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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q/A



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



For the quarterly period ended September 30, 2002



OR



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



For the transition period from  to



Commission File Number 333-60778



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DRESSER, INC.

(Exact name of registrant as specified in its charter)



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



15455 Dallas
Parkway, Suite 1100

Addison, Texas 75001

(Address of principal executive offices) (zip code)



(972) 361-9800

(Registrants telephone number, including area code)



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



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



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Explanatory Note



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



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



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



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



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



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



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



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##### Table of Contents

DRESSER, INC.



INDEX



|           |  |                                                                                                                             |  | PageNo.
|---------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | -------
|           |  | PART I. FINANCIAL INFORMATION                                                                                               |  |        
|           |  |                                                                                                                            
|Item 1.    |  | Financial Statements                                                                                                        |  |        
|           |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001 (unaudited) |  | 4      
|           |  | Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited)and December 31, 2001                             |  | 5      
|           |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (unaudited)           |  | 6      
|           |  | Notes to Condensed Consolidated Financial Statements as of September 30, 2002 (unaudited)                                   |  | 7      
|           |  |                                                                                                                            
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 33     
|           |  |                                                                                                                            
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                                  |  | 60     
|           |  |                                                                                                                            
|Item 4.    |  | Controls and Procedures                                                                                                     |  | 63     
|           |  |                                                                                                                            
|           |  | PART II. OTHER INFORMATION                                                                                                  |  |        
|           |  |                                                                                                                            
|Item 1.    |  | Legal Proceedings                                                                                                           |  | 65     
|           |  |                                                                                                                            
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                   |  | 65     
|           |  |                                                                                                                            
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                         |  | 65     
|           |  |                                                                                                                            
|Item 6.    |  | Exhibits and Reports on Form 8-K:                                                                                           |  |        
|           |  |                                                                                                                            
|           |  | Exhibits                                                                                                                    |  | 66     
|           |  | Reports on Form 8-K                                                                                                         |  | 66     
|           | 
|Signatures |  | 67                                                                                                                         



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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 Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|--------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                                                          |  | 2002                             |       |   | 2001                            |  
|                                                          |  | Restated                         |       |   | Restated                        |  
|Revenues                                                  |  | $                                | 407.9 |   |                                 | $
|Cost of revenues                                          |  |                                  | 308.8 |   |                                 |  
|                                                          |  |                                  |       |   |                                 |  
|Gross profit                                              |  |                                  | 99.1  |   |                                 |  
|Selling, engineering, administrative and general expenses |  |                                  | 80.1  |   |                                 |  
|                                                          |  |                                  |       |   |                                 |  
|Operating income                                          |  |                                  | 19.0  |   |                                 |  
|Equity earnings of unconsolidated subsidiaries            |  |                                  | 0.8   |   |                                 |  
|Interest expense                                          |  |                                  | (21.6 | ) |                                 |  
|Interest income                                           |  |                                  | 0.9   |   |                                 |  
|Other (deductions) income, net                            |  |                                  | (1.8  | ) |                                 |  
|                                                          |  |                                  |       |   |                                 |  
|(Loss) income before taxes                                |  |                                  | (2.7  | ) |                                 |  
|Benefit (provision) for income taxes                      |  |                                  | 2.9   |   |                                 |  
|                                                          |  |                                  |       |   |                                 |  
|Net income (loss)                                         |  | $                                | 0.2   |   |                                 | $
|                                                          |  |                                  |       |   |                                 |  



See accompanying notes
to condensed consolidated financial statements



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##### Table of Contents

DRESSER, INC.

Condensed Consolidated Balance Sheets

(in millions, except share information)



|                                                                                                       |  | September 30, 2002 |         |   | December 31, 2001 |  
|------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | -
|                                                                                                       |  | Restated           |         |   | Restated          |  
|                                                                                                       |  | (unaudited)        |         |   |                   |  
|ASSETS                                                                                                 |  |                    |         |   |                   |  
|Current assets:                                                                                        |  |                    |         |   |                   |  
|Cash and equivalents                                                                                   |  | $                  | 92.6    |   |                   | $
|Receivables                                                                                            |  |                    | 317.5   |   |                   |  
|Inventories                                                                                            |  |                    | 306.7   |   |                   |  
|Other current assets                                                                                   |  |                    | 14.7    |   |                   |  
|                                                                                                       |  |                    |         |   |                   |  
|Total current assets                                                                                   |  |                    | 731.5   |   |                   |  
|Property, plant and equipment                                                                          |  |                    | 215.2   |   |                   |  
|Investments in unconsolidated subsidiaries                                                             |  |                    | 7.5     |   |                   |  
|Deferred financing fees and other assets                                                               |  |                    | 70.2    |   |                   |  
|Prepaid and intangible pension assets                                                                  |  |                    | 59.7    |   |                   |  
|Deferred tax assets                                                                                    |  |                    | 2.3     |   |                   |  
|Goodwill                                                                                               |  |                    | 289.3   |   |                   |  
|Intangibles                                                                                            |  |                    | 6.2     |   |                   |  
|                                                                                                       |  |                    |         |   |                   |  
|Total assets                                                                                           |  | $                  | 1,381.9 |   |                   | $
|                                                                                                       |  |                    |         |   |                   |  
|LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCK AND SHAREHOLDERS DEFICIT                             |  |                    |         |   |                   |  
|Current liabilities:                                                                                   |  |                    |         |   |                   |  
|Accounts and notes payable                                                                             |  | $                  | 209.6   |   |                   | $
|Deferred revenue                                                                                       |  |                    | 19.5    |   |                   |  
|Accrued expenses                                                                                       |  |                    | 131.9   |   |                   |  
|                                                                                                       |  |                    |         |   |                   |  
|Total current liabilities                                                                              |  |                    | 361.0   |   |                   |  
|Pension and other retiree benefit obligations                                                          |  |                    | 267.0   |   |                   |  
|Long-term debt                                                                                         |  |                    | 964.8   |   |                   |  
|Other liabilities                                                                                      |  |                    | 45.2    |   |                   |  
|Commitments and contingencies                                                                          |  |                    |         |   |                   |  
|                                                                                                       |  |                    |         |   |                   |  
|Total liabilities                                                                                      |  |                    | 1,638.0 |   |                   |  
|                                                                                                       |  |                    |         |   |                   |  
|Mandatorily redeemable common stock                                                                    |  |                    | 7.9     |   |                   |  
|                                                                                                       |  |                    |         |   |                   |  
|Shareholders deficit:                                                                                 |  |                    |         |   |                   |  
|Common stock, $0.01 par value; issued and outstanding: 1,000 in 2002 (See Note 2)                      |  |                    |        |   |                   |  
|Common stock, $0.001 par value; issued and outstanding: 10,410,089 class A and 790,744 class B in 2001 |  |                    |        |   |                   |  
|Capital in excess of par value                                                                         |  |                    | 447.2   |   |                   |  
|Shareholders deficit, net                                                                             |  |                    | (639.1  | ) |                   |  
|Accumulated other comprehensive loss                                                                   |  |                    | (72.1   | ) |                   |  
|                                                                                                       |  |                    |         |   |                   |  
|Total shareholders deficit                                                                            |  |                    | (264.0  | ) |                   |  
|                                                                                                       |  |                    |         |   |                   |  
|Total liabilities, mandatorily redeemable common stock and shareholders deficit                       |  | $                  | 1,381.9 |   |                   | $
|                                                                                                       |  |                    |         |   |                   |  



See accompanying notes
to condensed consolidated financial statements



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DRESSER, INC.

Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)



|                                                                                          |  | Nine Months Ended September 30, |       
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ------
|                                                                                          |  | 2002                            |       
|                                                                                          |  | Restated                        |       
|Cash flows from operating activities:                                                     |  |                                 |       
|Net income (loss)                                                                         |  | $                               | 1.1   
|Adjustments to reconcile net income (loss) to cash flow provided by operating activities: |  |                                 |       
|Depreciation and amortization                                                             |  |                                 | 32.7  
|Equity earnings of unconsolidated affiliates                                              |  |                                 | (2.6  
|Loss on repayment of debt                                                                 |  |                                 | 15.4  
|Deferred tax valuation allowance                                                          |  |                                 |      
|Other changes, net                                                                        |  |                                 |       
|Receivables                                                                               |  |                                 | (4.4  
|Inventories                                                                               |  |                                 | 46.8  
|Accounts payable                                                                          |  |                                 | (4.1  
|Other                                                                                     |  |                                 | 1.2   
|                                                                                          |  |                                 |       
|Net cash provided by operating activities                                                 |  |                                 | 86.1  
|                                                                                          |  |                                 |       
|Cash flows from investing activities:                                                     |  |                                 |       
|Recapitalization transaction                                                              |  |                                 |      
|Asset acquisitions                                                                        |  |                                 | (21.4 
|Capital expenditures                                                                      |  |                                 | (11.0 
|Other                                                                                     |  |                                 |      
|                                                                                          |  |                                 |       
|Net cash used in investing activities                                                     |  |                                 | (32.4 
|                                                                                          |  |                                 |       
|Cash flow from financing activities:                                                      |  |                                 |       
|Changes in intercompany activities                                                        |  |                                 |      
|Proceeds from the issuance of long-term debt                                              |  |                                 | 256.3 
|Repayment of long-term debt (including current portion)                                   |  |                                 | (313.6
|(Decrease) increase in short-term notes payable                                           |  |                                 | (9.4  
|Payment of deferred financing fees                                                        |  |                                 | (8.3  
|Proceeds from the issuance of stock                                                       |  |                                 | 10.0  
|Equity issuance costs                                                                     |  |                                 |      
|Cash overdrafts                                                                           |  |                                 |      
|                                                                                          |  |                                 |       
|Net cash (used in) provided by financing activities                                       |  |                                 | (65.0 
|                                                                                          |  |                                 |       
|Effect of translation adjustments on cash                                                 |  |                                 | 2.2   
|                                                                                          |  |                                 |       
|Net (decrease) increase in cash and equivalents                                           |  |                                 | (9.1  
|Cash and equivalents, beginning of period                                                 |  |                                 | 101.7 
|                                                                                          |  |                                 |       
|Cash and equivalents, end of period                                                       |  | $                               | 92.6  
|                                                                                          |  |                                 |       
|Supplemental disclosure of cash flow information:                                         |  |                                 |       
|Cash payments during the period for:                                                      |  |                                 |       
|Interest                                                                                  |  | $                               | 44.9  
|Income taxes                                                                              |  |                                 | 16.0  



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



In January 2001, Halliburton Company (Halliburton), together with its wholly-owned subsidiary Dresser B.V., signed an Agreement and Plan of Recapitalization with DEG Acquisitions, LLC, an entity owned by affiliates of First
Reserve Corporation (First Reserve) and Odyssey Investment Partners, LLC (Odyssey), to effect the recapitalization of its businesses relating to, among other things, the design, manufacture and marketing of flow control,
measurement systems and compression and power systems for customers primarily in the energy industry. Halliburton originally acquired the businesses as part of its acquisition of Dresser Industries, Inc. in 1998. Dresser Industries operations
consisted of the Companys businesses and certain other operating units retained by Halliburton following the consummation of the recapitalization 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 to Halliburton approximately $1,300 million to redeem
our common equity and acquire the stock of certain of our foreign subsidiaries from Dresser B.V. The recapitalization transaction and related expenses were financed through the issuance of $300.0 million of senior subordinated notes, $720.0 million
of borrowings under our credit facility, and approximately $400.0 million of common equity contributed by DEG Acquisitions, LLC.



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



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



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DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



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



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



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



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



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



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



Restatement of our
Financial Statements



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



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DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



Errors in carve-out financial statements:



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



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



|                                                          |  | Three Months ended September 30, |   | Nine Months ended September 30, |  
|--------------------------------------------------------- |  | -------------------------------- | - | ------------------------------- | -
|                                                          |  | 2002                             |   | 2001                            |  
|                                                          |  | (in millions)                    |  
|Statement of operations impact:                           |  |                                  |   |                                 |  
|Selling, engineering, administrative and general expenses |  | $                                |  |                                 | $
|Operating income                                          |  | $                                |  |                                 | $
|                                                          |  |                                  |   |                                 |  



Errors in leveraged recapitalization transaction:



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



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



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



|                                |  | Three Months ended September 30, |   |      | Nine Months ended September 30, |     
|------------------------------- |  | -------------------------------- | - | ---- | ------------------------------- | ----
|                                |  | 2002                             |   | 2001 |                                 |     
|                                |  | (in millions)                    |  
|Statement of operations impact: |  |                                  |   |      |                                 |     
|Provision for income taxes      |  | $                                |  |      | $                               | (5.3
|Net income                      |  | $                                |  |      | $                               | 5.3 
|                                |  |                                  |   |      |                                 |     



Errors in reserves:



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



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



|                                                          |  | Three Months ended September 30, |   |      | Nine Months ended September 30, |     
|--------------------------------------------------------- |  | -------------------------------- | - | ---- | ------------------------------- | ----
|                                                          |  | 2002                             |   | 2001 |                                 |     
|                                                          |  | (in millions)                    |  
|Statement of operations impact:                           |  |                                  |   |      |                                 |     
|Cost of revenues                                          |  | $                                |  |      | $                               | 1.7 
|Selling, engineering, administrative and general expenses |  |                                  |  |      |                                 | 2.2 
|Operating income                                          |  | $                                |  |      | $                               | (3.9
|                                                          |  |                                  |   |      |                                 |     



10



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



Other errors:



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



|                                        |  | September 30, 2002 |       |   | December 31, 2001 |  
|--------------------------------------- |  | ------------------ | ----- | - | ----------------- | -
|                                        |  | (in millions)      |      
|Balance sheet impact:                   |  |                    |       |   |                   |  
|Current assets                          |  | $                  | (14.2 | ) |                   | $
|Long-term assets                        |  |                    | (15.0 | ) |                   |  
|Current liabilities                     |  |                    | (9.8  | ) |                   |  
|Long-term liabilities                   |  |                    | (5.3  | ) |                   |  
|Mandatorily redeemable common stock     |  |                    | 7.9   |   |                   |  
|Shareholders deficit/Divisional equity |  | $                  | (22.0 | ) |                   | $
|                                        |  |                    |       |   |                   |  



|                                                          |  | Three Months ended September 30, |      |   | Nine Months ended September 30, |  
|--------------------------------------------------------- |  | -------------------------------- | ---- | - | ------------------------------- | -
|                                                          |  | 2002                             |      |   | 2001                            |  
|                                                          |  | (in millions)                    |     
|Statement of operations impact:                           |  |                                  |      |   |                                 |  
|Revenue                                                   |  | $                                | 1.7  |   |                                 | $
|Cost of revenues                                          |  |                                  | 2.0  |   |                                 |  
|Selling, engineering, administrative and general expenses |  |                                  | 1.4  |   |                                 |  
|Operating income                                          |  |                                  | (1.7 | ) |                                 |  
|Interest expense                                          |  |                                  | (0.4 | ) |                                 |  
|Other income (deductions)                                 |  |                                  |     |   |                                 |  
|Income before taxes                                       |  |                                  | (1.3 | ) |                                 |  
|Provision for income taxes                                |  |                                  | (2.9 | ) |                                 |  
|Net income                                                |  | $                                | 1.6  |   |                                 | $
|                                                          |  |                                  |      |   |                                 |  



Errors in the statement of cash flows:



We made errors in our 2001 statement of cash flows for the nine months ended September 30, 2001, the correction of which resulted in a net decrease in operating cash flows of $50.6 million, an increase in cash flows from investing
activities of $0.7 million, an increase in cash flows provided by financing activities of $51.9 million and a decrease of $2.0 million on the effects of translation adjustments on cash.



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



11



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



|                                          |  | September 30, 2001 |      
|----------------------------------------- |  | ------------------ | -----
|                                          |  | (in millions)      |      
|Statement of Cash flows:                  |  |                    |      
|Cash flows from operating activities      |  | $                  | (50.7
|Cash flows from investing activities      |  |                    | 0.7  
|Cash flows from financing activities      |  |                    | 51.9 
|Effect of translation adjustments on cash |  |                    | (2.0 
|                                          |  |                    |      
|Net change to cash flows                  |  | $                  | (0.1 
|                                          |  |                    |      



Reclassifications:



We have also
reclassified equity earnings of unconsolidated subsidiaries from revenues to a separate line item on the financial statements. The impact was to reduce revenues in for the three months ending September 30, 2002 and 2001 by $0.8 million and $0.4
million, respectively. Revenue was reduced by $2.6 million and $1.4 million for the nine months ended September 30, 2002 and 2001, respectively. We have also reclassified progress billings to customers from a reduction of both inventory to deferred
revenue. The impact was to increase inventory and deferred revenue by $14.0 million and $2.0 million as of September 30, 2002 and December 31, 2001, respectively.



12



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



Summary of Restated Items



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



|                                                                                 |  | September 30, 2002     |         |   | September 30, 2002 |   |         | December 31, 2001      |  |   | December 31, 2001 |  
|-------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------------ | - | ------- | ---------------------- |  | - | ----------------- | -
|                                                                                 |  | As previously reported |         |   | As Restated        |   |         | As previously reported |  |   | As Restated       |  
|                                                                                 |  | (in millions)          |        
|Current assets:                                                                  |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Cash and equivalents                                                             |  | $                      | 92.6    |   |                    | $ | 92.6    |                        |  | $ | 97.2              |  
|Receivables                                                                      |  |                        | 320.3   |   |                    |   | 317.5   |                        |  |   | 316.2             |  
|Inventories                                                                      |  |                        | 304.1   |   |                    |   | 306.7   |                        |  |   | 328.3             |  
|Other current assets                                                             |  |                        | 14.7    |   |                    |   | 14.7    |                        |  |   | 10.4              |  
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Total current assets                                                             |  |                        | 731.7   |   |                    |   | 731.5   |                        |  |   | 752.1             |  
|Property, plant and equipment                                                    |  |                        | 215.2   |   |                    |   | 215.2   |                        |  |   | 235.9             |  
|Prepaid and intangible pension assets                                            |  |                        |         |   |                    |   | 59.7    |                        |  |   |                  |  
|Goodwill                                                                         |  |                        | 428.3   |   |                    |   | 289.3   |                        |  |   | 408.7             |  
|Other long-term assets                                                           |  |                        | 176.6   |   |                    |   | 86.2    |                        |  |   | 193.0             |  
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Total assets                                                                     |  | $                      | 1,551.8 |   |                    | $ | 1,381.9 |                        |  | $ | 1,589.7           |  
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Current liabilities:                                                             |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Accounts and notes payable                                                       |  | $                      | 210.2   |   |                    | $ | 209.6   |                        |  | $ | 245.3             |  
|Other accrued expenses                                                           |  |                        | 165.8   |   |                    |   | 151.4   |                        |  |   | 147.7             |  
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Total current liabilities                                                        |  |                        | 376.0   |   |                    |   | 361.0   |                        |  |   | 393.0             |  
|Pension and other retiree benefit                                                |  |                        | 195.6   |   |                    |   | 267.0   |                        |  |   | 214.3             |  
|Long-term debt                                                                   |  |                        | 964.8   |   |                    |   | 964.8   |                        |  |   | 1,000.0           |  
|Other liabilities                                                                |  |                        | 33.1    |   |                    |   | 45.2    |                        |  |   | 26.0              |  
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Total liabilities                                                                |  |                        | 1,569.5 |   |                    |   | 1,638.0 |                        |  |   | 1,633.3           |  
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Mandatorily redeemable common stock                                              |  |                        |        |   |                    |   | 7.9     |                        |  |   |                  |  
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Total shareholders deficit                                                      |  |                        | (17.7   | ) |                    |   | (264.0  | )                      |  |   | (43.6             | )
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  
|Total liabilities, mandatorily redeemable common stock and shareholders deficit |  | $                      | 1,551.8 |   |                    | $ | 1,381.9 |                        |  | $ | 1,589.7           |  
|                                                                                 |  |                        |         |   |                    |   |         |                        |  |   |                   |  



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



|                                                 |  | September 30,2002 |        |   | December 31,2001 |  
|------------------------------------------------ |  | ----------------- | ------ | - | ---------------- | -
|                                                 |  | (in millions)     |       
|Shareholders deficit, as previously reported    |  | $                 | (17.7  | ) |                  | $
|Errors in carve-out financial statements         |  |                   | (9.1   | ) |                  |  
|Errors in leveraged recapitalization transaction |  |                   | (218.1 | ) |                  |  
|Errors in reserves                               |  |                   | 2.9    |   |                  |  
|Other errors                                     |  |                   | (22.0  | ) |                  |  
|                                                 |  |                   |        |   |                  |  
|Shareholders deficit, as restated               |  | $                 | (264.0 | ) |                  | $
|                                                 |  |                   |        |   |                  |  



13



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



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



|                                                          |  | Three Months Ended September 30, |         |   | Three Months Ended September 30, |  
|--------------------------------------------------------- |  | -------------------------------- | ------- | - | -------------------------------- | -
|                                                          |  | 2002                             |         |   | 2002                             |  
|                                                          |  | As previouslyreported            |         |   | As Restated                      |  
|                                                          |  | (in millions)                    |        
|Revenues                                                  |  | $                                | 407.0   |   |                                  | $
|Cost of revenues                                          |  |                                  | 306.8   |   |                                  |  
|                                                          |  |                                  |         |   |                                  |  
|Gross profit                                              |  |                                  | 100.2   |   |                                  |  
|Selling, engineering, administrative and general expenses |  |                                  | 78.7    |   |                                  |  
|                                                          |  |                                  |         |   |                                  |  
|Operating income                                          |  |                                  | 21.5    |   |                                  |  
|Equity earnings of unconsolidated subsidiaries            |  |                                  |        |   |                                  |  
|Interest expense                                          |  |                                  | (22.0   | ) |                                  |  
|Other (deductions) income, net                            |  |                                  | (0.9    | ) |                                  |  
|                                                          |  |                                  |         |   |                                  |  
|(Loss) income before taxes                                |  |                                  | (1.4    | ) |                                  |  
|Benefit (provision) for income taxes                      |  |                                  |        |   |                                  |  
|                                                          |  |                                  |         |   |                                  |  
|Net (loss) income                                         |  | $                                | (1.4    | ) |                                  | $
|                                                          |  |                                  |         |   |                                  |  
|                                                          |  |                                 
|                                                          |  | Nine Months EndedSeptember 30,   |         |   | Nine Months EndedSeptember 30,   |  
|                                                          |  | 2002                             |         |   | 2002                             |  
|                                                          |  | As previously reported           |         |   | As Restated                      |  
|                                                          |  | (in millions)                    |        
|Revenues                                                  |  | $                                | 1,207.3 |   |                                  | $
|Cost of revenues                                          |  |                                  | 882.9   |   |                                  |  
|                                                          |  |                                  |         |   |                                  |  
|Gross profit                                              |  |                                  | 324.4   |   |                                  |  
|Selling, engineering, administrative and general expenses |  |                                  | 235.6   |   |                                  |  
|                                                          |  |                                  |         |   |                                  |  
|Operating income                                          |  |                                  | 88.8    |   |                                  |  
|Equity earnings of unconsolidated subsidiaries            |  |                                  |        |   |                                  |  
|Interest expense                                          |  |                                  | (80.1   | ) |                                  |  
|Other income, net                                         |  |                                  | 2.0     |   |                                  |  
|                                                          |  |                                  |         |   |                                  |  
|Income before taxes                                       |  |                                  | 10.7    |   |                                  |  
|Provision for income taxes                                |  |                                  | (4.6    | ) |                                  |  
|                                                          |  |                                  |         |   |                                  |  
|Net income (loss)                                         |  | $                                | 6.1     |   |                                  | $
|                                                          |  |                                  |         |   |                                  |  



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



14



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



|                                                             |  | Three Months ended September 30, |      |   | Nine Months ended September 30, |  
|------------------------------------------------------------ |  | -------------------------------- | ---- | - | ------------------------------- | -
|                                                             |  | 2002                             |      |   | 2001                            |  
|                                                             |  | (in millions)                    |     
|(Loss) income before taxes, as previously reported           |  | $                                | (1.4 | ) |                                 | $
|Errors in carve-out financial statements                     |  |                                  |     |   |                                 |  
|Errors in reserves                                           |  |                                  |     |   |                                 |  
|Other errors                                                 |  |                                  | (1.3 | ) |                                 |  
|                                                             |  |                                  |      |   |                                 |  
|(Loss) income before taxes, as restated                      |  | $                                | (2.7 | ) |                                 | $
|                                                             |  |                                  |      |  
|Benefit (provision) for income taxes, as previously reported |  | $                                |     |   |                                 | $
|Errors in leveraged recapitalization transaction             |  |                                  |     |   |                                 |  
|Other errors                                                 |  |                                  | (2.9 | ) |                                 |  
|                                                             |  |                                  |      |   |                                 |  
|Provision for income taxes, as restated                      |  | $                                | 2.9  |   |                                 | $
|                                                             |  |                                  |      |   |                                 |  
|Net income, as restated                                      |  | $                                | 0.2  |   |                                 | $
|                                                             |  |                                  |      |   |                                 |  



Note 2. Corporate Reorganization



Effective July 3, 2002, Dresser, entered into an
agreement and plan of merger (Merger Agreement) with Dresser, Ltd., a Bermuda company, and Dresser Mergerco Inc., a Delaware Corporation and a wholly-owned indirect subsidiary of Dresser and Dresser, Ltd. Dresser Mergerco merged with and
into Dresser, with Dresser being the surviving corporation.



Upon the terms of the Merger Agreement, each outstanding share of Dresser common stock was cancelled and the holders received one class A common share of Dresser Ltd., for each share of Dresser class A common stock, and one class B common
share of Dresser Ltd. for each share of Dresser class B common stock, respectively, held by each shareholder. The reorganization has been accounted for as a reorganization of entities under common control, and accordingly, it did not result in any
changes to the consolidated amounts of assets, liabilities, and shareholders deficit.



In addition, the certification of incorporation was amended. The total number of shares of stock, which Dresser shall have the authority to issue, is 10,000 having a par value of $0.01 per share of common stock.



Note 3. Restructuring and Other Exit Activities



During the third quarter, we initiated restructuring programs affecting
several business units in an effort to obtain manufacturing efficiencies and cost savings. In connection with these activities, we have elected early application of Statement of Financial Accounting Standards (SFAS) No. 146
Accounting for Costs Associated with Exit or Disposal Activities 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.



During the third quarter of 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



15



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



dispenser manufacturing in our Austin, Texas facility; and (3) discontinue several small product lines. We incurred charges of approximately $3.9 million for
inventory markdowns associated with these activities. These costs have been reflected in costs of revenues in our condensed consolidated statements of operations.



In connection with these activities, as described above, we incurred certain restructuring charges related to termination
benefits as we terminated 93 employees. We also impaired certain assets, related to machinery, goodwill, and capitalized designs. These costs have been reflected in selling, engineering, general and administrative costs. The restructuring charges
are detailed below:



|Description                |  | Restructuring Charge |     | Cash Payments |   | Non-Cash Charges |  | Reserved at 9/30/2002
|-------------------------- |  | -------------------- | --- | ------------- | - | ---------------- |  | ---------------------
|                           |  | (in millions)       
|Termination benefits       |  | $                    | 1.6 |               | $ | 0.1              |  | $                    
|Write-down of other assets |  |                      | 0.5 |               |   |                 |  |                      
|Write-down of machinery    |  |                      | 0.2 |               |   |                 |  |                      
|Write-down of goodwill     |  |                      | 0.2 |               |   |                 |  |                      
|                           |  |                      |     |               |   |                  |  |                      
|Total                      |  | $                    | 2.5 |               | $ | 0.1              |  | $                    
|                           |  |                      |     |               |   |                  |  |                      



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. Measurement systems will now primarily have the
results of the retail fueling product line. Compression and power systems components have not changed and the segment will continue to report the results of the natural gas and 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. These systems and other products are used to monitor liquids and gases.



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



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



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



16



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



|                                       |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|-------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                                       |  | (in millions)                    |      
|                                       |  | 2002                             |       |   | 2001                            |  
|                                       |  | Restated                         |       |   | Restated                        |  
|Revenues:                              |  |                                  |       |   |                                 |  
|Flow Control                           |  | $                                | 254.9 |   |                                 |  
|Measurement Systems                    |  |                                  | 80.8  |   |                                 |  
|Compression and Power Systems          |  |                                  | 73.1  |   |                                 |  
|Reconciling Items, Including Corporate |  |                                  | (0.9  | ) |                                 |  
|                                       |  |                                  |       |   |                                 |  
|Total                                  |  | $                                | 407.9 |   |                                 | $
|                                       |  |                                  |       |   |                                 |  
|Operating income:                      |  |                                  |       |   |                                 |  
|Flow Control                           |  | $                                | 10.7  |   |                                 | $
|Measurement Systems                    |  |                                  | 8.1   |   |                                 |  
|Compression and Power Systems          |  |                                  | 3.9   |   |                                 |  
|Reconciling Items, Including Corporate |  |                                  | (3.7  | ) |                                 |  
|                                       |  |                                  |       |   |                                 |  
|Total                                  |  | $                                | 19.0  |   |                                 | $
|                                       |  |                                  |       |   |                                 |  



Note 5. Receivables



Accounts receivable are stated at their estimated net realizable value.
Included in receivables are notes receivable of $10.6 million and $7.6 million as of September 30, 2002 and December 31, 2001, respectively. Allowances for doubtful accounts of $6.8 million and $5.4 million as of September 30, 2002 and December 31,
2001, 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 $58.1 million and $86.8 million of our inventories as of September 30, 2002 and
December 31, 2001, respectively. The excess of FIFO over LIFO costs as of September 30, 2002 and December 31, 2001, were $72.2 million and $72.2 million, respectively. Inventories are summarized as follows:



17



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



|                                 |  | September 30,2002 |       |   | December 31,2001 |  
|-------------------------------- |  | ----------------- | ----- | - | ---------------- | -
|                                 |  | (in millions)     |      
|                                 |  | Restated          |       |   | Restated         |  
|Finished products and parts      |  | $                 | 204.3 |   |                  | $
|In-process products and parts    |  |                   | 96.5  |   |                  |  
|Raw materials and supplies       |  |                   | 72.1  |   |                  |  
|                                 |  |                   |       |   |                  |  
|Total inventory                  |  | $                 | 372.9 |   |                  | $
|Less:                            |  |                   |       |   |                  |  
|LIFO reserve and full absorption |  |                   | (66.2 | ) |                  |  
|                                 |  |                   |       |   |                  |  
|Inventories, net                 |  | $                 | 306.7 |   |                  | $
|                                 |  |                   |       |   |                  |  



In connection with
certain restructuring activities, as discussed in Note 3, we decided to exit from certain product lines. As a result, we incurred charges of $3.9 million associated with the markdown of inventory related to these products. In addition, we recorded
additional reserves for excess and obsolete inventory and write-downs for inventory shrinkage of $5.7 million. These charges have been reflected in cost of revenues in our condensed consolidated statements of operations.



Note 7. Acquisitions



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



Additionally, in April 2002, we issued 250,000 shares of class B common stock to DEG Acquisitions, LLC for $10.0 million. The proceeds were used to
finance the purchase of the Modern Acquisition.



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



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



18



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



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



Note 8. Goodwill



Effective January 1, 2002, we adopted SFAS No. 142
Goodwill and Other Intangibles. SFAS No. 142 supersedes APB No. 17, Intangible Assets, and eliminates the requirement to amortize goodwill and intangible assets with indefinite useful lives, addresses the amortization of
intangible assets with defined lives and requires that goodwill and intangible assets with indefinite useful lives be tested for impairment at least on an annual basis. Accordingly, as of January 1, 2002, we no longer amortize goodwill. During the
second quarter of 2002, we completed the transitional goodwill test prescribed in SFAS No. 142 with respect to our existing goodwill as of January 1, 2002. The transitional goodwill impairment tests involved a comparison of the fair value of each of
our reporting units, as defined under SFAS No. 142, with its carrying amount. Based on the transitional impairment test, we determined there was no impairment of our goodwill.



The following table provides comparative net income information had goodwill amortization been excluded for the three and
nine months ended September 30, 2002 and 2001, respectively.



|                                  |  | Three Months Ended September 30, |     | Nine Months Ended September 30, |  
|--------------------------------- |  | -------------------------------- | --- | ------------------------------- | -
|                                  |  | (in millions)                    |    
|                                  |  | 2002                             |     | 2001                            |  
|                                  |  | Restated                         |     | Restated                        |  
|Net income (loss)                 |  | $                                | 0.2 |                                 | $
|Goodwill amortization, net of tax |  |                                  |    |                                 |  
|                                  |  |                                  |     |                                 |  
|Adjusted net income (loss)        |  | $                                | 0.2 |                                 | $
|                                  |  |                                  |     |                                 |  



Note 9. Debt



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



In March 2002, we also obtained an
amendment to the credit facility that among other things increased the amount by which the Tranche B term loan can be increased from $95.0 million to $195.0 million. Fees paid in connection with the issuance of the notes and the amendment were $5.5
million and $1.0 million, respectively, at the time of closing. The deferred financing fees are amortized to interest expense using the effective interest method over the terms of the respective debt. In June 2002, we obtained a second amendment to
the credit facility, which allowed for the modification of our corporate structure. See Note 2.



In June 2002, we also made a voluntary prepayment of $30.0 million on our credit facility, which extinguished our Tranche A term loans. As a result of the
early extinguishment of debt we recorded a loss of $0.3 million, which represented the write-off of the remaining unamortized debt issuance costs associated with the Tranche A term loans. In September 2002, we made an additional voluntary prepayment
of $23.0 million on our credit facility,



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



which was applied to our Tranche B term loan. As a result of these voluntary prepayments, we recorded a loss of $2.2 million, which represented the write-off
of a portion of the unamortized debt issuance costs. These losses have been reflected as interest expense in our condensed consolidated statements of operations. As of September 30, 2002, we had $404.1 million outstanding under the credit facility.



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



Note 10. Derivative Instruments



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



In April 2002, we entered into a fair value interest rate
swap, which was not eligible to receive accounting treatment as a hedge. The interest rate swap has a notional amount of $100.0 million and matures in October 2003. We receive a fixed rate of 9.375% and pay a variable rate of LIBOR plus 6.20% (7.99%
at September 30, 2002). At September 30, 2002, the interest rate swap had a fair market value of $1.9 million. This amount has been reflected as a reduction to interest expense in our condensed consolidated statements of operations.



Note 11. Comprehensive Income



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



|                                                 |  | Three Months Ended September 30, |      |   | Nine Months Ended September 30, |  
|------------------------------------------------ |  | -------------------------------- | ---- | - | ------------------------------- | -
|                                                 |  | 2002                             |      |   | 2001                            |  
|                                                 |  | Restated                         |      |   | Restated                        |  
|                                                 |  | (in millions)                    |     
|Net income (loss)                                |  | $                                | 0.2  |   |                                 | $
|Other comprehensive income                       |  |                                  |      |   |                                 |  
|Foreign currency translation adjustment          |  |                                  | 6.1  |   |                                 |  
|Unrealized (loss) gain on derivative instruments |  |                                  | (1.5 | ) |                                 |  
|                                                 |  |                                  |      |   |                                 |  
|Comprehensive income (loss)                      |  | $                                | 4.8  |   |                                 | $
|                                                 |  |                                  |      |   |                                 |  



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DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



Note 12. Commitments and Contingencies



Halliburton Indemnifications



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



Company Indemnifications



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



Environmental



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



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.



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



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



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



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



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



Note 13. 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 October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS
No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 primarily addresses significant issues relating to the implementation of SFAS No. 121 and develops a single accounting
model for long-lived assets to be disposed of, whether previously held and used or newly acquired. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board No. 30 (APB 30), Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events and Transaction, for segments of a business to be disposed of. SFAS No. 144 retains APB 30s requirement that
entities report discontinued operations separately from continuing operations and extends that reporting requirement to a component of an entity that has been disposed of or is classified as held for sale. The provisions of SFAS No. 144
were effective for fiscal years beginning after December 15, 2001. We adopted this statement on January 1, 2002. There was no impact to our results of operations or financial position as a result of adopting this standard.



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



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. We have elected early application of this statement; see Note 3.



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



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



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##### Table of Contents

DRESSER, INC.

Notes to Condensed Consolidated Financial Statements  (Continued)

(unaudited)



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



In November 2002, the FASB issued FASB Interpretation No. (FIN) 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation
supercedes FIN 34 Disclosure of Indirect Guarantee of Indebtedness of Others. FIN 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. It also
requires that a guarantor recognize a liability, at the inception of a guarantee, for the fair value of the obligation undertaken in issuing the guarantee. The initial measurement and recognition provisions of FIN 45 are effective for guarantees
issued or modified after December 31, 2002. The disclosure requirements are effective for interim or annual periods ending after December 15, 2002. See Note 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 14. Supplemental Guarantor Information



In connection with our senior subordinated notes due 2011, our wholly-owned subsidiaries guaranteed, jointly and severally, our obligation to pay
principal and interest on the senior subordinated notes on a full and unconditional basis. The following supplemental condensed consolidating financial information presents the balance sheet as of September 30, 2002 and December 31, 2001 and the
statements of operations and cash flows for the three and nine months ended September 30, 2002 and 2001, respectively. In the condensed consolidating financial statements, the investments in wholly-owned subsidiaries are accounted for using the
equity method. Certain prior year amounts have been reclassified to conform to current year presentation.



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##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2002

(in millions)

(unaudited)

(restated)



|                                                                                          |  | Parent |         |   | Subsidiary Guarantors |   | Non- Guarantor Subsidiaries |  | Eliminations |       |  | Total Consolidated |       
|----------------------------------------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | --------------------------- |  | ------------ | ----- |  | ------------------ | ------
|ASSETS                                                                                    |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Current Assets:                                                                           |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Cash and equivalents                                                                      |  | $      | 44.6    |   |                       | $ | 0.2                         |  | $            | 47.8  |  | $                  |      
|Receivables                                                                               |  |        | 129.8   |   |                       |   | 4.7                         |  |              | 183.0 |  |                    |      
|Inventories                                                                               |  |        | 144.0   |   |                       |   | 14.5                        |  |              | 148.2 |  |                    |      
|Other current assets                                                                      |  |        | 5.1     |   |                       |   | 0.1                         |  |              | 9.5   |  |                    |      
|                                                                                          |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Total current assets                                                                      |  |        | 323.5   |   |                       |   | 19.5                        |  |              | 388.5 |  |                    |       
|Property, plant and equipment                                                             |  |        | 145.9   |   |                       |   | 0.2                         |  |              | 69.1  |  |                    |      
|Investments in consolidated subsidiaries                                                  |  |        | 424.5   |   |                       |   | 382.5                       |  |              |      |  |                    | (807.0
|Investment in unconsolidated subsidiaries                                                 |  |        | 0.3     |   |                       |   |                            |  |              | 7.2   |  |                    |      
|Deferred financing fees and other assets                                                  |  |        | 52.7    |   |                       |   |                            |  |              | 17.5  |  |                    |      
|Prepaid and intangible pension assets                                                     |  |        | 53.7    |   |                       |   |                            |  |              | 6.0   |  |                    |      
|Deferred tax assets                                                                       |  |        |        |   |                       |   |                            |  |              | 2.3   |  |                    |      
|Goodwill                                                                                  |  |        | 106.3   |   |                       |   | 23.8                        |  |              | 159.2 |  |                    |      
|Intangibles                                                                               |  |        | 2.2     |   |                       |   |                            |  |              | 4.0   |  |                    |      
|                                                                                          |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Total assets                                                                              |  | $      | 1,109.1 |   |                       | $ | 426.0                       |  | $            | 653.8 |  | $                  | (807.0
|                                                                                          |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCK AND SHAREHOLDERS (DEFICIT) EQUITY       |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Current liabilities:                                                                      |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Accounts and notes payable                                                                |  | $      | 78.8    |   |                       | $ | 0.9                         |  | $            | 129.9 |  | $                  |      
|Contract advances                                                                         |  |        | 10.1    |   |                       |   |                            |  |              | 9.4   |  |                    |      
|Accrued expenses                                                                          |  |        | 45.6    |   |                       |   | 0.6                         |  |              | 85.7  |  |                    |      
|                                                                                          |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Total current liabilities                                                                 |  |        | 134.5   |   |                       |   | 1.5                         |  |              | 225.0 |  |                    |      
|Pension and other retiree benefit obligations                                             |  |        | 259.2   |   |                       |   |                            |  |              | 7.8   |  |                    |      
|Long-term debt                                                                            |  |        | 960.0   |   |                       |   |                            |  |              | 4.8   |  |                    |      
|Other liabilities                                                                         |  |        | 11.5    |   |                       |   |                            |  |              | 33.7  |  |                    |      
|Commitments and contingencies                                                             |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|                                                                                          |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Total liabilities                                                                         |  |        | 1,365.2 |   |                       |   | 1.5                         |  |              | 271.3 |  |                    |      
|Mandatorily redeemable preferred stock                                                    |  |        | 7.9     |   |                       |   |                            |  |              |      |  |                    |      
|Shareholders (deficit) equity:                                                           |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Shareholders (deficit) equity, net                                                       |  |        | (264.0  | ) |                       |   | 424.5                       |  |              | 382.5 |  |                    | (807.0
|                                                                                          |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Total shareholders (deficit) equity                                                      |  |        | (264.0  | ) |                       |   | 424.5                       |  |              | 382.5 |  |                    | (807.0
|                                                                                          |  |        |         |   |                       |   |                             |  |              |       |  |                    |       
|Total liabilities, mandatorily redeemable common stock and shareholders (deficit) equity |  | $      | 1,109.1 |   |                       | $ | 426.0                       |  | $            | 653.8 |  | $                  | (807.0
|                                                                                          |  |        |         |   |                       |   |                             |  |              |       |  |                    |       



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##### Table of Contents

DRESSER, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2001

(in millions)

(restated)



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



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DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended September 30, 2002

(in millions)

(unaudited)

(restated)



|                                                          |  | Parent |       |   | Subsidiary Guarantors |   |      | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Total Consolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | --------------------- | - | ---- | --------------------------- |  | - | ------------ | - |  | ------------------ | -----
|Revenues                                                  |  | $      | 256.0 |   |                       | $ | 11.6 |                             |  | $ | 176.4        |   |  | $                  | (36.1
|Cost of revenues                                          |  |        | 193.6 |   |                       |   | 9.7  |                             |  |   | 141.5        |   |  |                    | (36.0
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |      
|Gross profit                                              |  |        | 62.4  |   |                       |   | 1.9  |                             |  |   | 34.9         |   |  |                    | (0.1 
|Selling, engineering, administrative and general expenses |  |        | 33.6  |   |                       |   | 0.6  |                             |  |   | 46.0         |   |  |                    | (0.1 
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |      
|Operating income                                          |  |        | 28.8  |   |                       |   | 1.3  |                             |  |   | (11.1        | ) |  |                    |     
|Equity earnings of unconsolidated subsidiaries            |  |        | 0.1   |   |                       |   |     |                             |  |   | 0.7          |   |  |                    |     
|Equity earnings of consolidated subsidiaries              |  |        | (6.1  | ) |                       |   | (7.3 | )                           |  |   |             |   |  |                    | 13.4 
|Interest expense                                          |  |        | (22.8 | ) |                       |   | (0.1 | )                           |  |   | 1.3          |   |  |                    |     
|Interest income                                           |  |        | 0.2   |   |                       |   |     |                             |  |   | 0.7          |   |  |                    |     
|Other deductions, net                                     |  |        | (0.2  | ) |                       |   |     |                             |  |   | (1.6         | ) |  |                    |     
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |      
|Income (loss) before taxes                                |  |        |      |   |                       |   | (6.1 | )                           |  |   | (10.0        | ) |  |                    | 13.4 
|Benefit for income taxes                                  |  |        | 0.2   |   |                       |   |     |                             |  |   | 2.7          |   |  |                    |     
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |      
|Net income (loss)                                         |  | $      | 0.2   |   |                       | $ | (6.1 | )                           |  | $ | (7.3         | ) |  | $                  | 13.4 
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |      



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DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended September 30, 2001

(in millions)

(unaudited)

(restated)



|                                                          |  | Parent |       |   | Subsidiary Guarantors |   | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Total Consolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | --------------------- | - | --------------------------- |  | - | ------------ | - |  | ------------------ | -----
|Revenues                                                  |  | $      | 257.2 |   |                       | $ |                            |  | $ | 170.7        |   |  | $                  | (26.5
|Cost of revenues                                          |  |        | 187.1 |   |                       |   |                            |  |   | 120.7        |   |  |                    | (26.3
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      
|Gross profit                                              |  |        | 70.1  |   |                       |   |                            |  |   | 50.0         |   |  |                    | (0.2 
|Selling, engineering, administrative and general expenses |  |        | 50.2  |   |                       |   |                            |  |   | 31.4         |   |  |                    | (0.2 
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      
|Operating income                                          |  |        | 19.9  |   |                       |   |                            |  |   | 18.6         |   |  |                    |     
|Equity earnings of unconsolidated subsidiaries            |  |        | (0.6  | ) |                       |   |                            |  |   | 1.0          |   |  |                    |     
|Equity earnings of consolidated subsidiaries              |  |        | 9.2   |   |                       |   | 9.2                         |  |   |             |   |  |                    | (18.4
|Interest expense                                          |  |        | (22.3 | ) |                       |   |                            |  |   | (3.6         | ) |  |                    |     
|Interest income                                           |  |        | 0.3   |   |                       |   |                            |  |   | 1.3          |   |  |                    |     
|Other income (deductions), net                            |  |        | 5.3   |   |                       |   |                            |  |   | (2.1         | ) |  |                    |     
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      
|Income before taxes                                       |  |        | 11.8  |   |                       |   | 9.2                         |  |   | 15.2         |   |  |                    | (18.4
|Provision for income taxes                                |  |        | (0.1  | ) |                       |   |                            |  |   | (6.0         | ) |  |                    |     
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      
|Net income                                                |  | $      | 11.7  |   |                       | $ | 9.2                         |  | $ | 9.2          |   |  | $                  | (18.4
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      



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DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2002

(in millions)

(unaudited)

(restated)



|                                                          |  | Parent |       |   | Subsidiary Guarantors |   |      | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Total Consolidated |       
|--------------------------------------------------------- |  | ------ | ----- | - | --------------------- | - | ---- | --------------------------- |  | - | ------------ | - |  | ------------------ | ------
|Revenues                                                  |  | $      | 760.9 |   |                       | $ | 19.7 |                             |  | $ | 531.8        |   |  | $                  | (101.7
|Cost of revenues                                          |  |        | 568.3 |   |                       |   | 16.3 |                             |  |   | 405.2        |   |  |                    | (101.4
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |       
|Gross profit                                              |  |        | 192.6 |   |                       |   | 3.4  |                             |  |   | 126.6        |   |  |                    | (0.3  
|Selling, engineering, administrative and general expenses |  |        | 136.4 |   |                       |   | 1.0  |                             |  |   | 103.7        |   |  |                    | (0.3  
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |       
|Operating income                                          |  |        | 56.2  |   |                       |   | 2.4  |                             |  |   | 22.9         |   |  |                    |      
|Equity earnings of unconsolidated subsidiaries            |  |        | 0.1   |   |                       |   |     |                             |  |   | 2.5          |   |  |                    |      
|Equity earnings of consolidated subsidiaries              |  |        | 19.4  |   |                       |   | 17.3 |                             |  |   |             |   |  |                    | (36.7 
|Interest expense                                          |  |        | (74.8 | ) |                       |   | (0.3 | )                           |  |   | (3.7         | ) |  |                    |      
|Interest income                                           |  |        | 0.6   |   |                       |   |     |                             |  |   | 1.4          |   |  |                    |      
|Other (deductions) income, net                            |  |        | (0.2  | ) |                       |   |     |                             |  |   | (0.3         | ) |  |                    |      
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |       
|Income before taxes                                       |  |        | 1.3   |   |                       |   | 19.4 |                             |  |   | 22.8         |   |  |                    | (36.7 
|Provision for income taxes                                |  |        | (0.2  | ) |                       |   |     |                             |  |   | (5.5         | ) |  |                    |      
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |       
|Net income                                                |  | $      | 1.1   |   |                       | $ | 19.4 |                             |  | $ | 17.3         |   |  | $                  | (36.7 
|                                                          |  |        |       |   |                       |   |      |                             |  |   |              |   |  |                    |       



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DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2001

(in millions)

(unaudited)

(restated)



|                                                          |  | Parent |       |   | Subsidiary Guarantors |   | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Total Consolidated |      
|--------------------------------------------------------- |  | ------ | ----- | - | --------------------- | - | --------------------------- |  | - | ------------ | - |  | ------------------ | -----
|Revenues                                                  |  | $      | 768.5 |   |                       | $ |                            |  | $ | 448.1        |   |  | $                  | (79.9
|Cost of revenues                                          |  |        | 550.8 |   |                       |   |                            |  |   | 315.5        |   |  |                    | (78.4
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      
|Gross profit                                              |  |        | 217.7 |   |                       |   |                            |  |   | 132.6        |   |  |                    | (1.5 
|Selling, engineering, administrative and general expenses |  |        | 171.1 |   |                       |   |                            |  |   | 78.0         |   |  |                    | (1.5 
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      
|Operating income                                          |  |        | 46.6  |   |                       |   |                            |  |   | 54.6         |   |  |                    |     
|Equity earnings of unconsolidated subsidiaries            |  |        | 0.1   |   |                       |   |                            |  |   | 1.3          |   |  |                    |     
|Equity earnings of consolidated subsidiaries              |  |        | 30.7  |   |                       |   | 30.7                        |  |   |             |   |  |                    | (61.4
|Interest expense                                          |  |        | (39.6 | ) |                       |   |                            |  |   | (6.8         | ) |  |                    |     
|Interest income                                           |  |        | 0.9   |   |                       |   |                            |  |   | 2.1          |   |  |                    |     
|Other income (deductions), net                            |  |        | 0.3   |   |                       |   |                            |  |   | (0.6         | ) |  |                    |     
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      
|Income before taxes                                       |  |        | 39.0  |   |                       |   | 30.7                        |  |   | 50.6         |   |  |                    | (61.4
|Provision for income taxes                                |  |        | (78.4 | ) |                       |   |                            |  |   | (19.9        | ) |  |                    |     
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      
|Net (loss) income                                         |  | $      | (39.4 | ) |                       | $ | 30.7                        |  | $ | 30.7         |   |  | $                  | (61.4
|                                                          |  |        |       |   |                       |   |                             |  |   |              |   |  |                    |      



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DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2002

(in millions)

(unaudited)

(restated)



|                                                                                             |  | Parent |        |   | Subsidiary Guarantors |   |       | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Total Consolidated |      
|-------------------------------------------------------------------------------------------- |  | ------ | ------ | - | --------------------- | - | ----- | --------------------------- |  | - | ------------ | - |  | ------------------ | -----
|Cash flows from operating activities:                                                        |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Net income                                                                                   |  | $      | 1.1    |   |                       | $ | 19.4  |                             |  | $ | 17.3         |   |  | $                  | (36.7
|Adjustments to reconcile net income to cash flow provided by (used in) operating activities: |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Depreciation and amortization                                                                |  |        | 21.6   |   |                       |   |      |                             |  |   | 11.1         |   |  |                    |     
|Equity earnings of consolidated affiliates                                                   |  |        | (19.4  | ) |                       |   | (17.3 | )                           |  |   |             |   |  |                    | 36.7 
|Equity earnings of unconsolidated affiliates                                                 |  |        | (0.1   | ) |                       |   |      |                             |  |   | (2.5         | ) |  |                    |     
|Loss on extinguishment of debt                                                               |  |        | 15.4   |   |                       |   |      |                             |  |   |             |   |  |                    |     
|Other                                                                                        |  |        | 78.8   |   |                       |   | 5.2   |                             |  |   | (44.5        | ) |  |                    |     
|                                                                                             |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Net cash provided by (used in) operating activities                                          |  |        | 97.4   |   |                       |   | 7.3   |                             |  |   | (18.6        | ) |  |                    |     
|Cash flows from investing activities:                                                        |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Asset acquisitions                                                                           |  |        | (21.4  | ) |                       |   |      |                             |  |   |             |   |  |                    |     
|Capital expenditures                                                                         |  |        | (7.7   | ) |                       |   |      |                             |  |   | (3.3         | ) |  |                    |     
|                                                                                             |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Net cash used in investing activities                                                        |  |        | (29.1  | ) |                       |   |      |                             |  |   | (3.3         | ) |  |                    |     
|Cash flows from financing activities:                                                        |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Changes in intercompany activity                                                             |  |        | (109.0 | ) |                       |   |      |                             |  |   | 109.0        |   |  |                    |     
|Proceeds from the issuance of long term debt                                                 |  |        | 256.3  |   |                       |   |      |                             |  |   |             |   |  |                    |     
|Repayment of debt (including current portion)                                                |  |        | (208.2 | ) |                       |   | (7.1  | )                           |  |   | (98.3        | ) |  |                    |     
|Decrease in short-term notes payable                                                         |  |        |       |   |                       |   |      |                             |  |   | (9.4         | ) |  |                    |     
|Payment of deferred financing fees                                                           |  |        | (8.2   | ) |                       |   |      |                             |  |   | (0.1         | ) |  |                    |     
|Proceeds from the issuance of stock                                                          |  |        | 10.0   |   |                       |   |      |                             |  |   |             |   |  |                    |     
|                                                                                             |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Net cash (used in) provided by financing activities                                          |  |        | (59.1  | ) |                       |   | (7.1  | )                           |  |   | 1.2          |   |  |                    |     
|Effect of translation adjustments on cash                                                    |  |        |       |   |                       |   |      |                             |  |   | 2.2          |   |  |                    |     
|Net increase (decrease) in cash and equivalents                                              |  |        | 9.2    |   |                       |   | 0.2   |                             |  |   | (18.5        | ) |  |                    |     
|Cash and equivalents, beginning of period                                                    |  |        | 35.4   |   |                       |   |      |                             |  |   | 66.3         |   |  |                    |     
|                                                                                             |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Cash and equivalents, end of period                                                          |  | $      | 44.6   |   |                       | $ | 0.2   |                             |  | $ | 47.8         |   |  | $                  |     
|                                                                                             |  |        |        |   |                       |   |       |                             |  |   |              |   |  |                    |      



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DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2001

(in millions)

(unaudited)

(restated)



|                                                                                          |  | Parent |          |   | Subsidiary Guarantors |   |       | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Total Consolidated |      
|----------------------------------------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ----- | --------------------------- |  | - | ------------ | - |  | ------------------ | -----
|Cash flows from operating activities:                                                     |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Net (loss) income                                                                         |  | $      | (39.4    | ) |                       | $ | 30.7  |                             |  | $ | 30.7         |   |  | $                  | (61.4
|Adjustments to reconcile net (loss) income to cash flow provided by operating activities: |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Depreciation and amortization                                                             |  |        | 22.8     |   |                       |   |      |                             |  |   | 17.8         |   |  |                    |     
|Equity earnings of consolidated affiliates                                                |  |        | (30.7    | ) |                       |   | (30.7 | )                           |  |   |             |   |  |                    | 61.4 
|Equity earnings of unconsolidated affiliates                                              |  |        | (0.1     | ) |                       |   |      |                             |  |   | (1.3         | ) |  |                    |     
|Deferred tax valuation                                                                    |  |        | 78.0     |   |                       |   |      |                             |  |   |             |   |  |                    |     
|Other, net                                                                                |  |        | 20.1     |   |                       |   |      |                             |  |   | (53.2        | ) |  |                    |     
|                                                                                          |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Net cash provided by (used in) operating activities                                       |  |        | 50.7     |   |                       |   |      |                             |  |   | (6.0         | ) |  |                    |     
|Cash flows from investing activities:                                                     |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Recapitalization transaction                                                              |  |        | (1,296.3 | ) |                       |   |      |                             |  |   |             |   |  |                    |     
|Asset acquisitions                                                                        |  |        | (34.6    | ) |                       |   |      |                             |  |   |             |   |  |                    |     
|Capital expenditures                                                                      |  |        | (18.1    | ) |                       |   |      |                             |  |   | (6.3         | ) |  |                    |     
|Other                                                                                     |  |        | 4.9      |   |                       |   |      |                             |  |   |             |   |  |                    |     
|                                                                                          |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Net cash used in investing activities                                                     |  |        | (1,344.1 | ) |                       |   |      |                             |  |   | (6.3         | ) |  |                    |     
|Cash flows from financing activities:                                                     |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Changes equity in intercompany activity                                                   |  |        | 43.5     |   |                       |   |      |                             |  |   | (47.6        | ) |  |                    |     
|Proceeds from the issuance of long-term debt                                              |  |        | 920.0    |   |                       |   |      |                             |  |   | 100.0        |   |  |                    |     
|Repayment of long-term debt                                                               |  |        | (3.2     | ) |                       |   |      |                             |  |   | (1.8         | ) |  |                    |     
|Increase in short-term notes payable                                                      |  |        |         |   |                       |   |      |                             |  |   | 9.1          |   |  |                    |     
|Payment of deferred financing fees                                                        |  |        | (61.1    | ) |                       |   |      |                             |  |   |             |   |  |                    |     
|Proceeds from the issuance of stock                                                       |  |        | 405.8    |   |                       |   |      |                             |  |   |             |   |  |                    |     
|Equity issuance costs                                                                     |  |        | (8.6     | ) |                       |   |      |                             |  |   |             |   |  |                    |     
|Cash overdrafts                                                                           |  |        | 10.7     |   |                       |   |      |                             |  |   | 1.6          |   |  |                    |     
|                                                                                          |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Net cash provided by financing activities:                                                |  |        | 1,307.1  |   |                       |   |      |                             |  |   | 61.3         |   |  |                    |     
|Effect of translation adjustments on cash                                                 |  |        |         |   |                       |   |      |                             |  |   |             |   |  |                    |     
|Net increase in cash and equivalents                                                      |  |        | 13.7     |   |                       |   |      |                             |  |   | 49.0         |   |  |                    |     
|Cash and equivalents, beginning of period                                                 |  |        | 5.6      |   |                       |   |      |                             |  |   | 14.2         |   |  |                    |     
|                                                                                          |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      
|Cash and equivalents, end of period                                                       |  | $      | 19.3     |   |                       | $ |      |                             |  | $ | 63.2         |   |  | $                  |     
|                                                                                          |  |        |          |   |                       |   |       |                             |  |   |              |   |  |                    |      



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



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



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



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



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



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



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



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



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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 nine months ended September 30, 2002, consisted of North America (53.3%), Europe/Africa (23.4%), Latin America (8.9%), Asia (9.6%) and the Middle East (4.8%). 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 nine months ended September 30, 2002, we generated revenues of $1,210.7 million, operating income of $81.5 million and a net income of $1.1
million.



Market Forces



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



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



Critical Accounting Policies and Estimates



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



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



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Reserve for Uncollectible Accounts Receivable



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



Inventory Reserves



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



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



Impairment of
Long-Lived Assets and Goodwill



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



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



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



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



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



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



Product Warranties



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



Income Taxes



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



Other Contingencies



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



Pension and Other Post-Retirement Benefits



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



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Restructuring and Other Exit Activities



During the third quarter, we initiated restructuring programs affecting several business units in an effort to obtain
manufacturing efficiencies and cost savings. In connection with these activities, we have elected early application of SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities 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 have also announced plans to restructure our European operations that will include the consolidation of dispenser manufacturing in
our Malmo, Sweden facility and the associated downsizing of a plant in Germany during 2003. As these costs have not been incurred, no accruals for these costs have been reflected in our financial statements. It is anticipated that we may incur
approximately $5.0 million in costs associated with these activities.



During the third quarter of 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 and (3) discontinue several small product lines. We incurred charges of approximately $3.9 million for
inventory markdowns associated with these activities. These costs have been reflected in costs of revenues in our condensed consolidated statements of operations.



In connection with these activities, as described above, we incurred certain restructuring charges related to termination
benefits as we terminated 93 employees. We also impaired certain assets, related to machinery, goodwill, and capitalized designs. These costs have been reflected in selling, engineering, general and administrative costs. The restructuring charges
are detailed below:



|Description                |  | RestructuringCharge |     | CashPayments |   | Non-CashCharges |  | Reserved at9/30/2002
|-------------------------- |  | ------------------- | --- | ------------ | - | --------------- |  | --------------------
|                           |  | (in millions)      
|Termination benefits       |  | $                   | 1.6 |              | $ | 0.1             |  | $                   
|Write-down of other assets |  |                     | 0.5 |              |   |                |  |                     
|Write-down of machinery    |  |                     | 0.2 |              |   |                |  |                     
|Write-down of goodwill     |  |                     | 0.2 |              |   |                |  |                     
|                           |  |                     |     |              |   |                 |  |                     
|Total                      |  | $                   | 2.5 |              | $ | 0.1             |  | $                   
|                           |  |                     |     |              |   |                 |  |                     



Stand-Alone Company



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



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



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Effects of Currency Fluctuations and Inflation



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



Revenues



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



Cost of Revenues



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



Gross Margin



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



Selling, Engineering, Administrative and General Expenses



Selling expenses consist of costs associated with marketing and sales.
Administrative and general expenses are primarily management, accounting, treasury and legal costs. Engineering expenses are costs attributable to research and development and engineering. Selling, general and administrative expenses also include
costs associated with health, safety and environmental administration and retiree medical and pension benefits. Research and development expenses are costs associated with product or customer initiatives or with projects that seek improvements in
manufacturing processes. Research and development expenses are expensed as incurred.



Depreciation and Amortization



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



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Income Taxes



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



Interest Expense



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



Bookings and Backlog



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



Results of Operations



The following table presents selected financial information regarding each of our segments for the three and nine months ended September 30, 2002 and
2001, 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.



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|                                                                      |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|--------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                                                                      |  | 2002                             |       |   | 2001                            |  
|                                                                      |  | (in millions)                    |      
|Revenues (restated):                                                  |  |                                  |       |   |                                 |  
|Flow Control                                                          |  | $                                | 254.9 |   |                                 | $
|Measurement Systems                                                   |  |                                  | 80.8  |   |                                 |  
|Compression and Power Systems                                         |  |                                  | 73.1  |   |                                 |  
|Reconciling Items, Including Corporate                                |  |                                  | (0.9  | ) |                                 |  
|                                                                      |  |                                  |       |   |                                 |  
|Total                                                                 |  | $                                | 407.9 |   |                                 | $
|                                                                      |  |                                  |       |   |                                 |  
|Gross profit (restated):                                              |  |                                  |       |   |                                 |  
|Flow Control                                                          |  | $                                | 59.9  |   |                                 | $
|Measurement Systems                                                   |  |                                  | 21.7  |   |                                 |  
|Compression and Power Systems                                         |  |                                  | 17.4  |   |                                 |  
|Reconciling Items, Including Corporate                                |  |                                  | 0.1   |   |                                 |  
|                                                                      |  |                                  |       |   |                                 |  
|Total                                                                 |  | $                                | 99.1  |   |                                 | $
|                                                                      |  |                                  |       |   |                                 |  
|Selling, engineering, administrative and general expenses (restated): |  |                                  |       |   |                                 |  
|Flow Control                                                          |  | $                                | 49.2  |   |                                 | $
|Measurement Systems                                                   |  |                                  | 13.6  |   |                                 |  
|Compression and Power Systems                                         |  |                                  | 13.5  |   |                                 |  
|Reconciling Items, Including Corporate                                |  |                                  | 3.8   |   |                                 |  
|                                                                      |  |                                  |       |   |                                 |  
|Total                                                                 |  | $                                | 80.1  |   |                                 | $
|                                                                      |  |                                  |       |   |                                 |  
|Operating income (restated):                                          |  |                                  |       |   |                                 |  
|Flow Control                                                          |  | $                                | 10.7  |   |                                 | $
|Measurement Systems                                                   |  |                                  | 8.1   |   |                                 |  
|Compression and Power Systems                                         |  |                                  | 3.9   |   |                                 |  
|Reconciling Items, Including Corporate                                |  |                                  | (3.7  | ) |                                 |  
|                                                                      |  |                                  |       |   |                                 |  
|Total                                                                 |  | $                                | 19.0  |   |                                 | $
|                                                                      |  |                                  |       |   |                                 |  
|Depreciation and amortization:                                        |  |                                  |       |   |                                 |  
|Flow Control                                                          |  | $                                | 6.8   |   |                                 | $
|Measurement Systems                                                   |  |                                  | 1.3   |   |                                 |  
|Compression and Power Systems                                         |  |                                  | 3.1   |   |                                 |  
|Reconciling Items, Including Corporate                                |  |                                  | 0.2   |   |                                 |  
|                                                                      |  |                                  |       |   |                                 |  
|Total                                                                 |  | $                                | 11.4  |   |                                 | $
|                                                                      |  |                                  |       |   |                                 |  
|Bookings:                                                             |  |                                  |       |   |                                 |  
|Flow Control                                                          |  | $                                | 228.2 |   |                                 | $
|Measurement Systems                                                   |  |                                  | 82.7  |   |                                 |  
|Compression and Power Systems                                         |  |                                  | 66.1  |   |                                 |  
|                                                                      |  |                                  |       |   |                                 |  
|Total                                                                 |  | $                                | 377.0 |   |                                 | $
|                                                                      |  |                                  |       |   |                                 |  



|                                       |  | September 30, |      
|-------------------------------------- |  | ------------- | -----
|                                       |  | 2002          |      
|                                       |  | (in millions) |      
|Backlog:                               |  |               |      
|Flow Control                           |  | $             | 279.0
|Measurement Systems                    |  |               | 47.9 
|Compression and Power Systems          |  |               | 49.6 
|Reconciling Items, Including Corporate |  |               | (3.5 
|                                       |  |               |      
|Total                                  |  | $             | 373.0
|                                       |  |               |      



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



Consolidated



Revenues.Revenues were $407.9 million and $401.4 million for the three months ended September 30, 2002 and 2001,
respectively. This increase of $6.5 million, or 1.6%, was primarily attributable to increases in our flow control segment, which offset decreases in our compression and power systems and measurement segment. Our flow control segment benefited from
acquisitions in 2001 and 2002 as well as increased sales volume in our valve product lines. Our compression and power systems segment was negatively impacted by declines in demand for natural gas compression while our measurement systems segment was
impacted by reduced purchasing from our major oil customers.



Cost of revenues.Cost of revenues as a percentage of revenues were 75.7% and 70.1% for the three months ended September 30, 2002 and 2001 respectively. Our costs as a percentage of revenue were impacted by declines in sales of high
margin original equipment in our compression and power systems segments and substantial volume of low margin third-party buyouts associated with large international projects in our flow control segment. In addition, our cost of revenues was impacted
by the discontinuation of certain product lines, which resulted in markdowns of inventory of approximately $3.9 and by non-cash charges of approximately $5.7 million related to inventory shrinkage and additional reserves for excess and obsolete
inventory.



Gross Profit.Gross profit was $99.1
million and $119.9 million for the three months ended September 30, 2002 and 2001, respectively. As a percentage of revenues, gross profit decreased to 24.3% in 2002 from 29.9% in 2001, primarily as a result of the factors discussed above.



Selling, Engineering, Administrative and General
Expenses. Selling, engineering, administrative and general expenses were $80.1 million in 2002 and $81.4 million for the three months ended September 30, 2002 and 2001, respectively. This was in decrease of $1.3 million or 1.6%. Increases in
selling, engineering, administrative and general expenses were in part attributable to restructuring charges of $2.5 million, non-cash charges related to the impairment of certain assets of $1.4 million and other non-cash charges of $0.3 million. In
2002, we also had $1.0 million of increased costs attributable to businesses acquired in 2001 and 2002. These increases in costs were offset by cost reductions at our natural gas and power generation business and the suspension of goodwill
amortization in 2002. The amortization of goodwill was $2.6 million for the three months ended September 30, 2001. As a percentage of revenues, these costs declined to 19.6% of revenues in 2002 from 20.3% of revenues in 2001.



Operating Income.Operating income was $19.0 million and $38.5 million
for the three months ended September 30, 2002 and 2001, respectively. The decrease of $19.5 million or 50.6% was attributable to declines in all three of our segments. Our compression and power systems segment was impacted by a reduction in gas
compression demand reducing our sales of original gas compression equipment. Declines in our measurement systems segment were impacted by a reduction in purchasing from our major oil customers. Our flow control segment was impacted by costs
associated with our decision to discontinue certain products lines and additional reserves for excess and obsolete inventory.



Interest Expense.Interest expense was $21.6 million and $25.9 million for the three months ended September 30, 2002 and 2001, respectively. The
decrease of $4.3 million or 16.6% was primarily impacted by reductions in long-term debt and reductions in interest rates. Long-term debt was $964.9 million with a weighted average interest rate of 7.61% at September 30, 2002, as compared to
long-term debt of $1,014.3 million with a weighted average interest rate of 7.85% at September 30, 2001. In addition, in the third quarter of 2002, we recorded a $1.1 million reduction to interest expense for the change in the fair market value of
the derivative, which was offset in part by payments on our interest rate swaps of $0.8 million. Reductions in the amortization of debt issuance costs of $1.3 million were offset in part by the write-off of debt issuance costs of $2.2 million.



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Benefit (provision) for income taxes.Benefit (provision) for income taxes was $2.9 million and
$(6.1) million for the three months ended September 30, 2002 and 2001, respectively. The decrease in the provision was due primarily from a reduction in income before taxes, based on the factors described above.



Bookings and Backlog.Bookings were $377.0 million and $406.9 million
for the three months ended September 30, 2002 and 2001, respectively, a decline of 7.3%. Backlog at September 30, 2002 was $373.0 million compared to $440.5 million at September 30, 2001, a 15.3% decline.



Segment Analysis



Flow Control.Revenues were $254.9 million and $230.7 million for the three months ended September 30, 2002 and 2001,
respectively. The increase of $24.2 million or 10.5% was in part due to acquisitions made during 2001 and 2002 along with increased sales in our valve product lines. Increases in revenue attributable to these acquisitions were approximately $15.0
million, with the remainder of the increases in revenues attributable to our valve products. However, we did experience declines in our instrument, metering and piping specialty product lines due to weak market conditions.



Gross profit was $59.9 million and $71.1 million for the three months ended
September 30, 2002 and 2001, respectively. The decrease of $11.2 million or 15.8% was as a result of several factors. Although we had positive growth in gross profit of approximately $2.5 million attributable to acquisitions, our metering, piping
and instrument product lines experienced a decline in gross profit due to weak market conditions. During the third quarter, we decided to exit certain product lines, and as a result, recorded charges of $3.7 million associated with inventory
markdowns. Also during the third quarter, we recorded additional reserves of approximately $5.2 million related to inventory shrinkage and excess and obsolete inventory. In addition, in our on/off valve product line, we had a substantial volume of
low margin third-party buyouts associated with large international projects, also impacting our costs as a percentage of revenues. As a percentage of revenues, gross profit decreased to 23.5% in 2002 from 30.8% in 2001.



Selling, engineering, administrative, and general expenses were $49.2 million
and $49.6 million for the three months ended September 30, 2002 and 2001, respectively. The decrease of $0.4 or 0.8% was impacted in part by acquisitions and certain restructuring activities. Increases attributable to acquisitions and restructuring
charges were approximately $1.0 million and $1.8 million, respectively. Restructuring charges included severance costs of $0.9 million and non-cash charges related to the impairment of assets for an additional $0.9 million. We also incurred other
non-cash charges of $0.3 million. These increases were offset in part by the suspension of the amortization of goodwill, which was $2.2 million for the three months ended September 30, 2001. As a percentage of revenue, these costs decreased to 19.3%
in 2002 from 21.5% in 2001.



Operating income was $10.7 million
and $21.5 million for the three months ended September 30, 2002 and 2001, respectively. This was a decrease of $10.8 million or 50.2%. Although operating income was positively impacted by $1.5 million attributable to acquisitions, it was negatively
impacted by inventory markdowns and restructuring charges as discussed above.



Bookings were $228.2 million and $249.0 million for the three months ended September 30, 2002 and 2001, respectively, a decline of 8.4%. Backlog at September 30, 2002 was $279.0 million compared to $303.7 million at
September 30, 2001, a decline of 8.1%. The decline in bookings and backlog was primarily attributable to declines in our on/off product lines. Our on/off products were impacted by the delays in the releases of project orders coupled with weakness in
core business bookings in a number of our flow control product lines.



Measurement Systems.Revenues were $80.8 million and $80.7 million for the three months ended September 30, 2002 and 2001, respectively. The increase of $0.1 million or 0.1% of increased service revenue offset by reduced purchases
from major oil customers and general market weakness in the United States and Canada.



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Gross profit was $21.7 million and $21.9 million for the three months ended September 30, 2002 and 2001,
respectively. This was a decrease of $0.2 million or 0.9%. Gross profit was impacted by unfavorable other variable costs and manufacturing costs. In addition, we incurred $0.2 million in inventory markdowns resulting from our decision to cease
manufacturing fuel dispensers at a Canadian manufacturing facility. As a percentage of revenue, gross margins decreased to 26.9% in 2002 from 27.1% in 2001.



Selling, engineering, administrative, and general expenses were $13.6 million and $13.9 million for the three months ended September 30, 2002 and 2001,
respectively. This was a decrease of $0.3 million or 2.2%. The third quarter of 2002 was impacted by the suspension of the amortization of goodwill. Amortization expense for goodwill was $0.4 million for the three months ended September 30, 2001.
The third quarter of 2002 was impacted by a non-cash charge of $0.5 million for the impairment of certain machinery and $0.4 million of severance for the termination of employees associated with restructuring activities. However, these increases in
2002 were offset by U.S cost reductions of approximately $1.2 million. As a percentage of revenue, these costs decreased to 16.8% in 2002 from 17.2% in 2001.



Operating income was $8.1 million and $8.0 million for the three months ended September 30, 2002 and 2001, respectively. The increase of $0.1 million or
1.3% was primarily a result of the factors discussed above.



Bookings were $82.7 million and $86.9 million for the three months ended September 30, 2002 and 2001, respectively, a decline of 4.8%. Backlog at September 30, 2002 was $47.9 million compared to $63.5 million at September 30, 2001, a
decline of 24.6%. Weak market conditions in 2002 and an overall decline in the U.S. dispenser market led to lower bookings and backlog in 2002 as compared to the prior year.



Compression and Power Systems.Revenues were $73.1 million and $91.3 million for the three months ended September 30,
2002 and 2001 respectively. This decrease of $18.2 million or 19.9% was in large part due to a decrease in original equipment sales. Sales of our natural gas engines, in particular our VHP product line, were lower by approximately $16.7 million as
compared to the same period in the prior year due to sharply lower gas compression demand. Aftermarket part sales decreased by approximately $4.6 million primarily attributable to diminished gas compression fleet utilization. However, our power
generation business was moderately favorable for the quarter.



Gross profit was $17.4 million and $26.9 million for the three months ended September 30, 2002 and 2001, respectively. This decrease of $9.5 million or 35.3% was primarily a result of depressed gas compression volume and intense price
competition in our power generation business. As a percentage of revenues, gross margins decreased to 23.8% in 2002 from 29.5% in 2001. Margins were impacted by manufacturing efficiency and rate variances associated with declining production volume,
as well as significant price competition in certain of our products. In addition, in the third quarter we recorded an additional $0.5 million of reserves for excess and obsolete inventory in our blower product lines.



Selling, engineering, administrative, and general expenses were $13.5 million
and $13.4 million for the three months ended September 30, 2002, and 2001, respectively. This was an increase of $0.1 million or 0.8%. We achieved reductions with lower purchased services of approximately $1.2 million and a reduction of payroll
costs of $0.5 million at our natural gas and power generation business. This was offset by higher costs in our blower business, which included a non-cash charge for the impairment of machinery of $0.9 million and termination benefits of $0.3 million
associated with restructuring activities. As a percentage of revenue, these costs increased to 18.5% in 2002 from 14.7% in 2001.



Operating income was $3.9 million and $13.5 million for the three months ended September 30, 2002 and 2001, respectively. The decrease of $9.6 million or
71.1% was primarily as a result of the factors discussed above.



Bookings were $66.1 million and $71.0 million for the three months ended September 30, 2002 and 2001, respectively. This was a decrease of $4.9 million or 6.9%. Backlog was $49.6 million and $77.0 million at September 30, 2002 and 2001,
respectively. This was a decrease of $27.4 million or 35.6%. The decline in the gas compression demand led to a reduction in bookings and backlog.



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Nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001



Consolidated



Revenues.Revenues were $1,210.7 million and $1,136.7 million for the nine months ended September 30, 2002 and 2001,
respectively. The increase of $74.0 million, or 6.5%, in revenues was attributable to increases in our flow control segment, which offset decreases in both our measurement and compression and power systems segments. Our flow control segment
benefited from acquisitions in 2001 and 2002 as well as increased sales volume in our valve product lines. Our compression and power systems segment was negatively impacted by declines in demand for natural gas compression, as compared to 2001. Our
measurement systems segment was negatively impacted by reduced capital spending on retail fuel equipment.



Cost of revenues.Cost of revenues as a percentage of revenues increased to 73.4% in 2002 from 69.3% in 2001. During the year, we experienced sharp
declines in the sales of our high margin equipment in our compression and power systems segment, which also impacted our costs as a percentage of revenues. In addition, in our on/off valve product line, we had a substantial volume of low margin
third-party buyouts associated with large international projects and higher manufacturing costs related to throughput issues in a plant in Italy also impacting our costs as a percentage of revenues. Cost of revenues was also impacted by the
discontinuation of certain product lines, which resulted in markdowns of inventory of approximately $3.9 million and approximately $5.7 million related to inventory shrinkage and an additional reserve for excess and obsolete inventory.



Gross Profit.Gross profit was $322.3 million and
$348.8 million for the nine months ended September 30, 2002 and 2001, respectively. As a percentage of revenues, gross profit decreased to 26.6% in 2002 from 30.7% in 2001, primarily as a result of the factors discussed above.



Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses were $240.8 million and $247.6 million for the nine months ended September 30, 2002 and 2001, respectively. This was a decrease of $6.8 million or 2.7%. Selling, engineering, administrative and
general expenses were impacted by higher volume, which includes the impact of acquisitions. In addition, we incurred $2.5 million in expenses related to restructuring activities and $1.4 million related to the impairment of certain assets, and other
non-cash charges of $0.3 million. These increases were generally offset by the suspension of goodwill amortization in 2002. For the nine months ended September 30, 2001, selling, engineering, administrative and general expenses included $6.8 million
of amortization of goodwill and $7.0 million of expenses related to the closure of a manufacturing facility. Selling, engineering, administrative and general expenses decreased as a percentage of revenues, to 19.9% of revenues in 2002 from 21.8% of
revenues in 2001.



Operating Income.Operating
income was $81.5 million and $101.2 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease of $19.7 million or 19.5% was primarily a result of declines in our compression and power systems segment. This segment was
impacted by the depressed demand for new gas compression engines.



Interest Expense.Interest expense was $78.8 million and $46.4 million for the nine months ended September 30, 2002 and 2001, respectively. This was an increase of $32.4 million or 69.8%. Interest expense was primarily impacted by
the debt incurred as a result of the reorganization in April of 2001 and the write-off of debt issuance costs in 2002. Prior to the reorganization, as part of Halliburton, no third party debt was allocated to us, except for operational accounts
payable. As a result, we did not have any significant interest expense for the three months ended March 31, 2001. Interest expense was $0.8 million for the three months ended March 31, 2001, as compared to $20.9 million, excluding the write-off of
debt issuance costs for the three months ended March 31, 2002. In addition, during 2002, we extinguished our Tranche A term loans and repaid a portion of our Tranche B term loan, which resulted in the write-off of $15.4 million in the amortization
of debt issuance costs.



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Provision for income taxes.Provision for income taxes was $5.7 million and $98.3 million for the
nine months ended September 30, 2002 and 2001, respectively. The decrease in the provision was primarily due to a charge to tax expense for the creation of a valuation allowance against deferred tax assets in 2001 as well as a decrease in state and
foreign income taxes during 2002 due to changes in taxable income in respective tax jurisdictions. No federal income tax expense or benefit was recorded during fiscal 2002 or 2001 as the Companys domestic operations generated taxable losses
which the Company is unable to carry-back against prior year tax payments. The Company recorded deferred income tax expense of $78.0 million during 2001 in establishing a valuation allowance against the Companys deferred tax assets as our
historical financial results and financial projections do not support the continued recoverability of the deferred tax assets in accordance with SFAS No. 109, Accounting for Income Taxes.



Bookings and Backlog.Bookings during the 2002 period of $1,157.7 million were 2.8% below bookings during the same
period in 2001. Increased bookings in our flow control segment were offset by declines in our measurement and compression and power systems segments. Backlog at September 30, 2002 period was $373.0 million compared to $440.5 million at September 30,
2001, a 15.3% decrease.



Segment Analysis



Flow Control.Revenues were $775.1 million and $638.4 million for the
nine months ended September 30, 2002 and 2001, respectively. The increase of $136.7 million or 21.4% was in part due to acquisitions made during 2001 and 2002 along with increased sales in valve product lines, in particular, our on/off product
lines. Increases in revenue attributable to these acquisitions were approximately $64.5 million, with the remainder of the increases in revenues attributable to our valve products. However, we did experience declines in our instrument and metering
and piping product lines due to weak market conditions.



Gross
profit was $212.3 million and $207.9 million for the nine months ended September 30, 2002 and 2001, respectively. The increase of $4.4 million or 2.1% was impacted by several factors. We had positive growth in gross profit from our on/off valves,
including growth from our acquisitions, which contributed approximately $11.1 million to the increase. This was offset in part by declines in gross profit by our instrument, metering and piping specialty product lines, which was affected by weak
market conditions. In addition during the third quarter, we decided to exit certain product lines, and as a result, recorded charges of approximately $3.7 million associated with inventory markdowns. Also during the third quarter, we recorded
charges of approximately $5.2 million related to inventory shrinkage and additional reserves for excess and obsolete inventory. As a percentage of revenue, gross profit was 27.4% and 32.6% for the nine months ended September 30, 2002 and 2001,
respectively. Our margins were impacted not only by the inventory markdowns but also by the product mixes in our valve product lines. In our on/off valve product line, we had a substantial volume of low margin third-party buyouts associated with
large international projects and higher manufacturing costs related to throughput issues in a plant in Italy. In the control valve and pressure relief valve product lines, growth in lower margin original equipment sales for new construction business
combined with relatively flat higher margin part sales resulted in overall lower margins.



Selling, engineering, administrative, and general expenses were $148.5 million and $137.8 million for the nine months ended September 30, 2002 and 2001, respectively. The increase of $10.7 million or 7.8% was impacted
in by increased volume that includes the impact of acquisitions. Increases attributable to acquisitions were approximately $2.4 million. In addition, we incurred $1.8 million in restructuring charges and $0.3 million in other non-cash charges. These
increases were offset in part by the suspension of the amortization of goodwill, which was $5.6 million for the nine months ended September 30, 2001. As a percentage of revenue, these costs decreased to 19.2% in 2002 from 21.6% in 2001.



Operating income was $63.8 million and $70.1 million for the nine months
ended September 30, 2002 and 2001, respectively. This was an decrease of $6.3 million or 9.0%. Although operating income was positively impacted by $5.2 million attributable to acquisitions, it was negatively impacted by the inventory markdowns and
other factors, as discussed above.



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Bookings were $732.0 million and $691.5 million for the nine months ended September 30, 2002 and 2001,
respectively. This was an increase of $40.5 million or 5.9%. Backlog was $279.0 million and $303.7 million at September 30, 2002 and 2001, respectively, a decrease of $24.7 million or 8.1%. Increases in bookings were primarily attributable to
increases in our valve product lines, with the most significant increase in our on/off product line. However, we also experienced some decline in bookings in our instrument, metering and piping businesses due to weakened market conditions.



Measurement Systems.Revenues were $225.4 million and
$234.4 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease of $9.0 million or 3.8% was in large part attributable to a decline of purchases by our major oil customers, which contributed to the decline of sales
in the United States. We also saw declines in some of our other foreign markets, such as Germany, South Africa and Canada. Declines were offset by increased export sales to Africa and higher service business revenue in Scandinavia.



Gross profit was $57.0 million and $59.9 million for the nine months ended
September 30, 2002 and 2001, respectively. This was a decrease of $2.9 million or 4.8%. Gross profit was impacted by a decrease in sales volume, offset in part by favorable reductions in other variable costs and manufacturing costs. In addition, we
incurred $0.2 million in inventory markdowns related resulting from our decision to cease manufacturing fuel dispensers at a Canadian manufacturing facility. As a percentage of revenue, gross margins decreased to 25.3% in 2002 from 25.6% in 2001.



Selling, engineering, administrative, and general expenses
were $41.2 million and $51.7 million for the nine months ended September 30, 2002 and 2001, respectively. This was a decrease of $10.5 million or 20.3%. As a percentage of revenue, these costs decreased to 18.3% in 2002 from 22.1% in 2001. However,
costs in 2001 were impacted by $7.0 million in expenses related to the closure and relocation of a retail fuel dispenser facility and the suspension of the amortization of goodwill. For the nine months ended September 30, 2001, selling, engineering,
administrative and general expenses included $1.2 million of amortization of goodwill. In 2002, our costs were impacted by a non-cash charge of $0.5 million for the impairment of certain machinery and $0.4 million as severance for the termination of
employees associated with restructuring activities.



Operating
income was $15.8 million and $8.2 million for the nine months ended September 30, 2002 and 2001, respectively. The increase of $7.6 million or 92.7% was impacted by the charges related to the closure of a retail fuel dispenser facility and the
suspension of goodwill, as discussed above, which was offset primarily with lower sales volume and charges taken for restructuring activities and the impairment of machinery.



Bookings were $216.5 million and $245.9 million for the nine months ended September 30, 2002 and 2001, respectively; a
decrease of $29.4 million or 12.0%. Backlog was $47.9 million and $63.5 million for the nine months ended September 30, 2002 and 2001, respectively. Reductions in bookings and backlog were a result of reductions in orders from major oil customers
and high volume retailers as compared to 2001.



Compression
and Power Systems.Revenues were $213.0 million and $268.1 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease of $55.1 million or 20.6% was primarily a result of a reduction in the demand for gas
compression. Our original equipment sales were lower by approximately $40.8 million, with the most significant decline in our VHP line of engines. Our aftermarket part sales also felt the impact of a weakened demand as we saw a decrease of
approximately $13.9 million.



Gross profit was $53.0 million
and $81.0 million for the nine months ended September 30, 2002 and 2001, respectively. This was a decrease of $28.0 million or 34.6%. As a percentage of revenue, gross margin decreased to 24.9% in 2002 from 30.2% in 2001. This decrease was primarily
a result of lower sales volume and production and efficiency related variances associated with declining production volume. In addition, in the third quarter, we recorded an additional $0.5 million for reserves for excess and obsolete inventory in
our blower product lines.



Selling, engineering,
administrative, and general expenses were $38.8 million and $39.1 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease of $0.3 million or 0.8% was primarily a



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result of reductions in spending of various purchased services and a reduction in product promotion and travel, as well as an increase of $1.0 million
related to cost recoveries from the U.S. Department of Energy. These reductions were offset in part by increases in our blower business, which also included a non-cash charge for the impairment of machinery of $0.9 million and termination benefits
of $0.3 million associated with restructuring activities. As a percentage of revenue, these costs increased to 18.2% in 2002 from 14.6% in 2001. This percentage was impacted by the sharp decrease in revenues, as a result of the factors discussed
above.



Operating income was $14.2 million and $41.9 million
for the nine months ended September 30, 2002 and 2001, respectively. The decrease of $27.7 million or 66.1% was primarily impacted by declines in orders for engines used in gas compression, as discussed above.



Bookings were $209.2 million and $253.7 million for the nine months ended
September 30, 2002 and 2001, respectively. This was a decrease of $44.5 million or 17.5%. Backlog was $49.6 million and $77.0 million at September 30, 2002 and 2001, respectively. The decline in gas compression demand led to a significant reduction
in bookings and backlog on a year over year comparison.



Liquidity and
Capital Resources



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



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



Cash and equivalents were $92.6 million and $82.5 million as of September 30,
2002 and 2001 respectively. A significant portion of our cash and equivalents balances is utilized in our international operations and may not be immediately available to service debt in the United States.



Net cash flows generated from operating activities were $86.1 million and
$44.7 million for the nine months ended September 30, 2002 and 2001, respectively.



Net cash flows used in investing activities was $32.4 million for the nine months ended September 30, 2002. Net cash flows used in investing activities resulted from the Modern Acquisition and capital expenditures.
Net cash flows used in investing activities was $1,350.4 million for the nine months ended September 30, 2001 resulting primarily from cash used to complete the recapitalization transaction and other acquisitions and capital expenditures of $24.4
million.



Net cash flows used in financing activities was $65.0
million for the nine months ended September 30, 2002, resulting primarily from the repayment of debt with the use of the proceeds from the issuance of additional senior subordinated notes and the payment of deferred financing fees. In addition, we
issued an additional 250,000 shares of class B common stock for proceeds of $10.0 million. Net cash flow provided by financing activities was $1,368.4 million for the nine months ended September 30, 2001 resulting from the proceeds of the 2001 notes
and borrowings under the credit facility, along with cash from the investors, which were used to complete the recapitalization transaction and certain other acquisitions.



In March 2002, we issued an additional $250.0 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% of their principal amounts plus
accrued interest from October 15, 2001. We recorded a $6.3 million premium that is amortized over the term of the notes, and recorded as a reduction to interest expense. The net proceeds were used to repay existing indebtedness under



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the Tranche A term loans of the credit facility. Fees paid at closing in connection with the issuance were approximately $5.5 million; in addition we
incurred legal and other fees of approximately $0.6 million. These fees are included in deferred financing fees and other assets on our balance sheet. The net proceeds of the offering were used to repay existing indebtedness under the Tranche A term
loans of the credit facility. This repayment significantly reduced the principal balances of the Tranche A term loans. As a result, we recorded a loss of $12.9 million, which represented the write-off of a portion of the unamortized deferred
financing fees. This loss has been reflected as interest expense in our condensed consolidated financial statements.



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



In June 2002, we made a voluntary prepayment on our credit facility of $30.0 million, which extinguished our Tranche A term loans. As a result of the
early extinguishment of debt we recorded a loss of $0.3 million, which represented the write-off of the remaining unamortized debt issuance costs associated with the Tranche A term loans. In September 2002, we made an additional voluntary prepayment
of $23.0 million on our credit facility, which was applied to our Tranche B term loan. As a result of these voluntary prepayments, we recorded a loss of $2.2 million, which represented the write-off of a portion of the unamortized debt issuance
costs. These costs have been reflected as interest expense in our condensed consolidated statements of operations.



As of September 30, 2002, we had $555.9 million of senior subordinated notes, including a $5.9 million premium, $404.1 million of debt consisting of the
Tranche B term loan under the credit facility, $3.2 million of other long-term debt, and $1.7 million in capital leases. In addition, we have a $100.0 million revolving credit facility, subject to certain conditions, of which $62.2 million was
available and $37.8 million was reserved for letters of credit as of September 30, 2002.



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



|                                                                               |  | Remainderof 2002 |     | 2003 |   | 2004 |  | 2005 |      | 2006 |   | 2007 and Thereafter |  | Total
|------------------------------------------------------------------------------ |  | ---------------- | --- | ---- | - | ---- |  | ---- | ---- | ---- | - | ------------------- |  | -----
|                                                                               |  | (in millions)   
|Contractual Cash Obligations                                                   |  |                  |     |      |   |      |  |      |      |      |   |                     |  |      
|Long-Term Debt1                                                                |  | $                | 0.3 |      | $ | 0.5  |  | $    | 2.6  |      | $ | 4.8                 |  | $    
|Capital Lease Obligations                                                      |  |                  | 0.2 |      |   | 0.5  |  |      | 0.3  |      |   | 0.3                 |  |      
|Operating Leases                                                               |  |                  | 3.7 |      |   | 13.1 |  |      | 11.3 |      |   | 9.2                 |  |      
|                                                                               |  |                  |     |      |   |      |  |      |      |      |   |                     |  |      
|Total Contractual Cash Obligations                                             |  | $                | 4.2 |      | $ | 14.1 |  | $    | 14.2 |      | $ | 14.3                |  | $    
|                                                                               |  |                  |     |      |   |      |  |      |      |      |   |                     |  |      
|                                                                               |  |                  |     |      |   |      |  |      |      |      |   |                     |  |      
|1Excludes a $5.9 premium, which is being amortized over the term of the notes. |  |                  |    
|                                                                               |  |                  |     |      |   |      | 
|                                                                               |  | Remainderof 2002 |     | 2003 |   | 2004 |  | 2005 |      | 2006 |   | 2007 and Thereafter |  | Total
|                                                                               |  | (in millions)   
|Commitments                                                                    |  |                  |     |      |   |      |  |      |      |      |   |                     |  |      
|Letters of Credit                                                              |  | $                | 5.8 |      | $ | 30.3 |  | $    | 1.6  |      | $ |                    |  | $    
|                                                                               |  |                  |     |      |   |      |  |      |      |      |   |                     |  |      
|Total Commitments                                                              |  | $                | 5.8 |      | $ | 30.3 |  | $    | 1.6  |      | $ |                    |  | $    
|                                                                               |  |                  |     |      |   |      |  |      |      |      |   |                     |  |      



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



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



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



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



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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.



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



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



In November 2002, the FASB issued FASB
Interpretation No. (FIN) 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation supercedes FIN 34 Disclosure of Indirect
Guarantee of Indebtedness of Others. FIN 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. It also requires that a guarantor recognize a liability, at
the inception of a guarantee, for the fair value of the obligation undertaken in issuing the guarantee. The initial measurement and recognition provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for interim or annual periods ending after December 15, 2002. 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.



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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.. We have elected early application of this statement; see Note 3 to our condensed consolidated financial statements.



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.



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



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



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



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



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



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



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



Some of our customers contribute a substantial amount to our revenues. For the nine months ended September 30, 2002, our largest customer represented
approximately 3.4% of total revenues, and our top ten customers collectively represented approximately 15.8% of total revenues. The loss of any of these customers, or class of customers, or decreases in these customers capital expenditures,
could decrease our cash flow, market share and profits. As a result of industry consolidation, especially among natural gas compression and major oil companies, our largest customers have become larger and, as a result, account for a larger
percentage of our sales. We could lose a large customer as a result of a merger or consolidation. Major oil companies and national oil companies have moved toward creating alliances and preferred supplier relationships with suppliers. In addition,
these customers are increasingly pursuing arrangements with suppliers that can meet a larger portion of their needs on a more global basis. Typically, a customer can terminate these arrangements at any time. The loss of a customer, or the award of a
contract to a competitor, could significantly reduce our cash flow, market share and profits.



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



Since we manufacture and sell our products worldwide, our business is subject to risks associated with doing business
internationally. Our sales outside North America, as a percentage of our total sales, was 46.7% for the nine months ended September 30, 2002. Accordingly, our future results could be harmed by a variety of factors, including:



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



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.



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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 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.



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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 September 30, 2002, we had approximately 8,100 employees.
Approximately 40% of our U.S. workforce and 41% of our global workforce is represented by labor unions. Currently, of our material collective bargaining agreements, one will expire in May 2004, three will expire in 2005, two will expire in 2006 and
two will expire in 2008. Two of our labor contracts will expire at the time the respective plants are closed. Although we believe that our relations with our employees are good, we cannot assure you that we will be successful in negotiating new
collective bargaining agreements, that such negotiations will not result in significant increases in the cost of labor or that a breakdown in such negotiations will not result in the disruption of our operations.



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



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



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



The historical financial information included herein for periods prior to the consummation of the recapitalization transaction may not necessarily reflect
our results of operations, financial position and cash flows in the future or the results of operations, financial position and cash flows that would have occurred if we had been a separate, independent entity during the periods presented. The
historical financial information included in this Form



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10-Q for those periods does not fully reflect the many significant changes that occurred in our capital structure, funding and operations as a result of the
recapitalization, the credit facility, the notes offering or the additional costs we expect to incur in operating as an independent company. For example, funds required for working capital and other cash needs for those periods were obtained from
Halliburton on an interest-free intercompany basis without any debt service requirement.



We may be faced with unexpected product claims or regulations.



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



Our substantial indebtedness could adversely affect our financial condition.



We are a highly leveraged company. As of September 30, 2002, we had $964.9 million of outstanding long-term indebtedness,
including the current portion of our long-term debt, $32.6 million of short-term notes and a stockholders deficit of $264.0 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 flow 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 September 30, 2002, we had $62.2 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



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guarantors in a bankruptcy, liquidation or reorganization or similar proceeding relating to us or the subsidiary guarantors or our or their property, the
holders of our senior indebtedness and senior indebtedness of the subsidiary guarantors will be entitled to be paid in full in cash before any payment may be made with respect to the notes or the subsidiary guarantees. In addition, the credit
facility is secured by substantially all of our assets and the assets of our wholly-owned domestic subsidiaries.



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



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



As of September 30, 2002, the notes and the subsidiary guarantees would have
been subordinated to $409.0 million of long-term indebtedness, including the current portion, $1.7 million in capital lease obligations, $32.6 million of short-term and approximately $62.2 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.



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



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



Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow 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 flow 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 credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Futures borrowing 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 nine months ended September 30, 2002 of our subsidiaries that are not guarantors
were $531.8 million. As of the nine months ended September 30, 2002, those subsidiaries held 47.3% of our total assets. Each of the subsidiary guarantors would be released from its guarantee of the notes if we transfer 5% or more of its voting stock
to a third party so that it is no longer wholly-owned. The indenture does not restrict our ability to do so.



Because a substantial portion of our operations are conducted by foreign and non-wholly-owned subsidiaries, our cash flow 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.



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.



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|                                      |  | 2002          |         |   | 2003 |   |          | 2004 |  |   | 2005 |   |  | 2006 |      |   | Thereafter |   |      | Total |  | Fair Value |      
|------------------------------------- |  | ------------- | ------- | - | ---- | - | -------- | ---- |  | - | ---- | - |  | ---- | ---- | - | ---------- | - | ---- | ----- |  | ---------- | -----
|                                      |  | (in millions) |        
|Related forward contracts to sell USD |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Japanese Yen                          |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Contract Amount                       |  | $             |        |   |      | $ | 0.4      |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               |        |   |      |   | 130.2950 |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Euro                                  |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Contract Amount                       |  | $             | 21.2    |   |      | $ | 18.6     |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 0.9193  |   |      |   | 0.9575   |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Related forward contracts to sell GBP |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Euro                                  |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Contract Amount                       |  | $             | 1.4     |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 0.6316  |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Related forward contracts to buy USD  |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|South African Rand                    |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Contract Amount                       |  | $             | 0.3     |   |      | $ | 0.1      |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 11.3530 |   |      |   | 11.1457  |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Euro                                  |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Contract Amount                       |  | $             | 0.7     |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 0.9065  |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Related forward contracts to buy EUR  |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|South African Rand                    |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Contract Amount                       |  | $             | 0.3     |   |      | $ | 0.1      |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 10.4900 |   |      |   | 10.9010  |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|United States Dollar                  |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Contract Amount                       |  | $             | 0.5     |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 0.09342 |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Related forward contracts to buy GBP  |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Euro                                  |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Contract Amount                       |  | $             | 0.1     |   |      | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Avg. Contract Rate                    |  |               | 0.6402  |   |      |   |         |      |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Long-term debt                        |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|U.S. Dollar Functional Currency       |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Fixed Rate                            |  | $             | 0.1     |   |      | $ | 0.7      |      |  | $ | 0.7  |   |  | $    | 0.7  |   |            | $ | 0.7  |       |  | $          | 553.0
|Average Interest Rate                 |  |               | 9.28    | % |      |   | 9.29     | %    |  |   | 9.30 | % |  |      | 9.31 | % |            |   | 9.31 | %     |  |            | 9.35 
|Variable Rate                         |  | $             |        |   |      | $ |         |      |  | $ | 2.1  |   |  | $    | 4.2  |   |            | $ | 4.1  |       |  | $          | 393.7
|Average Interest Rate                 |  |               | 5.26    | % |      |   | 6.13     | %    |  |   | 7.26 | % |  |      | 7.96 | % |            |   | 7.92 | %     |  |            | 8.30 
|Euro Functional Currency              |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Fixed Rate                            |  | $             | 0.5     |   |      | $ | 0.9      |      |  | $ | 0.7  |   |  | $    | 0.7  |   |            | $ | 0.6  |       |  | $          | 0.6  
|Average Interest Rate                 |  |               | 4.22    | % |      |   | 4.32     | %    |  |   | 4.37 | % |  |      | 4.46 | % |            |   | 4.50 | %     |  |            | 4.50 
|Variable Rate                         |  | $             |        |   |      | $ | 0.1      |      |  | $ | 0.2  |   |  | $    | 0.2  |   |            | $ | 0.2  |       |  | $          | 0.2  
|Average Interest Rate                 |  |               | 2.87    | % |      |   | 2.72     | %    |  |   | 3.20 | % |  |      | 3.68 | % |            |   | 4.07 | %     |  |            | 4.32 
|Interest Rate Swaps                   |  |               |         |   |      |   |          |      |  |   |      |   |  |      |      |   |            |   |      |       |  |            |      
|Pay Fixed/Receive Variable            |  | $             |        |   |      | $ | 115.0    |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Average Pay Rate                      |  |               | 4.49    | % |      |   | 4.49     | %    |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Average Receive Rate                  |  |               | 1.76    | % |      |   | 2.11     | %    |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Pay Variable/Receive Fixed            |  | $             |        |   |      | $ | 100.0    |      |  | $ |     |   |  | $    |     |   |            | $ |     |       |  | $          |     
|Average Pay Rate                      |  |               | 7.96    | % |      |   | 8.62     | %    |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     
|Average Receive Rate                  |  |               | 9.38    | % |      |   | 9.38     | %    |  |   |     |   |  |      |     |   |            |   |     |       |  |            |     



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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, if any, remedial measures were necessary. We believe our management has taken or
is in the process of taking the steps necessary to correct the errors and avoid similar errors in the future.



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



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



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



Item 2. Change in Securities and Use of Proceeds



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



Upon the terms of the Merger Agreement, each outstanding share of Dresser common stock was cancelled and the holders thereof received one class A common
share of Dresser Ltd., for each share of Dresser class A common stock, and one class B common share of Dresser Ltd. for each share of Dresser class B common stock, respectively, held by each shareholder.



The certification of incorporation was amended; the total number of shares of
stock, which Dresser shall have the authority to issue, is 10,000 having a par value of $0.01 per shares of common stock. Dresser Holdings, Inc., a Delaware corporation, is the sole shareholder of Dresser and holds 1,000 shares.



Item 4. Submission of Matters to a Vote of Security Holders



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



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Item 6. Exhibits and Reports on Form 8-K



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



|ExhibitNo. |  | Description of Exhibit                                                                                                   
|---------- |  | -------------------------------------------------------------------------------------------------------------------------
|           | 
|*2.1       |  | Agreement and Plan of Merger by and among Dresser, Inc., Dresser, Ltd. and Dresser Mergerco, Inc.                        
|           | 
|*4.1       |  | Consent, Amendment, Assignment and Assumption of the Dresser, Inc. Amended and Restated Investor Rights Agreement.       
|           | 
|*4.2       |  | Consent, Amendment, Assignment and Assumption of the Dresser, Inc. Sponsor Rights Agreement.                             
|           | 
|*10.1      |  | Executive Employment Agreement and Exhibit dated October 8, 2002 between Dresser and Steven G. Lamb.                     
|           | 
|31.1       |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  
|           | 
|31.2       |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  
|           | 
|32.1       |  | Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|           | 
|32.2       |  | Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

---

|* | Filed previously as an exhibit to our Quarterly report on 10-Q, dated November 14, 2002 and incorporated by reference herein.
|- | -----------------------------------------------------------------------------------------------------------------------------



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



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



Current Report on Form 8-K of Dresser dated August
14, 2002 reporting under Item 9. Regulation FD Disclosure announcing it had provided to the Securities and Exchange Commission the certifications, as required by 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.



Current Report on Form 8-K of Dresser dated August 14, 2002
reporting under Item 9. Regulation FD Disclosure announcing its financial results for the quarter ended June 30, 2002.



Current Report on Form 8-K of Dresser dated October 17, 2002 reporting under Item 9. Regulation FD announcing the appointment of a new president of
Dresser, Inc.



Current Report on Form 8-K of Dresser dated
October 31, 2002 reporting under Item 9. Regulation FD announcing its restructuring programs.



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##### Table of Contents

SIGNATURES



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



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



67