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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q



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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 March 31, 2005



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 001-32372



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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)



---



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



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



Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



The number of shares
outstanding of common stock (par value $0.01 per share) as of December 15, 2005 was 1,000.



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##### Table of Contents



INDEX



|                              |  |                                                                                                                |  |        
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | -------
|                              |  |                                                                                                                |  | PageNo.
|PART I. FINANCIAL INFORMATION |  |                                                                                                               
|Item 1.                       |  | Financial Statements                                                                                           |  |        
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Operations for the three months endedMarch 31, 2005 and 2004 (unaudited)  |  | 3      
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 (unaudited)                   |  | 4      
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited) |  | 5      
|                              |  |                                                                                                               
|                              |  | Notes to Condensed Consolidated Financial Statements as of March 31, 2005 (unaudited)                          |  | 6      
|                              |  |                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 24     
|                              |  |                                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                     |  | 47     
|                              |  |                                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                                        |  | 49     
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                               
|                              |  |                                                                                                               
|Item 6.                       |  | Exhibits                                                                                                       |  | 55     
|                              | 
|Signatures                    |  | 56                                                                                                            



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



DRESSER, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except share and per share amounts)

(unaudited)



|                                                          |  |                             |        |   |                 |   |         |  
|--------------------------------------------------------- |  | --------------------------- | ------ | - | --------------- | - | ------- | -
|                                                          |  | Three Months EndedMarch 31, |       
|                                                          |  | 2005                        |        |   | 2004 (Restated) |  
|Revenues                                                  |  | $                           | 502.9  |   |                 | $ | 436.4   |  
|Cost of revenues                                          |  |                             | 362.1  |   |                 |   | 315.1   |  
|                                                          |  |                             |        |   |                 |   |         |  
|Gross profit                                              |  |                             | 140.8  |   |                 |   | 121.3   |  
|Selling, engineering, administrative and general expenses |  |                             | 121.5  |   |                 |   | 104.8   |  
|                                                          |  |                             |        |   |                 |   |         |  
|Operating income                                          |  |                             | 19.3   |   |                 |   | 16.5    |  
|Interest expense                                          |  |                             | (21.6  | ) |                 |   | (30.6   | )
|Interest income                                           |  |                             | 0.3    |   |                 |   | 0.3     |  
|Other income (expense), net                               |  |                             | (0.6   | ) |                 |   | (0.7    | )
|                                                          |  |                             |        |   |                 |   |         |  
|Income (loss) before income taxes                         |  |                             | (2.6   | ) |                 |   | (14.5   | )
|Provision for income taxes                                |  |                             | (0.7   | ) |                 |   | (3.2    | )
|                                                          |  |                             |        |   |                 |   |         |  
|Income (loss) before equity interests                     |  |                             | (3.3   | ) |                 |   | (17.7   | )
|Equity in earnings of unconsolidated subsidiaries         |  |                             | 1.1    |   |                 |   | 0.7     |  
|Minority owners share of consolidated subsidiaries       |  |                             | (0.2   | ) |                 |   | 0.1     |  
|                                                          |  |                             |        |   |                 |   |         |  
|Net income (loss)                                         |  | $                           | (2.4   | ) |                 | $ | (16.9   | )
|                                                          |  |                             |        |   |                 |   |         |  
|Basic and diluted net income (loss) per share             |  | $                           | (2,400 | ) |                 | $ | (16,900 | )
|                                                          |  |                             |        |   |                 |   |         |  
|Basic and diluted weighted average shares outstanding     |  |                             | 1,000  |   |                 |   | 1,000   |  
|                                                          |  |                             |        |   |                 |   |         |  



See accompanying notes
to condensed consolidated financial statements



3



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##### Table of Contents

DRESSER, INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(in millions, except share information)

(unaudited)



|                                                                               |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                               |  | March 31,2005 |         |   | December 31,2004 |  
|ASSETS                                                                         |  |               |         |   |                  |   |         |  
|Current assets:                                                                |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                      |  | $             | 77.4    |   |                  | $ | 98.6    |  
|Accounts receivable, net of allowance for doubtful accounts of $15.4 and $15.6 |  |               | 408.8   |   |                  |   | 439.5   |  
|Notes receivable                                                               |  |               | 1.4     |   |                  |   | 3.1     |  
|Inventories                                                                    |  |               | 358.8   |   |                  |   | 327.8   |  
|Other current assets                                                           |  |               | 39.3    |   |                  |   | 37.2    |  
|                                                                               |  |               |         |   |                  |   |         |  
|Total current assets                                                           |  |               | 885.7   |   |                  |   | 906.2   |  
|                                                                               |  |              
|Property, plant and equipment, net                                             |  |               | 237.0   |   |                  |   | 240.6   |  
|Investments in unconsolidated subsidiaries                                     |  |               | 9.6     |   |                  |   | 9.3     |  
|Goodwill                                                                       |  |               | 357.4   |   |                  |   | 358.2   |  
|Other assets                                                                   |  |               | 152.0   |   |                  |   | 149.9   |  
|                                                                               |  |               |         |   |                  |   |         |  
|Total assets                                                                   |  | $             | 1,641.7 |   |                  | $ | 1,664.2 |  
|                                                                               |  |               |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                          |  |               |         |   |                  |   |         |  
|Current liabilities:                                                           |  |               |         |   |                  |   |         |  
|Accounts payable                                                               |  | $             | 281.0   |   |                  | $ | 312.0   |  
|Notes payable                                                                  |  |               | 16.6    |   |                  |   | 10.7    |  
|Current maturities of long-term debt                                           |  |               | 2.8     |   |                  |   | 3.2     |  
|Payroll and other compensation                                                 |  |               | 64.2    |   |                  |   | 60.6    |  
|Deferred revenue                                                               |  |               | 41.0    |   |                  |   | 32.2    |  
|Accrued expenses                                                               |  |               | 131.3   |   |                  |   | 126.9   |  
|                                                                               |  |               |         |   |                  |   |         |  
|Total current liabilities                                                      |  |               | 536.9   |   |                  |   | 545.6   |  
|                                                                               |  |              
|Pension and other retiree benefit obligations                                  |  |               | 342.6   |   |                  |   | 343.7   |  
|Long-term debt, net of current maturities                                      |  |               | 1,061.2 |   |                  |   | 1,061.8 |  
|Other liabilities                                                              |  |               | 25.7    |   |                  |   | 29.3    |  
|                                                                               |  |               |         |   |                  |   |         |  
|Total liabilities                                                              |  |               | 1,966.4 |   |                  |   | 1,980.4 |  
|                                                                               |  |              
|Commitments and contingencies                                                  |  |               |        |   |                  |   |        |  
|Minority interest                                                              |  |               | 3.1     |   |                  |   | 3.5     |  
|Mandatorily redeemable common stock of Dresser, Ltd.                           |  |               | 6.7     |   |                  |   | 6.7     |  
|                                                                               |  |              
|Shareholders deficit:                                                         |  |               |         |   |                  |   |         |  
|Common stock $0.01 par value; issued and outstanding: 1,000 shares             |  |               |        |   |                  |   |        |  
|Additional paid in capital                                                     |  |               | 456.3   |   |                  |   | 455.7   |  
|Loan to Dresser, Ltd.                                                          |  |               | (1.6    | ) |                  |   | (1.6    | )
|Dividends in excess of net book value                                          |  |               | (605.6  | ) |                  |   | (605.6  | )
|Accumulated deficit                                                            |  |               | (160.9  | ) |                  |   | (158.5  | )
|Accumulated other comprehensive loss                                           |  |               | (22.7   | ) |                  |   | (16.4   | )
|                                                                               |  |               |         |   |                  |   |         |  
|Total shareholders deficit                                                    |  |               | (334.5  | ) |                  |   | (326.4  | )
|                                                                               |  |               |         |   |                  |   |         |  
|Total liabilities and shareholders deficit                                    |  | $             | 1,641.7 |   |                  | $ | 1,664.2 |  
|                                                                               |  |               |         |   |                  |   |         |  



See accompanying notes
to condensed consolidated financial statements



4



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DRESSER, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)



|                                                                             |  |                             |       |   |                 |   |       |  
|---------------------------------------------------------------------------- |  | --------------------------- | ----- | - | --------------- | - | ----- | -
|                                                                             |  | Three Months EndedMarch 31, |      
|                                                                             |  | 2005                        |       |   | 2004 (Restated) |  
|Cash flows from operating activities:                                        |  |                             |       |   |                 |   |       |  
|Net loss                                                                     |  | $                           | (2.4  | ) |                 | $ | (16.9 | )
|Adjustments to reconcile net loss to cash flow used in operating activities: |  |                             |       |   |                 |   |       |  
|Depreciation and amortization                                                |  |                             | 12.5  |   |                 |   | 11.2  |  
|Equity in earnings of unconsolidated subsidiaries                            |  |                             | (1.1  | ) |                 |   | (0.7  | )
|Loss on repayment of debt                                                    |  |                             |      |   |                 |   | 11.3  |  
|Amortization of deferred financing fees, net of amortization of bond premium |  |                             | 1.2   |   |                 |   | 1.3   |  
|Other non-cash changes in income                                             |  |                             | 4.3   |   |                 |   | (0.5  | )
|Changes in operating assets and liabilities, net of acquisition of business: |  |                             |       |   |                 |   |       |  
|Accounts receivable                                                          |  |                             | 25.7  |   |                 |   | (1.8  | )
|Inventories                                                                  |  |                             | (34.9 | ) |                 |   | (3.0  | )
|Accounts payable                                                             |  |                             | (27.2 | ) |                 |   | (18.7 | )
|Accrued expenses                                                             |  |                             | 16.9  |   |                 |   | 4.2   |  
|Pension and other retiree benefit obligations                                |  |                             | (0.6  | ) |                 |   | 10.7  |  
|Other changes in assets and liabilities                                      |  |                             | (9.9  | ) |                 |   | (3.6  | )
|                                                                             |  |                             |       |   |                 |   |       |  
|Net cash used in operating activities                                        |  |                             | (15.5 | ) |                 |   | (6.5  | )
|                                                                             |  |                             |       |   |                 |   |       |  
|Cash flows from investing activities:                                        |  |                             |       |   |                 |   |       |  
|Capital expenditures                                                         |  |                             | (8.7  | ) |                 |   | (12.9 | )
|Proceeds from sale of assets                                                 |  |                             | 0.1   |   |                 |   |      |  
|Changes in restricted cash                                                   |  |                             | (1.8  | ) |                 |   | 0.2   |  
|Other                                                                        |  |                             | (0.6  | ) |                 |   |      |  
|                                                                             |  |                             |       |   |                 |   |       |  
|Net cash used in investing activities                                        |  |                             | (11.0 | ) |                 |   | (12.7 | )
|                                                                             |  |                             |       |   |                 |   |       |  
|Cash flows from financing activities:                                        |  |                             |       |   |                 |   |       |  
|Repayment of long-term debt (including current portion)                      |  |                             | (0.8  | ) |                 |   | (25.0 | )
|Net change in short-term notes payable                                       |  |                             | 6.4   |   |                 |   | 1.6   |  
|                                                                             |  |                             |       |   |                 |   |       |  
|Net cash provided by (used in) financing activities                          |  |                             | 5.6   |   |                 |   | (23.4 | )
|                                                                             |  |                             |       |   |                 |   |       |  
|Effect of translation adjustments on cash                                    |  |                             | (0.3  | ) |                 |   |      |  
|                                                                             |  |                             |       |   |                 |   |       |  
|Net decrease in cash and cash equivalents                                    |  |                             | (21.2 | ) |                 |   | (42.6 | )
|Cash and cash equivalents, beginning of period                               |  |                             | 98.6  |   |                 |   | 149.0 |  
|                                                                             |  |                             |       |   |                 |   |       |  
|Cash and cash equivalents, end of period                                     |  | $                           | 77.4  |   |                 | $ | 106.4 |  
|                                                                             |  |                             |       |   |                 |   |       |  
|Supplemental disclosure of cash flow information:                            |  |                             |       |   |                 |   |       |  
|Cash payments during the period for:                                         |  |                             |       |   |                 |   |       |  
|Interest                                                                     |  | $                           | 7.6   |   |                 | $ | 7.2   |  
|Income taxes                                                                 |  | $                           | 4.0   |   |                 | $ | 2.5   |  



See accompanying notes
to condensed consolidated financial statements



5



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##### Table of Contents

DRESSER, INC.



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Note 1. Basis of Presentation



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S.
GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March
31, 2005, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. 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, 2004. As used in this report, the terms Dresser, the Company, we, our or us refer to Dresser, Inc. and its predecessors, subsidiaries and affiliates unless the
context indicates otherwise.



Restatement of Historical Financial Statements



We have restated our financial statements and other
information for errors identified in amounts previously reported in our historical financial statements for the first nine months of 2004 and periods prior to 2004. Errors identified in our 2004 restatement which specifically relate to the first
quarter of 2004 consisted of: $0.5 million of net loss attributed to accounting for foreign currency translation; $3.2 million of net loss attributed to accounting for inventory, including capitalization of inventory costs, the elimination of
profits related to intercompany inventory transfers, and excess and obsolete inventory; $4.9 million of net income attributed to capitalization and amortization of deferred financing fees and $0.3 million of net income attributed to other
errors, primarily of a control-related or bookkeeping nature.



6



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The following table sets forth the effects of the restatement on our previously reported statement of
operations for the three months ended March 31, 2004.



|                                                           |  |                                                   |         |   |            |   |         |  
|---------------------------------------------------------- |  | ------------------------------------------------- | ------- | - | ---------- | - | ------- | -
|                                                           |  | Three Months Ended                                |        
|                                                           |  | March 31, 2004                                    |        
|                                                           |  | AsReported                                        |         |   | AsRestated |  
|                                                           |  | (in millions, except share and per share amounts) |        
|Revenues                                                   |  | $                                                 | 436.3   |   |            | $ | 436.4   |  
|Cost of revenues                                           |  |                                                   | 311.9   |   |            |   | 315.1   |  
|                                                           |  |                                                   |         |   |            |   |         |  
|Gross profit                                               |  |                                                   | 124.4   |   |            |   | 121.3   |  
|Selling, engineering, administrative, and general expenses |  |                                                   | 104.7   |   |            |   | 104.8   |  
|                                                           |  |                                                   |         |   |            |   |         |  
|Operating income                                           |  |                                                   | 19.7    |   |            |   | 16.5    |  
|Interest expense                                           |  |                                                   | (36.0   | ) |            |   | (30.6   | )
|Interest income                                            |  |                                                   | 0.3     |   |            |   | 0.3     |  
|Other income (expense), net                                |  |                                                   | (0.2    | ) |            |   | (0.7    | )
|                                                           |  |                                                   |         |   |            |   |         |  
|Income (loss) before income taxes                          |  |                                                   | (16.2   | ) |            |   | (14.5   | )
|Provision for income taxes                                 |  |                                                   | (3.2    | ) |            |   | (3.2    | )
|                                                           |  |                                                   |         |   |            |   |         |  
|Income (loss) before equity interests                      |  |                                                   | (19.4   | ) |            |   | (17.7   | )
|Equity in earnings of unconsolidated subsidiaries          |  |                                                   | 0.9     |   |            |   | 0.7     |  
|Minority owner's share of consolidated subsidiaries        |  |                                                   | 0.1     |   |            |   | 0.1     |  
|                                                           |  |                                                   |         |   |            |   |         |  
|Net income (loss)                                          |  | $                                                 | (18.4   | ) |            | $ | (16.9   | )
|                                                           |  |                                                   |         |   |            |   |         |  
|Basic and diluted net income (loss) per share              |  | $                                                 | (18,400 | ) |            | $ | (16,900 | )
|                                                           |  |                                                   |         |   |            |   |         |  
|Basic and diluted weighted average shares outstanding      |  |                                                   | 1,000   |   |            |   | 1,000   |  
|                                                           |  |                                                   |         |   |            |   |         |  



7



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 2. Income (Loss) Per Share



We compute basic and diluted income (loss) per share in accordance with Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings per Share. Basic income (loss) per share is determined by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is determined by
dividing the net income (loss) by the weighted average number of common shares and potential common shares outstanding during the period. We had no potential common shares outstanding for any of the periods presented.



Following are the components used to calculate our basic and diluted income
(loss) per share:



|                                                          |  |                                                 |        |   |                |   |         |  
|--------------------------------------------------------- |  | ----------------------------------------------- | ------ | - | -------------- | - | ------- | -
|                                                          |  | Three Months EndedMarch 31,                     |       
|                                                          |  | 2005                                            |        |   | 2004(Restated) |  
|                                                          |  | (in millions, exceptshare and per shareamounts) |       
|Consolidated operations:                                  |  |                                                 |        |   |                |   |         |  
|Net income (loss)                                         |  | $                                               | (2.4   | ) |                | $ | (16.9   | )
|                                                          |  |                                                 |        |   |                |   |         |  
|Average equivalent shares:                                |  |                                                 |        |   |                |   |         |  
|Basic and diluted weighted average shares of common stock |  |                                                 | 1,000  |   |                |   | 1,000   |  
|                                                          |  |                                                 |        |   |                |   |         |  
|Per share amounts:                                        |  |                                                 |        |   |                |   |         |  
|Basic and diluted income (loss) per share                 |  | $                                               | (2,400 | ) |                | $ | (16,900 | )
|                                                          |  |                                                 |        |   |                |   |         |  



Note 3. Business Segment
Information



We aggregate our business units into three
reportable segments: flow control, measurement systems and compression and power systems. The business segments are organized around the products and services provided to the customers each serves. The business units aggregated share like
businesses, operational and economic features.



Flow
Control. Operations of the flow control segment include the design, manufacture and marketing of valves and actuators. These products are used to start, stop and control the flow of liquids and gases and to protect process equipment from
excessive pressure. In addition, this segment also includes the design, manufacture and marketing of natural gas meters, regulators, digital and analog pressure and temperature gauges, transducers, and piping specialties such as couplings and pipe
fabrications. In September 2005, we agreed to sell our on/off valves and instruments product lines. See Note 10. Acquisitions and Dispositions.



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



Compression and Power Systems. Operations of the compression and power systems segment consist of the design, manufacture and marketing of natural gas fueled engines used primarily in natural gas compression
and power generation applications. We also manufacture positive displacement blowers and centrifugal compressors used in air and gas applications.



8



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



We evaluate performance based on the operating income or loss from each business segment which
excludes interest, other income (deductions) and income taxes. The following table presents information by reportable segment for the three months ended March 31, 2005 and 2004:



|                                           |  |               |       |                     |   |                             |  |                                        |       |  |       |       |   |  |   |        
|------------------------------------------ |  | ------------- | ----- | ------------------- | - | --------------------------- |  | -------------------------------------- | ----- |  | ----- | ----- | - |  | - | -------
|                                           |  | FlowControl   |       | MeasurementsSystems |   | Compressionand PowerSystems |  | ReconcilingItems,IncludingCorporate(1) |       |  | Total
|                                           |  | (in millions)
|Three Months Ended March 31, 2005          |  |               |       |                     |   |                             |  |                                        |       |  |       |       |   |  |   |        
|Revenues from external customers           |  | $             | 265.3 |                     | $ | 148.9                       |  | $                                      | 88.7  |  | $     |      |   |  | $ | 502.9  
|Intersegment revenues                      |  |               | 1.7   |                     |   | 0.6                         |  |                                        | 0.7   |  |       | (3.0  | ) |  |   |       
|Operating income                           |  |               | 10.5  |                     |   | 13.6                        |  |                                        | 14.5  |  |       | (19.3 | ) |  |   | 19.3   
|Depreciation and amortization              |  |               | 5.5   |                     |   | 3.4                         |  |                                        | 1.9   |  |       | 1.7   |   |  |   | 12.5   
|Goodwill                                   |  |               | 247.1 |                     |   | 110.3                       |  |                                        |      |  |       |      |   |  |   | 357.4  
|Total assets                               |  |               | 871.2 |                     |   | 444.8                       |  |                                        | 155.6 |  |       | 170.1 |   |  |   | 1,641.7
|Capital expenditures                       |  |               | 4.8   |                     |   | 1.7                         |  |                                        | 0.8   |  |       | 1.4   |   |  |   | 8.7    
|                                           |  |               |       |                     |  
|Three Months Ended March 31, 2004Restated |  |               |       |                     |   |                             |  |                                        |       |  |       |       |   |  |   |        
|Revenues from external customers           |  | $             | 254.9 |                     | $ | 97.2                        |  | $                                      | 84.3  |  | $     |      |   |  | $ | 436.4  
|Intersegment revenues                      |  |               | 0.2   |                     |   | 1.3                         |  |                                        | 0.1   |  |       | (1.6  | ) |  |   |       
|Operating income                           |  |               | 8.5   |                     |   | 11.6                        |  |                                        | 8.7   |  |       | (12.3 | ) |  |   | 16.5   
|Depreciation and amortization              |  |               | 5.6   |                     |   | 1.2                         |  |                                        | 3.5   |  |       | 0.9   |   |  |   | 11.2   
|Goodwill                                   |  |               | 299.3 |                     |   | 15.5                        |  |                                        |      |  |       |      |   |  |   | 314.8  
|Total assets                               |  |               | 830.7 |                     |   | 141.4                       |  |                                        | 136.3 |  |       | 258.9 |   |  |   | 1,367.3
|Capital expenditures                       |  |               | 8.2   |                     |   | 0.3                         |  |                                        | 0.7   |  |       | 3.7   |   |  |   | 12.9   

---

|(1) | Revenue and operating income represent inter-segment eliminations and certain corporate overhead costs not allocated to each business segment. Assets primarily consist of cash,
deferred financing fees, prepaid and intangible pension costs and deferred tax assets.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 4. Inventories



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



Inventories
on the LIFO method represented $77.0 million and $64.0 million of our total inventories as of March 31, 2005 and December 31, 2004, respectively. The excess of FIFO over LIFO costs were $86.8 million as of March 31, 2005 and December 31, 2004.
Inventories are summarized as follows:



|                              |  |               |       |   |                  |   |       |  
|----------------------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                              |  | March 31,2005 |       |   | December 31,2004 |  
|                              |  | (in millions) |      
|Finished products and parts   |  | $             | 198.5 |   |                  | $ | 222.4 |  
|In-process products and parts |  |               | 138.2 |   |                  |   | 102.2 |  
|Raw materials and supplies    |  |               | 108.9 |   |                  |   | 90.0  |  
|                              |  |               |       |   |                  |   |       |  
|Inventories                   |  |               | 445.6 |   |                  |   | 414.6 |  
|Less:                         |  |               |       |   |                  |   |       |  
|LIFO reserve                  |  |               | (86.8 | ) |                  |   | (86.8 | )
|                              |  |               |       |   |                  |   |       |  
|Total inventories             |  | $             | 358.8 |   |                  | $ | 327.8 |  
|                              |  |               |       |   |                  |   |       |  





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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 5. Pension and Other Retiree Benefit Obligations



We sponsor several qualified and nonqualified pension plans and other
postretirement benefit plans that cover a significant number of our employees. The following tables provide information related to our net periodic benefit cost for the three months ended March 31, 2005 and 2004:



|                                   |  |                              |      |   |                           |   |      |      |  |   |                 |   |  |   |      |  
|---------------------------------- |  | ---------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | --------------- | - |  | - | ---- | -
|                                   |  | Defined Benefit Plans        |      |   | OtherPostretirement Plans |  
|                                   |  | Three Months Ended March 31, |     
|                                   |  | 2005                         |      |   | 2004 (Restated)           |   |      | 2005 |  |   | 2004 (Restated) |  
|                                   |  | (in millions)                |     
|                                   |  |                              |      |  
|Service cost                       |  | $                            | 2.0  |   |                           | $ | 1.8  |      |  | $ | 0.6             |   |  | $ | 0.5  |  
|Interest cost                      |  |                              | 4.7  |   |                           |   | 4.4  |      |  |   | 2.5             |   |  |   | 2.8  |  
|Amortization of prior service cost |  |                              | 0.5  |   |                           |   | 0.5  |      |  |   | (1.9            | ) |  |   | (1.9 | )
|Amortization of net loss           |  |                              | 1.7  |   |                           |   | 1.3  |      |  |   | 0.5             |   |  |   | 0.7  |  
|Transition obligation              |  |                              | 0.5  |   |                           |   | 0.5  |      |  |   |                |   |  |   |     |  
|Expected return on assets          |  |                              | (4.5 | ) |                           |   | (4.2 | )    |  |   |                |   |  |   |     |  
|                                   |  |                              |      |   |                           |   |      |      |  |   |                 |   |  |   |      |  
|Net periodic benefit cost          |  | $                            | 4.9  |   |                           | $ | 4.3  |      |  | $ | 1.7             |   |  | $ | 2.1  |  
|                                   |  |                              |      |   |                           |   |      |      |  |   |                 |   |  |   |      |  



We made cash
contributions of approximately $10.2 million to our pension benefit plans during the three months ended March 31, 2005 compared to $2.0 million for the three months ended March 31, 2004. We expect to make additional cash contributions of $12.1
million throughout the remainder of 2005.



Note 6. Debt



In December 2005, we used net cash proceeds of $215 million from the sale of
substantially all of our on/off valves business and our instruments business to repay a portion of our Tranche C term loan.



Also during 2005, we entered into several amendments and waivers to our credit agreement that, among other things, amended certain financial covenants
under our senior secured credit facility and extended to February 15, 2006, our deadline for providing our senior lenders with audited financial statements for the year ended December 31, 2004, and restated audited financial statements, to
the extent that financial statements for earlier years are required to be restated in connection with the preparation of the 2004 financial statements. The amendments also waived any default or event of default relating in any respect to the
re-audit, revision or restatement of any financial statement delivered to the lenders prior to February 15, 2006, including any default or event of default relating in any respect to any errors contained in such financial statements.



In addition, during 2005, we entered into several consents and
waivers to our senior unsecured term loan agreement and extended to February 15, 2006, the deadline for providing our lenders under the senior unsecured term loan agreement with audited financial statements for the year ended December 31, 2004
and extended to February 15, 2006, our deadline for providing these lenders with unaudited financial statements for the first, second and third fiscal quarters of 2005. The consents also waived any default or event of default relating in any
respect to the re-audit, revision or restatement of any financial statement delivered to the lenders under the credit agreement prior to February 15, 2006, including any default or event of default relating in any respect to any errors
contained in such financial statements.



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Prior to the filing of this Form 10-Q with the SEC, we had not timely furnished certain annual and
quarterly financial information required to be contained in our 2004 Form 10-K and our 2005 First, Second and Third Quarter Reports on Form 10-Q, respectively, as required by Section 4.03(a) of the indenture governing our senior subordinated notes.
In addition, because of the restatement of prior period financial information described in our 2004 Form 10-K, certain of our prior SEC filings may be deemed not to have complied with Section 4.03(a). On December 6, 2005, we commenced a solicitation
of consents from the holders of these notes and on December 19, 2005, executed a supplemental indenture extending the financial statement delivery requirement to February 15, 2006 and waiving past default. With the filing of this Form 10-Q and
the filing of our 2005 Second and Third Quarter Reports on Form 10-Q, we will satisfy the applicable requirements of, and cured any default that may have been deemed to exist under Section 4.03(a) of the indenture.



Note 7. Comprehensive Income (Loss)



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



|                                                 |  |                             |      |   |                 |   |       |  
|------------------------------------------------ |  | --------------------------- | ---- | - | --------------- | - | ----- | -
|                                                 |  | Three Months EndedMarch 31, |     
|                                                 |  | 2005                        |      |   | 2004 (Restated) |  
|                                                 |  | (in millions)               |     
|                                                 |  |                            
|Net income (loss)                                |  | $                           | (2.4 | ) |                 | $ | (16.9 | )
|Other comprehensive (loss) income                |  |                             |      |   |                 |   |       |  
|Foreign currency translation adjustment          |  |                             | (4.8 | ) |                 |   | (1.7  | )
|Unrealized gain (loss) on derivative instruments |  |                             | (1.5 | ) |                 |   | (2.4  | )
|                                                 |  |                             |      |   |                 |   |       |  
|Comprehensive income (loss)                      |  | $                           | (8.7 | ) |                 | $ | (21.0 | )
|                                                 |  |                             |      |   |                 |   |       |  



Note 8. Commitments and
Contingencies



Halliburton Indemnifications



In accordance with the agreement relating to our recapitalization
transaction, Halliburton agreed to indemnify us 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 Dresser. In
addition, Halliburton has agreed to indemnify us 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 our businesses prior to the closing; and certain environmental liability claims
against us, to the extent that notice is given to Halliburton prior to the fifth anniversary of the closing. Halliburton had also agreed to indemnify us against any loss, liability, damage or expense relating to workers compensation, general
liability, and automobile liability arising out of events or occurrences prior to the closing, but such rights with respect to those claims expired in April 2004. The maximum aggregate amount of all losses indemnifiable by Halliburton pursuant to
the recapitalization agreement is $950.0 million. In the case of certain general indemnities in the recapitalization agreement, other than those described above, there is an aggregate $15 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



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



obligations, such amounts shall be offset by insurance proceeds received by us or the amount of tax benefit received by us. All indemnification claims are
subject to notice and procedural requirements that may result in Halliburton denying indemnification claims for some losses.



Under the agreement relating to our recapitalization transaction, we agreed to indemnify Halliburton for all assumed obligations of the businesses as set
forth in the recapitalization agreement. This includes certain environmental matters including those arising out of acts by us which take place after the closing. We have the same aggregate indemnity deductible and maximum indemnity obligation as
set forth above in the Halliburton indemnity, but do 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.



As Halliburton has publicly disclosed, it has
been subject to numerous lawsuits involving asbestos claims associated with, among other things, the operating units of Dresser Industries that were retained by Halliburton or disposed of by Dresser Industries or Halliburton prior to the
recapitalization transaction. These lawsuits have resulted in significant expense for Halliburton. In December 2003, certain affiliates of Halliburton filed a petition for relief under the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. Those affiliates filed a plan of reorganization that became effective on January 20, 2005, which requires asbestos plaintiffs with claims against us or Halliburton to look for relief exclusively to a trust
established under the plan. The plan prevents us from asserting our right to indemnification under the recapitalization agreement with Halliburton as it relates to asbestos claims based on events occurring prior to the closing of the
recapitalization. However, this indemnification right is unnecessary because the plan also prevents those asbestos plaintiffs from asserting claims against us.



We have not historically incurred, and in the future we do not believe that we will incur, any material liability as a result of the past use of
asbestos in products manufactured by the businesses currently owned by us or any predecessor entities of those businesses.



Environmental Matters



Our businesses and some of our products are subject to regulation under various and changing federal, state, local and foreign laws and regulations
relating to the environment and to employee safety and health. These environmental laws and regulations govern the generation, storage, transportation, handling, disposal and emission of various regulated substances. These environmental laws also
impose liability for personal injury or property damage related to releases of hazardous substances. Under environmental laws, permits are required for operation of our businesses, and these permits are subject to renewal, modification and, in
certain circumstances, revocation. We believe we are substantially in compliance with these laws and permitting requirements. Various and changing environmental laws allow regulatory authorities and private parties to compel, or seek reimbursement
for, cleanup of environmental contamination at sites now or formerly owned or operated by our businesses and at facilities where our waste is or has been disposed.



As a result, we spend money each year assessing and remediating contaminated properties to avoid future liabilities, to
comply with legal and regulatory requirements, to minimize pollution costs, or to respond to claims by third parties. Several such sites are currently being investigated and/or remediated under applicable environmental law. While we do not expect
that the costs for such activities will be, in the aggregate, material, and also believe that the Halliburton indemnity (discussed above) will provide coverage for many of these costs, we have set aside reserves for these costs. However, in the
event that we were to incur these costs ourselves,



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



these reserves may not fully cover the costs of such investigation and/or remediation. Going forward, we expect to incur ongoing capital and operating costs
for investigation and remediation and to maintain compliance with currently applicable environmental laws and regulations; however, we do not expect those costs, in the aggregate, to be material.



As Halliburton has publicly disclosed, it has been subject to numerous
lawsuits involving asbestos claims associated with, among other things, the operating units of Dresser Industries that were retained by Halliburton or disposed of by Dresser Industries or Halliburton prior to the recapitalization transaction. These
lawsuits have resulted in significant expense for Halliburton. Pursuant to the recapitalization agreement with Halliburton, all liabilities related to asbestos claims arising out of events occurring prior to the consummation of the recapitalization
transaction, are defined to be excluded liabilities, whether they resulted from activities of Halliburton, Dresser Industries or any predecessor entities of any of our businesses. The recapitalization agreement provides for certain
indemnification obligations of Halliburton for losses and liabilities that we incur arising out of, among others, such excluded liabilities. Those affiliates filed a plan of reorganization that became effective on January 20, 2005, which
requires asbestos plaintiffs with claims against us or Halliburton to look for relief exclusively to a trust established under the plan. The plan prevents us from asserting our right to indemnification under the recapitalization agreement with
Halliburton as it relates to asbestos claims based on events occurring prior to the closing of the recapitalization. However, this indemnification right is unnecessary because the plan also prevents those asbestos plaintiffs from asserting claims
against us. See Halliburton Indemnifications.



We
have not incurred, and do not believe that we will incur, any material liability as a result of the past use of asbestos in products manufactured by the businesses currently owned by us or any predecessor entities of our businesses.



Export Controls and Economic Sanctions Under Applicable U.S. Commerce and Treasury
Department Regulations



In April 2004, we received
allegations that the Dubai branch of one of our U.S. subsidiaries may have engaged in transactions involving the sale of control valves and related parts to Iraq without required authorization. Upon initial investigation, we found transactions by
the branch relating to Iraq, Iran and Sudan that appeared to have been undertaken without the required prior U.S. governmental authorizations. A short time after the Dubai branch investigation commenced, we expanded the investigation to include
other Dresser affiliates that since January 1999 may have engaged in transactions relating to U.S.-sanctioned countries (including those countries already mentioned, Libya (prior to April 2004), Cuba and Syria (since mid-May 2004)) to determine
whether there were any other violations of U.S. laws related to export controls and economic sanctions. The investigation was completed and voluntary disclosures to the U.S. Commerce and Treasury departments were made in late April 2005. The
investigation identified a significant number of sales by certain of our foreign affiliates to sanctioned countries (in addition to the sales by the Dubai branch) that appear to have been performed without required U.S. government authorization.



In response to the foregoing, we have undertaken and are
continuing to implement a comprehensive remedial program that is designed to prevent further unlawful transactions by our foreign subsidiaries and branches, and unlawful facilitations by U.S. persons of otherwise legal transactions by our foreign
subsidiaries, involving sanctioned countries. While our foreign subsidiaries may lawfully conduct business with sanctioned countries (other than Cuba), pursuant to a recently adopted company-wide policy they will no longer be permitted to accept new
business (other than such business as they are contractually obligated to undertake in



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



compliance with U.S. laws) intended to or for Iran or Sudan. We have also adopted a requirement that the U.S. export/import compliance and/or legal
department conduct a review of all proposed transactions by our foreign subsidiaries relating to sanctioned countries to determine whether such sales are consistent with the new policy and in compliance with applicable U.S. laws. In addition, we
have issued further guidance and provided additional training, to our employees concerning the application of U.S. foreign trade controls, and we have reorganized our management team that oversees compliance with these controls. Primary
responsibility for overseeing such compliance resides with a newly created corporate officer position titled Executive Vice President, Ethics and Compliance, which reports directly to the Chief Executive Officer and to the Audit Committee. We have
also established the position of Corporate Export/Import Compliance Director, reporting directly to the new Executive Vice President. At each business unit, compliance managers and export/import compliance managers have also been appointed. These
business unit managers report to the new Executive Vice President and the new Corporate Export /Import Compliance Director, respectively. We are also taking appropriate disciplinary action against personnel who failed to meet their obligations under
company-wide policy or otherwise engaged in wrongful conduct.



While our investigation has been completed, and voluntary disclosure reports have been submitted to the U.S. Commerce and Treasury departments, it remains unclear as to what extent the various activities reported to these government
agencies violate U.S. export control and economic sanctions regulations and what penalties the government agencies may seek to impose for conduct that is found to be unlawful. Accordingly, we are unable to determine at this time the extent of
violations or the nature or size of the penalties to which we may be subject as a result of any unauthorized dealings with U.S.-sanctioned countries. If we are found to be in violation of the applicable U.S. Commerce and Treasury department
regulations restricting dealings with Iran, Sudan and Cuba (and in the past, Iraq and Libya), we could be subject to civil or criminal penalties, including fines and/or suspension of the privilege to engage in export trading or to have our foreign
affiliates receive U.S.-origin goods, software or technology.



We believe that a loss in connection with this matter is probable and currently estimate our minimum probable liability to be approximately $0.8 million, which we recorded as a reserve in the fourth quarter of 2004. Given that the
resolution of these issues is inherently uncertain at this time, we are not able to reasonably estimate the maximum amount or a meaningful range of probable or reasonably likely liability that could result from an adverse resolution of this matter
or any related private causes of action that may arise. Since the U.S. Commerce and Treasury departments could impose aggregate penalties in excess of the reserve, and these amounts could be substantial, we cannot currently predict whether the
ultimate resolution of this matter will have a material adverse effect on our business, including our ability to do business outside the United States, or on our financial condition. In addition, our expenses related to the investigation and
remedial actions have been and may continue to be substantial.



Other
Contingencies



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



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 9. Accrued Warranties



We offer warranties on the sale of certain of our products and we record an accrual for estimated future claims. Such
accruals are based upon historical experience and managements estimate of the level of future claims. Accrued warranties are included in accrued expenses in our balance sheet. The following shows the activity of our warranty accrual:



|                                                        |  |                             |      |   |      |   |      |  
|------------------------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                                        |  | Three Months EndedMarch 31, |     
|                                                        |  | 2005                        |      |   | 2004 |  
|                                                        |  | (in millions)               |     
|Balance at the beginning of the period                  |  | $                           | 25.8 |   |      | $ | 26.9 |  
|Accruals for warranties issued during the period        |  |                             | 4.6  |   |      |   | 5.2  |  
|Changes in accruals related to pre-existing warranties  |  |                             | 0.1  |   |      |   | (1.4 | )
|Settlements made (in cash or in kind) during the period |  |                             | (5.5 | ) |      |   | (4.4 | )
|                                                        |  |                             |      |   |      |   |      |  
|Balance at the end of the period                        |  | $                           | 25.0 |   |      | $ | 26.3 |  
|                                                        |  |                             |      |   |      |   |      |  



Note 10. Acquisitions and
Dispositions



On/Off Valve Business



In November 2005, we sold substantially all of the worldwide on/off valve
business of our flow control segment to Cooper Cameron Corporation. The sale of the Brazilian portion of the on/off business is awaiting Brazilian regulatory confirmation of transfer permits and tax documentation, which we expect to be completed in
early 2006. The total purchase price for the on/off business was $223.8 million in cash, subject to post-closing adjustments including $21.3 million attributable to the Brazilian operation. In connection with the sale, Cooper Cameron has assumed
certain liabilities which include ordinary course customer/vendor contracts, leases and other commercial agreements; specified agency/distributor agreements; working capital liabilities, including payables and accrued payroll; specified severance,
change of control and employment agreements; product warranty/product liability for products shipped post-closing, as well as product warranty/product liability for products shipped pre-closing, but only to the extent of warranty reserves; and
liquidated damages on shipped products to the extent of reserves, plus 50% of liquidated damages on backlog shipped within 180 days of the closing.



We retained all liabilities not specifically assumed, including litigation, environmental (whether known or unknown), debt, pension liabilities and other
benefit plans; product warranty/product liability for products shipped pre-closing in excess of warranty reserves; liquidated damages on shipped products in excess of reserves, plus 50% of liquidated damages on backlog shipped within 180 days of the
closing (net of unused reserves from shipped products).



The
accompanying financial statements do not reflect the effects of the disposition of our on/off valve business as it does not qualify as a discontinued operation at March 31, 2005. The on/off valve business comprised approximately $468.4 million of
total assets and $287.6 million of total liabilities at March 31, 2005. Revenues from the on/off valve business consisted of $94.0 million for the three months ended March 31, 2005, and operating income (loss) consisted of $(3.5) million
for the three months ended March 31, 2005. We do not expect any resulting gain or loss from the sale of our on/off valve business to be significant to the sales transaction.



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Instruments Business



Also in November 2005, we sold our instruments business of our flow control segment to Ashcroft Holdings, Inc., an affiliate of KPS Special Situations
Fund II, L.P. (Ashcroft), for approximately $34.0 million in cash, subject to certain post-closing adjustments. Ashcroft assumed certain liabilities which include ordinary course contracts, leases, distributor and sales agent contracts,
and other commercial agreements; working capital liabilities, including payables and accrued payroll; termination or severance obligations that may be payable to certain distributors, sales agents and employees; and liabilities under the units
German pension plan.



We retained all liabilities not
specifically assumed, including certain known environmental liabilities, such as remediation obligations at our Stratford, Connecticut facility; certain pension and frozen retiree medical and life insurance liabilities; specified litigation; and
pre-closing product and export control liabilities.



The
accompanying financial statements do not reflect the effects of the disposition of our instruments business as it does not qualify as a discontinued operation at March 31, 2005. The instruments business comprised approximately $63.3 million of total
assets and $16.6 million of total liabilities at March 31, 2005. Revenues from the instruments business consisted of $29.9 million for the three months ended March 31, 2005, and operating income (loss) consisted of $0.6 million for the three months
ended March 31, 2005. We do not expect any resulting gain or loss from the sale of our instruments business to be significant to the sales transaction.



Note 11. New Accounting Pronouncements Issued But Not Yet Adopted



There are several accounting standards and interpretations that have not yet been adopted by us. Below is a discussion of significant standards that may
impact us.



Inventory Costing. In November 2004, the
FASB issued SFAS 151, Inventory Costsan Amendment of ARB No. 43, Chapter 4. This statement clarifies the accounting for idle facility expense, freight, handling costs and wasted material to require these items to be expensed
as current period charges, regardless of whether they meet the criterion of abnormal previously defined in Accounting Research Bulletin (ARB) 43. This statement also requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for fiscal years beginning after June 15, 2005. We are currently evaluating the effects of this pronouncement.



Accounting for Stock-Based Compensation. In December
2004, the FASB issued SFAS no. 123(R), Share Based Payments, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the
cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB
Opinion No. 25. In March 2005, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) 107, Share Based Payments, which expresses views of the Staff about the application of SFAS No. 123(R). SFAS No. 123(R) is
effective for annual reporting periods beginning on or after June 15, 2005. We are currently evaluating the effects of this pronouncement.



Exchanges of Nonmonetary Assets. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which eliminates the
exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our financial statements.





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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Accounting for Asset Retirement Obligations. In March 2005, the FASB issued FASB
Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations. FIN No. 47 requires companies to record a liability for those asset retirement obligations in which the timing or amount of settlement of the
obligation are uncertain. FIN No. 47 will require us to accrue a liability when a range of scenarios indicate that the potential timing and settlement amounts of our conditional asset retirement obligations can be determined and disclose information
regarding unrecognized conditional asset retirement obligations. We will adopt the provisions of this standard in the fourth quarter of 2005 and have not yet determined the impact, if any, that this pronouncement will have on our financial
statements.



Accounting Changes and Error Corrections.
In June 2005, the FASB issued FASB No. 154, Accounting Changes and Error Corrections, which requires the retrospective application of changes to accounting principles, changes in estimates, and reporting entities. SFAS No. 154 will be
effective for accounting changes and corrections occurring in fiscal years beginning after December 15, 2005. We will adopt the provisions of this standard in the first quarter of 2006 and we do not believe this standard will have a material impact
on our financial statements.



Note 12. Income Taxes



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



Note 13. Supplemental Guarantor Information



In connection with our senior subordinated notes due 2011, certain of our
wholly-owned domestic subsidiaries guaranteed, jointly and severally, our obligation to pay principal and interest on the senior subordinated notes on a full and unconditional basis. The following supplemental condensed consolidating financial
information presents the balance sheets as of March 31, 2005 and December 31, 2004, the statements of operations for the three months ended March 31, 2005 and 2004, and cash flows for the three months ended March 31, 2005 and 2004. In the condensed
consolidating financial statements, investments in wholly-owned subsidiaries are accounted for using the equity method. Certain prior year amounts have been reclassified to conform to current year presentation.



17



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DRESSER, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2005

(in millions)

(unaudited)



|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|---------------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | --------------------------- |  | ------------ | ----- |  | ----------------- | -------- | - |  | - | ------- | -
|                                                           |  | Parent |         |   | SubsidiaryGuarantors |   | Non- Guarantor Subsidiaries |  | Eliminations |       |  | TotalConsolidated |         
|ASSETS                                                     |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Current assets:                                            |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Cash and cash equivalents                                  |  | $      | 28.7    |   |                      | $ |                            |  | $            | 48.7  |  | $                 |         |   |  | $ | 77.4    |  
|Accounts receivable, net                                   |  |        | 147.4   |   |                      |   |                            |  |              | 261.4 |  |                   |         |   |  |   | 408.8   |  
|Notes receivable                                           |  |        |        |   |                      |   |                            |  |              | 1.4   |  |                   |         |   |  |   | 1.4     |  
|Inventories                                                |  |        | 139.7   |   |                      |   |                            |  |              | 219.1 |  |                   |         |   |  |   | 358.8   |  
|Other current assets                                       |  |        | 7.5     |   |                      |   |                            |  |              | 31.8  |  |                   |         |   |  |   | 39.3    |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total current assets                                       |  |        | 323.3   |   |                      |   |                            |  |              | 562.4 |  |                   |         |   |  |   | 885.7   |  
|Property, plant and equipment, net                         |  |        | 120.1   |   |                      |   |                            |  |              | 116.9 |  |                   |         |   |  |   | 237.0   |  
|Investments in and advances with consolidated subsidiaries |  |        | 559.4   |   |                      |   | 550.1                       |  |              |      |  |                   | (1,109.5 | ) |  |   |        |  
|Investments in unconsolidated subsidiaries                 |  |        |        |   |                      |   |                            |  |              | 9.6   |  |                   |         |   |  |   | 9.6     |  
|Goodwill                                                   |  |        | 107.9   |   |                      |   | 9.3                         |  |              | 240.2 |  |                   |         |   |  |   | 357.4   |  
|Other assets                                               |  |        | 99.5    |   |                      |   |                            |  |              | 52.5  |  |                   |         |   |  |   | 152.0   |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total assets                                               |  | $      | 1,210.2 |   |                      | $ | 559.4                       |  | $            | 981.6 |  | $                 | (1,109.5 | ) |  | $ | 1,641.7 |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY             |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Current liabilities:                                       |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Accounts payable                                           |  | $      | 86.8    |   |                      | $ |                            |  | $            | 194.2 |  | $                 |         |   |  | $ | 281.0   |  
|Notes payable                                              |  |        |        |   |                      |   |                            |  |              | 16.6  |  |                   |         |   |  |   | 16.6    |  
|Current maturities of long-term debt                       |  |        | 1.7     |   |                      |   |                            |  |              | 1.1   |  |                   |         |   |  |   | 2.8     |  
|Accrued payroll and other compensation                     |  |        | 29.1    |   |                      |   |                            |  |              | 35.1  |  |                   |         |   |  |   | 64.2    |  
|Deferred revenue                                           |  |        | 8.8     |   |                      |   |                            |  |              | 32.2  |  |                   |         |   |  |   | 41.0    |  
|Accrued expenses                                           |  |        | 44.8    |   |                      |   |                            |  |              | 86.5  |  |                   |         |   |  |   | 131.3   |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total current liabilities                                  |  |        | 171.2   |   |                      |   |                            |  |              | 365.7 |  |                   |         |   |  |   | 536.9   |  
|                                                           |  |        |         |   |                     
|Pension and other retiree benefits obligations             |  |        | 288.3   |   |                      |   |                            |  |              | 54.3  |  |                   |         |   |  |   | 342.6   |  
|Long-term debt, net of current maturities                  |  |        | 1,059.2 |   |                      |   |                            |  |              | 2.0   |  |                   |         |   |  |   | 1,061.2 |  
|Other liabilities                                          |  |        | 19.3    |   |                      |   |                            |  |              | 6.4   |  |                   |         |   |  |   | 25.7    |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total liabilities                                          |  |        | 1,538.0 |   |                      |   |                            |  |              | 428.4 |  |                   |         |   |  |   | 1,966.4 |  
|                                                           |  |        |         |   |                     
|Commitments and contingencies                              |  |        |        |   |                      |   |                            |  |              |      |  |                   |         |   |  |   |        |  
|Minority interest                                          |  |        |        |   |                      |   |                            |  |              | 3.1   |  |                   |         |   |  |   | 3.1     |  
|Mandatorily redeemable common stock of Dresser, Ltd.       |  |        | 6.7     |   |                      |   |                            |  |              |      |  |                   |         |   |  |   | 6.7     |  
|                                                           |  |        |         |   |                     
|Shareholders (deficit) equity:                            |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total shareholders (deficit) equity                       |  |        | (334.5  | ) |                      |   | 559.4                       |  |              | 550.1 |  |                   | (1,109.5 | ) |  |   | (334.5  | )
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total liabilities and shareholders (deficit) equity       |  | $      | 1,210.2 |   |                      | $ | 559.4                       |  | $            | 981.6 |  | $                 | (1,109.5 | ) |  | $ | 1,641.7 |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  



18



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DRESSER, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2004

(in millions)

(unaudited)



|                                                          |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|--------------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | --------------------------- |  | ------------ | ------- |  | ----------------- | -------- | - |  | - | ------- | -
|                                                          |  | Parent |         |   | SubsidiaryGuarantors |   | Non- Guarantor Subsidiaries |  | Eliminations |         |  | TotalConsolidated |         
|ASSETS                                                    |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Current assets:                                           |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Cash and cash equivalents                                 |  | $      | 28.0    |   |                      | $ |                            |  | $            | 70.6    |  | $                 |         |   |  | $ | 98.6    |  
|Accounts receivable, net                                  |  |        | 131.4   |   |                      |   | 3.1                         |  |              | 305.0   |  |                   |         |   |  |   | 439.5   |  
|Notes receivable                                          |  |        | 1.0     |   |                      |   |                            |  |              | 2.1     |  |                   |         |   |  |   | 3.1     |  
|Inventories                                               |  |        | 115.3   |   |                      |   | 11.2                        |  |              | 201.3   |  |                   |         |   |  |   | 327.8   |  
|Other current assets                                      |  |        | 12.0    |   |                      |   |                            |  |              | 25.2    |  |                   |         |   |  |   | 37.2    |  
|                                                          |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Total current assets                                      |  |        | 287.7   |   |                      |   | 14.3                        |  |              | 604.2   |  |                   |         |   |  |   | 906.2   |  
|                                                          |  |        |         |   |                     
|Property, plant and equipment, net                        |  |        | 123.2   |   |                      |   | 0.1                         |  |              | 117.3   |  |                   |         |   |  |   | 240.6   |  
|Investments in and advance with consolidated subsidiaries |  |        | 612.7   |   |                      |   | 581.6                       |  |              |        |  |                   | (1,194.3 | ) |  |   |        |  
|Investments in unconsolidated subsidiaries                |  |        |        |   |                      |   |                            |  |              | 9.3     |  |                   |         |   |  |   | 9.3     |  
|Goodwill                                                  |  |        | 100.1   |   |                      |   | 17.1                        |  |              | 241.0   |  |                   |         |   |  |   | 358.2   |  
|Other assets                                              |  |        | 93.8    |   |                      |   | 0.4                         |  |              | 55.7    |  |                   |         |   |  |   | 149.9   |  
|                                                          |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Total assets                                              |  | $      | 1,217.5 |   |                      | $ | 613.5                       |  | $            | 1,027.5 |  | $                 | (1,194.3 | ) |  | $ | 1,664.2 |  
|                                                          |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY            |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Current liabilities:                                      |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Accounts payable                                          |  | $      | 92.5    |   |                      | $ | 0.5                         |  | $            | 219.0   |  | $                 |         |   |  | $ | 312.0   |  
|Notes payable                                             |  |        |        |   |                      |   |                            |  |              | 10.7    |  |                   |         |   |  |   | 10.7    |  
|Current maturities of long-term debt                      |  |        | 2.0     |   |                      |   |                            |  |              | 1.2     |  |                   |         |   |  |   | 3.2     |  
|Accrued payroll and other compensation                    |  |        | 27.8    |   |                      |   | 0.2                         |  |              | 32.6    |  |                   |         |   |  |   | 60.6    |  
|Deferred revenues                                         |  |        | 5.8     |   |                      |   |                            |  |              | 26.4    |  |                   |         |   |  |   | 32.2    |  
|Accrued expenses                                          |  |        | 37.5    |   |                      |   | 0.1                         |  |              | 89.3    |  |                   |         |   |  |   | 126.9   |  
|                                                          |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Total current liabilities                                 |  |        | 165.6   |   |                      |   | 0.8                         |  |              | 379.2   |  |                   |         |   |  |   | 545.6   |  
|                                                          |  |        |         |   |                     
|Pension and other retiree benefits obligations            |  |        | 289.1   |   |                      |   |                            |  |              | 54.6    |  |                   |         |   |  |   | 343.7   |  
|Long-term debt, net of current maturities                 |  |        | 1,059.5 |   |                      |   |                            |  |              | 2.3     |  |                   |         |   |  |   | 1,061.8 |  
|Other liabilities                                         |  |        | 23.0    |   |                      |   |                            |  |              | 6.3     |  |                   |         |   |  |   | 29.3    |  
|                                                          |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Total liabilities                                         |  |        | 1,537.2 |   |                      |   | 0.8                         |  |              | 442.4   |  |                   |         |   |  |   | 1,980.4 |  
|                                                          |  |        |         |   |                     
|Commitments and contingencies                             |  |        |        |   |                      |   |                            |  |              |        |  |                   |         |   |  |   |        |  
|Minority interest                                         |  |        |        |   |                      |   |                            |  |              | 3.5     |  |                   |         |   |  |   | 3.5     |  
|Mandatorily redeemable common stock of Dresser, Ltd.      |  |        | 6.7     |   |                      |   |                            |  |              |        |  |                   |         |   |  |   | 6.7     |  
|                                                          |  |        |         |   |                     
|Shareholders (deficit) equity:                           |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Total shareholders (deficit) equity                      |  |        | (326.4  | ) |                      |   | 612.7                       |  |              | 581.6   |  |                   | (1,194.3 | ) |  |   | (326.4  | )
|                                                          |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  
|Total liabilities and shareholders (deficit) equity      |  | $      | 1,217.5 |   |                      | $ | 613.5                       |  | $            | 1,027.5 |  | $                 | (1,194.3 | ) |  | $ | 1,664.2 |  
|                                                          |  |        |         |   |                      |   |                             |  |              |         |  |                   |          |   |  |   |         |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2005

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | --------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 277.7 |   |                      | $ |                            |  | $ | 250.8        |   |  | $                 | (25.6 | ) |  | $ | 502.9 |  
|Cost of revenues                                          |  |        | 196.0 |   |                      |   |                            |  |   | 191.7        |   |  |                   | (25.6 | ) |  |   | 362.1 |  
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Gross profit                                              |  |        | 81.7  |   |                      |   |                            |  |   | 59.1         |   |  |                   |      |   |  |   | 140.8 |  
|Selling, engineering, administrative and general expenses |  |        | 71.2  |   |                      |   |                            |  |   | 50.3         |   |  |                   |      |   |  |   | 121.5 |  
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Operating income                                          |  |        | 10.5  |   |                      |   |                            |  |   | 8.8          |   |  |                   |      |   |  |   | 19.3  |  
|Interest expense                                          |  |        | (20.7 | ) |                      |   |                            |  |   | (7.4         | ) |  |                   | 6.5   |   |  |   | (21.6 | )
|Interest income                                           |  |        | 6.5   |   |                      |   |                            |  |   | 0.3          |   |  |                   | (6.5  | ) |  |   | 0.3   |  
|Other income (expense), net                               |  |        | (0.6  | ) |                      |   |                            |  |   |             |   |  |                   |      |   |  |   | (0.6  | )
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |        | (4.3  | ) |                      |   |                            |  |   | 1.7          |   |  |                   |      |   |  |   | (2.6  | )
|Provision for income taxes                                |  |        | (0.1  | ) |                      |   |                            |  |   | (0.6         | ) |  |                   |      |   |  |   | (0.7  | )
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |        | (4.4  | ) |                      |   |                            |  |   | 1.1          |   |  |                   |      |   |  |   | (3.3  | )
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |                            |  |   | 1.1          |   |  |                   |      |   |  |   | 1.1   |  
|Equity in earnings of consolidated subsidiaries           |  |        | 2.0   |   |                      |   | 2.0                         |  |   |             |   |  |                   | (4.0  | ) |  |   |      |  
|Minority owners share of consolidated subsidiaries       |  |        |      |   |                      |   |                            |  |   | (0.2         | ) |  |                   |      |   |  |   | (0.2  | )
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income                                                |  | $      | (2.4  | ) |                      | $ | 2.0                         |  | $ | 2.0          |   |  | $                 | (4.0  | ) |  | $ | (2.4  | )
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2004Restated

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | --------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 256.1 |   |                      | $ | 5.4  |                             |  | $ | 201.3        |   |  | $                 | (26.4 | ) |  | $ | 436.4 |  
|Cost of revenues                                          |  |        | 189.4 |   |                      |   | 4.6  |                             |  |   | 147.5        |   |  |                   | (26.4 | ) |  |   | 315.1 |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Gross profit                                              |  |        | 66.7  |   |                      |   | 0.8  |                             |  |   | 53.8         |   |  |                   |      |   |  |   | 121.3 |  
|Selling, engineering, administrative and general expenses |  |        | 61.9  |   |                      |   | 0.9  |                             |  |   | 42.0         |   |  |                   |      |   |  |   | 104.8 |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Operating income (loss)                                   |  |        | 4.8   |   |                      |   | (0.1 | )                           |  |   | 11.8         |   |  |                   |      |   |  |   | 16.5  |  
|Interest expense                                          |  |        | (30.1 | ) |                      |   | (0.1 | )                           |  |   | (5.1         | ) |  |                   | 4.7   |   |  |   | (30.6 | )
|Interest income                                           |  |        | 4.6   |   |                      |   |     |                             |  |   | 0.4          |   |  |                   | (4.7  | ) |  |   | 0.3   |  
|Other income (expense), net                               |  |        | (0.4  | ) |                      |   | (0.1 | )                           |  |   | (0.2         | ) |  |                   |      |   |  |   | (0.7  | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |        | (21.1 | ) |                      |   | (0.3 | )                           |  |   | 6.9          |   |  |                   |      |   |  |   | (14.5 | )
|Provision for income taxes                                |  |        | (0.2  | ) |                      |   |     |                             |  |   | (3.0         | ) |  |                   |      |   |  |   | (3.2  | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |        | (21.3 | ) |                      |   | (0.3 | )                           |  |   | 3.9          |   |  |                   |      |   |  |   | (17.7 | )
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |     |                             |  |   | 0.7          |   |  |                   |      |   |  |   | 0.7   |  
|Equity in earnings of consolidated subsidiaries           |  |        | 4.4   |   |                      |   | 4.7  |                             |  |   |             |   |  |                   | (9.1  | ) |  |   |      |  
|Minority owners share of consolidated subsidiaries       |  |        |      |   |                      |   |     |                             |  |   | 0.1          |   |  |                   |      |   |  |   | 0.1   |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income (loss)                                         |  | $      | (16.9 | ) |                      | $ | 4.4  |                             |  | $ | 4.7          |   |  | $                 | (9.1  | ) |  | $ | (16.9 | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2005

(in millions)

(unaudited)



|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|--------------------------------------------------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ----- | --------------------------- |  | - | ------------ | - |  | ----------------- | ---- | - |  | - | ----- | -
|                                                                                                    |  | Parent |       |   | SubsidiaryGuarantors |   |       | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |     
|Cash flows from operating activities:                                                               |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net income (loss)                                                                                   |  | $      | (2.4  | ) |                      | $ | 2.0   |                             |  | $ | 2.0          |   |  | $                 | (4.0 | ) |  | $ | (2.4  | )
|Adjustments to reconcile net income (loss) to cash flow (used in) provided by operating activities: |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Depreciation and amortization                                                                       |  |        | 6.7   |   |                      |   |      |                             |  |   | 5.8          |   |  |                   |     |   |  |   | 12.5  |  
|Equity earnings of unconsolidated and consolidated subsidiaries                                     |  |        | (2.0  | ) |                      |   | (2.0  | )                           |  |   | (1.1         | ) |  |                   | 4.0  |   |  |   | (1.1  | )
|Amortization of deferred financing fees, net of amortization of bond premium                        |  |        | 1.2   |   |                      |   |      |                             |  |   |             |   |  |                   |     |   |  |   | 1.2   |  
|Other noncash changes in income (loss)                                                              |  |        | 2.2   |   |                      |   | (0.4  | )                           |  |   | 2.5          |   |  |                   |     |   |  |   | 4.3   |  
|Changes in operating assets and liabilities                                                         |  |        | (56.0 | ) |                      |   | 22.2  |                             |  |   | 3.8          |   |  |                   |     |   |  |   | (30.0 | )
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net cash (used in) provided by operating activities                                                 |  |        | (50.3 | ) |                      |   | 21.8  |                             |  |   | 13.0         |   |  |                   |     |   |  |   | (15.5 | )
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Cash flows from investing activities:                                                               |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Capital expenditures                                                                                |  |        | (3.8  | ) |                      |   |      |                             |  |   | (4.9         | ) |  |                   |     |   |  |   | (8.7  | )
|Proceeds from sale of assets                                                                        |  |        |      |   |                      |   |      |                             |  |   | 0.1          |   |  |                   |     |   |  |   | 0.1   |  
|Changes in restricted cash                                                                          |  |        |      |   |                      |   |      |                             |  |   | (1.8         | ) |  |                   |     |   |  |   | (1.8  | )
|Other                                                                                               |  |        |      |   |                      |   |      |                             |  |   | (0.6         | ) |  |                   |     |   |  |   | (0.6  | )
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net cash provided by (used in) investing activities                                                 |  |        | (3.8  | ) |                      |   |      |                             |  |   | (7.2         | ) |  |                   |     |   |  |   | (11.0 | )
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Cash flows from financing activities:                                                               |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Advances from (to) affiliates:                                                                      |  |        | 55.3  |   |                      |   | (21.8 | )                           |  |   | (33.5        | ) |  |                   |     |   |  |   |      |  
|Net increase in short term notes payable                                                            |  |        |      |   |                      |   |      |                             |  |   | 6.4          |   |  |                   |     |   |  |   | 6.4   |  
|Repayment of long-term debt (including current portion)                                             |  |        | (0.5  | ) |                      |   |      |                             |  |   | (0.3         | ) |  |                   |     |   |  |   | (0.8  | )
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net cash provided by (used in) financing activities                                                 |  |        | 54.8  |   |                      |   | (21.8 | )                           |  |   | (27.4        | ) |  |                   |     |   |  |   | 5.6   |  
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Effect of translation adjustments on cash                                                           |  |        |      |   |                      |   |      |                             |  |   | (0.3         | ) |  |                   |     |   |  |   | (0.3  | )
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net increase (decrease) in cash and cash equivalents                                                |  |        | 0.7   |   |                      |   |      |                             |  |   | (21.9        | ) |  |                   |     |   |  |   | (21.2 | )
|Cash and cash equivalents, beginning of period                                                      |  |        | 28.0  |   |                      |   |      |                             |  |   | 70.6         |   |  |                   |     |   |  |   | 98.6  |  
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Cash and cash equivalents, end of period                                                            |  | $      | 28.7  |   |                      | $ |      |                             |  | $ | 48.7         |   |  | $                 |     |   |  | $ | 77.4  |  
|                                                                                                    |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |      |   |  |   |       |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2004Restated

(in millions)

(unaudited)



|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|----------------------------------------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | --------------------------- |  | - | ------------ | - |  | ----------------- | ---- | - |  | - | ----- | -
|                                                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |     
|Cash flows from operating activities:                                                     |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net income (loss)                                                                         |  | $      | (16.9 | ) |                      | $ | 4.4  |                             |  | $ | 4.7          |   |  | $                 | (9.1 | ) |  | $ | (16.9 | )
|Adjustments to reconcile net income (loss) to cash flow provided by operating activities: |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Depreciation and amortization                                                             |  |        | 7.6   |   |                      |   |     |                             |  |   | 3.6          |   |  |                   |     |   |  |   | 11.2  |  
|Equity earnings of unconsolidated and consolidated subsidiaries                           |  |        | (4.4  | ) |                      |   | (4.7 | )                           |  |   | (0.7         | ) |  |                   | 9.1  |   |  |   | (0.7  | )
|Loss on repayment of debt                                                                 |  |        | 11.3  |   |                      |   |     |                             |  |   |             |   |  |                   |     |   |  |   | 11.3  |  
|Amortization of deferred financing fees, net of amortization of bond premium              |  |        | 1.3   |   |                      |   |     |                             |  |   |             |   |  |                   |     |   |  |   | 1.3   |  
|Other noncash changes in income (loss)                                                    |  |        | 0.8   |   |                      |   | 0.1  |                             |  |   | (1.4         | ) |  |                   |     |   |  |   | (0.5  | )
|Changes in operating assets and liabilities                                               |  |        | 46.7  |   |                      |   | 0.2  |                             |  |   | (59.1        | ) |  |                   |     |   |  |   | (12.2 | )
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net cash provided by (used in) operating activities                                       |  |        | 46.4  |   |                      |   |     |                             |  |   | (52.9        | ) |  |                   |     |   |  |   | (6.5  | )
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Cash flows from investing activities:                                                     |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Capital expenditures                                                                      |  |        | (10.3 | ) |                      |   |     |                             |  |   | (2.6         | ) |  |                   |     |   |  |   | (12.9 | )
|Changes in restricted cash                                                                |  |        |      |   |                      |   |     |                             |  |   | 0.2          |   |  |                   |     |   |  |   | 0.2   |  
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net cash used in investing activities                                                     |  |        | (10.3 | ) |                      |   |     |                             |  |   | (2.4         | ) |  |                   |     |   |  |   | (12.7 | )
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Cash flows from financing activities:                                                     |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Advances from (to) affiliates:                                                            |  |        | (28.1 | ) |                      |   |     |                             |  |   | 28.1         |   |  |                   |     |   |  |   |      |  
|Net increase in short-term notes payable                                                  |  |        | 0.1   |   |                      |   |     |                             |  |   | 1.5          |   |  |                   |     |   |  |   | 1.6   |  
|Repayment of long-term debt (including current portion)                                   |  |        | (25.0 | ) |                      |   |     |                             |  |   |             |   |  |                   |     |   |  |   | (25.0 | )
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net cash provided by (used in) financing activities                                       |  |        | (53.0 | ) |                      |   |     |                             |  |   | 29.6         |   |  |                   |     |   |  |   | (23.4 | )
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Effect of translation adjustments on cash                                                 |  |        |      |   |                      |   |     |                             |  |   |             |   |  |                   |     |   |  |   |      |  
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Net decrease in cash and cash equivalents                                                 |  |        | (16.9 | ) |                      |   |      |                             |  |   | (25.7        | ) |  |                   |     |   |  |   | (42.6 | )
|Cash and cash equivalents, beginning of period                                            |  |        | 80.0  |   |                      |   |     |                             |  |   | 69.0         |   |  |                   |     |   |  |   | 149.0 |  
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  
|Cash and cash equivalent, end of period                                                   |  | $      | 63.1  |   |                      | $ |     |                             |  | $ | 43.3         |   |  | $                 |     |   |  | $ | 106.4 |  
|                                                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |      |   |  |   |       |  



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



Certain statements in this report constitute forward-looking statements as that term is defined under Section 21E of the Securities and
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words believe, expect, anticipate, intend, estimate, plan and other expressions,
that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Although forward-looking statements reflect managements good faith beliefs, undue 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; the purchasing plans or decisions of our customers; general
industry conditions, including competition and product, raw material and energy prices; changes in exchange rates and currency values; capital expenditure requirements; access to capital markets and the risks and uncertainties described below under
Certain Risk Factors.



Restatement of Historical Financial
Statements



As discussed in Note 1 of the Notes to
Condensed Consolidated Financial Statements, we have restated our historical financial statements and other financial information for errors identified in amounts we had previously reported. In light of the restatement, our previously filed
financial statements and other financial information for the years ended December 31, 2003 and prior and for each of the first three quarters in 2004 should no longer be relied upon. All restated financial information is included in our Annual
Report on Form 10-K for the year ended December 31, 2004.



Management and our independent registered public accounting firm have identified six material weaknesses regarding elements of our internal control over financial reporting. As a result of these material weaknesses, our Chief Executive
Officer and Chief Financial Officer concluded that, as of March 31, 2005, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified in the SECs rules and forms.



To address the material weaknesses, we performed additional analyses and other post-closing procedures to ensure that the consolidated financial
statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial position, results of
operations and cash flows for the periods presented. See Item 4. Controls and Procedures for information concerning each of our six material weaknesses.



Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in
accordance with accounting principals generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including our allowance for uncollectible accounts, inventory valuation and obsolescence, long-lived tangible and intangible
assets, income taxes, reserve for warranty obligations, pensions and other post-retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. In our Annual Report on Form 10-K for the year ended December 31,



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2004, we identified and disclosed critical accounting policies, which included reserves of uncollectible accounts receivable, inventory reserves, impairment
of long-lived assets and goodwill, product warranties, income taxes, other contingencies and pension and other post retirement benefit obligations. These critical accounting policies affect significant judgments and estimates used in the preparation
of our financial statements. We reviewed our policies in conjunction with the preparation of this report and have determined that those critical policies remain and have not changed since December 31, 2004.



Outlook



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



There are several key indicators that drive our business. Over the long-term, demand for energy infrastructure and oilfield equipment is driven by
fluctuations in worldwide economic activity and energy consumption, which is a function of global population, industrial growth, the levels of energy consumption per capita and changes in energy usage patterns. In the short term, demand for our
products is affected by overall worldwide economic conditions and by fluctuations in the level of activity and capital spending by major, national and independent oil and gas companies, gas distribution companies, pipeline companies, power
generation companies and petrochemical processing plants, as well as our customers access to capital. Activity levels can vary substantially in different geographic regions throughout the world. For example, in recent years U.S. markets have
been relatively weak while international markets have been relatively strong. The level of oil and gas prices affect all of these activities and are a significant factor in determining our primary customers level of cash flow. Our business is
subject to cyclicality and periodic downturns, which have caused revenue and earnings to fluctuate in the past. Our customers perception of oil and gas prices in the near-to-long-term will impact our business, and as such, continued
expectation of higher prices will correspond to strengthening in our business. See Certain Risk FactorsOur business is cyclical in nature and our business and operating results could be harmed during economic or industry downturns.



We believe that in order to maintain our competitiveness, we
need to continue to focus on operational efficiency and cash flow. This focus includes our on-going initiatives to increase manufacturing efficiencies, consolidate raw material sources, increase global procurement and improve working capital
efficiency. We have improved global procurement through increased coordination among our business units and increased outsourcing of non-core manufacturing functions.



Flow Control. Demand for our on/off valves is generally driven by full-field development of oil and natural gas
reserves as well as pipeline construction. The global exploration and production market is very active, and we are benefiting from increased drilling activity and the offshore exploration, and onshore processing infrastructures associated with the
growing demand for liquefied natural gas in the Middle East, Asia Pacific and West Africa. The transmission market, driven by recent strong gas prices and the need for on-going maintenance and integrity projects that had been postponed when gas
prices were weaker, is stronger in 2005 than in the prior two years.



Our control valve business has successfully expanded into new market segments, including steam conditioning, gas to liquids and hydrocarbon upstream projects such as offshore platforms. In addition, the business has benefited from higher
energy prices which are driving increased investment in oil production from non-traditional sources, such as Canadian tar sands and new hydrocarbon processing methods including coal liquefaction. Demand for infrastructure and industrial capacity,
particularly for power generation, is strong in China, Korea and India. Aftermarket sales continue to represent a significant component of control valve revenues. Most recently, aftermarket sales have benefited from increased oil production capacity
in Russia and West Africa and from spending in North American, Western Europe, Japan and other mature markets where new project activity is limited.



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Like the control valve and on/off valve businesses, our pressure relief product line is benefiting from
increased spending in the energy industry. In addition, the pressure relief product line is experiencing improved aftermarket demand in the United States in 2005 as compared to 2004 and a continuation of international demand relative to 2004.



Our natural gas solutions business (formerly metering and
piping specialties), which primarily addresses the natural gas utility market, began to experience improved market conditions during 2004, which has continued in 2005 due to general economic expansion and the continued growth in the demand for
natural gas.



Our instruments business, which serves a diverse
customer base, has generally experienced favorable market conditions in 2005, especially in the process industries, which represent a significant portion of its revenues.



In November 2005, we sold our on/off valves and instruments product lines. See Subsequent Events and Item
1. Financial Statements, Note 10. Acquisitions and Dispositions, for a description of the sales agreements.



Measurement Systems. The market for new equipment strengthened during 2004 across all customer segments especially in North America, Asia and Latin
America. During 2005, we have witnessed a leveling-off in demand in developed markets because of a decline in major oil retail spending replaced by stronger independent and high volume orders, especially in North America. Internationally, we are
experiencing increased market activity from the national oil companies in Latin America, Eastern Europe and Asia, and we have been successful in a number of recent tenders.



Increased spending by major oil companies in 2004 to upgrade older sites has, as expected, slowed. However, through the
first half of 2005, they are continuing planned programs to roll-out point-of-sales equipment. Sales to high volume retailers and independent marketers continue to be strong as a result of aggressive building and upgrade programs.



Compression and Power Systems. During 2004, gas compression-related
engine sales and parts sales began to recover from relatively low levels in 2003, and U. S. activity has continued to strengthen in 2005. We have experienced strong Canadian activity since 2004, and we expect this demand to continue through 2006.
Engine sales into power generation applications remain relatively strong, although competition based upon price and engine efficiency remains intense. The domestic power generation market is expected to remain flat through the remainder of 2005
while international markets for engines and parts are relatively strong, especially in Pakistan, Bangladesh and South America. Because of the high demand and long product delivery lead times that we believe are currently common across the industry,
we are making investments in our business to shorten our delivery schedules.



Our blower and compressor business is being driven by increased demand in the environmental and primary metals market. Governmental regulation in both the water and clean air segments is driving demand for our
products for wastewater treatment and flue gas desulphurization. High purity steel demand is driving the need for increased global capacity in direct reduced iron. The process to produce this product utilizes our large rotary lobe and centrifugal
blowers.



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Results of Operations



Three months ended March 31, 2005 compared to the three months ended March 31, 2004



Consolidated



The following table presents selected financial information regarding consolidated results for the three months ended March 31, 2005 and 2004,
respectively.



|                                                          |  |                                   |       |   |             |       |   |                |   |             |  |       |          |  |   |          |   |  |        |  
|--------------------------------------------------------- |  | --------------------------------- | ----- | - | ----------- | ----- | - | -------------- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ------ | -
|                                                          |  | Three months ended March 31,      |      
|                                                          |  | 2005                              |       |   | % ofRevenue |       |   | 2004(Restated) |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |      
|                                                          |  |                                   |       |   |             |      
|Revenues                                                  |  | $                                 | 502.9 |   |             | 100.0 | % |                | $ | 436.4       |  | 100.0 | %        |  | $ | 66.5     |   |  | 15.2   | %
|Cost of revenues                                          |  |                                   | 362.1 |   |             | 72.0  |   |                |   | 315.1       |  | 72.2  |          |  |   | 47.0     |   |  | 14.9   |  
|                                                          |  |                                   |       |   |             |       |   |                |   |             |  |       |          |  |   |          |   |  |        |  
|Gross profit                                              |  |                                   | 140.8 |   |             | 28.0  |   |                |   | 121.3       |  | 27.8  |          |  |   | 19.5     |   |  | 16.1   |  
|Selling, engineering, administrative and general expenses |  |                                   | 121.5 |   |             | 24.2  |   |                |   | 104.8       |  | 24.0  |          |  |   | 16.7     |   |  | 15.9   |  
|                                                          |  |                                   |       |   |             |       |   |                |   |             |  |       |          |  |   |          |   |  |        |  
|Operating income                                          |  | $                                 | 19.3  |   |             | 3.8   | % |                | $ | 16.5        |  | 3.8   | %        |  | $ | 2.8      |   |  | 17.0   | %
|                                                          |  |                                   |       |   |             |       |   |                |   |             |  |       |          |  |   |          |   |  |        |  
|Other items:                                              |  |                                   |       |   |             |       |   |                |   |             |  |       |          |  |   |          |   |  |        |  
|Depreciation and amortization                             |  | $                                 | 12.5  |   |             |       |   |                | $ | 11.2        |  |       |          |  | $ | 1.3      |   |  | 11.6   | %
|Restructuring charges                                     |  |                                   | (0.9  | ) |             |       |   |                |   | 3.2         |  |       |          |  |   | (4.1     | ) |  | (128.1 | )
|Bookings                                                  |  |                                   | 600.4 |   |             |       |   |                |   | 446.4       |  |       |          |  |   | 154.0    |   |  | 34.5   |  
|Backlog                                                   |  |                                   | 770.2 |   |             |       |   |                |   | 486.3       |  |       |          |  |   | 283.9    |   |  | 58.4   |  



Revenues.
Revenues in our measurement systems segment increased approximately $47.7 million primarily due to the acquisitions of Nuovo Pignone in June 2004 and higher volumes associated with dispenser sales. Revenue in our flow control segment increased
approximately $4.1 million primarily due to higher global demand for our control valves and pressure relief products, tempered by delayed customer shipments and lower volume in our on/off valves product line. Our compression and power systems
segment increased revenues approximately $5.0 million due to higher service parts sales resulting from increased engine utilization by our customers. In addition, we experienced the favorable effect of changes in foreign currency exchange rates of
$11.3 million.



Gross Profit. Our measurement systems
segment increased gross profit by $11.4 million primarily due to the acquisition of Nuovo Pignone in 2004. Our flow control segment increased $2.2 million primarily due to higher volumes in our control valves and natural gas solutions product lines,
partially offset by lower gross profit from our on/off valves product line due to delayed customer shipments. Compression and power systems increased gross profit by $2.8 million primarily due to higher demand for industrial blowers in 2005. In
addition, we experienced the favorable effect of changes in foreign currency exchange rates of $3.1 million. As a percentage of revenue, gross profit remained relatively unchanged compared to the first quarter of 2004.



Selling, engineering, administrative and general expenses. Measurement
systems segment expenses increased $10.3 million primarily due to the acquisition of Nuovo Pignone in June 2004 and increases in our flow control segment of $1.0 million were primarily driven by higher marketing and promotion activity associated
with volume growth. Our compression and power systems segment reduced expenses by $3.0 primarily due to lower employee separation and retirement costs. In addition, we experienced the unfavorable effect of changes in foreign currency exchange rates
of $1.9 million.



Our corporate and other expenses increased
$7.1 million due to approximately $2.3 million in fees associated with our export and controls investigation and approximately $1.6 million in higher consulting fees. In addition, we incurred higher expenses of $3.1 million associated with credit
amendment fees, stock option expense, depreciation expense and other miscellaneous accruals.



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In the second quarter of 2005, we wrote-off approximately $2.9 million of capitalized expenses associated
with our previously announced initial public offering. The capitalized expenses were associated with costs which will no longer provide value in our future initial public offering. During the third quarter of 2005, we decided to discontinue our
previously announced plans to implement an ERP system after a pilot installation at our U.S. retail fueling operation indicated that the intended benefits of the system would not be realized in a timely manner and the cost to complete the
implementation at our other locations would be significantly higher than originally expected. Accordingly, we will incur exit costs in the third quarter of 2005 of approximately $1.0 million in severance expenses and $12.0 million in impaired
assets.



Interest Expense. Interest expense during the
first quarter of 2005 was $21.6 million, or $9.0 million lower than 2004. The decrease was primarily due to $11.3 million associated with the write-off of deferred financing fees during the first quarter of 2004.



Provision for Income Taxes. Provision for income taxes during the
first quarter of 2005 was $0.7 million, or $2.5 million lower than 2004. The decrease was due to changes in the distribution of pretax income across geographical jurisdictions with different tax rates. In 2005, we continued to provide a full
valuation allowance against our U.S. deferred tax assets and therefore, we have not provided any tax expense or benefit related to our U.S. operations during 2005.



Bookings and Backlog. Bookings increased in our flow control segment primarily due to strong engineering contractor
sales compared to 2004 and backlog in the flow control segment increased primarily due to delayed customer shipments. Our measurement systems segment increased bookings and backlog primarily due to the acquisition of Nuovo Pignone in June 2004.
Bookings in our compression and power systems segment increased due to higher demand for engines and service parts in our natural gas engines and aftermarket parts business, and backlog increased due to higher demand in the waste water treatment and
primary metals markets.



Flow Control



The following table presents selected financial information regarding
results for our flow control segment for the three months ended March 31, 2005 and 2004, respectively.



|                                                          |  |                                   |       |             |       |   |                |   |             |  |       |          |  |   |          |   |  |       |   
|--------------------------------------------------------- |  | --------------------------------- | ----- | ----------- | ----- | - | -------------- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | --
|                                                          |  | Three months ended March 31,      |      
|                                                          |  | 2005                              |       | % ofRevenue |       |   | 2004(Restated) |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |      
|                                                          |  |                                   |       |             |       |  
|Revenues                                                  |  | $                                 | 267.0 |             | 100.0 | % |                | $ | 255.1       |  | 100.0 | %        |  | $ | 11.9     |   |  | 4.7   | % 
|Cost of revenues                                          |  |                                   | 191.9 |             | 71.9  |   |                |   | 184.3       |  | 72.2  |          |  |   | 7.6      |   |  | 4.1   |   
|                                                          |  |                                   |       |             |       |   |                |   |             |  |       |          |  |   |          |   |  |       |   
|Gross profit                                              |  |                                   | 75.1  |             | 28.1  |   |                |   | 70.8        |  | 27.8  |          |  |   | 4.3      |   |  | 6.1   |   
|Selling, engineering, administrative and general expenses |  |                                   | 64.6  |             | 24.2  |   |                |   | 62.3        |  | 24.4  |          |  |   | 2.3      |   |  | 3.7   |   
|                                                          |  |                                   |       |             |       |   |                |   |             |  |       |          |  |   |          |   |  |       |   
|Operating income                                          |  | $                                 | 10.5  |             | 3.9   | % |                | $ | 8.5         |  | 3.3   | %        |  | $ | 2.0      |   |  | 23.5  | % 
|                                                          |  |                                   |       |             |       |   |                |   |             |  |       |          |  |   |          |   |  |       |   
|Other items:                                              |  |                                   |       |             |       |   |                |   |             |  |       |          |  |   |          |   |  |       |   
|Depreciation and amortization                             |  | $                                 | 5.5   |             |       |   |                | $ | 5.6         |  |       |          |  | $ | (0.1     | ) |  | (1.8  | )%
|Restructuring charges                                     |  |                                   | 0.1   |             |       |   |                |   | 2.8         |  |       |          |  |   | (2.7     | ) |  | (96.4 | ) 
|Bookings                                                  |  |                                   | 336.9 |             |       |   |                |   | 275.9       |  |       |          |  |   | 61.0     |   |  | 22.1  |   
|Backlog                                                   |  |                                   | 530.4 |             |       |   |                |   | 371.4       |  |       |          |  |   | 159.0    |   |  | 42.8  |   



Revenues.
Revenues in our control valves and pressure relief product lines increased $13.5 million due to continuing higher demand in the Americas, Europe, and Asia. Higher sales volume and favorable product mix improved revenues in our natural gas solutions
product line by $2.8 million. Revenues in our on/off valves



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product line decreased by $9.4 million from the comparable period in 2004 due to delayed customer shipments and lower orders at the distribution businesses.
In addition, our flow control segment revenues benefited from the favorable impact of changes in foreign currency exchange rates of $7.8 million.



Gross Profit. Gross profit in our control valves product line increased $1.5 million driven by higher volume, partially offset by unfavorable
product mix. Our natural gas solutions product line increased $2.0 million due to increased volume, reductions in variable costs, and increased operating efficiency. Gross profit in our on/off valves product line decreased $2.3 million due to volume
decline from delayed shipments. In addition, our flow control segment benefited from the favorable impact of changes in foreign currency exchange rates of $2.1 million. As a percentage of revenues, gross profit remained relatively unchanged
compared to the first quarter of 2004.



Selling,
Engineering, Administrative and General Expenses. Selling, engineering, administrative and general expenses increased primarily due to higher marketing and promotion activity and commission expenses related to volume growth of $3.4 million. This
was partially offset by lower restructuring expenses of $2.6 million in 2005. In addition, the flow control segment was unfavorably impacted by changes in foreign currency exchange rates of $1.3 million.



Bookings and Backlog. Bookings and backlog increased $61.0 million and
$159.0 million, respectively. Bookings increased primarily due to strong engineering contractor sales compared to 2004 and back log increased due to delayed customer shipments.



Measurement Systems



The following table presents selected financial information regarding results for our measurement systems segment for the three months ended March 31,
2005 and 2004, respectively.



|                                                          |  |                                   |       |             |       |   |                |   |             |  |       |          |  |          |      |  |       |  
|--------------------------------------------------------- |  | --------------------------------- | ----- | ----------- | ----- | - | -------------- | - | ----------- |  | ----- | -------- |  | -------- | ---- |  | ----- | -
|                                                          |  | Three months ended March 31,      |      
|                                                          |  | 2005                              |       | % ofRevenue |       |   | 2004(Restated) |   | % ofRevenue |  |       | $ Change |  | % Change |     
|                                                          |  | (in millions, except percentages) |      
|                                                          |  |                                   |       |             |       |  
|Revenues                                                  |  | $                                 | 149.6 |             | 100.0 | % |                | $ | 98.5        |  | 100.0 | %        |  | $        | 51.1 |  | 51.9  | %
|Cost of revenues                                          |  |                                   | 109.6 |             | 73.3  |   |                |   | 70.8        |  | 71.9  |          |  |          | 38.8 |  | 54.8  |  
|                                                          |  |                                   |       |             |       |   |                |   |             |  |       |          |  |          |      |  |       |  
|Gross profit                                              |  |                                   | 40.0  |             | 26.7  |   |                |   | 27.7        |  | 28.1  |          |  |          | 12.3 |  | 44.1  |  
|Selling, engineering, administrative and general expenses |  |                                   | 26.4  |             | 17.6  |   |                |   | 16.1        |  | 16.3  |          |  |          | 10.3 |  | 64.0  |  
|                                                          |  |                                   |       |             |       |   |                |   |             |  |       |          |  |          |      |  |       |  
|Operating income                                          |  | $                                 | 13.6  |             | 9.1   | % |                | $ | 11.6        |  | 11.8  | %        |  | $        | 2.0  |  | 17.2  | %
|                                                          |  |                                   |       |             |       |   |                |   |             |  |       |          |  |          |      |  |       |  
|Other items:                                              |  |                                   |       |             |       |   |                |   |             |  |       |          |  |          |      |  |       |  
|Depreciation and amortization                             |  | $                                 | 3.4   |             |       |   |                | $ | 1.2         |  |       |          |  | $        | 2.2  |  | 183.3 | %
|Restructuring charges                                     |  |                                   | 0.3   |             |       |   |                |   |            |  |       |          |  |          | 0.3  |  | NM    |  
|Bookings                                                  |  |                                   | 131.5 |             |       |   |                |   | 97.4        |  |       |          |  |          | 34.1 |  | 35.0  |  
|Backlog                                                   |  |                                   | 98.8  |             |       |   |                |   | 58.3        |  |       |          |  |          | 40.5 |  | 69.5  |  



Revenues. The
increase in revenues was primarily due to the June 2004 acquisition of the distribution businesses of Nuovo Pignone, which contributed $39.2 million in 2005. In addition, we experienced higher volume in both Latin America of $3.8 million and in
North America of $4.2 million related to dispenser sales. Changes in foreign currency exchange rates favorably impacted revenue by $3.4 million.



Gross Profit. Gross profit increased due to higher volume and product mix in North America of $3.6 million and Latin America of $0.7 million. In
addition, the acquisition of Nuovo Pignone contributed $7.9 million in



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2005. Changes in foreign currency exchange rates favorably impacted gross profit by $0.9 million. As a percentage of revenues, gross profit decreased to
26.7% in the three months ended March 31, 2005 compared to 28.1% in the comparable 2004 period. The decline in margins was primarily attributed to unfavorable product mix associated with our Nuovo Pignone business. We are currently evaluating
various business strategies to increase our profit margin from this business.



Selling, Engineering, Administrative and General Expenses. Selling, engineering, administrative and general expenses increased due to the acquisition of Nuovo Pignone, which contributed $7.5 million, and higher
spending of $1.4 million in the United States related to our global expansion efforts and the implementation of an ERP system.



Bookings and Backlog. Bookings increased $34.1 million from the comparable period in 2004 primarily due to Nuovo Pignone, which contributed $29.6
million in 2005. Backlog increased $40.7 million from the comparable period in 2004 due to Nuovo Pignone, which contributed $33.7 million in 2005.



Compression and Power Systems



The following table presents selected financial information regarding results for our compression and power systems segment for the three months ended
March 31, 2005 and 2004, respectively.



|                                                          |  |                                   |       |   |              |       |   |                 |   |              |  |       |          |  |   |          |   |  |       |   
|--------------------------------------------------------- |  | --------------------------------- | ----- | - | ------------ | ----- | - | --------------- | - | ------------ |  | ----- | -------- |  | - | -------- | - |  | ----- | --
|                                                          |  | Three months ended March 31,      |      
|                                                          |  | 2005                              |       |   | % of Revenue |       |   | 2004 (Restated) |   | % of Revenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |      
|Revenues                                                  |  | $                                 | 89.4  |   |              | 100.0 | % |                 | $ | 84.4         |  | 100.0 | %        |  | $ | 5.0      |   |  | 5.9   | % 
|Cost of revenues                                          |  |                                   | 63.8  |   |              | 71.4  |   |                 |   | 61.6         |  | 73.0  |          |  |   | 2.2      |   |  | 3.6   |   
|                                                          |  |                                   |       |   |              |       |   |                 |   |              |  |       |          |  |   |          |   |  |       |   
|Gross profit                                              |  |                                   | 25.6  |   |              | 28.6  |   |                 |   | 22.8         |  | 27.0  |          |  |   | 2.8      |   |  | 12.3  |   
|Selling, engineering, administrative and general expenses |  |                                   | 11.1  |   |              | 12.4  |   |                 |   | 14.1         |  | 16.7  |          |  |   | (3.0     | ) |  | (21.3 | ) 
|                                                          |  |                                   |       |   |              |       |   |                 |   |              |  |       |          |  |   |          |   |  |       |   
|Operating (loss) income                                   |  | $                                 | 14.5  |   |              | 16.2  | % |                 | $ | 8.7          |  | 10.3  | %        |  | $ | 5.8      |   |  | 66.7  | % 
|                                                          |  |                                   |       |   |              |       |   |                 |   |              |  |       |          |  |   |          |   |  |       |   
|Other items:                                              |  |                                   |       |   |              |       |   |                 |   |              |  |       |          |  |   |          |   |  |       |   
|Depreciation and amortization                             |  | $                                 | 1.9   |   |              |       |   |                 | $ | 3.5          |  |       |          |  | $ | (1.6     | ) |  | (45.7 | )%
|Restructuring charges                                     |  |                                   | (1.2  | ) |              |       |   |                 |   | 0.4          |  |       |          |  |   | (1.6     | ) |  | NM    |   
|Bookings                                                  |  |                                   | 132.1 |   |              |       |   |                 |   | 73.1         |  |       |          |  |   | 59.0     |   |  | 80.7  |   
|Backlog                                                   |  |                                   | 141.0 |   |              |       |   |                 |   | 56.6         |  |       |          |  |   | 84.4     |   |  | 149.1 |   



Revenues.
Revenues increased primarily due to higher service parts sales of $3.5 million, which were positively impacted by higher engine utilization by our customers. Energy prices have increased in recent months, resulting in our customers placing more
engine capacity in service. Also contributing to the increase were higher sales from industrial blowers of $1.6 million due to strong demand in the waste water treatment and primary metals market.



Gross Profit. Gross profit related to our industrial blowers business
increased $2.4 million due to higher demand in 2005 as well as impairment charges in 2004 related to our Houston facility. Gross profit related to power generation decreased $0.7 million primarily due to higher variable costs related to metal
prices, partially offset by manufacturing productivity improvements resulting from engine production efficiency. As a percentage of revenues, gross profit increased to 28.6% in the three months ended March 31, 2005 compared to 27.0% in the
comparable 2004 period.



Selling, Engineering,
Administrative and General Expenses. Selling, engineering, administrative and general expenses decreased due to employee separation and retirement costs of $1.2 million incurred in 2004 and the reversal



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of previously accrued employee separation costs of $1.3 million related to a terminated outsourcing plan in 2005. We had previously accrued
restructuring costs at the end of 2003 associated with the planned outsourcing for the manufacture of certain of our blowers. However, in the first quarter of 2005, we determined we could not establish an appropriate outsourcing partner and reversed
the previously established severance reserve.



Bookings and
Backlog. Bookings increased $59.0 million due to higher demand for engines and service parts in our natural gas engines and aftermarket parts business and higher demand in our industrial blowers market. Backlog increased $84.4 million due to
higher demand in waste water treatment and the primary metals markets as well as strong market demand due to early placement of engines in the gas compression market.



Liquidity and Capital Resources



Our primary source of cash is from operations. The primary 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 flows and, if necessary, borrowings under the revolving credit portion of our credit facility.



Cash and cash equivalents were $77.4 million and $106.4 million, as of March 31, 2005 and 2004, respectively. A significant
portion of our cash and cash equivalents are utilized in our international operations and may not be immediately available to service debt in the United States. In addition, due to our geographic diversity, our cash requirements tend to be higher
than the requirements for similar, but less diverse companies.



Cash flows used in operating activities were $15.5 million for the period ended March 31, 2005 compared to $6.5 million for the same period in 2004. The year-over-year decrease in operating cash resulted from losses on the repayment of debt
in 2004 of $11.3 million and a decrease in working capital of $17.8 million, partially offset by improved results of operations in 2005 of $14.5 million. Changes in working capital were primarily the result of an increase in inventory of $31.9
million primarily due to higher bookings and backlog, partially offset by a decrease in accounts receivable of $27.5 million, primarily due to improved collections, an increase in other accrued expenses of $4.9 million and an increase in accounts
payable of $8.5 million.



Cash flows used in investing
activities for the period ended March 31, 2005 were $11.0 million, primarily resulting from capital expenditures of $8.7 million.



Cash flows provided by financing activities for the period ended March 31, 2005 were $5.6 million, resulting from changes in our short-term and long-term
debt.



|                                                                                  |  |               |        
|--------------------------------------------------------------------------------- |  | ------------- | -------
|                                                                                  |  | (in millions)
|Total long-term debt, including current maturities outstanding at March 31, 2005: |  |               |        
|Tranche C term loan                                                               |  | $             | 380.0  
|Senior unsecured term loan                                                        |  |               | 125.0  
|93/8%
senior subordinated notes                                                   |  |               | 550.0  
|Other debt                                                                        |  |               | 9.0    
|                                                                                  |  |               |        
|Total long-term debt, including current maturities                                |  | $             | 1,064.0
|                                                                                  |  |               |        



In November 2005, we
sold substantially all of our on/off valves business and our instruments business and used $215 million of net cash proceeds to repay a portion of our Tranche C term loan. The Brazilian portion of the on/off valves business is awaiting Brazilian
regulatory confirmation of transfer permits and tax documentation, which we expect to be completed in early 2006. We expect to apply the net cash proceeds of $21.3 million relating to the sale of our Brazilian on/off business to the repayment of a
portion of our indebtedness.



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During 2005, we entered into several amendments and waivers to our credit agreement that, among other
things, amended certain financial covenants under our senior secured credit facility and extended to February 15, 2006, our deadline for providing our senior lenders with audited financial statements for the year ended December 31, 2004, and
restated audited financial statements, to the extent that financial statements for earlier years are required to be restated in connection with the preparation of the 2004 financial statements. The amendments also waived any default or event of
default relating in any respect to the re-audit, revision or restatement of any financial statement delivered to the lenders prior to February 15, 2006, including any default or event of default relating in any respect to any errors contained
in such financial statements.



In addition, during 2005, we
entered into several consents and waivers to our senior unsecured term loan agreement and extended to February 15, 2006, the deadline for providing our lenders under the senior unsecured term loan agreement with audited financial statements for
the year ended December 31, 2004 and extended to February 15, 2006, our deadline for providing these lenders with unaudited financial statements for the first and second fiscal quarters of 2005. The consent also waived any default or event of
default relating in any respect to the re-audit, revision or restatement of any financial statement delivered to the lenders under the credit agreement prior to February 15, 2006, including any default or event of default relating in any
respect to any errors contained in such financial statements.



Prior to the filing of this Form 10-Q with the SEC, we had not timely furnished certain annual and quarterly financial information required to be contained in our 2004 Form 10-K and our 2005 First and Second Quarter Reports on Form 10-Q,
respectively, as required by Section 4.03(a) of the indenture governing our senior subordinated notes. In addition, because of the restatement of prior period financial information described in our 2004 Form 10-K, certain of our prior SEC filings
may be deemed not to have complied with Section 4.03(a). On December 6, 2005, we commenced a solicitation of consents from the holders of these notes and on December 19, 2005, executed a supplemental indenture extending the financial statement
delivery requirement to February 15, 2006 and waiving past defaults. With the filing of this Form 10-Q and the filing of our 2005 Second and Third Quarter Reports on Form 10-Q, we will satisfy the applicable requirements of, and cure any
default that may have been deemed to exist under Section 4.03(a) of the indenture.



We have a $100.0 million revolving credit facility, of which $35.7 million was available subject to certain conditions, and $64.3 million was utilized for letters of credit as of March 31, 2005.



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



Our long-term ability to make payments on and to refinance our indebtedness, including our credit facility, our senior unsecured term loan and our senior
subordinated notes, to achieve specified financial ratios required under our credit agreement, and to fund future acquisitions, planned capital expenditures and research and development efforts will depend on our ability to 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. However, based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flows from operations and available cash will allow us to achieve our required financial ratios, and together with available borrowings under the revolving credit portion of our credit facility, will be
adequate to meet our future liquidity needs for at least the next few years. We cannot be assured, however, that our business will generate sufficient cash flows from operations, that currently anticipated cost savings and operating improvements
will be realized on schedule or that future borrowings will be available to us under the revolving credit portion of our credit facility in an amount sufficient to enable us to achieve our financial ratios or to pay or refinance our indebtedness,
including our credit facility, our senior unsecured term loan or our senior subordinated notes, or to fund our acquisition strategy or meet our other liquidity needs. If we are unable to achieve the financial ratios specified in our credit facility,
we could be required to seek approval from our senior lenders to modify these ratios. In the past, we have had to seek approval for the modification of these financial ratios. In addition, if we consummate an acquisition, our debt service
requirements could increase, which could adversely impact our future earnings.



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We may need to refinance all or a portion of our indebtedness, including our credit facility, our senior
unsecured term loan or senior subordinated notes, on or before maturity. We cannot be assured that we will be able to refinance any of our indebtedness, including our credit facility, our senior unsecured term loan and our senior subordinated notes,
on commercially reasonable terms or at all. See Certain Risk FactorsRestrictive covenants in our senior secured credit facility, the indenture governing our senior subordinated notes and our senior unsecured term loan may restrict our
ability to pursue our business strategies.



We may from
time to time seek to retire our outstanding debt through cash repurchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on
prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, we may elect to issue additional share to finance future acquisitions or to meet our other
liquidity needs. Any future equity issuances will dilute the ownership interest in our company and may adversely impact earnings per share in future periods.



Subsequent Events



On/Off Valve Business



In November 2005, we sold substantially all of our worldwide on/off valve business to Cooper Cameron Corporation. The sale of the Brazilian portion of the on/off business is awaiting Brazilian regulatory confirmation of transfer permits and
tax documents which we expect to be completed in early 2006. The total purchase price for the on/off business was $223.8 million in cash, subject to post-closing adjustments, including $21.3 million attributable to the Brazilian operation. In
connection with the sale, Cooper Cameron has assumed certain liabilities which include ordinary course customer/vendor contracts, leases and other commercial agreements; specified agency/distributor agreements; working capital liabilities, including
payables and accrued payroll; specified severance, change of control and employment agreements; product warranty/ product liability for products shipped post-closing, as well as product warranty/product liability for products shipped pre-closing,
but only to the extent of warranty reserves; and liquidated damages on shipped products to the extent of reserves, plus 50% of liquidated damages on backlog shipped within 180 days of the closing.



We retained all liabilities not specifically assumed, including litigation,
environmental (whether known or unknown), debt, pension liabilities and other benefit plans; product warranty/product liability for products shipped pre-closing in excess of warranty reserves; liquidated damages on shipped products in excess of
reserves, plus 50% of liquidated damages on backlog shipped within 180 days of the closing (net of unused reserves from shipped products).



Instruments Business



Also in November 2005, we sold our instruments business to Ashcroft Holdings, Inc., an affiliate of KPS Special Situations Fund II, L.P.
(Ashcroft), for approximately $34.0 million in cash, subject to certain limited post-closing adjustments. Ashcroft will assume certain liabilities which include ordinary course contracts, leases, distributor and sales agent contracts,
and other commercial agreements; working capital liabilities, including payables and accrued payroll; termination or severance obligations that may be payable to certain distributors, sales agents and employees; and liabilities under the units
German pension plan.



We retained all liabilities not
specifically assumed, including certain known environmental liabilities, such as remediation obligations at our Stratford, Connecticut facility; certain pension and frozen retiree medical and life insurance liabilities; specified litigation; and
pre-closing product and export control liabilities.



New Accounting
Pronouncements Issued But Not Yet Adopted



There are
several accounting standards and interpretations that have not yet been adopted by us. Below is a discussion of significant standards that may impact us.



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Inventory Costing. In November 2004, the FASB issued SFAS 151, Inventory Costsan
Amendment of ARB No. 43, Chapter 4. This statement clarifies the accounting for idle facility expense, freight, handling costs and wasted material to require these items to be expensed as current period charges, regardless of whether they
meet the criterion of abnormal previously defined in Accounting Research Bulletin (ARB) 43. This statement also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of this statement are effective for fiscal years beginning after June 15, 2005. We are currently evaluating the effects of this pronouncement.



Accounting for Stock-Based Compensation. In December 2004, the FASB issued SFAS no. 123(R), Share Based
Payments, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. In March 2005, the Securities and Exchange
Commission released Staff Accounting Bulletin (SAB) 107, Share Based Payments, which expresses views of the Staff about the application of SFAS No. 123(R). SFAS No. 123(R) is effective for annual reporting periods beginning on or after
June 15, 2005. We are currently evaluating the effects of this pronouncement.



Exchanges of Nonmonetary Assets. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We
do not believe the adoption of SFAS No. 153 will have a material impact on our financial statements.



Accounting for Asset Retirement Obligations. In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional
Asset Retirement Obligations. FIN No. 47 requires companies to record a liability for those asset retirement obligations in which the timing or amount of settlement of the obligation are uncertain. FIN No. 47 will require us to accrue a
liability when a range of scenarios indicate that the potential timing and settlement amounts of our conditional asset retirement obligations can be determined and disclose information regarding unrecognized conditional asset retirement obligations.
We will adopt the provisions of this standard in the fourth quarter of 2005 and have not yet determined the impact, if any, that this pronouncement will have on our financial statements.



Accounting Changes and Error Corrections. In June 2005, the FASB issued FASB No. 154, Accounting Changes and
Error Corrections, which requires the retrospective application of changes to accounting principles, changes in estimates, and reporting entities. SFAS No. 154 will be effective for accounting changes and corrections occurring in fiscal years
beginning after December 15, 2005. We will adopt the provisions of this standard in the first quarter of 2006 and we do not believe this standard will have a material impact on our 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.



We have a history of net losses, and we may not become profitable or sustain profitability in the future.



Since 2001, we have had a history of net losses. During 2004, 2003 and 2002,
we reported net losses of approximately $63.9 million, $37.9 million and $10.8 million, respectively. For the three months ended March 31, 2005, we reported a net loss of $2.4 million. At March 31, 2005, we had an accumulated stockholders



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deficit of $334.5 million. We cannot assure you that we will achieve profitability in the future. If we continue to incur net losses, our business, results
of operations and financial condition could be materially and adversely affected.



Our customers businesses are cyclical in nature, and our business and operating results could be harmed during economic or industry downturns.



The businesses of most of our customers, particularly oil, gas and engineering and construction companies, are, to varying
degrees, cyclical and have historically experienced periodic downturns. Profitability in those industries is highly sensitive to supply and demand cycles and volatile product prices, and our customers in those industries historically have tended to
delay large capital projects, including expensive maintenance and upgrades, during industry downturns. These industry downturns have been characterized by diminished product demand, excess manufacturing capacity and subsequent accelerated erosion of
average selling prices. Therefore, any significant downturn in our customers markets or in general economic conditions could result in a reduction in demand for our products and services and could harm our operating results. For example, in
2001 and 2002 we experienced the effects of a contracting global economy, which resulted in lower capital expenditures by our customers, which, in turn, adversely affected demand for and pricing of our products and services. In addition, because we
only compete in some segments of the energy infrastructure and oilfield equipment industries, a downturn in the specific segments we serve may affect us more severely than our competitors who compete in the industry as a whole.



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



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



For the three months ended March 31, 2005, our largest customer represented
approximately 2.4% of our total revenues, and our top ten customers collectively represented approximately 15.6% of our total revenues. The loss of any of these customers, or class of customers, or decreases in these customers capital
expenditures, could decrease our cash flow, market share and profits. As a result of industry consolidation, especially among natural gas compression and major oil companies, our largest customers have become larger and, as a result, account for a
greater percentage of our sales. We could also lose a large customer as a result of a merger or consolidation. Major oil companies and national oil companies have moved toward creating alliances and preferred supplier relationships with suppliers.
In addition, these customers are increasingly pursuing arrangements with suppliers that can meet a larger portion of their needs on a more global basis. Typically, a customer can terminate these arrangements at any time. The loss of a customer, or
the award of a contract to a competitor, could significantly reduce our cash flow, market share and profits.



The sale of our on/off valve business could impact our ability to maintain relationships with our current customers or attract new customers because our
on/off valves product line gave us the ability to provide a comprehensive suite of valve products to our customers.



We face intense competition in our industry. Increasing competition and consolidation could require us to adjust the prices of our products, which could have a
material adverse effect on our revenues, profitability and our ability to develop new and competitive products.



We encounter intense competition in all areas of our business. Some of our competitors have greater financial and other resources than we do. Competition
in our primary business segments is based on a number of considerations including product performance, customer service, product lead times, global reach, brand reputation,



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



We have experienced material weaknesses in our internal controls. If we fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results and our management may not be able to provide its report on the effectiveness of our internal controls as required by the Sarbanes-Oxley Act of 2002.



Management and our independent registered public accounting firm have
identified material weaknesses regarding elements of our internal control over financial reporting. The Public Company Accounting Oversight Boards Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination
of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of these material weaknesses, our chief executive
officer and chief financial officer concluded that, as of March 31, 2005, the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the SECs rules and forms.



Overall six material weaknesses have been identified and are described in detail in Item 4. Controls and
Procedures. We have taken and continue to take steps to correct these material weaknesses. The efficacy of the steps we have taken to date and the steps we are still in the process of taking to improve the reliability of our interim financial
statements is subject to continued management review supported by confirmation and testing by our internal auditors, as well as audit committee oversight. We cannot be certain that these measures will ensure that we implement and maintain adequate
controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our
reporting obligations. In addition, we cannot assure you that we will not in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date. Beginning
with the year ending December 31, 2007, under our current filing status, pursuant to Section 404 of the Sarbanes-Oxley Act, our management will be required to deliver a report that assesses the effectiveness of our internal control over financial
reporting, and we will be required to deliver an attestation report of our auditors on our managements assessment of and operating effectiveness of internal controls. Should we issue public equity prior to July 1, 2006, and otherwise satisfy
the definition of accelerated filer under applicable SEC rules, we will be required to be in compliance with Section 404 by December 31, 2006. We have substantial efforts ahead of us to complete documentation of our internal control
system and financial processes, design and assessment of our information systems, remediation of control deficiencies identified in these efforts and management testing of the design and operation of our internal controls. We cannot assure you that
we will be able to complete the required management assessment by our reporting deadline. An inability to complete and document this assessment could result in a scope limitation qualification or a scope limitation disclaimer by our auditors on
their attestation of our internal controls. In addition, one of our material weaknesses relates to our internal control over our financial organization, including inadequate accounting polices, procedures, training, experience, communication and
oversight. As a result, we are not able to conclude that our internal controls over financial accounting and reporting are effective, which could result in the inability of our external auditors to deliver an unqualified report, or any report,



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on our internal controls. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a
negative effect on the trading price of our securities.



If we are found
in violation of Commerce and Treasury Department regulations restricting dealings with sanctioned countries, we may be subject to civil or criminal penalties, which may have a material adverse effect on our business or our ability to do business
outside the United States.



In April 2004, we received
allegations that the Dubai branch of one of our U.S. subsidiaries may have engaged in transactions involving the sale of control valves and related parts to Iraq without required authorization. Upon initial investigation, we found transactions by
the branch relating to Iraq, Iran and Sudan that appeared to have been undertaken without the required prior U.S. governmental authorizations. A short time after the Dubai branch investigation commenced, we expanded the investigation to include
other Dresser affiliates that since January 1999 may have engaged in transactions relating to U.S.-sanctioned countries (including those countries already mentioned, Libya (prior to April 2004), Cuba and Syria (since mid-May 2004)) to determine
whether there were any other violations of U.S. laws related to export controls and economic sanctions. The investigation was completed and voluntary disclosures to the U.S. Commerce and Treasury departments were made in late April 2005. The
investigation identified a significant number of sales by certain of our foreign affiliates to sanctioned countries (in addition to the sales by the Dubai branch) that appear to have been performed without required U.S. government authorization.



In response to the foregoing, we have undertaken and are
continuing to implement a comprehensive remedial program that is designed to prevent further unlawful transactions by our foreign subsidiaries and branches, and unlawful facilitations by U.S. persons of otherwise legal transactions by our foreign
subsidiaries, involving sanctioned countries. While our foreign subsidiaries may lawfully conduct business with sanctioned countries (other than Cuba), pursuant to a recently adopted company-wide policy they will no longer be permitted to accept new
business (other than such business as they are contractually obligated to undertake in compliance with U.S. laws) intended to or for Iran or Sudan. We have also adopted a requirement that the U.S. export/import compliance and/or legal department
conduct a review of all proposed transactions by our foreign subsidiaries relating to sanctioned countries to determine whether such sales are consistent with the new policy and in compliance with applicable U.S. laws. In addition, we have issued
further guidance and provided additional training to our employees concerning the application of U.S. foreign trade controls, and we have reorganized our management team that oversees compliance with these controls. Primary responsibility for
overseeing such compliance resides with a newly created corporate officer position titled Executive Vice President, Ethics and Compliance, which reports directly to the Chief Executive Officer and to the Audit Committee. We have also established the
position of Corporate Export/Import Compliance Director, reporting directly to the new Executive Vice President. At each business unit, compliance managers and export/import compliance managers have also been appointed. These business unit managers
report to the new Executive Vice President and the new Corporate Export /Import Compliance Director, respectively. We are also taking appropriate disciplinary action against personnel who failed to meet their obligations under company-wide policy or
otherwise engaged in wrongful conduct.



While our investigation
has been completed, and voluntary disclosure reports have been submitted to the Commerce and Treasury departments, it remains unclear as to what extent the various activities reported to these government agencies violate U.S. export control and
economic sanctions regulations and what penalties the government agencies may seek to impose for conduct that is found to be unlawful. Accordingly, we are unable to determine at this time the extent of violations or the nature or size of the
penalties to which we may be subject as a result of any unauthorized dealings with U.S.-sanctioned countries. If we are found to be in violation of the applicable Commerce and Treasury department regulations restricting dealings with Iran, Sudan and
Cuba (and in the past, Iraq and Libya), we could be subject to civil or criminal penalties, including fines and/or suspension of the privilege to engage in export trading or to have our foreign affiliates receive U.S.-origin goods, software or
technology.



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We believe that a loss in connection with this matter is probable and currently estimate our minimum
probable liability to be approximately $0.8 million, which we recorded as a reserve in the fourth quarter of 2004. Given that the resolution of these issues is inherently uncertain at this time, we are not able to reasonably estimate the maximum
amount or a meaningful range of probable or reasonably likely liability that could result from an adverse resolution of this matter or any related private causes of action that may arise. Since the Commerce and Treasury departments could impose
aggregate penalties in excess of the reserve, and these amounts could be substantial, we cannot currently predict whether the ultimate resolution of this matter will have a material adverse effect on our business, including our ability to do
business outside the United States, or on our financial condition. In addition, our expenses related to the investigation and remedial actions have been and may continue to be substantial.



The majority of our sales occur outside the United States, and economic, political and
other risks or negative events in the international markets where we have sales and operations could adversely affect our ability to transact business in these markets, which could adversely affect our business, revenues and operating results.



Since we manufacture and sell our products worldwide,
our business is subject to risks associated with doing business internationally. Our sales outside the United States for the three months ended March 31, 2005 were 63% of our total sales for that period. Since 2001, our sales outside the United
States as a percentage of our total sales has increased, and we expect this percentage to continue to increase in the foreseeable future. Accordingly, significant negative events affecting the markets where we operate, or other international
markets, could jeopardize or limit our ability to transact business in the manner we expect, which could adversely affect our business, revenues and operating results. Some of these factors include:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Fluctuations in the
value of the U.S. dollar may adversely affect our results of operations. Because our financial results are reported in dollars, if we generate sales or earnings in other currencies, the translation of



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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. In 2004, foreign currency appreciation (particularly the value of the Euro relative to the U.S. dollar) significantly
increased our revenues and backlog. In the future, any foreign currency depreciation relative to the U.S. dollar would decrease our revenues and backlog.



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



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.



We are subject to the Foreign Corrupt Practices Act, or the FCPA, and our failure to comply with the laws and regulations thereunder
could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.



As a U.S. company, we are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making
improper payments to foreign officials for the purpose of obtaining or keeping business. Although we make every effort to comply with the FCPA and to ensure that our employees comply with the FCPA, we cannot assure you that such precautions will
protect us against liability under the FCPA, particularly as a result of actions taken in the past, or which may be taken in the future by our agents, employees and intermediaries for whom we may have exposure under the FCPA. If we are not in
compliance with such laws and regulations, we may be subject to criminal and civil penalties, which may cause harm to our reputation and to our brand names and could have an adverse effect on our business, financial condition and results of
operations.



Disruptions and uncertainties caused by war or terrorism,
particularly in the Middle East, could adversely affect our ability to transact business in the manner we expect, which could adversely affect our business, operating results and financial condition.



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 the economies of the
countries in which we do business and create further uncertainties. Because we operate in the Middle East and continue to have strong development activity there, deterioration of the political climate in the Middle East could directly impact our
facilities and could affect our sales, supply chain, production capability and ability to deliver our products and services to our customers. 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.



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



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



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



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



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



| |  |  | other unexpected costs associated with operating our business.
| | - |  | --------------------------------------------------------------



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



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



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



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



Any issued patents that cover our proprietary
technology may not provide us with substantial protection or be commercially beneficial to us. The issuance of a patent is not conclusive as to its validity or its enforceability. Protecting our intellectual property can be expensive and may not be
cost effective.



Competitors may also be able to design around
our patents. If we are unable to protect our patented technologies, our competitors could commercialize our technologies, which could have a material adverse effect on our business, results of operations and financial condition.



The cost of compliance with environmental laws and regulations and environmental
liabilities could adversely affect our financial condition.



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



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We have incurred, and may continue to incur, both operating and capital costs to comply with
environmental laws and regulations, including potentially substantial costs for remediation and investigation of some of our properties (many of which are sites of long-standing manufacturing operations). In addition, new laws and regulations,
stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination, the imposition of new clean-up requirements or new claims for property damage or personal injury arising from environmental matters could
require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations.



If we are unsuccessful in negotiating new collective bargaining agreements, we could experience disruptions in our operations.



As of March 31, 2005, we had approximately 9,100
employees. Approximately 31% of our workforce in the United States is represented by labor unions. Of our eight material collective bargaining agreements, one will expire in 2006, five will expire in 2008, one will expire in 2009 and one will expire
in 2011. Although we believe that our relations with our employees are generally good, we cannot assure you that we will be successful in negotiating new collective bargaining agreements. The renegotiation of our existing collective bargaining
agreements could result in significant increases in our labor costs. In addition, a breakdown in such negotiations could result in the disruption of our operations, which could have a material adverse effect on our business, financial condition and
results of operations. For example, in May 2003, our labor agreement with the International Association of Machinists & Aerospace Workers, AFL-CIO District 10 at our Waukesha, Wisconsin manufacturing plant expired, and we failed to reach
agreement on a new labor contract at that time. The bargaining unit voted in favor of a strike on May 2, 2003. On July 23, 2003, we announced the signing of a new three-year labor agreement, and our union shop employees resumed work on July 28,
2003. The strike had a material adverse impact on our results of operations in the second and third quarters of 2003.



If we lose members of our senior management, or if we are unable to attract and retain other qualified personnel, our business, financial condition and results of
operations 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 have experienced significant management turnover in the past. We cannot assure you that we will be able to
attract and retain the personnel necessary for the development of our business. The loss of the services of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial
condition and results of operations. We do not currently maintain key person life insurance on any of our key employees.



We rely on a limited number of third party suppliers and subcontractors for many specific components and sub-assemblies. If our supplies are interrupted, we may not
be able to expediently obtain substitute suppliers and subcontractors, which could have a material adverse effect on our business, financial condition and results of operations.



We rely on a limited number of non-affiliated suppliers and subcontractors for the supply of many specific components and
sub-assemblies that are incorporated into our products. As our business has increased, we have recently experienced delays in the delivery of some components and sub-assemblies. If these suppliers or manufacturers experience financial, operational,
manufacturing capacity or quality assurance difficulties, or if there is any disruption in our relationships, we may be required to locate alternative sources of supply. Our inability to obtain sufficient quantities of these components and
sub-assemblies and the relatively long lead time needed to qualify new subcontractors may result in delays in delivery, interruption or delays in manufacturing and the cancellation of orders for our products, any of which could have a material
adverse effect on our business, financial condition and results of operations.



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We are dependent on the availability and pricing of raw materials and components, and we cannot assure you that we
will be able to obtain such raw materials and components at current price levels or at all.



We require substantial amounts of raw materials that we purchase from outside sources. Raw materials comprise a significant portion of our total costs.
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 have a material adverse effect on
our operating results.



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



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



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



We rely in part, on independent distributors to sell our products and provide direct service and aftermarket support to our customers. Our arrangements with these
distributors are not exclusive and may be canceled on short notice.



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



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



As of March 31, 2005, private equity funds managed by First Reserve and Odyssey, through DEG Acquisitions, LLC, indirectly owned 88.48% of our common stock. The funds therefore have the power to control the election
of our directors, and their interests may not be aligned with our other investors interests. The directors elected by First Reserve and Odyssey will have authority, subject to the terms of our debt agreements, to issue additional shares of
common stock, implement repurchase programs and make other decisions about our common stock.



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



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



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



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



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



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



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



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



If we fail to integrate acquired businesses successfully, or to manage our growth, that failure could have a material
adverse effect on our business. Further, we may be unable to maintain or enhance the profitability of any acquired business, consolidate its operations to achieve cost savings or maintain or renew any of its contracts. In addition, there may be
liabilities that we fail, or are unable, to discover in the course of performing due diligence investigations on any company that we may acquire or have recently acquired. Also, there may be additional costs relating to acquisitions including, but
not limited to, possible purchase price adjustments. Any of our rights to indemnification from sellers to us, even if obtained, may not be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities
associated with the business or property acquired. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business.



We are a highly leveraged company, and our substantial indebtedness could adversely affect our financial condition.



As of March 31, 2005, we had $1,064.0 million of outstanding long-term
indebtedness, including the current portion, $16.6 million of short-term notes and a shareholders deficit of $334.5 million. This level of indebtedness could have important consequences, including the following:



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



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



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



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



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



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



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



Restrictive covenants in our credit facility, the
indenture governing our senior subordinated notes and our senior unsecured term loan facility may restrict our ability to pursue our business strategies.



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



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



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



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



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



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



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



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



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



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



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



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



The terms of our credit facility, the indenture governing our subordinated
notes and our $125 million senior unsecured term loan facility do not prohibit us from incurring significant additional indebtedness in the future, including indebtedness for acquisitions. As of March 31, 2005, we had $35.7 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.



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



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



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



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



To service our indebtedness, we rely on cash generated by our foreign and
non-wholly-owned subsidiaries.



The guarantors of our
senior secured credit facility 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
quarter ended March 31, 2005 of our subsidiaries that are not guarantors were $250.8 million. As of March 31, 2005, our subsidiaries that are not guarantors held 60% of our total assets. Each of the subsidiary guarantors would be released from its
guarantee if we transfer 5% or more of its voting stock to a third party so that it is no longer wholly-owned, as defined in the governing agreement. The agreement does not restrict our ability to do so.



Since a substantial portion of our operations are conducted by foreign and
non-wholly-owned subsidiaries, our cash flows and our ability to service debt, including our ability to pay the interest on and principal of our indebtedness when due, are dependent to a significant extent on interest payments, repayment of
intercompany loan principal 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, 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 by the foreign and non-wholly-owned subsidiaries may be dependent upon these subsidiaries earnings.



Our foreign and non-wholly-owned subsidiaries are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to our indebtedness, or to make any funds available whether by dividends, loans, distributions or other payments. Any right that we 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 our debt to realized 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.



We have substantial NOLs, which may not be available to us if our proposed initial public offering causes us to experience an ownership change or if we experience an ownership change in the future.



As of December 31, 2004 we had U.S. federal net
operating loss carryforwards, or NOLs, of approximately $192.2 million, which are due to expire in the years 2020 through 2024. The Internal Revenue Code of 1986, as amended, or the Code, imposes significant limitations on the utilization of NOLs in
the event of an ownership change as defined under section 382 of the Code, which we refer to as the Section 382 Limitation. The Section 382 Limitation is an annual limitation on the amount of pre-ownership NOLs that a corporation may use
to offset its post-ownership change taxable income. The Section 382 Limitation is calculated by multiplying the value of a corporations stock immediately before an ownership change by the long-term tax-exempt rate (as published by the
Internal Revenue Service). Generally, an ownership change occurs with respect to a corporation if the aggregate increase in the percentage of stock ownership by value of that corporation by one or more 5% or greater stockholders (including specified
groups of shareholders who in the aggregate own at least 5% of that corporations stock) exceeds 50 percentage points over a three-year testing period. Our proposed initial public offering may result in an ownership change. If that offering
causes us to experience an ownership change, our



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ability to use our NOLs would be subject to the Section 382 Limitation. Moreover, even if our proposed initial public offering does not cause an ownership
change, it is possible that as a result of the issuance of common stock pursuant to that offering, combined with the future issuance of new shares of common stock or sales of common stock by our 5% or greater stockholders or transactions involving
our 5% or greater stockholders, we may experience an ownership change in the future, which would cause our NOLs to be subject to the Section 382 Limitation.



Material litigation or changes in legislation or regulations could result in increased costs and restrictions on our ability to conduct our business, which 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, either
individually or in the aggregate, have a material effect on our business, liquidity or financial condition. However, any material litigation that may arise in the future, and for which we are not indemnified, may materially adversely impact our
business, liquidity or financial condition.



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, which could have an adverse effect on our profitability.



We may be faced with unexpected product claims or regulations, which could require the time and attention of management and require us to pay considerable fines and
damages.



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, such as significant damage to property or serious personal injury, 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. Any such litigation or claim may cause us to incur substantial costs, divert the attention of our management from our business and subject us to fines and
damages, which could have a material adverse effect on our business, financial condition and results of operations.



Our historical financial information may not be comparable to future periods and may not reflect our results of operations, financial position or cash flows for
future periods.



The historical financial information
included herein for periods prior to our April 2001 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 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, our credit facility, our senior subordinated notes or the additional costs 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.



The requirements of complying with the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 may strain our resources and divert management attention
from operating activities.



As a public company, we
will be subject to the reporting requirements of the Securities Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002, including Section 404, which requires compliance with its provisions



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by December 31, 2007, under our current filing status. Should we issue public equity before July 1, 2006, and otherwise satisfy the definition of an
accelerated filer under applicable SEC rules, we would be required to comply with Section 404 by December 31, 2006. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual,
quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures, corporate governance standards and internal controls over financial
reporting. Beginning with the year ending December 31, 2007, under our current filing status, pursuant to Section 404 of the Sarbanes-Oxley Act, our management will be required to deliver a report that assesses the effectiveness of our internal
control over financial reporting, and we will be required to deliver an attestation report of our auditors on our managements assessment of and operating effectiveness of internal controls. In order to maintain and improve the effectiveness of
our disclosure controls and procedures and internal control over financial reporting, and to ensure our ongoing compliance with public company reporting requirements, significant resources, management oversight and personnel will be devoted to
legal, financial and accounting activities. We cannot assure you that we will be able to complete the documentation and management assessment required by Section 404 of the Sarbanes-Oxley Act by our reporting deadline. In addition, any such efforts
may divert managements attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to hire additional accounting and
financial staff with appropriate public company experience and technical accounting knowledge, and we cannot assure you that we would be able to do so in a timely fashion.



Additionally, we expect that the requirements of complying with public equity company reporting requirements may make it
more difficult or more expensive for us to obtain director and officer liability insurance. We may be forced to accept reduced policy limits or coverage, or to incur substantially higher costs to obtain the same or similar coverage. As a result, it
may be more difficult for us to attract and retain qualified people to serve on our Board of Directors or as executive officers.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



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



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



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



|                                      |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|------------------------------------- |  | ----------------- | -------- | --------- | ----------------- | - | ---------------- | ---- | --------- | - | ---- | - |  | ---- | ----- | - | ---------- | - | ----- | ----- |  | - | ----- | - |  | - | ----- |  | -- | ----- | - |  | - | ----- |  | - | ----- | -
|                                      |  | March 31, 2005    |          |           | December 31, 2004 |  
|                                      |  | Carrying Amount   |          | FairValue |                   |   | Carrying  Amount |      | FairValue |  
|                                      |  | Remainder of 2005 |          |           | 2006              |   |                  | 2007 |           |   | 2008 |   |  | 2009 |       |   | Thereafter |   |       | Total |  |   |      
|                                      |  | (in millions)     |         
|Related forward contracts to sell USD |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Japanese Yen                          |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 0.4      |           |                   | $ |                 |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 0.4   |  | $  |      |   |  | $ | 0.4   |  | $ |      |  
|Avg. Contract Rate                    |  |                   | 104.6897 |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Euro                                  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 71.2     |           |                   | $ | 1.3              |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 72.5  |  | $  | 1.8   |   |  | $ | 82.9  |  | $ | 4.2   |  
|Avg. Contract Rate                    |  |                   | 1.2918   |           |                   |   | 1.3297           |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Canadian Dollar                       |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 |         |           |                   | $ |                 |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ |      |  | $  |      |   |  | $ | 22.4  |  | $ |      |  
|Avg. Contract                         |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Related forward contracts to sell GBP |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Euro                                  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 0.1      |           |                   | $ |                 |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 0.1   |  | $  |      |   |  | $ | 0.3   |  | $ |      |  
|Avg. Contract Rate                    |  |                   | 0.7055   |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Related forward contracts to buy USD  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|South African Rand                    |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 0.9      |           |                   | $ |                 |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 0.9   |  | $  |      |   |  | $ | 1.5   |  | $ | (0.2  | )
|Avg. Contract Rate                    |  |                   | 6.0951   |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Euro                                  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 8.4      |           |                   | $ | 0.1              |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 8.5   |  | ($ | 0.1   | ) |  | $ | 7.9   |  | $ |      |  
|Avg. Contract Rate                    |  |                   | 1.3313   |           |                   |   | 1.3234           |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Japanese Yen                          |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 4.7      |           |                   | $ | 13.1             |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 17.8  |  | ($ | 0.1   | ) |  | $ | 18.7  |  | $ |      |  
|Avg. Contract Rate                    |  |                   | 102.9773 |           |                   |   | 101.00           |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|British Pound                         |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 3.2      |           |                   | $ | 2.4              |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 5.6   |  | $  |      |   |  | $ | 5.0   |  | $ |      |  
|Avg. Contract Rate                    |  |                   | 1.8567   |           |                   |   | 1.9034           |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Canadian Dollar                       |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 5.5      |           |                   | $ | 11.8             |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 17.3  |  | $  |      |   |  | $ | 43.7  |  | $ |      |  
|Avg. Contract Rate                    |  |                   | 1.2304   |           |                   |   | 1.2351           |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Related forward contracts to buy JPY  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Euro                                  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 1.1      |           |                   | $ |                 |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 1.1   |  | $  |      |   |  | $ | 1.1   |  | $ | (0.1  | )
|Avg. Contract Rate                    |  |                   | 132.1200 |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Related forward contracts to buy EUR  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|South African Rand                    |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 | 0.2      |           |                   | $ |                 |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ | 0.2   |  | $  |      |   |  | $ | 0.1   |  | $ |      |  
|Avg. Contract Rate                    |  |                   | 8.1044   |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Related forward contracts to buy GBP  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Euro                                  |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Contract Amount                       |  | $                 |         |           |                   | $ |                 |      |           | $ |     |   |  | $    |      |   |            | $ |      |       |  | $ |      |   |  | $ |      |  | $  |      |   |  | $ | 0.5   |  | $ |      |  
|Avg. Contract Rate                    |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Long-term debt                        |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|U.S. Dollar Functional Currency       |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Fixed Rate                            |  | $                 | 2.0      |           |                   | $ | 0.9              |      |           | $ | 0.7  |   |  | $    | 0.7   |   |            | $ | 0.7   |       |  | $ | 550.9 |   |  | $ | 555.9 |  | $  | 584.8 |   |  | $ | 556.5 |  | $ | 604.5 |  
|Average Interest Rate                 |  |                   | 9.31     | %         |                   |   | 9.32             | %    |           |   | 9.34 | % |  |      | 9.35  | % |            |   | 9.36  | %     |  |   | 9.37  | % |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Variable Rate                         |  | $                 |         |           |                   | $ |                 |      |           | $ |     |   |  | $    | 191.0 |   |            | $ | 189.0 |       |  | $ | 125.0 |   |  | $ | 505.0 |  | $  | 514.3 |   |  | $ | 505.0 |  | $ | 513.4 |  
|Average Interest Rate                 |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      | 7.26  | % |            |   | 7.82  | %     |  |   | 8.18  | % |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Euro Functional Currency              |  |                   |          |           |                   |   |                  |      |           |   |      |   |  |      |       |   |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  
|Fixed Rate                            |  | $                 | 0.7      |           |                   | $ | 1.2              |      |           | $ | 0.7  |   |  | $    | 0.5   |   |            | $ |      |       |  | $ |      |   |  | $ | 3.1   |  | $  | 3.1   |   |  | $ | 3.5   |  | $ | 3.4   |  
|Average Interest Rate                 |  |                   | 4.44     | %         |                   |   | 4.43             | %    |           |   | 4.41 | % |  |      | 4.41  | % |            |   |       |       |  |   |       |   |  |   |       |  |    |       |   |  |   |       |  |   |       |  



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Item 4. Controls and Procedures



We are committed to maintaining disclosure controls and procedures 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, Chief Financial Officer and the Board of Directors, as appropriate, to allow for timely decisions
regarding required disclosure. As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report. 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 and
implementing controls and procedures based on the application of managements judgment.



Internal Control over Financial Reporting



Management and our independent registered public accounting firm have identified material weaknesses regarding elements of our internal control over financial reporting. The Public Company Accounting Oversight
Boards Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. As a result of these material weaknesses, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2005, the end of the period covered by this report, our disclosure
controls and procedures were not effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
SECs rules and forms.



To address the material
weaknesses, the company performed additional analyses and other post-closing procedures to ensure that the consolidated financial statements were prepared in accordance with United States Generally Accepted Accounting Principles. Accordingly,
management believes that the financial statements included in this report fairly present in all material respects the companys financial position, results of operations and cash flows for the periods presented.



The six material weaknesses that have been identified, and the steps we have
taken and continue to take to remediate the material weaknesses, are:



| |  |  | An ineffective control environment in ourfinance organization, including inadequate accounting policies, procedures, training, experience, communication and
oversight.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our independent
registered public accounting firm first identified this as a reportable condition to management in connection with the preparation of our Annual Report on Form 10-K for the fiscal year ending December 31, 2002. Corporate accounting does not have
enough insight into operations to adequately identify issues, and our field personnel do not possess the necessary accounting expertise to accurately record transactions in instances involving non-routine entries or complex accounting or recognize
the need to request assistance from corporate accounting. There is also inadequate understanding among our business unit accounting staff with respect to the proper application of United States Generally Accepted Accounting Principles and our
accounting policies. Other contributing factors include the complexity of our consolidation process, particularly with respect to multiple legal entities and operational units; inadequate and disparate computer systems and numerous accounting
centers. Also contributing to the condition is a lack of precision at certain operations in the application of our accounting policies, including the reconciliation of accounts to the general ledger, and inconsistent application of these policies
with respect to inventory costing, bad debts, sales allowances, inventory reserves, property, warranty and various expense accruals.



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We recently discontinued our previously announced plans to develop an enterprise resource
planning (ERP) system after a pilot installation at our U.S. retail fueling operation indicated we would not realize the intended benefits in a timely manner. We are currently reviewing options for other business units and expect to have a strategy
developed before year-end 2005 that will address the overall control environment in our finance organization.



To remediate these deficiencies, we have taken steps to increase the consistency and transparency of our consolidation and financial
reporting processes. We are installing a new consolidation systems package which will provide more robust tools for data collection, consolidations, and translations and will enhance the reporting process on a company-wide basis. We expect to
complete the installation of this consolidation system by mid-2006.



We have directed numerous senior managers whom we hired in the last two years, each with the requisite training and experience, to assist in improving the quality of our controls and procedures by developing
additional risk-based policies and procedures. These individuals include a new Vice President of Finance who is responsible for streamlining the financial organization, reducing the number of accounting centers and increasing the accounting
staffs expertise, education and professionalism, a Director of Accounting, and a new Director of Internal Audit, who reports directly to our Chief Executive Officer and Audit Committee and is actively working with management to enhance the
effectiveness of our internal audit function. Within the last two years, we have also appointed new controllers at seven of our eight principal operating units, and we have increased the competency of our corporate accounting staff.



We have hired a Director of Financial Programs and Control
and have dedicated ten individuals with appropriate qualifications to prepare to comply with Section 404 of the Sarbanes-Oxley Act of 2002, which we will be required to be in compliance with by December 31, 2007, under our current filing status.
Should we issue public equity before July 1, 2006 and otherwise satisfy the definition of an accelerated filer under applicable SEC rules, we will be required to be in compliance with Section 404 by December 31, 2006. We have also hired
highly skilled personnel and other expert consultants at both the corporate and business unit levels. We have commenced projects to update policies and procedures and to enhance overall company-level controls. All significant locations are being
evaluated as to their financial reporting controls. Finally, in 2004 we launched a virtual learning center designed to provide employees with educational opportunities on a variety of functional topics including finance, information technology, and
regulations impacting the Companys business, human resources and general management.



In August 2005, we conducted a high level meeting to, among other things, discuss the weaknesses identified above and develop strategies
for addressing them. The meeting included the senior representatives from the Accounting and Finance teams from each operation worldwide.



In summary, we have instituted, and continue to improve, numerous processes and procedures in order to remediate this weakness. We have
enhanced training, review processes, communications, systems and quality of personnel over the last two years to address the overall indicators of this complex and embedded problem. We have also retained outside consultants to help with this effort.
We expect to have this weakness fully resolved by year-end 2006.



| |  |  | Insufficient monitoring and accounting for transactions that are non-routine, or subject to new or complex accounting.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



Management first identified this material weakness using
indicators detailed in our Quarterly Report on Form 10-Q for the second quarter of 2004 as well as the information used in the preparation of our Annual Report on Form 10-K for the year ended December 31, 2004. This material weakness



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affects several of our operating units. We determined that this material weakness resulted from insufficient review processes at both the business unit and
corporate levels and that an appropriate review at all levels did not exist. Moreover, personnel at our various business units were failing to report new agreements or transactions to our accounting department, which resulted in inaccurate
accounting.



To remediate this material
weakness, we have significantly increased the number and skills of management and staff personnel in our accounting and finance departments to increase our depth of experience in accounting, SEC reporting matters and internal audit, and have
recently implemented processes to identify and review all significant or non-routine issues. In addition, qualified personnel with requisite training and experience have been assigned to each significant location to assist the reporting units in
their implementation and remediation of internal control over financial reporting and control gaps for Sarbanes-Oxley compliance. We have implemented processes commencing in late 2004 to ensure detailed accounting review is performed at all levels
of the organization with appropriate corporate oversight. We expect that this material weakness will be remediated by year-end 2005.



| |  |  | Accounting adjustmentswere incorrectly categorized as changes in estimates instead of errors pursuant to Accounting Principles Board Opinion No. 20 (APB 20).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



This material weakness was
identified in connection with the preparation of our financial statements for the fiscal year ended December 31, 2004. This material weakness resulted from insufficient training among our accounting staff regarding the application of APB 20 and
caused errors in the reporting by our operating units.



To remediate this material weakness, we continue to review and revise a number of our disclosure and accounting policies and procedures. In addition, management is developing a plan for worldwide training of our accounting staff, which will
include SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB No. 20 and SFAS No. 3. We expect that this material weakness will be remediated by year-end 2005.



| |  |  | Inadequate monitoring by accounting management of our foreign business units, which incorrectly translated foreign currency under methods that were not consistent with Statement
of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This material weakness was identified in each of our operating units and in our corporate accounting group due to a failure to develop a
process to apply SFAS No. 52 correctly. This condition includes the failure to translate foreign currencies at appropriate period-end rates and to use the correct classifications of inter-company notes to record foreign exchange effects correctly.
This material weakness was identified while preparing our financial statements for the year ended December 31, 2004.



To remediate these deficiencies, management has instituted requirements for appropriate levels of precision to be applied at all levels
for the accounting department review at quarter-end and year-end, particularly with respect to significant or non-routine issues. In addition, we are installing a new consolidation systems package, which will provide more robust tools for data
collection, consolidations, and translations and will enhance the reporting process on a company-wide basis. This new system will systematically translate all foreign operations to the United States dollar correctly, using the appropriate rates. We
have also updated, and will continue to update, our review procedures with respect to compliance by our business units. We have implemented a comprehensive review between corporate accounting and treasury personnel for all changes to inter-company
notes. Finally, the worldwide training of our accounting staff referenced above will focus on items that have given rise to audit adjustments. Remediation is expected to be completed by year-end 2005.



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| |  |  | Incorrect assessment of the composition of charges allocable to inventory at our Houston on/off valve operation.
| | - |  | ----------------------------------------------------------------------------------------------------------------



Our independent registered public accounting firm first
identified this material weakness during its 2003 audit field work of our Houston on/off valve operation where errors occurred in the determination of the book value of inventory. Although we implemented certain changes based on the 2003 weakness,
the accounting personnel at the Houston operation failed to understand the costs associated with the production of inventory and how the costs should be allocated to the ending inventory on hand. These deficiencies resulted from a lack of
understanding of the true makeup of the cost pools and of the actual production activity that generated the costs in the pools. As a result of these deficiencies, significant adjustments were made to the fiscal quarters in 2004 and, as part of the
significant fourth quarter 2003 adjustment, amounts were restated back to 2000 and earlier.



To ensure inventory balances are properly stated, we have established enhanced corporate oversight of the accounting at our Houston on/off
valve operation. This continued corporate oversight will require additional analysis to verify that adjustments are adequate to correctly state inventory values in the future. We expect that this material weakness will be remediated by year-end
2005.



| |  |  | Incorrect revenue recognition practices relating to manufacture and sale contracts at our Houston on/off valve operation.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



Our independent registered public accounting firm identified
this material weakness during its audit field work of the Houston on/off valve operation for the period ending December 31, 2003. This material weakness reflects a lack of understanding of current revenue recognition rules relating to contracts
that may have multiple deliverables and the impact of single or multiple units of accounting treatment, particularly the application of Staff Accounting Bulletin Nos. 101 and 104, Revenue Recognition and EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables, to the revenue recognition process. This material weakness also resulted from a lack of understanding by the relevant accounting personnel of the specific contract language
and the business processes that existed to perform the units obligations under these contracts; unfamiliarity with the authoritative literature; and a lack of proper oversight in the creation of these contracts. Management is currently
utilizing external support to perform additional review work to ensure that the proper accounting treatment has been applied.



To remediate this material weakness, the corporate accounting department has implemented quarterly reviews of all contracts and their
administration across all business units. We are implementing training of our business unit personnel designed to ensure that the level of analysis will be adequate to correctly understand the contractual obligations of the unit. This training
program is currently being developed, and we expect that it will be fully implemented during the fourth quarter of 2005. In addition, management has directed that future contracts be structured in a manner designed to avoid these types of revenue
recognition issues. We have also appointed new controllers for both of our on/off product line and North American operations. We expect that this material weakness will be remediated by year-end 2005.



Although we have implemented and continue to implement
remediation efforts, a material weakness indicates that there is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period. In addition, we cannot assure you that we
will not in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date. We are taking steps to improve our internal control over financial
reporting to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The efforts we have taken and continue to take are subject to continued management review supported by confirmation and testing by management and by our internal auditors,
as well as



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audit committee oversight. As a result, additional changes are expected to be made to our internal control over financial reporting. Other than the foregoing
initiatives since the date of the evaluation supervised by our management, there have been no material changes in our disclosure controls and procedures, or our internal control over financial reporting, that have materially affected, or are
reasonably likely to materially affect, our disclosure controls and procedures or our internal control over financial reporting.



Export Controls and Economic Sanctions Under Applicable U.S. Commerce and Treasury Department Regulations



In April 2004, we received allegations that the Dubai branch of one of our
U.S. subsidiaries may have engaged in transactions involving the sale of control valves and related parts to Iraq without required authorization. Upon initial investigation, we found transactions by the branch relating to Iraq, Iran and Sudan that
appeared to have been undertaken without the required prior U.S. governmental authorizations. A short time after the Dubai branch investigation commenced, we expanded the investigation to include other Dresser affiliates that since January 1999 may
have engaged in transactions relating to U.S.-sanctioned countries (including those countries already mentioned, Libya (prior to April 2004), Cuba and Syria (since mid-May 2004)) to determine whether there were any other violations of U.S. laws
related to export controls and economic sanctions. The investigation was completed and voluntary disclosures to the U.S. Commerce and Treasury departments were made in late April 2005. The investigation identified a significant number of sales by
certain of our foreign affiliates to sanctioned countries (in addition to the sales by the Dubai branch) that appear to have been performed without required U.S. government authorization.



In response to the foregoing, we have undertaken and are continuing to implement a comprehensive remedial program that is
designed to prevent the risk of further unlawful transactions by our foreign subsidiaries and branches, and unlawful facilitations by U.S. persons of otherwise legal transactions by our foreign subsidiaries, involving sanctioned countries. While our
foreign subsidiaries may lawfully conduct business with sanctioned countries (other than Cuba), pursuant to a recently adopted company-wide policy they will no longer be permitted to accept new business (other than such business as they are
contractually obligated to undertake in compliance with U.S. laws) intended to or for Iran or Sudan. We have also adopted a requirement that the U.S. export/import compliance and/or legal department conduct a review of all proposed transactions by
our foreign subsidiaries relating to sanctioned countries to determine whether such sales are consistent with the new policy and in compliance with applicable U.S. laws. In addition, we have issued further guidance and provided additional training
to our employees concerning the application of U.S. foreign trade controls, and we have reorganized our management team that oversees compliance with these controls. Primary responsibility for overseeing such compliance resides with a newly created
corporate officer position titled Executive Vice President, Ethics and Compliance, which reports directly to the Chief Executive Officer and the Audit Committee. We have also established the position of Corporate Export/Import Compliance Director,
reporting directly to the new Executive Vice President. At each business unit, compliance managers and export/import compliance managers have also been appointed. These business unit managers report to the new Executive Vice President and the new
Corporate Export /Import Compliance Director, respectively. We are also taking appropriate disciplinary action against personnel who failed to meet their obligations under company-wide policy or otherwise engaged in wrongful conduct.



While our investigation has been completed, and voluntary disclosure reports
have been submitted to the U.S. Commerce and Treasury departments, it remains unclear as to what extent the various activities reported to these government agencies violate U.S. export control and economic sanctions regulations and what penalties
the government agencies may seek to impose for conduct that is found to be unlawful. Accordingly, we are unable to determine at this time the extent of violations or the nature or size of the penalties to which we may be subject as a result of any
unauthorized dealings with U.S.-sanctioned countries. If we are found to be in violation of the applicable U.S. Commerce and Treasury department regulations restricting dealings with Iran, Sudan and Cuba (and in the past, Iraq and Libya), we could
be subject to civil or criminal penalties, including fines and/or



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suspension of the privilege to engage in export trading or to have our foreign affiliates receive U.S.-origin goods, software or technology.



We believe that a loss in connection with this matter is probable and
currently estimate our minimum probable liability to be approximately $0.8 million, which we recorded as a reserve in the fourth quarter of 2004. Given that the resolution of these issues is inherently uncertain at this time, we are not able to
reasonably estimate the maximum amount or a meaningful range of probable or reasonably likely liability that could result from an adverse resolution of this matter or any related private causes of action that may arise. Since the U.S. Commerce and
Treasury departments could impose aggregate penalties in excess of the reserve, and these amounts could be substantial, we cannot currently predict whether the ultimate resolution of this matter will have a material adverse effect on our business,
including our ability to do business outside the United States, or on our financial condition. In addition, our expenses related to the investigation and remedial actions have been and may continue to be substantial.



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PART II. OTHER INFORMATION



Item 6. Exhibits



|           |  |                                                                                                                                    
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description of Exhibit                                                                                                             
|           | 
|*31.1      |  | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                        
|           | 
|*31.2      |  | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                        
|           | 
|*32.1      |  | Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|           | 
|*32.2      |  | Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

---

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



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SIGNATURES



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



|                        |  |     |  |                                                                      
|----------------------- |  | --- |  | ---------------------------------------------------------------------
|                        |  |     |  | DRESSER, INC.                                                        
|                        |  |    
|Date: December 20, 2005 |  | By: |  | /S/    PATRICK M.
MURRAY                                             
|                        |  |     |  | Patrick M. Murray Chief Executive Officer and Chairman of the Board  
|                        |  |    
|                        |  |     |  | /S/    JAMES A.
NATTIER                                              
|                        |  |     |  | James A. Nattier Executive Vice President and Chief Financial Officer
|                        |  |    
|                        |  |     |  | /S/    THOMAS J.
KANUK                                               
|                        |  |     |  | Thomas J. Kanuk Corporate Controller and Chief Accounting Officer    



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