   |  | $    
|                  |  |                  |      |      |   |      |  |      |     |      |   |                    |  |      
|Total Commitments |  | $                | 29.2 |      | $ | 2.1  |  | $    | 0.1 |      | $ |                   |  | $    
|                  |  |                  |      |      |   |      |  |      |     |      |   |                    |  |      



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



Recent Accounting Pronouncements



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



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



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



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In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure, which amends FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition
guidance and annual disclosure provisions of SFAS No. 148 are in effect for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after December 15, 2002. The transition guidance provided in the statement had no impact on our results of operations or financial position, as we elected not to change the
accounting of our stock based compensation from APB No. 25 Accounting for Stock Issued to Employees. We have implemented the disclosure provisions of this statement, see Note 2 to our condensed consolidated financial statements.



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



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



In November 2002, the
FASB issued FASB Interpretation No. (FIN) 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation supercedes FIN 34
Disclosure of Indirect Guarantee of Indebtedness of Others. FIN 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. It also requires that a
guarantor recognize a liability, at the inception of a guarantee, for the fair value of the obligation undertaken in issuing the guarantee. The initial measurement and recognition provisions of FIN 45 are effective for guarantees issued or modified
after December 31, 2002. The disclosure requirements



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are effective for interim or annual periods ending after December 15, 2002. See Note 14 to our condensed consolidated financial statements. The adoption of
the measurement and recognition provisions of this interpretation did not have a material impact on our results of operations or financial position.



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



Certain Risk Factors



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



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



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



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



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



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



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



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



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



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 three months ended March 31, 2003, our largest customer represented approximately 2.6% of total revenues, and our top ten customers collectively
represented approximately 13.6% of total revenues. The loss of any of these customers, or class of customers, or decreases in these customers capital expenditures, could decrease our cash flow, market share and profits. As a result of industry
consolidation, especially among natural gas compression and major oil companies, our largest customers have become larger and, as a result, account for a larger percentage of our sales. We could lose a large customer as a result of a merger or
consolidation. Major oil companies and national oil companies have moved toward creating alliances and preferred supplier relationships with suppliers. In addition, these customers are increasingly pursuing arrangements with suppliers that can meet
a larger portion of their needs on a more global basis. Typically, a customer can terminate these arrangements at any time. The loss of a customer, or the award of a contract to a competitor, could significantly reduce our cash flow, market share
and profits.



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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 North America, as a percentage of our total sales, were 47.3% for the three months ended March 31, 2003. Accordingly, our future results
could be harmed by a variety of factors, including:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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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.



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



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



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



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



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



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



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



We
face intense competition.



We encounter intense
competition in all areas of our business. Competition in our primary business segments is based on a number of considerations including product performance, customer service, product lead times, global reach, brand reputation, breadth of product
line, quality of aftermarket service and support and price. Additionally, customers for our products are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. Our customers increasingly demand
more technologically advanced and integrated products and we must continue to develop our expertise and technical capabilities in order to manufacture and market these products successfully. To remain competitive, we will need to invest continuously



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in research and development, manufacturing, marketing, customer service and support and our distribution networks. We believe that in order to maintain our
competitiveness, we need to continue to focus on increasing operational efficiency and cash flow. This focus includes our on-going initiatives to increase manufacturing efficiencies, consolidate raw material sources, increase global procurement and
improve working capital efficiency. We believe these initiatives offer us opportunities to improve our profitability and cash flow. The continuation of re-engineering, plant consolidations, and the implementation of a new enterprise-wide reporting,
or ERP, system is critical to achieving these improvements. We may have to adjust the prices of some of our products to stay competitive. We cannot assure you that we will have sufficient resources to continue to make such investments, we will
achieve our stated objectives or that we will maintain our competitive position. Some of our competitors have greater financial and other resources than we do.



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



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



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



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



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



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



As of March 31, 2003, we had approximately 7,800 employees. Approximately
37% of our U.S. workforce and 44% of our global workforce is represented by labor unions. Currently, of our material collective bargaining agreements, one will expire in May 2004, three will expire in 2005, two will expire in 2006 and two will
expire in 2008. Two of our labor contracts will expire at the time the respective plants are closed. Although we believe that our relations with our employees are good, we cannot assure you that we will be successful in negotiating new collective
bargaining agreements, that such negotiations will not result in significant increases in the cost of labor or that a breakdown in such negotiations will not result in the disruption of our operations.



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



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



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



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



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



We rely on independent distributors.



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



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



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



The interests of First Reserve, Odyssey and their affiliates could conflict with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of
First Reserve



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and Odyssey as equity holders might conflict with interests of holders of our debt securities. Affiliates of First Reserve and Odyssey may also have an
interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to investors. In addition, our sponsors or their
affiliates currently own, and may in the future own, businesses that directly compete with ours.



We may be faced with unexpected product claims or regulations.



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



Our substantial indebtedness could adversely affect our financial condition.



We are a highly leveraged company. As of March 31, 2003, we had $962.2 million of outstanding long-term indebtedness,
including the current portion of long-term debt, $17.5 million of short-term notes and a stockholders deficit of $297.0 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; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



The terms of the indenture governing the notes do not prohibit us from incurring significant additional indebtedness in the future. As of March 31, 2003, we had $68.5 million available for additional borrowing under
the revolving credit facility, subject to certain conditions. All borrowings under the credit facility are senior to the notes.



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



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



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to the notes or the subsidiary guarantees. In addition, the credit facility is secured by substantially all of our assets and the assets of our wholly-owned
domestic subsidiaries.



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



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



As of
March 31, 2003, the notes and the subsidiary guarantees would have been subordinated to $406.6 million of long-term indebtedness, including $6.9 million in capital lease obligations, $17.5 million of short-term indebtedness and approximately
$68.5 million would have been available for borrowing as additional senior indebtedness under the credit facility, subject to certain conditions. We will be permitted to borrow substantial additional indebtedness, including senior indebtedness, in
the future under the terms of the indenture.



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



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



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



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



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



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



| |  |  | grant liens;
| | - |  | ------------



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



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



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



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



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



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



Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain



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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. In addition, pursuant to the recapitalization agreement, we are indemnified by Halliburton for up to $950.0 million (in aggregate with all other losses) of losses arising out of
all legal actions initiated prior to the closing of the recapitalization transaction and certain legal actions arising after the closing. However, material litigation or litigation that is material in the aggregate, and for which we are not
indemnified, may impact our 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.



Certain subsidiaries are not included as subsidiary guarantors.



The guarantors of the notes include our wholly-owned domestic subsidiaries. However, our financial statements include both our wholly-owned and non-wholly-owned domestic subsidiaries and our foreign subsidiaries. The
aggregate revenues for the three months ended March 31, 2003 of our subsidiaries that are not guarantors were $157.3 million. As of the three months ended March 31, 2003, those subsidiaries held 47.6% 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.



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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 therefore, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive
any assets of any of the foreign subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of notes to realize proceeds from the sale of any of those subsidiaries assets, will be
effectively subordinated to the claims of that subsidiarys creditors, including trade creditors and holders of debt of that subsidiary.



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



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



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



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



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



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



Generally, an entity will be considered insolvent if:



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



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



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



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



Item 3. Quantitative and Qualitative Disclosures about Market Risk



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





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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.



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



|                                      |  | 2003          |          |   | 2004 |   |      | 2005 |  |   | 2006 |   |  | 2007 |      |   | Thereafter |   |      | Total |  | FairValue |      
|------------------------------------- |  | ------------- | -------- | - | ---- | - | ---- | ---- |  | - | ---- | - |  | ---- | ---- | - | ---------- | - | ---- | ----- |  | --------- | -----
|                                      |  | (in millions) |         
|Related forward contracts to sell USD |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Japanese Yen                          |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Contract Amount                       |  | $             | 0.1      |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Avg. Contract Rate                    |  |               | 123.2091 |   |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Euro                                  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Contract Amount                       |  | $             | 60.3     |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Avg. Contract Rate                    |  |               | 1.0228   |   |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Related forward contracts to sell GBP |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Euro                                  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Contract Amount                       |  | $             | 0.4      |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Avg. Contract Rate                    |  |               | 0.6729   |   |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Related forward contracts to buy USD  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|South African Rand                    |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Contract Amount                       |  | $             | 0.6      |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Avg. Contract Rate                    |  |               | 9.6377   |   |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Euro                                  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Contract Amount                       |  | $             | 0.2      |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Avg. Contract Rate                    |  |               | 1.0699   |   |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Related forward contracts to buy EUR  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|South African Rand                    |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Contract Amount                       |  | $             | 0.2      |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Avg. Contract Rate                    |  |               | 9.5881   |   |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Related forward contracts to buy JPY  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Euro                                  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Contract Amount                       |  | $             | 2.6      |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Avg. Contract Rate                    |  |               | 119.7198 |   |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Related forward contracts to buy GBP  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Euro                                  |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Contract Amount                       |  | $             | 0.2      |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Avg. Contract Rate                    |  |               | 0.6697   |   |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Long-term debt                        |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|U.S. Dollar Functional Currency       |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Fixed Rate                            |  | $             | 1.9      |   |      | $ | 2.5  |      |  | $ | 2.9  |   |  | $    | 0.7  |   |            | $ | 0.7  |       |  | $         | 552.3
|Average Interest Rate                 |  |               | 9.28     | % |      |   | 9.30 | %    |  |   | 9.31 | % |  |      | 9.33 | % |            |   | 9.33 | %     |  |           | 9.35 
|Variable Rate                         |  | $             |         |   |      | $ |     |      |  | $ | 2.1  |   |  | $    | 4.1  |   |            | $ | 4.1  |       |  | $         | 386.3
|Average Interest Rate                 |  |               | 4.72     | % |      |   | 4.77 | %    |  |   | 5.28 | % |  |      | 5.84 | % |            |   | 6.34 | %     |  |           | 6.62 
|Euro Functional Currency              |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Fixed Rate                            |  | $             | 0.9      |   |      | $ | 0.8  |      |  | $ | 0.8  |   |  | $    | 0.7  |   |            | $ | 0.3  |       |  | $         | 0.3  
|Average Interest Rate                 |  |               | 7.29     | % |      |   | 7.60 | %    |  |   | 8.26 | % |  |      | 8.02 | % |            |   | 9.75 | %     |  |           | 9.75 
|Variable Rate                         |  | $             | 0.1      |   |      | $ | 0.2  |      |  | $ | 0.1  |   |  | $    | 0.2  |   |            | $ | 0.2  |       |  | $         |     
|Average Interest Rate                 |  |               | 2.37     | % |      |   | 3.55 | %    |  |   | 4.78 | % |  |      | 5.61 | % |            |   | 5.69 | %     |  |           | 6.30 
|Interest Rate Swaps                   |  |               |          |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |           |      
|Pay Fixed/Receive Variable            |  | $             | 115.0    |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $         |     
|Average Pay Rate                      |  |               | 4.49     | % |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     
|Average Receive Rate                  |  |               | 1.27     | % |      |   |     |      |  |   |     |   |  |      |     |   |            |   |     |       |  |           |     



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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.



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



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



As required by SEC Rule 13a-15(b), we have carried out an evaluation, under the supervision and with the participation of our management, including our
chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The evaluation examined those disclosure controls and procedures both as of March 31, 2003, the end
of the period covered by this report, and, because of the late filing of this report, during the weeks preceding the filing of this report. Based upon the foregoing, our chief executive officer and chief financial officer concluded that, as of March
31, 2003, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including
our chief executive officer and our chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure and that the following initiatives with respect to our disclosure controls and procedures were required:



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



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



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



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



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



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



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



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



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



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



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



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



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



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PART II. OTHER INFORMATION



Item 1. Legal Proceeding



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



Item 2. Defaults Upon Senior Securities



Under the indenture that governs our senior subordinated notes, the covenants require that we furnish to all holders of the notes all quarterly and annual financial information required to be contained in a filing with the SEC on Forms 10-Q
and 10-K within the time period specified in the SECs rules and regulations. In 2002, we determined that our 2001 financial statements, which had been previously been audited by Andersen, needed to be restated and re-audited, which resulted in
a delay in the filing of our annual report on Form 10-K for 2002 and our quarterly reports on Form 10-Q for the periods ended March 31, 2003, June 30, 2003 and September 30, 2003.



The failure to perform under this covenant would constitute an event of default if the default continues for a period of 30
days after we receive a written notice specifying the default (and demanding that the default be remedied) from the trustee or holders of at least 25% of the outstanding principal amount of the notes. On December 4, 2003 we completed a consent
solicitation to amend the indenture of our senior subordinated notes to provide that Dresser will only be obligated to furnish to the holders of the senior subordinated notes a report by Dressers certified independent accountants with respect
to annual information for fiscal years beginning after December 31, 2000. Each holder that consented also waived all events of default with respect to breaches of the reporting provision of the indenture and all rights to cause the principal and
accrued interest on the senior subordinated notes to be immediately due and payable. We entered into a supplemental indenture with the trustee for the holders and the guarantors of the senior subordinated notes on December 4, 2003 to put into
effect the amendment.



Item 6. Exhibits and Reports on Form 8-K



a.) Exhibits



|ExhibitNo. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                            
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           | 
|4.1        |  | Amendment No. 4 and Waiver to the Credit Agreement effective April 3, 2003 among Dresser, Inc., D.I. Luxembourg S.A.R.L., DEG Acquisitions, LLC, Dresser Holdings, Inc., the
Subsidiary Guarantors party to the Credit Agreement and the Lenders and Agents named therein incorporated by reference to Exhibit 4.1 to our 8-K dated April 3, 2003.
|           | 
|*31.1      |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                            
|           | 
|*31.2      |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                            
|           | 
|*32.1      |  | Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                                                                                                                                                                                         
|           | 
|*32.2      |  | Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                                                                                                                                                                                         

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



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b.) Reports on Form 8-K



Current
Report on Form 8-K of Dresser dated March 7, 2003 reporting under Item 2. Acquisition or Disposition of Assets, announcing the acquisition of the assets of Tokheim North America and its MSI business unit.



Current Report on Form 8-K of Dresser dated March 24, 2003 reporting under
Item 9. Regulation FD Disclosure announcing its intention to re-audit its 2001 financial statements.



Current Report on Form 8-K of Dresser dated April 3, 2003 reporting under Item 5. Other Events and Regulation FD Disclosure, announcing it had entered
into an amendment No. 4 and waiver to its credit agreement.



Current Report on Form 8-K of Dresser dated April 24, 2003 reporting under Item 9. Regulation FD Disclosure announcing the disclosure of certain of certain cost saving results.



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SIGNATURES



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



|Date: December 11, 2003 |  |  |  | DRESSER, INC.
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