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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 September 30, 2004



OR



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



For the transition period from  to



Commission File Number 333-60778



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DRESSER, INC.

(Exact name of registrant as specified in its charter)



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



15455 Dallas
Parkway, Suite 1100

Addison, Texas 75001

(Address of principal executive offices) (zip code)



(972) 361-9800

(Registrants telephone number, including area code)



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



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



The number of shares outstanding of common stock (par value $0.01 per share)
as of November 15, 2004 was 1,000.



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DRESSER, INC.



INDEX



|                              |  |                                                                                                                             |  |        
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | -------
|                              |  |                                                                                                                             |  | PageNo.
|PART I.
FINANCIAL INFORMATION |  |                                                                                                                            
|Item 1.                       |  | Financial Statements                                                                                                        |  |        
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 (unaudited) |  | 3      
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 (unaudited)                            |  | 4      
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)           |  | 5      
|                              |  |                                                                                                                            
|                              |  | Notes to Condensed Consolidated Financial Statements as of September 30, 2004 (unaudited)                                   |  | 6      
|                              |  |                                                                                                                            
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 29     
|                              |  |                                                                                                                            
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                  |  | 53     
|                              |  |                                                                                                                            
|Item 4.                       |  | Controls and Procedures                                                                                                     |  | 55     
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                                                            
|                              |  |                                                                                                                            
|Item 1.                       |  | Legal Proceedings                                                                                                           |  | 57     
|                              |  |                                                                                                                            
|Item 6.                       |  | Exhibits                                                                                                                    |  | 57     
|                              |  |                                                                                                                            
|                              |  | Exhibits                                                                                                                    |  | 57     
|                              | 
|Signatures                    |  |                                                                                                                            



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 EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                                          |  | 2004                            |       |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|Revenues                                                  |  | $                               | 508.3 |   |                                | $ | 417.5  |      |  | $ | 1,440.4 |   |  | $ | 1,183.8 |  
|Cost of revenues                                          |  |                                 | 360.9 |   |                                |   | 306.1  |      |  |   | 1,025.2 |   |  |   | 871.4   |  
|                                                          |  |                                 |       |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                              |  |                                 | 147.4 |   |                                |   | 111.4  |      |  |   | 415.2   |   |  |   | 312.4   |  
|Selling, engineering, administrative and general expenses |  |                                 | 116.7 |   |                                |   | 88.8   |      |  |   | 325.2   |   |  |   | 272.5   |  
|                                                          |  |                                 |       |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating income                                          |  |                                 | 30.7  |   |                                |   | 22.6   |      |  |   | 90.0    |   |  |   | 39.9    |  
|Interest expense                                          |  |                                 | (20.2 | ) |                                |   | (21.2  | )    |  |   | (74.7   | ) |  |   | (62.9   | )
|Interest income                                           |  |                                 | 0.4   |   |                                |   | 0.5    |      |  |   | 0.9     |   |  |   | 2.4     |  
|Other income (expense), net                               |  |                                 | (0.8  | ) |                                |   | (0.8   | )    |  |   | (0.7    | ) |  |   | 7.4     |  
|                                                          |  |                                 |       |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                         |  |                                 | 10.1  |   |                                |   | 1.1    |      |  |   | 15.5    |   |  |   | (13.2   | )
|Provision for income taxes                                |  |                                 | (6.1  | ) |                                |   | (10.8  | )    |  |   | (13.3   | ) |  |   | (21.0   | )
|                                                          |  |                                 |       |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) before equity interests                     |  |                                 | 4.0   |   |                                |   | (9.7   | )    |  |   | 2.2     |   |  |   | (34.2   | )
|Equity in earnings of unconsolidated subsidiaries         |  |                                 | 0.8   |   |                                |   | 0.5    |      |  |   | 2.4     |   |  |   | 2.0     |  
|Minority owners share of consolidated subsidiaries       |  |                                 | (0.7  | ) |                                |   |       |      |  |   | (0.8    | ) |  |   |        |  
|                                                          |  |                                 |       |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                                         |  | $                               | 4.1   |   |                                | $ | (9.2   | )    |  | $ | 3.8     |   |  | $ | (32.2   | )
|                                                          |  |                                 |       |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net income (loss) per share             |  | $                               | 4,100 |   |                                | $ | (9,200 | )    |  | $ | 3,800   |   |  | $ | (32,200 | )
|                                                          |  |                                 |       |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted weighted average shares outstanding     |  |                                 | 1,000 |   |                                |   | 1,000  |      |  |   | 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)



|                                                                               |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                               |  | September 30,2004 |         |   | December 31,2003 |  
|ASSETS                                                                         |  |                   |         |   |                  |   |         |  
|Current assets:                                                                |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                      |  | $                 | 102.0   |   |                  | $ | 148.9   |  
|Restricted cash                                                                |  |                   | 2.3     |   |                  |   | 0.7     |  
|Accounts receivable, net of allowance for doubtful accounts of $13.6 and $15.1 |  |                   | 378.7   |   |                  |   | 276.2   |  
|Notes receivable                                                               |  |                   | 5.5     |   |                  |   | 4.4     |  
|Inventories                                                                    |  |                   | 338.2   |   |                  |   | 290.3   |  
|Other current assets                                                           |  |                   | 22.7    |   |                  |   | 20.5    |  
|                                                                               |  |                   |         |   |                  |   |         |  
|Total current assets                                                           |  |                   | 849.4   |   |                  |   | 741.0   |  
|                                                                               |  |                  
|Property, plant and equipment, net                                             |  |                   | 226.9   |   |                  |   | 208.1   |  
|Investments in unconsolidated subsidiaries                                     |  |                   | 8.4     |   |                  |   | 7.3     |  
|Deferred financing fees                                                        |  |                   | 25.5    |   |                  |   | 40.2    |  
|Goodwill                                                                       |  |                   | 396.0   |   |                  |   | 315.2   |  
|Other assets                                                                   |  |                   | 122.0   |   |                  |   | 92.4    |  
|                                                                               |  |                   |         |   |                  |   |         |  
|Total assets                                                                   |  | $                 | 1,628.2 |   |                  | $ | 1,404.2 |  
|                                                                               |  |                   |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                          |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                           |  |                   |         |   |                  |   |         |  
|Accounts payable                                                               |  | $                 | 259.7   |   |                  | $ | 198.4   |  
|Notes payable                                                                  |  |                   | 8.7     |   |                  |   | 2.9     |  
|Current maturities of long-term debt                                           |  |                   | 3.0     |   |                  |   | 2.7     |  
|Payroll and other compensation                                                 |  |                   | 58.6    |   |                  |   | 47.6    |  
|Accrued expenses                                                               |  |                   | 160.6   |   |                  |   | 145.2   |  
|                                                                               |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                      |  |                   | 490.6   |   |                  |   | 396.8   |  
|                                                                               |  |                  
|Pension and other retiree benefit obligations                                  |  |                   | 341.9   |   |                  |   | 340.1   |  
|Long-term debt, net of current maturities                                      |  |                   | 1,072.5 |   |                  |   | 941.4   |  
|Other liabilities                                                              |  |                   | 20.8    |   |                  |   | 25.2    |  
|                                                                               |  |                   |         |   |                  |   |         |  
|Total liabilities                                                              |  |                   | 1,925.8 |   |                  |   | 1,703.5 |  
|                                                                               |  |                  
|Commitments and contingencies                                                  |  |                   |        |   |                  |   |        |  
|Minority interest                                                              |  |                   | 3.5     |   |                  |   | 0.4     |  
|Mandatorily redeemable common stock of Dresser, Ltd.                           |  |                   | 7.4     |   |                  |   | 12.9    |  
|                                                                               |  |                  
|Shareholders deficit:                                                         |  |                   |         |   |                  |   |         |  
|Common stock $0.01 par value; issued and outstanding: 1,000 shares             |  |                   |        |   |                  |   |        |  
|Additional paid in capital                                                     |  |                   | 453.9   |   |                  |   | 442.5   |  
|Loan to Dresser, Ltd.                                                          |  |                   | (1.6    | ) |                  |   |        |  
|Dividends in excess of net book value                                          |  |                   | (595.8  | ) |                  |   | (595.8  | )
|Accumulated deficit                                                            |  |                   | (108.9  | ) |                  |   | (112.7  | )
|Accumulated other comprehensive loss                                           |  |                   | (56.1   | ) |                  |   | (46.6   | )
|                                                                               |  |                   |         |   |                  |   |         |  
|Total shareholders deficit                                                    |  |                   | (308.5  | ) |                  |   | (312.6  | )
|                                                                               |  |                   |         |   |                  |   |         |  
|Total liabilities and shareholders deficit                                    |  | $                 | 1,628.2 |   |                  | $ | 1,404.2 |  
|                                                                               |  |                   |         |   |                  |   |         |  



See accompanying notes
to condensed consolidated financial statements



4



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DRESSER, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)



|                                                                                          |  |                                |        |   |      |   |       |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ----- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |       
|                                                                                          |  | 2004                           |        |   | 2003 |  
|Cash flows from operating activities:                                                     |  |                                |        |   |      |   |       |  
|Net income (loss)                                                                         |  | $                              | 3.8    |   |      | $ | (32.2 | )
|Adjustments to reconcile net income (loss) to cash flow provided by operating activities: |  |                                |        |   |      |   |       |  
|Depreciation and amortization                                                             |  |                                | 35.6   |   |      |   | 31.7  |  
|Equity in earnings of unconsolidated subsidiaries                                         |  |                                | (2.4   | ) |      |   | (2.0  | )
|Loss on repayment of debt                                                                 |  |                                | 16.6   |   |      |   | 0.1   |  
|Gain on sale of assets                                                                    |  |                                | (3.5   | ) |      |   |      |  
|Loss on foreign currency exchange                                                         |  |                                | 1.7    |   |      |   | 7.1   |  
|Amortization of deferred financing fees, net of amortization of bond premium              |  |                                | 2.8    |   |      |   | 4.5   |  
|Changes in operating assets and liabilities, net of acquisition of business:              |  |                                |        |   |      |   |       |  
|Receivables                                                                               |  |                                | (37.9  | ) |      |   | (19.6 | )
|Inventories                                                                               |  |                                | (18.0  | ) |      |   | 0.2   |  
|Accounts payable                                                                          |  |                                | 23.0   |   |      |   | 10.0  |  
|Accrued expenses                                                                          |  |                                | 20.7   |   |      |   | 39.5  |  
|Pension and other retiree benefit obligations                                             |  |                                | (0.3   | ) |      |   | 6.6   |  
|Other                                                                                     |  |                                | (10.4  | ) |      |   | (8.5  | )
|                                                                                          |  |                                |        |   |      |   |       |  
|Net cash provided by operating activities                                                 |  |                                | 31.7   |   |      |   | 37.4  |  
|                                                                                          |  |                                |        |   |      |   |       |  
|Cash flows from investing activities:                                                     |  |                                |        |   |      |   |       |  
|Acquisition of businesses                                                                 |  |                                | (174.0 | ) |      |   |      |  
|Acquisition of assets                                                                     |  |                                |       |   |      |   | (15.4 | )
|Capital expenditures                                                                      |  |                                | (36.5  | ) |      |   | (17.8 | )
|Proceeds from sale of assets                                                              |  |                                | 4.2    |   |      |   |      |  
|Changes in restricted cash                                                                |  |                                | (1.6   | ) |      |   | 9.7   |  
|                                                                                          |  |                                |        |   |      |   |       |  
|Net cash used in investing activities                                                     |  |                                | (207.9 | ) |      |   | (23.5 | )
|                                                                                          |  |                                |        |   |      |   |       |  
|Cash flows from financing activities:                                                     |  |                                |        |   |      |   |       |  
|Proceeds from issuance of long-term debt                                                  |  |                                | 172.8  |   |      |   |      |  
|Repayment of long-term debt (including current portion)                                   |  |                                | (46.9  | ) |      |   | (8.8  | )
|Net increase (decrease) in short-term notes payable                                       |  |                                | 5.9    |   |      |   | (9.1  | )
|Payment of deferred financing fees                                                        |  |                                |       |   |      |   | (3.9  | )
|Purchase of shares, net of proceeds from escrow and exercise of stock options             |  |                                | (1.9   | ) |      |   |      |  
|                                                                                          |  |                                |        |   |      |   |       |  
|Net cash provided by (used in) financing activities                                       |  |                                | 129.9  |   |      |   | (21.8 | )
|                                                                                          |  |                                |        |   |      |   |       |  
|Effect of translation adjustments on cash                                                 |  |                                | (0.6   | ) |      |   | 3.9   |  
|                                                                                          |  |                                |        |   |      |   |       |  
|Net decrease in cash and cash equivalents                                                 |  |                                | (46.9  | ) |      |   | (4.0  | )
|Cash and cash equivalents, beginning of period                                            |  |                                | 148.9  |   |      |   | 112.0 |  
|                                                                                          |  |                                |        |   |      |   |       |  
|Cash and cash equivalents, end of period                                                  |  | $                              | 102.0  |   |      | $ | 108.0 |  
|                                                                                          |  |                                |        |   |      |   |       |  
|Non-cash financing activities:                                                            |  |                                |        |   |      |   |       |  
|Refinancing of long-term debt, net of transaction fees                                    |  | $                              | 381.6  |   |      | $ |      |  
|Financing fees related to the acquisition of Nuovo Pignone                                |  |                                | 2.8    |   |      |   |      |  
|Reclassification of mandatorily redeemable common stock to additional paid-in-capital     |  |                                | 5.5    |   |      |   |      |  
|Supplemental disclosure of cash flow information:                                         |  |                                |        |   |      |   |       |  
|Cash payments during the period for:                                                      |  |                                |        |   |      |   |       |  
|Interest                                                                                  |  | $                              | 44.2   |   |      | $ | 48.5  |  
|Income taxes                                                                              |  |                                | 8.9    |   |      |   | 9.0   |  



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. Organization and Basis of Presentation



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



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



In connection with the
recapitalization in April 2001, Dresser paid Halliburton approximately $1,300 million to redeem our common equity and acquire the stock of certain foreign subsidiaries from Dresser B.V. The recapitalization transaction and related expenses were
financed through the issuance of $300 million of senior subordinated notes, $720 million of borrowings under our credit facility, and approximately $400 million of common equity contributed by DEG Acquisitions, LLC.



On July 3, 2002, Dresser modified its corporate structure by forming a
Delaware holding company and two Bermuda holding companies between the existing shareholders and Dresser. Dresser is now wholly owned by Dresser Holdings, Inc., a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the sole
shareholder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the sole shareholder of Dresser Holdings, Ltd. The former direct shareholders of Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to their
prior direct ownership interests in Dresser. Certain transactions conducted through Dresser, Ltd. (the parent) are reflected in the accounts of Dresser, Inc., in as much as the parent has no assets other than its investment in Dresser, Inc.



The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three and nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, refer
to the financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2003.



6



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##### Table of Contents

DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Significant Fourth Quarter Adjustment



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



|                              |  |               |       |  
|----------------------------- |  | ------------- | ----- | -
|                              |  | (in millions) |      
|Flow control                  |  | $             | (7.3  | )
|Measurement systems           |  |               | (1.6  | )
|Compression and power systems |  |               |      |  
|Corporate and other, net      |  |               | (1.1  | )
|                              |  |               |       |  
|Pre-tax income effect         |  | $             | (10.0 | )
|                              |  |               |       |  



Note 2. Acquisitions



Research and Development Technology



In September 2004, we acquired several engines and core technology from
Wartsila France SAS, for $12.3 million. The technology and engines were purchased for the purpose of advancing the development of new engine designs. In accordance with Statement of Financial Accounting Standards (SFAS) No.2
Accounting for Research and Development Costs, items acquired for a particular research and development project that have no alternative future use should be expensed at the time the costs are incurred. As a result, we recognized $12.3
million of expense in the third quarter, which was reflected in selling, engineering, administrative and general expense in our compression and power systems segment.



Nuovo Pignone



On June 4, 2004, we completed the purchase of the distribution business of Nuovo Pignone S.p.A., a subsidiary of General Electric Company, for
approximately $170 million and approximately $1.5 million in direct acquisition costs. The purchased business includes a retail fueling systems operation, comprised of gasoline, liquefied petroleum gas and compressed natural gas dispenser products
and services, and a gas meters operation, which manufactures and markets certain natural gas meters. This business generated $151.4 million of revenues in the year ended December 31, 2003. The acquisition is expected to substantially improve our
market share in retail fueling, be complementary from a customer, product and geographical perspective and provide us with substantial cost saving opportunities. To finance the cash consideration related to the acquisition, we obtained additional
borrowings under our existing credit facility in the amount of $175 million, which included $2.8 million of capitalized financing fees. The results of operations for this business are reflected in our measurement systems segment as of the beginning
of June 2004.



We have accounted for the acquisition under the
purchase method of accounting for business combinations and have preliminarily allocated the purchase price to the assets acquired and liabilities assumed based on the estimated fair values as of the acquisition date. We have determined the
existence of certain patents, trademarks, trade names and other intangibles and have assessed a preliminary value of approximately $13.7 million. We are in the process of obtaining valuations for certain assets and assessing certain liabilities and
income taxes attributed to the transaction. We expect to complete our assessment by the end of 2004. The results of these valuations may impact our preliminary allocation of the purchase price. In addition, the purchase and sale agreement we entered
into related to the acquisition allows for a post-closing adjustment period of 165 days after the closing date to calculate and finalize any net working capital adjustments, unless extensions of time are agreed to by both parties. We expect to
complete our net working capital calculation by the end of 2004. While the allocation of the purchase price may be impacted by the net working capital calculation and other valuation analysis, we do not believe any resulting adjustments will have a
material impact on the purchase price allocation or on the Company as a whole.



7



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##### Table of Contents

DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



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



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



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



|                                          |  |                                         |        |   |                                 |   |         |      |  |   |         |  
|----------------------------------------- |  | --------------------------------------- | ------ | - | ------------------------------- | - | ------- | ---- |  | - | ------- | -
|                                          |  | Three Months Ended September 30,        |        |   | Nine Months Ended September 30, |  
|                                          |  | 2003                                    |        |   | 2004                            |   |         | 2003 | 
|                                          |  | (in millions, except per share amounts) |       
|Revenues                                  |  | $                                       | 453.8  |   |                                 | $ | 1,507.6 |      |  | $ | 1,300.9 |  
|Net income (loss)                         |  | $                                       | (9.6   | ) |                                 | $ | (1.7    | )    |  | $ | (39.0   | )
|Basic and diluted income (loss) per share |  | $                                       | (9,600 | ) |                                 | $ | (1,700  | )    |  | $ | (39,000 | )



Note 3. Stock-based compensation



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



8



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##### Table of Contents

DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



|                                                                                                                  |  |                                         |       |   |                                |   |        |      |  |   |       |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ----- | - | ------------------------------ | - | ------ | ---- |  | - | ----- | - |  | - | ------- | -
|                                                                                                                  |  | Three Months EndedSeptember 30,         |       |   | Nine Months EndedSeptember 30, |  
|                                                                                                                  |  | 2004                                    |       |   | 2003                           |   |        | 2004 |  |   | 2003  |  
|                                                                                                                  |  | (in millions, except per share amounts) |      
|Net income (loss)                                                                                                 |  | $                                       | 4.1   |   |                                | $ | (9.2   | )    |  | $ | 3.8   |   |  | $ | (32.2   | )
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects |  |                                         | 3.0   |   |                                |   |       |      |  |   | 3.4   |   |  |   |        |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards   |  |                                         | (3.0  | ) |                                |   | (0.3   | )    |  |   | (3.4  | ) |  |   | (1.0    | )
|                                                                                                                  |  |                                         |       |   |                                |   |        |      |  |   |       |   |  |   |         |  
|Pro forma net income (loss)                                                                                       |  | $                                       | 4.1   |   |                                | $ | (9.5   | )    |  | $ | 3.8   |   |  | $ | (33.2   | )
|                                                                                                                  |  |                                         |       |   |                                |   |        |      |  |   |       |   |  |   |         |  
|Net income (loss) per share                                                                                       |  |                                         |       |   |                                |   |        |      |  |   |       |   |  |   |         |  
|Basic and diluted - reported                                                                                      |  | $                                       | 4,100 |   |                                | $ | (9,200 | )    |  | $ | 3,800 |   |  | $ | (32,200 | )
|                                                                                                                  |  |                                         |       |   |                                |   |        |      |  |   |       |   |  |   |         |  
|Basic and diluted - pro forma                                                                                     |  | $                                       | 4,100 |   |                                | $ | (9,500 | )    |  | $ | 3,800 |   |  | $ | (33,200 | )
|                                                                                                                  |  |                                         |       |   |                                |   |        |      |  |   |       |   |  |   |         |  



In July 2004, we
implemented a program allowing employee option holders the opportunity to surrender a portion of their current options in exchange for some combination of new time and performance options. The program was completed on August 23, 2004. In some
foreign jurisdictions the program was structured as a cancellation of options and amendment of existing options to comply with foreign tax laws, but the end result of the program did not change. The replacement options were issued with the same
exercise price as the original options ($40) and will vest and expire as if issued on the original issuance date of the surrendered options. The performance component of the performance options was modified to increase the likelihood for achievement
of the performance conditions, and therefore acceleration of vesting of those options, through lower thresholds than the original performance criteria. Performance options automatically vest nine and one half years from the original issuance date,
however vesting can be accelerated whereby 25% of these options can vest annually, should performance criteria be met in calendar years 2004 through 2007. All of the option holders exchanged their options. As a result, 234,333 options were
surrendered, and 35,208 and 149,875 time-based and performance options, respectively, were issued in replacement. The incremental value associated with the cancellation and reissuance of these options did not have a significant impact on our
stock-based compensation expense.



Additionally, in July 2004,
the Company issued 258,750 new time-based options and 258,750 new performance options to certain employees. All options were issued with an exercise price of $40 per share, and generally expire ten years from the issuance date. The time options
generally vest 20% on the first anniversary of the date of the grant then one forty-eighth of the remaining 80% per month thereafter until the options are fully vested, and the performance options vest automatically in nine and one half years, with
vesting accelerated, up to 25% per year, should performance criteria be met in calendar years 2004 through 2007. Vesting and expiration dates for options issued to two employees are based on their date of employment and, as a result, their vesting
is accelerated . The options are estimated to have five to six year expected lives, and the value of the options will be expensed over the expected vesting period of the respective options.



Note 4. Income (Loss) Per Share



We compute basic and diluted income (loss) per share in accordance with 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.



9



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##### Table of Contents

DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The following is a reconciliation between basic and diluted weighted average shares:



|                                                          |  |                                                   |       |      |                                |        |      |  |      |       |  |   |        |  
|--------------------------------------------------------- |  | ------------------------------------------------- | ----- | ---- | ------------------------------ | ------ | ---- |  | ---- | ----- |  | - | ------ | -
|                                                          |  | Three Months EndedSeptember 30,                   |       |      | Nine Months EndedSeptember 30, |       
|                                                          |  | 2004                                              |       | 2003 |                                |        | 2004 |  | 2003 |      
|                                                          |  | (in millions, except share and per share amounts) |      
|Numerator:                                                |  |                                                   |       |      |                                |        |      |  |      |       |  |   |        |  
|Net income (loss)                                         |  | $                                                 | 4.1   |      | $                              | (9.2   | )    |  | $    | 3.8   |  | $ | (32.2  | )
|Denominator:                                              |  |                                                   |       |      |                                |        |      |  |      |       |  |   |        |  
|Effect of common stock:                                   |  |                                                   |       |      |                                |        |      |  |      |       |  |   |        |  
|Basic and diluted weighted average shares of common stock |  |                                                   | 1,000 |      |                                | 1,000  |      |  |      | 1,000 |  |   | 1,000  |  
|                                                          |  |                                                   |       |      |                                |        |      |  |      |       |  |   |        |  
|Basic income (loss) per share                             |  | $                                                 | 4,100 |      | $                              | (9,200 | )    |  | $    | 3,800 |  | $ | 32,200 |  
|                                                          |  |                                                   |       |      |                                |        |      |  |      |       |  |   |        |  
|Effect of dilutive securities:                            |  |                                                   |      |      |                                |       |      |  |      |      |  |   |       |  
|Diluted income (loss) per share                           |  | $                                                 | 4,100 |      | $                              | (9,200 | )    |  | $    | 3,800 |  | $ | 32,200 |  
|                                                          |  |                                                   |       |      |                                |        |      |  |      |       |  |   |        |  



Note 5. Restructuring and Other
Exit Activities



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



We incurred $1.6 million and $6.5 million of restructuring charges for the three and nine months ended September 30, 2004, respectively. Restructuring
charges of $0.3 million and $0.6 million have been reflected in cost of revenues for the three and nine months ended September 30, 2004. Restructuring charges of $1.3 million and $5.9 million have been reflected in selling, engineering,
administrative and general expenses for the three and nine months ended September 30, 2004. During the first nine months of 2004, we incurred costs in connection with the continuation of (1) a consolidation of an instrument operation in Berea,
Kentucky with existing operations in Brazil into a new facility in Sao Caetano, Brazil, (2) a consolidation of a control valve operation in Burlington, Canada into existing facilities, (3) a consolidation of certain flow control operations in
Houston, Texas into a single new facility, (4) a consolidation of a retail fueling dispenser manufacturing operation in Germany into an existing facility in Sweden and (5) a decision to outsource the manufacturing of certain blowers. The costs
associated with these actions for the nine months ended September 30, 2004 are as follows:



10



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##### Table of Contents

DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



|                                               |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|---------------------------------------------- |  | ------------------- | --- | ------------- | - | ---- | --------------- |  | - | --------------------------- | - |  | - | ---
|Description                                    |  | RestructuringCharge |     | Cash Payments |   |      | Non-CashCharges |  |   | Accrued atSeptember 30,2004
|                                               |  | (in millions)      
|Consolidate Berea operations                   |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|Other exit activities                          |  | $                   | 0.3 |               | $ | (0.1 | )               |  | $ | (0.2                        | ) |  | $ |   
|Consolidate Burlington operations              |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|Termination benefits                           |  |                     | 2.6 |               |   | (1.3 | )               |  |   |                            |   |  |   | 1.3
|Consolidate Houston operations                 |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|Termination benefits                           |  |                     | 0.1 |               |   | (0.1 | )               |  |   |                            |   |  |   |   
|Other exit activities                          |  |                     | 3.0 |               |   | (2.9 | )               |  |   |                            |   |  |   | 0.1
|Consolidate German retail fueling operations   |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|Other exit activities                          |  |                     | 0.2 |               |   | (0.2 | )               |  |   |                            |   |  |   |   
|Outsource the manufacturing of certain blowers |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|Termination benefits                           |  |                     | 0.1 |               |   |     |                 |  |   |                            |   |  |   | 0.1
|Other exit activities                          |  |                     | 0.2 |               |   | (0.2 | )               |  |   |                            |   |  |   |   
|                                               |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|Total                                          |  | $                   | 6.5 |               | $ | (4.8 | )               |  | $ | (0.2                        | ) |  | $ | 1.5
|                                               |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    



The restructuring charges by segment
for the nine months ended September 30, 2004 are as follows:



|                              |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|----------------------------- |  | ------------------- | --- | ------------- | - | ---- | --------------- |  | - | --------------------------- | - |  | - | ---
|Segment                       |  | RestructuringCharge |     | Cash Payments |   |      | Non-CashCharges |  |   | Accrued atSeptember 30,2004
|                              |  | (in millions)      
|Flow control                  |  | $                   | 6.0 |               | $ | (4.4 | )               |  | $ | (0.2                        | ) |  | $ | 1.4
|Measurement systems           |  |                     | 0.2 |               |   | (0.2 | )               |  |   |                            |   |  |   |   
|Compression and power systems |  |                     | 0.3 |               |   | (0.2 | )               |  |   |                            |   |  |   | 0.1
|                              |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    
|Total                         |  | $                   | 6.5 |               | $ | (4.8 | )               |  | $ | (0.2                        | ) |  | $ | 1.5
|                              |  |                     |     |               |   |      |                 |  |   |                             |   |  |   |    



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



11



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##### Table of Contents

DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



|                                               |  |                            |     |              |   |      |                             |  |   |    
|---------------------------------------------- |  | -------------------------- | --- | ------------ | - | ---- | --------------------------- |  | - | ---
|                                               |  | Accrued atDecember 31,2004 |     | CashPayments |   |      | Accrued atSeptember 30,2004
|                                               |  | (in millions)             
|Consolidate Berea operations                   |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  | $                          | 1.5 |              | $ | (1.5 | )                           |  | $ |   
|Consolidate German retail fueling operations   |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 3.2 |              |   | (2.6 | )                           |  |   | 0.6
|Outsource the manufacturing of certain blowers |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 1.7 |              |   | (0.2 | )                           |  |   | 1.5
|Other exit activities                          |  |                            | 0.1 |              |   | (0.1 | )                           |  |   |   
|Consolidate Burlington operations              |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 0.8 |              |   | (0.8 | )                           |  |   |   
|Consolidate Houston operations                 |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 1.3 |              |   | (1.3 | )                           |  |   |   
|Company wide reduction in force                |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 0.2 |              |   |     |                             |  |   | 0.2
|                                               |  |                            |     |              |   |      |                             |  |   |    
|Total                                          |  | $                          | 8.8 |              | $ | (6.5 | )                           |  | $ | 2.3
|                                               |  |                            |     |              |   |      |                             |  |   |    



Note 6. Business Segment
Information



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



Flow Control. Operations of the flow control segment include the design, manufacture and marketing of valves and actuators. These products are used
to start, stop and control the flow of liquids and gases and to protect process equipment from excessive pressure. In addition, this segment also includes the design, manufacture and marketing of natural gas meters, regulators, digital and analog
pressure and temperature gauges, transducers, and piping specialties such as couplings and pipe fabrications.



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



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



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



12



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##### Table of Contents

DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The table below presents revenues and operating income by segment.



|                                       |  |                                 |       |   |                                |   |       |      |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ------- | - |  | - | ------- | -
|                                       |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                       |  | 2004                            |       |   | 2003                           |   |       | 2004 |  |   | 2003    |  
|                                       |  | (in millions)                   |      
|Revenues:                              |  |                                 |       |   |                                |   |       |      |  |   |         |   |  |   |         |  
|Flow control                           |  | $                               | 271.1 |   |                                | $ | 253.8 |      |  | $ | 822.6   |   |  | $ | 729.3   |  
|Measurement systems                    |  |                                 | 163.1 |   |                                |   | 96.0  |      |  |   | 390.5   |   |  |   | 263.0   |  
|Compression and power systems          |  |                                 | 75.8  |   |                                |   | 69.5  |      |  |   | 232.1   |   |  |   | 195.6   |  
|Reconciling items, including corporate |  |                                 | (1.7  | ) |                                |   | (1.8  | )    |  |   | (4.8    | ) |  |   | (4.1    | )
|                                       |  |                                 |       |   |                                |   |       |      |  |   |         |   |  |   |         |  
|Total                                  |  | $                               | 508.3 |   |                                | $ | 417.5 |      |  | $ | 1,440.4 |   |  | $ | 1,183.8 |  
|                                       |  |                                 |       |   |                                |   |       |      |  |   |         |   |  |   |         |  
|Operating income:                      |  |                                 |       |   |                                |   |       |      |  |   |         |   |  |   |         |  
|Flow control                           |  | $                               | 21.3  |   |                                | $ | 13.6  |      |  | $ | 53.2    |   |  | $ | 43.7    |  
|Measurement systems                    |  |                                 | 24.9  |   |                                |   | 13.1  |      |  |   | 55.2    |   |  |   | 17.2    |  
|Compression and power systems          |  |                                 | (4.5  | ) |                                |   | 1.4   |      |  |   | 12.5    |   |  |   | 4.7     |  
|Reconciling items, including corporate |  |                                 | (11.0 | ) |                                |   | (5.5  | )    |  |   | (30.9   | ) |  |   | (25.7   | )
|                                       |  |                                 |       |   |                                |   |       |      |  |   |         |   |  |   |         |  
|Total                                  |  | $                               | 30.7  |   |                                | $ | 22.6  |      |  | $ | 90.0    |   |  | $ | 39.9    |  
|                                       |  |                                 |       |   |                                |   |       |      |  |   |         |   |  |   |         |  



Note 7. 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 $72.4 million and $59.8 million of
our total inventories as of September 30, 2004 and December 31, 2003, respectively. The excess of FIFO over LIFO costs was $69.9 million as of September 30, 2004 and December 31, 2003. Inventories are summarized as follows:



|                              |  |                   |       |   |                  |   |       |  
|----------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                              |  | September 30,2004 |       |   | December 31,2003 |  
|                              |  | (in millions)     |      
|Finished products and parts   |  | $                 | 231.8 |   |                  | $ | 188.5 |  
|In-process products and parts |  |                   | 104.6 |   |                  |   | 92.4  |  
|Raw materials and supplies    |  |                   | 71.7  |   |                  |   | 79.3  |  
|                              |  |                   |       |   |                  |   |       |  
|Inventories                   |  |                   | 408.1 |   |                  |   | 360.2 |  
|Less:                         |  |                   |       |   |                  |   |       |  
|LIFO reserve                  |  |                   | (69.9 | ) |                  |   | (69.9 | )
|                              |  |                   |       |   |                  |   |       |  
|Total inventories             |  | $                 | 338.2 |   |                  | $ | 290.3 |  
|                              |  |                   |       |   |                  |   |       |  



13



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 8. Pension and Other Retiree Benefit Obligations



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



|                                   |  |                                  |      |   |                                 |   |      |                       |  |   |                           |   |  |      |      |   |      |   |       |      |  |   |       |   |  |   |      |   |  |   |      |  
|---------------------------------- |  | -------------------------------- | ---- | - | ------------------------------- | - | ---- | --------------------- |  | - | ------------------------- | - |  | ---- | ---- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | - | ---- | - |  | - | ---- | -
|                                   |  | Defined Benefit Plans            |      |   | OtherPostretirement Plans       |   |      | Defined Benefit Plans |  |   | OtherPostretirement Plans |  
|                                   |  | Three Months Ended September 30, |      |   | Nine Months Ended September 30, |  
|                                   |  | 2004                             |      |   | 2003                            |   |      | 2004                  |  |   | 2003                      |   |  | 2004 |      |   | 2003 |   |       | 2004 |  |   | 2003  |  
|                                   |  | (in millions)                    |      |   | (in millions)                   |  
|                                   |  |                                  |      |   |                                 |   |      |                      
|Service cost                       |  | $                                | 1.8  |   |                                 | $ | 1.8  |                       |  | $ | 0.5                       |   |  | $    | 0.5  |   |      | $ | 5.3   |      |  | $ | 5.3   |   |  | $ | 1.5  |   |  | $ | 1.7  |  
|Interest cost                      |  |                                  | 4.5  |   |                                 |   | 3.8  |                       |  |   | 2.3                       |   |  |      | 3.1  |   |      |   | 13.4  |      |  |   | 11.5  |   |  |   | 7.1  |   |  |   | 9.3  |  
|Amortization of prior service cost |  |                                  | 0.5  |   |                                 |   | 0.5  |                       |  |   | (1.9                      | ) |  |      | (1.4 | ) |      |   | 1.6   |      |  |   | 1.6   |   |  |   | (5.5 | ) |  |   | (4.3 | )
|Amortization of net loss           |  |                                  | 1.3  |   |                                 |   | 0.5  |                       |  |   |                          |   |  |      | 0.4  |   |      |   | 4.0   |      |  |   | 1.4   |   |  |   | 0.4  |   |  |   | 1.2  |  
|Transition obligation              |  |                                  | 0.4  |   |                                 |   | 0.5  |                       |  |   |                          |   |  |      |     |   |      |   | 1.3   |      |  |   | 1.4   |   |  |   |     |   |  |   |     |  
|Expected return on assets          |  |                                  | (4.2 | ) |                                 |   | (4.0 | )                     |  |   |                          |   |  |      |     |   |      |   | (12.7 | )    |  |   | (12.1 | ) |  |   |     |   |  |   |     |  
|                                   |  |                                  |      |   |                                 |   |      |                       |  |   |                           |   |  |      |      |   |      |   |       |      |  |   |       |   |  |   |      |   |  |   |      |  
|Net periodic benefit cost          |  | $                                | 4.3  |   |                                 | $ | 3.1  |                       |  | $ | 0.9                       |   |  | $    | 2.6  |   |      | $ | 12.9  |      |  | $ | 9.1   |   |  | $ | 3.5  |   |  | $ | 7.9  |  
|                                   |  |                                  |      |   |                                 |   |      |                       |  |   |                           |   |  |      |      |   |      |   |       |      |  |   |       |   |  |   |      |   |  |   |      |  



We made cash
contributions of approximately $6.0 million to our domestic pension benefit plans during the nine months ended September 30, 2004. We expect to make additional cash contributions of $0.4 million throughout the remainder of 2004 and $9.1 million
during the first half of 2005.



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



Note 9.
Debt



In March 2004, we completed a refinancing of
approximately $382 million of our Tranche B term loan under our senior secured credit facility with a new six-year $125 million senior unsecured term loan and a new $260 million Tranche C term loan under our senior secured credit facility. The
Tranche B term loan was paid in full with the completion of the refinancing. The $125 million senior unsecured term loan bears an interest rate of LIBOR (three-month LIBOR was 2.02% at September 30, 2004) plus 3.5%, and the Tranche C term loan bears
an interest rate of LIBOR plus 2.5%. We elected to prepay $25 million of our Tranche C term loan at the time the refinancing was completed. The covenants contained in the agreement governing our new senior unsecured term loan are similar to the
indenture governing our senior subordinated notes. In connection with the refinancing, we expensed approximately $16.6 million in deferred financing costs associated with the Tranche B term loan, which was reflected in interest expense in our
condensed consolidated statements of operations.



In June 2004,
in conjunction with our acquisition of the Nuovo Pignone distribution business, we obtained additional Tranche C term loan borrowings in the amount of $175 million, which included approximately $2.8 million in capitalized financing fees. In July and
August 2004, we made optional prepayments of $10 million each on our Tranche C term loan. In October 2004, we made another $10 million prepayment on our Tranche C term loan. As a result of these optional prepayments, no mandatory principal payments
are due on our Tranche C term loan until March 31, 2008.



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Note 10. Comprehensive Income (loss)



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



|                                                 |  |                                 |      |   |                                |   |       |      |  |   |      |   |  |   |       |  
|------------------------------------------------ |  | ------------------------------- | ---- | - | ------------------------------ | - | ----- | ---- |  | - | ---- | - |  | - | ----- | -
|                                                 |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                                 |  | 2004                            |      |   | 2003                           |   |       | 2004 |  |   | 2003 |  
|                                                 |  | (in millions)                   |      |   | (in millions)                  |  
|                                                 |  |                                 |      |  
|Net income (loss)                                |  | $                               | 4.1  |   |                                | $ | (9.2  | )    |  | $ | 3.8  |   |  | $ | (32.2 | )
|Other comprehensive (loss) income                |  |                                 |      |   |                                |   |       |      |  |   |      |   |  |   |       |  
|Foreign currency translation adjustment          |  |                                 | (0.2 | ) |                                |   | (8.0  | )    |  |   | (6.1 | ) |  |   | 27.1  |  
|Unrealized gain (loss) on derivative instruments |  |                                 | 0.5  |   |                                |   | (3.5  | )    |  |   | (3.4 | ) |  |   | (1.5  | )
|                                                 |  |                                 |      |   |                                |   |       |      |  |   |      |   |  |   |       |  
|Comprehensive income (loss)                      |  | $                               | 4.4  |   |                                | $ | (20.7 | )    |  | $ | (5.7 | ) |  | $ | (6.6  | )
|                                                 |  |                                 |      |   |                                |   |       |      |  |   |      |   |  |   |       |  



Note 11. 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 on April 10, 2004. The maximum aggregate amount of all losses indemnifiable by Halliburton pursuant
to the recapitalization agreement is $950.0 million. In the case of certain general indemnities in the recapitalization agreement, other than those described above, there is an aggregate $15.0 million deductible that is applicable prior to the
indemnification obligations. In addition, any single claim for such indemnities is subject to a threshold of $0.5 million in the case where there was no knowledge of such claim by Halliburton and a $0.1 million threshold if there was knowledge. For
purposes of determining the threshold or maximum amount of indemnity and other overall indemnity obligations, such amounts shall be offset by insurance proceeds received by 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.



As Halliburton has publicly disclosed, it has been subject to numerous lawsuits involving asbestos claims associated with, among other things, the
operating units of Dresser Industries that were retained by Halliburton or disposed of by Dresser Industries or Halliburton prior to the recapitalization transaction. These lawsuits have resulted in significant expense for Halliburton. In December
2003, certain affiliates of Halliburton filed a petition for relief under the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Pennsylvania. In connection with the petition, the bankruptcy judge issued an order enjoining
asbestos claims against the debtors and Halliburton, as well as asbestos claims against us, pending confirmation and effectiveness of a definitive plan of reorganization for the Halliburton affiliates subject to the bankruptcy petition. On July 21,
2004, the plan of reorganization was confirmed by the bankruptcy judge, and on July 26, 2004 the confirmation order was affirmed by the U.S. District Court for the Western District of Pennsylvania. The confirmation order was appealed to the United
States Court of Appeals for the Third Circuit and, at the request of the debtors and certain of the debtors insurance carriers that had filed appeals, the District Court and the Court of Appeals have entered orders staying the confirmation
order. As a result of those stays, the plan of reorganization has not yet been consummated. Subsequently, the debtors filed several motions with the Bankruptcy Court seeking approval of settlements with certain insurance carriers. The debtors have
stated that if such settlements are approved the stay of the confirmation order will be lifted and the plan of reorganization will be consummated. The Bankruptcy Court has scheduled a hearing for November 18, 2004 to consider these motions.



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Our right to indemnification under the recapitalization agreement with Halliburton as it relates to asbestos claims based on events occurring prior to the
closing of the recapitalization has also been enjoined pending effectiveness of the definitive plan of reorganization referred to above. However, this indemnification right is unnecessary as long as we are also protected by the injunction, as we
are. We expect that our indemnity rights against Halliburton relating to asbestos claims based on events occurring prior to the closing of the recapitalization will terminate if the plan of reorganization is confirmed and becomes effective; however,
such rights would no longer be necessary because the plan would require asbestos plaintiffs with claims against us or Halliburton to look for relief exclusively to a trust to be established in the bankruptcy. If the plan of reorganization described
above does not become effective, or if the injunction of asbestos claims against us is otherwise terminated and asbestos claimants are again permitted to proceed against us, we would immediately seek to terminate the injunction of our exercise of
indemnification rights against Halliburton. Although we believe that in such a circumstance we would be able to terminate the injunction of our exercise of indemnification rights against Halliburton, we cannot assure you that we would succeed in
doing so. SeeEnvironmental Matters.



Although
we have been named in certain asbestos lawsuits, we have not historically incurred, and in the future we do not believe that we will incur, any material liability as a result of the past use of asbestos in products manufactured by the units of
Dresser Industries retained by Halliburton, or as a result of the past use of asbestos in products manufactured by the businesses currently owned by 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, 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 adequately cover these costs, we have set aside reserves for
these costs. However, in the event that we were to incur these costs ourselves, these reserves may not fully cover the costs of such investigation and/or remediation. Going forward, we expect to incur ongoing capital and operating costs for
investigation and remediation and to maintain compliance with currently applicable environmental laws and regulations; however, we do not expect those costs, in the aggregate, to be material.



As Halliburton has publicly disclosed, it has been subject to numerous
lawsuits involving asbestos claims associated with, among other things, the operating units of Dresser Industries that were retained by Halliburton or disposed of by Dresser Industries or Halliburton prior to the recapitalization transaction. These
lawsuits have resulted in significant expense for Halliburton. Pursuant to the recapitalization agreement with Halliburton, all liabilities related to asbestos claims arising out of events occurring prior to the consummation of the recapitalization
transaction, are defined to be excluded liabilities, whether they resulted from activities of Halliburton, Dresser Industries or any predecessor entities of any of our businesses. The recapitalization agreement provides for certain
indemnification obligations of Halliburton for losses and liabilities that we incur arising out of, among others, such excluded liabilities. Pursuant to a proposed bankruptcy plan of reorganization related to certain affiliates of
Halliburton, our indemnification rights with respect to asbestos claims arising out of events occurring prior to the recapitalization may be replaced with a permanent injunction that would prevent asbestos claimants from proceeding against us. See
Halliburton Indemnifications, and Note 1. Organization and Basis of Presentation.



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
units of Dresser Industries retained by Halliburton or as a result of the past use of asbestos in products manufactured by the businesses currently owned by us or any predecessor entities of our businesses.



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Legal Proceedings



In April 2004, we received allegations that the Dubai branch of one of our U.S. subsidiaries may have engaged in transactions involving the sale of
control valves and related parts to Iraq without required authorization. Upon initial investigation, we found transactions by the branch relating to Iraq, Iran and Sudan that appeared to have been undertaken without the required prior U.S.
governmental authorizations. With the assistance of outside counsel, we commenced a full investigation of the Dubai branchs transactions with sanctioned countries. On July 9, 2004, we submitted preliminary voluntary disclosures of the Dubai
branch transactions to the Commerce and Treasury Departments under their voluntary disclosure programs and committed to submit to these departments a report concerning the results of our investigation when it is concluded.



Thereafter, we expanded the investigation to include other Dresser affiliated
offices that have since January 1999 engaged in transactions relating to U.S.-sanctioned countries (including those countries mentioned as well as Libya (prior to late 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 Audit Committee of the Board of Directors assumed oversight of the investigation in early October 2004. We currently expect the investigation will be completed and our final reports to the Commerce and Treasury
Departments will be submitted during the first quarter of 2005.



The investigation has to date identified a significant number of sales by certain of our other foreign affiliates to sanctioned countries (in addition to such sales by the Dubai branch) that appear to have been performed without the
required U.S. governmental authorizations. In some of these transactions, current and former employees of several foreign and U.S. entities (including the Dubai branch) appear to have understood that the sales were wrongful and in some instances
took steps to conceal information about them.



The
investigation to date has also found evidence of potential violations by the Company and certain of its U.S. operations in connection with sanctioned country sales. These include issuing bank guarantees, entering into agreements with foreign
representatives, referring sales to foreign affiliates, and providing technical, business or other assistance or support in connection with foreign affiliate sales.



As part of its Management Integrity Initiative, the Company has commenced a comprehensive remedial program that is designed
to prevent the risk of further unlawful transactions or unlawful facilitations of otherwise legal transactions by our foreign affiliates involving sanctioned countries. Actions that we have initiated include adoption of a requirement that the U.S.
corporate legal department conduct a legal review of all pending or new sales by the Companys foreign affiliates to sanctioned countries to determine whether such sales are permissible under applicable U.S. export control laws, issuance of
further guidance to, and additional training of, our employees concerning the application of U.S. foreign trade controls, and reorganization of the Companys management team that oversees compliance with these controls. At the conclusion of the
investigation, we expect to take appropriate disciplinary action against personnel who willfully engaged in wrongful conduct.



Violations of the applicable Commerce and Treasury Department regulations restricting dealings with Iran, Sudan, Cuba and Syria (and, in the past, Iraq
and Libya) may result in 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. Because the investigation is
ongoing, we are unable to determine at this time the extent of the violations or the exact nature of the penalties to which the Company may be subjected as a result of any unauthorized dealings with U.S.-sanctioned countries. As a result, we cannot
currently predict whether the ultimate resolution of this matter will materially adversely affect us financially, or our business including our ability to do business outside the United States. At this time, we have made no provision in our
financial statements for any fines or penalties that might be incurred in this matter.



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 12. Accrued Warranties



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



|                                                        |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|------------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                        |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                                        |  | 2004                            |      |   | 2003                           |   |      | 2004 |  |   | 2003  |  
|                                                        |  | (in millions)                   |     
|Balance at the beginning of the period                  |  | $                               | 27.0 |   |                                | $ | 20.8 |      |  | $ | 26.9  |   |  | $ | 18.9  |  
|Accruals for warranties issued during the period        |  |                                 | 5.0  |   |                                |   | 5.6  |      |  |   | 16.4  |   |  |   | 13.8  |  
|Changes in accruals related to pre-existing warranties  |  |                                 | 0.4  |   |                                |   | 0.1  |      |  |   | 2.0   |   |  |   | 2.5   |  
|Settlements made (in cash or in kind) during the period |  |                                 | (5.8 | ) |                                |   | (4.0 | )    |  |   | (18.7 | ) |  |   | (12.7 | )
|                                                        |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Balance at the end of the period                        |  | $                               | 26.6 |   |                                | $ | 22.5 |      |  | $ | 26.6  |   |  | $ | 22.5  |  
|                                                        |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  



Note 13. Recent Accounting
Pronouncements



In May 2003, the Financial Accounting
Standard Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement establishes standards for how an issuer classifies and measures
certain financial instruments that are within its scope as a liability. Many of those instruments were previously classified as equity. SFAS No. 150 is to be implemented by reporting a cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted the statement in accordance with the pronouncement. The statement had no material impact on our results of operations or financial
position.



In January 2003, the FASB issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. In December 2003, the FASB issued FIN 46 (revised December 2003) Consolidation of Variable Interest Entities (FIN 46R), to address certain FIN 46 implementation issues. FIN
46R provides guidance related to evaluating, identifying and reporting of variable interest entities, or VIEs, including entities commonly referred to as special purpose entities, or SPEs. FIN 46R requires us to consolidate certain VIEs if we are
deemed to be the primary beneficiary, defined in FIN 46R, as the entity that absorbs a majority of the VIEs expected losses, receives a majority of the entitys expected residual returns or both.



The provisions of FIN 46R became effective for us as of September 3, 2004,
the date of the initial filing of Form S-1, for all VIEs subject to FIN 46R. Based on our evaluation, we do not believe we have ownership in any variable interest entities. Therefore, the adoption of FIN 46R had no impact on our financial position,
results of operations or cash flows. However, in future periods we will apply the consolidation or disclosure requirements of FIN 46R if we should own any interest deemed to be a variable interest.



In January 2004, the FASB issued FASB FSP. No. 106-1, which was amended by
FSP 106-2 in May 2004 and is effective as of the first interim or annual period beginning after June 15, 2004. We adopted FSP 106-2 as of April 2004. FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug
legislation by employers who provide prescription drug coverage for retirees eligible for Medicare. We recognized the effect of the new retiree prescription drug benefit coverage by Medicare, and as a result, recorded a net benefit of $1.6 million
in the second quarter of 2004, which was reflected as a reduction of selling, engineering, administrative and general expense. The availability of the new Medicare drug coverage decreased our



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DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



accumulated postretirement benefit obligation by approximately $27.7 million. We have elected not to apply for federal subsidies eligible under the Act.



Note 14. Related Party Transactions



Halliburton



For the three and nine months ended September 30, 2004, we sold approximately $3.7 million and $6.5 million, respectively,
of products and services to affiliates of Halliburton. Accounts receivable related to these affiliates of Halliburton totaled approximately $2.0 million at September 30, 2004. Approximately $0.2 million of accounts receivable due from Halliburton
affiliates at September 30, 2004, comprise trade and other receivables due from Halliburton operating units that entered into plans of bankruptcy during 2003. We have evaluated the likelihood of collectibility of the amounts due and have concluded
that our exposure to nonpayment is not significant.



Entech



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



At the time of the Entech acquisition, the First Reserve funds invested in
Entech and certain other Entech shareholders deposited into an escrow account shares of our common stock equal to the then aggregate value of certain known liabilities of Entech, including the value of the put right in excess of $40 per share, for
us to use to satisfy those liabilities as they became due. In connection with the modification of our corporate structure in 2002, the shares deposited in the escrow account became common shares of Dresser, Ltd. Each First Reserve fund and the other
two shareholders that deposited shares in the escrow account had the right to remove its shares from the escrow account upon substituting cash into the escrow account in an amount equal to $40 per share or a greater fair market determined by us, and
either the shareholders or we could challenge the valuation used for any cash substitution. By June 2004, the shares in the escrow account held by First Reserve Funds and not previously used to satisfy other known Entech liabilities had been
replaced with approximately $2.9 million in cash at a rate of $40 per share, which valuation was not challenged. The proceeds received from the escrow account were used to reduce the advance to Dresser, Ltd. The holders of the remaining 9,134
escrowed shares replaced their shares with approximately $0.3 million in cash in September 2004. We are now in the process of liquidating the escrow account and expect to complete the liquidation by the end of 2004. Accordingly, the remaining
approximately $0.3 million has been offset against the advance to Dresser, Ltd. The difference between the amount we paid to the putting shareholders and the amount of funds in the escrow account at the time the put right was exercised, in excess of
$40 per share repurchased, reflects the decreased value of the U.S. dollar against the British Pound since the closing of the Entech acquisition, when the dollar value of the put right and the other known liabilities addressed by the escrow account
was estimated.



Cash received by us from the exercise of stock
options totaling approximately $0.5 million has also reduced the advance to Dresser, Ltd., resulting in a loan receivable balance at September 30, 2004 of $1.6 million. The loan bears interest at LIBOR plus 2.75% and is payable on demand.



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##### Table of Contents

DRESSER, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Dresser-Rand Group, Inc.



In October 2004, we agreed to license the Dresser name and mark to Dresser-Rand Group, Inc., owned by First Reserve, for a total of $5 million
of consideration over a ten-year period. The agreement, which was approved by disinterested members of our Board of Directors, allows Dresser-Rand Group, Inc. world-wide, limited, nonexclusive, terminable license to use the Dresser name
as part of any trade name, corporate name, domain name, trademark or service mark in connection with the Dresser-Rand business lines.



Note 15. 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.



We continue to evaluate the implications of the recently enacted American Jobs Creation Act of 2004. Due to our net operating loss carryforward and
corresponding valuation allowance, we do not expect this Act to have an impact on our effective tax rate.



Note 16. 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 September 30, 2004 and December 31, 2003, the statements of operations for the three and nine months
ended September 30, 2004 and 2003 and cash flows for the nine months ended September 30, 2004 and 2003. In the condensed consolidating financial statements, investments in wholly-owned subsidiaries are accounted for using the equity method. Certain
prior year amounts have been reclassified to conform to current year presentation.



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS



September 30, 2004

(in millions)

(unaudited)



|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|---------------------------------------------------------- |  | ------ | ------- | - | -------------------- | - | --------------------------- |  | ------------ | ----- |  | ----------------- | -------- | - |  | - | ------- | -
|                                                           |  | Parent |         |   | SubsidiaryGuarantors |   | Non- Guarantor Subsidiaries |  | Eliminations |       |  | TotalConsolidated |         
|ASSETS                                                     |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Current assets:                                            |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Cash and cash equivalents                                  |  | $      | 41.0    |   |                      | $ | 0.4                         |  | $            | 60.6  |  | $                 |         |   |  | $ | 102.0   |  
|Restricted cash                                            |  |        |        |   |                      |   |                            |  |              | 2.3   |  |                   |         |   |  |   | 2.3     |  
|Accounts receivable, net                                   |  |        | 136.8   |   |                      |   | 3.5                         |  |              | 238.4 |  |                   |         |   |  |   | 378.7   |  
|Notes receivable                                           |  |        | 0.9     |   |                      |   |                            |  |              | 4.6   |  |                   |         |   |  |   | 5.5     |  
|Inventories                                                |  |        | 121.5   |   |                      |   | 12.6                        |  |              | 204.1 |  |                   |         |   |  |   | 338.2   |  
|Other current assets                                       |  |        | 10.2    |   |                      |   |                            |  |              | 12.5  |  |                   |         |   |  |   | 22.7    |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total current assets                                       |  |        | 310.4   |   |                      |   | 16.5                        |  |              | 522.5 |  |                   |         |   |  |   | 849.4   |  
|Property, plant and equipment, net                         |  |        | 129.9   |   |                      |   | 0.1                         |  |              | 96.9  |  |                   |         |   |  |   | 226.9   |  
|Investments in and advances with consolidated subsidiaries |  |        | 604.4   |   |                      |   | 564.9                       |  |              |      |  |                   | (1,169.3 | ) |  |   |        |  
|Investments in unconsolidated subsidiaries                 |  |        |        |   |                      |   |                            |  |              | 8.4   |  |                   |         |   |  |   | 8.4     |  
|Deferred financing fees                                    |  |        | 25.5    |   |                      |   |                            |  |              |      |  |                   |         |   |  |   | 25.5    |  
|Goodwill                                                   |  |        | 113.9   |   |                      |   | 23.8                        |  |              | 258.3 |  |                   |         |   |  |   | 396.0   |  
|Other assets                                               |  |        | 77.5    |   |                      |   |                            |  |              | 44.5  |  |                   |         |   |  |   | 122.0   |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total assets                                               |  | $      | 1,261.6 |   |                      | $ | 605.3                       |  | $            | 930.6 |  | $                 | (1,169.3 | ) |  | $ | 1,628.2 |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY             |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Current liabilities:                                       |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Accounts payable                                           |  | $      | 91.4    |   |                      | $ | 0.5                         |  | $            | 167.8 |  | $                 |         |   |  | $ | 259.7   |  
|Notes payable                                              |  |        |        |   |                      |   |                            |  |              | 8.7   |  |                   |         |   |  |   | 8.7     |  
|Current maturities of long-term debt                       |  |        | 2.0     |   |                      |   |                            |  |              | 1.0   |  |                   |         |   |  |   | 3.0     |  
|Payroll and other compensation                             |  |        | 24.8    |   |                      |   | 0.2                         |  |              | 33.6  |  |                   |         |   |  |   | 58.6    |  
|Accrued expenses                                           |  |        | 68.6    |   |                      |   | 0.2                         |  |              | 91.8  |  |                   |         |   |  |   | 160.6   |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total current liabilities                                  |  |        | 186.8   |   |                      |   | 0.9                         |  |              | 302.9 |  |                   |         |   |  |   | 490.6   |  
|                                                           |  |        |         |   |                     
|Pension and other retiree benefits obligations             |  |        | 288.0   |   |                      |   |                            |  |              | 53.9  |  |                   |         |   |  |   | 341.9   |  
|Long-term debt, net of current maturities                  |  |        | 1,070.2 |   |                      |   |                            |  |              | 2.3   |  |                   |         |   |  |   | 1,072.5 |  
|Other liabilities                                          |  |        | 17.7    |   |                      |   |                            |  |              | 3.1   |  |                   |         |   |  |   | 20.8    |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total liabilities                                          |  |        | 1,562.7 |   |                      |   | 0.9                         |  |              | 362.2 |  |                   |         |   |  |   | 1,925.8 |  
|                                                           |  |        |         |   |                     
|Commitments and contingencies                              |  |        |        |   |                      |   |                            |  |              |      |  |                   |         |   |  |   |        |  
|Minority interest                                          |  |        |        |   |                      |   |                            |  |              | 3.5   |  |                   |         |   |  |   | 3.5     |  
|Mandatorily redeemable common stock of Dresser, Ltd.       |  |        | 7.4     |   |                      |   |                            |  |              |      |  |                   |         |   |  |   | 7.4     |  
|                                                           |  |        |         |   |                     
|Shareholders (deficit) equity:                            |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total shareholders (deficit) equity                       |  |        | (308.5  | ) |                      |   | 604.4                       |  |              | 564.9 |  |                   | (1,169.3 | ) |  |   | (308.5  | )
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  
|Total liabilities and shareholders (deficit) equity       |  | $      | 1,261.6 |   |                      | $ | 605.3                       |  | $            | 930.6 |  | $                 | (1,169.3 | ) |  | $ | 1,628.2 |  
|                                                           |  |        |         |   |                      |   |                             |  |              |       |  |                   |          |   |  |   |         |  



21



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DRESSER, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS



December 31, 2003

(in millions)

(unaudited)



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



22



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS



For the Three Months Ended September 30, 2004

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | --------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 268.5 |   |                      | $ | 7.8                         |  | $ | 259.3        |   |  | $                 | (27.3 | ) |  | $ | 508.3 |  
|Cost of revenues                                          |  |        | 191.2 |   |                      |   | 6.2                         |  |   | 190.6        |   |  |                   | (27.1 | ) |  |   | 360.9 |  
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Gross profit                                              |  |        | 77.3  |   |                      |   | 1.6                         |  |   | 68.7         |   |  |                   | (0.2  | ) |  |   | 147.4 |  
|Selling, engineering, administrative and general expenses |  |        | 73.5  |   |                      |   | 0.6                         |  |   | 42.8         |   |  |                   | (0.2  | ) |  |   | 116.7 |  
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Operating income                                          |  |        | 3.8   |   |                      |   | 1.0                         |  |   | 25.9         |   |  |                   |      |   |  |   | 30.7  |  
|Interest expense                                          |  |        | (13.5 | ) |                      |   |                            |  |   | (6.7         | ) |  |                   |      |   |  |   | (20.2 | )
|Interest income                                           |  |        |      |   |                      |   |                            |  |   | 0.4          |   |  |                   |      |   |  |   | 0.4   |  
|Other income (expense), net                               |  |        | 0.2   |   |                      |   |                            |  |   | (1.0         | ) |  |                   |      |   |  |   | (0.8  | )
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |        | (9.5  | ) |                      |   | 1.0                         |  |   | 18.6         |   |  |                   |      |   |  |   | 10.1  |  
|Provision for income taxes                                |  |        | (0.5  | ) |                      |   | 0.3                         |  |   | (5.9         | ) |  |                   |      |   |  |   | (6.1  | )
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |        | (10.0 | ) |                      |   | 1.3                         |  |   | 12.7         |   |  |                   |      |   |  |   | 4.0   |  
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |                            |  |   | 0.8          |   |  |                   |      |   |  |   | 0.8   |  
|Equity in earnings of consolidated subsidiaries           |  |        | 14.1  |   |                      |   | 12.8                        |  |   |             |   |  |                   | (26.9 | ) |  |   |      |  
|Minority owners share of consolidated subsidiaries       |  |        |      |   |                      |   |                            |  |   | (0.7         | ) |  |                   |      |   |  |   | (0.7  | )
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income                                                |  | $      | 4.1   |   |                      | $ | 14.1                        |  | $ | 12.8         |   |  | $                 | (26.9 | ) |  | $ | 4.1   |  
|                                                          |  |        |       |   |                      |   |                             |  |   |              |   |  |                   |       |   |  |   |       |  



23



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS



For the Three Months Ended September 30, 2003

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | --------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 239.3 |   |                      | $ | 8.2  |                             |  | $ | 194.9        |   |  | $                 | (24.9 | ) |  | $ | 417.5 |  
|Cost of revenues                                          |  |        | 185.2 |   |                      |   | 6.8  |                             |  |   | 138.9        |   |  |                   | (24.8 | ) |  |   | 306.1 |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Gross profit                                              |  |        | 54.1  |   |                      |   | 1.4  |                             |  |   | 56.0         |   |  |                   | (0.1  | ) |  |   | 111.4 |  
|Selling, engineering, administrative and general expenses |  |        | 64.2  |   |                      |   | (0.9 | )                           |  |   | 25.6         |   |  |                   | (0.1  | ) |  |   | 88.8  |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Operating income (loss)                                   |  |        | (10.1 | ) |                      |   | 2.3  |                             |  |   | 30.4         |   |  |                   |      |   |  |   | 22.6  |  
|Interest expense                                          |  |        | (20.5 | ) |                      |   |     |                             |  |   | (0.7         | ) |  |                   |      |   |  |   | (21.2 | )
|Interest income                                           |  |        |      |   |                      |   |     |                             |  |   | 0.5          |   |  |                   |      |   |  |   | 0.5   |  
|Other income (expense), net                               |  |        | 0.1   |   |                      |   | 0.2  |                             |  |   | (1.1         | ) |  |                   |      |   |  |   | (0.8  | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before income taxes                         |  |        | (30.5 | ) |                      |   | 2.5  |                             |  |   | 29.1         |   |  |                   |      |   |  |   | 1.1   |  
|Provision for income taxes                                |  |        |      |   |                      |   |     |                             |  |   | (10.8        | ) |  |                   |      |   |  |   | (10.8 | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Income (loss) before equity interests                     |  |        | (30.5 | ) |                      |   | 2.5  |                             |  |   | 18.3         |   |  |                   |      |   |  |   | (9.7  | )
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |     |                             |  |   | 0.5          |   |  |                   |      |   |  |   | 0.5   |  
|Equity in earnings of consolidated subsidiaries           |  |        | 21.3  |   |                      |   | 18.8 |                             |  |   |             |   |  |                   | (40.1 | ) |  |   |      |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income (loss)                                         |  | $      | (9.2  | ) |                      | $ | 21.3 |                             |  | $ | 18.8         |   |  | $                 | (40.1 | ) |  | $ | (9.2  | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |       |  



24



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##### Table of Contents

DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS



For the Nine Months Ended September 30, 2004

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | --------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ------- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 799.6 |   |                      | $ | 22.5 |                             |  | $ | 716.2        |   |  | $                 | (97.9 | ) |  | $ | 1,440.4 |  
|Cost of revenues                                          |  |        | 581.0 |   |                      |   | 18.7 |                             |  |   | 523.0        |   |  |                   | (97.5 | ) |  |   | 1,025.2 |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Gross profit                                              |  |        | 218.6 |   |                      |   | 3.8  |                             |  |   | 193.2        |   |  |                   | (0.4  | ) |  |   | 415.2   |  
|Selling, engineering, administrative and general expenses |  |        | 192.3 |   |                      |   | 1.8  |                             |  |   | 131.5        |   |  |                   | (0.4  | ) |  |   | 325.2   |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Operating Income                                          |  |        | 26.3  |   |                      |   | 2.0  |                             |  |   | 61.7         |   |  |                   |      |   |  |   | 90.0    |  
|Interest expense                                          |  |        | (57.0 | ) |                      |   | (0.1 | )                           |  |   | (17.6        | ) |  |                   |      |   |  |   | (74.7   | )
|Interest income                                           |  |        |      |   |                      |   |     |                             |  |   | 0.9          |   |  |                   |      |   |  |   | 0.9     |  
|Other income (expense), net                               |  |        | 0.9   |   |                      |   | (0.1 | )                           |  |   | (1.5         | ) |  |                   |      |   |  |   | (0.7    | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Income (loss) before income taxes                         |  |        | (29.8 | ) |                      |   | 1.8  |                             |  |   | 43.5         |   |  |                   |      |   |  |   | 15.5    |  
|Provision for income taxes                                |  |        | (1.0  | ) |                      |   | 0.2  |                             |  |   | (12.5        | ) |  |                   |      |   |  |   | (13.3   | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Income (loss) before equity interests                     |  |        | (30.8 | ) |                      |   | 2.0  |                             |  |   | 31.0         |   |  |                   |      |   |  |   | 2.2     |  
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |     |                             |  |   | 2.4          |   |  |                   |      |   |  |   | 2.4     |  
|Equity in earnings of consolidated subsidiaries           |  |        | 34.6  |   |                      |   | 32.6 |                             |  |   |             |   |  |                   | (67.2 | ) |  |   |        |  
|Minority owners share of consolidated subsidiaries       |  |        |      |   |                      |   |     |                             |  |   | (0.8         | ) |  |                   |      |   |  |   | (0.8    | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Net income                                                |  | $      | 3.8   |   |                      | $ | 34.6 |                             |  | $ | 32.6         |   |  | $                 | (67.2 | ) |  | $ | 3.8     |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS



For the Nine Months Ended September 30, 2003

(in millions)

(unaudited)



|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|--------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ---- | --------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ------- | -
|                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |      | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Revenues                                                  |  | $      | 694.5 |   |                      | $ | 25.3 |                             |  | $ | 536.1        |   |  | $                 | (72.1 | ) |  | $ | 1,183.8 |  
|Cost of revenues                                          |  |        | 532.8 |   |                      |   | 20.6 |                             |  |   | 389.8        |   |  |                   | (71.8 | ) |  |   | 871.4   |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Gross profit                                              |  |        | 161.7 |   |                      |   | 4.7  |                             |  |   | 146.3        |   |  |                   | (0.3  | ) |  |   | 312.4   |  
|Selling, engineering, administrative and general expenses |  |        | 184.4 |   |                      |   | (0.8 | )                           |  |   | 89.2         |   |  |                   | (0.3  | ) |  |   | 272.5   |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Operating income (loss)                                   |  |        | (22.7 | ) |                      |   | 5.5  |                             |  |   | 57.1         |   |  |                   |      |   |  |   | 39.9    |  
|Interest expense                                          |  |        | (61.8 | ) |                      |   |     |                             |  |   | (1.1         | ) |  |                   |      |   |  |   | (62.9   | )
|Interest income                                           |  |        | 0.1   |   |                      |   |     |                             |  |   | 2.3          |   |  |                   |      |   |  |   | 2.4     |  
|Other income (expense), net                               |  |        | 0.3   |   |                      |   | 0.2  |                             |  |   | 6.9          |   |  |                   |      |   |  |   | 7.4     |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Income (loss) before income taxes                         |  |        | (84.1 | ) |                      |   | 5.7  |                             |  |   | 65.2         |   |  |                   |      |   |  |   | (13.2   | )
|Provision for income taxes                                |  |        | (0.1  | ) |                      |   |     |                             |  |   | (20.9        | ) |  |                   |      |   |  |   | (21.0   | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Income (loss) before equity interests                     |  |        | (84.2 | ) |                      |   | 5.7  |                             |  |   | 44.3         |   |  |                   |      |   |  |   | (34.2   | )
|Equity in earnings of unconsolidated subsidiaries         |  |        |      |   |                      |   |     |                             |  |   | 2.0          |   |  |                   |      |   |  |   | 2.0     |  
|Equity in earnings of consolidated subsidiaries           |  |        | 52.0  |   |                      |   | 46.3 |                             |  |   |             |   |  |                   | (98.3 | ) |  |   |        |  
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  
|Net income (loss)                                         |  | $      | (32.2 | ) |                      | $ | 52.0 |                             |  | $ | 46.3         |   |  | $                 | (98.3 | ) |  | $ | (32.2   | )
|                                                          |  |        |       |   |                      |   |      |                             |  |   |              |   |  |                   |       |   |  |   |         |  



26



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS



For the Nine Months Ended September 30, 2004

(in millions)

(unaudited)



|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | ------ | ------ | - | -------------------- | - | ----- | --------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ------ | -
|                                                                                             |  | Parent |        |   | SubsidiaryGuarantors |   |       | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Cash flows from operating activities:                                                        |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Net income                                                                                   |  | $      | 3.8    |   |                      | $ | 34.6  |                             |  | $ | 32.6         |   |  | $                 | (67.2 | ) |  | $ | 3.8    |  
|Adjustments to reconcile net income to cash flow (used in) provided by operating activities: |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Depreciation and amortization                                                                |  |        | 22.3   |   |                      |   |      |                             |  |   | 13.3         |   |  |                   |      |   |  |   | 35.6   |  
|Equity earnings of unconsolidated and consolidated subsidiaries                              |  |        | (34.6  | ) |                      |   | (32.6 | )                           |  |   | (2.4         | ) |  |                   | 67.2  |   |  |   | (2.4   | )
|Loss on repayment of debt                                                                    |  |        | 16.6   |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 16.6   |  
|Loss on foreign currency exchange                                                            |  |        | 1.7    |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 1.7    |  
|Amortization of deferred financing fees, net of amortization of bond premium                 |  |        | 2.8    |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 2.8    |  
|Other changes, net                                                                           |  |        | (69.7  | ) |                      |   | (1.6  | )                           |  |   | 44.9         |   |  |                   |      |   |  |   | (26.4  | )
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Net cash (used in) provided by operating activities                                          |  |        | (57.1  | ) |                      |   | 0.4   |                             |  |   | 88.4         |   |  |                   |      |   |  |   | 31.7   |  
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Cash flows from investing activities:                                                        |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Acquisition of businesses                                                                    |  |        |       |   |                      |   |      |                             |  |   | (174.0       | ) |  |                   |      |   |  |   | (174.0 | )
|Capital expenditures                                                                         |  |        | (4.9   | ) |                      |   |      |                             |  |   | (31.6        | ) |  |                   |      |   |  |   | (36.5  | )
|Proceeds from sale of assets                                                                 |  |        | 4.2    |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 4.2    |  
|Changes in restricted cash                                                                   |  |        |       |   |                      |   |      |                             |  |   | (1.6         | ) |  |                   |      |   |  |   | (1.6   | )
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Net cash used in investing activities                                                        |  |        | (0.7   | ) |                      |   |      |                             |  |   | (207.2       | ) |  |                   |      |   |  |   | (207.9 | )
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Cash flows from financing activities:                                                        |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Advances (to) from affiliates:                                                               |  |        | (106.0 | ) |                      |   |      |                             |  |   | 106.0        |   |  |                   |      |   |  |   |       |  
|Net (decrease) increase in short term notes payable                                          |  |        | (0.4   | ) |                      |   |      |                             |  |   | 6.3          |   |  |                   |      |   |  |   | 5.9    |  
|Proceeds from the issuance of long-term debt                                                 |  |        | 172.2  |   |                      |   |      |                             |  |   | 0.6          |   |  |                   |      |   |  |   | 172.8  |  
|Repayment of long-term debt (including current portion)                                      |  |        | (45.0  | ) |                      |   |      |                             |  |   | (1.9         | ) |  |                   |      |   |  |   | (46.9  | )
|Purchase of shares, net of proceeds from escrow and exercise of stock options                |  |        | (1.9   | ) |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | (1.9   | )
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Net cash provided by financing activities                                                    |  |        | 18.9   |   |                      |   |      |                             |  |   | 111.0        |   |  |                   |      |   |  |   | 129.9  |  
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Effect of translation adjustments on cash                                                    |  |        |       |   |                      |   |      |                             |  |   | (0.6         | ) |  |                   |      |   |  |   | (0.6   | )
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Net (decrease) increase in cash and cash equivalents                                         |  |        | (38.9  | ) |                      |   | 0.4   |                             |  |   | (8.4         | ) |  |                   |      |   |  |   | (46.9  | )
|Cash and cash equivalents, beginning of period                                               |  |        | 80.0   |   |                      |   |      |                             |  |   | 68.9         |   |  |                   |      |   |  |   | 148.9  |  
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Cash and cash equivalents, end of period                                                     |  | $      | 41.1   |   |                      | $ | 0.4   |                             |  | $ | 60.5         |   |  | $                 |      |   |  | $ | 102.0  |  
|                                                                                             |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Non-cash financing activities:                                                               |  |        |        |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |        |  
|Refinancing of long-term debt, net of transaction fees                                       |  | $      | 381.6  |   |                      | $ |      |                             |  | $ |             |   |  | $                 |      |   |  | $ | 381.6  |  
|Financing fees related to the acquisition of Nuovo Pignone                                   |  |        | 2.8    |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 2.8    |  
|Reclassification of mandatorily redeemable stock to paid-in-capital                          |  |        | 5.5    |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 5.5    |  



27



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DRESSER, INC.



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS



For the Nine Months Ended September 30, 2003

(in millions)

(unaudited)



|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|----------------------------------------------------------------------------------------- |  | ------ | ----- | - | -------------------- | - | ----- | --------------------------- |  | - | ------------ | - |  | ----------------- | ----- | - |  | - | ----- | -
|                                                                                          |  | Parent |       |   | SubsidiaryGuarantors |   |       | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | TotalConsolidated |      
|Cash flows from operating activities:                                                     |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net income (loss)                                                                         |  | $      | (32.2 | ) |                      | $ | 52.0  |                             |  | $ | 46.3         |   |  | $                 | (98.3 | ) |  | $ | (32.2 | )
|Adjustments to reconcile net income (loss) to cash flow provided by operating activities: |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Depreciation and amortization                                                             |  |        | 18.6  |   |                      |   |      |                             |  |   | 13.1         |   |  |                   |      |   |  |   | 31.7  |  
|Equity earnings of unconsolidated and consolidated subsidiaries                           |  |        | (52.0 | ) |                      |   | (46.3 | )                           |  |   | (2.0         | ) |  |                   | 98.3  |   |  |   | (2.0  | )
|Loss on repayment of debt                                                                 |  |        | 0.1   |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 0.1   |  
|Loss on foreign currency exchange                                                         |  |        | 7.1   |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 7.1   |  
|Amortization of deferred financing fees, net of amortization of bond premium              |  |        | 4.5   |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 4.5   |  
|Other changes, net                                                                        |  |        | 46.0  |   |                      |   | (3.5  | )                           |  |   | (14.3        | ) |  |                   |      |   |  |   | 28.2  |  
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net cash provided by operating activities                                                 |  |        | 7.9   |   |                      |   | 2.2   |                             |  |   | 43.1         |   |  |                   |      |   |  |   | 37.4  |  
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Cash flows from investing activities:                                                     |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Acquisition of assets                                                                     |  |        | (15.4 | ) |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | (15.4 | )
|Capital expenditures                                                                      |  |        | (10.3 | ) |                      |   |      |                             |  |   | (7.5         | ) |  |                   |      |   |  |   | (17.8 | )
|Changes in restricted cash                                                                |  |        | 9.7   |   |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | 9.7   |  
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net cash used in investing activities                                                     |  |        | (16.0 | ) |                      |   |      |                             |  |   | (7.5         | ) |  |                   |      |   |  |   | (23.5 | )
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Cash flows from financing activities:                                                     |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Advances from (to) affiliates:                                                            |  |        | 38.3  |   |                      |   |      |                             |  |   | (38.3        | ) |  |                   |      |   |  |   |      |  
|Payment of deferred financing fees                                                        |  |        | (3.9  | ) |                      |   |      |                             |  |   |             |   |  |                   |      |   |  |   | (3.9  | )
|Net decrease in short-term notes payable                                                  |  |        |      |   |                      |   |      |                             |  |   | (9.1         | ) |  |                   |      |   |  |   | (9.1  | )
|Repayment of long-term debt (including current portion)                                   |  |        | (7.5  | ) |                      |   |      |                             |  |   | (1.3         | ) |  |                   |      |   |  |   | (8.8  | )
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net (used in) cash provided by financing activities                                       |  |        | 26.9  |   |                      |   |      |                             |  |   | (48.7        | ) |  |                   |      |   |  |   | (21.8 | )
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Effect of translation adjustments on cash                                                 |  |        |      |   |                      |   |      |                             |  |   | 3.9          |   |  |                   |      |   |  |   | 3.9   |  
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Net increase (decrease) in cash and cash equivalents                                      |  |        | 3.0   |   |                      |   | 2.2   |                             |  |   | (9.2         | ) |  |                   |      |   |  |   | (4.0  | )
|Cash and cash equivalents, beginning of period                                            |  |        | 55.9  |   |                      |   | 0.5   |                             |  |   | 55.6         |   |  |                   |      |   |  |   | 112.0 |  
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  
|Cash and cash equivalent, end of period                                                   |  | $      | 58.9  |   |                      | $ | 2.7   |                             |  | $ | 46.4         |   |  | $                 |      |   |  | $ | 108.0 |  
|                                                                                          |  |        |       |   |                      |   |       |                             |  |   |              |   |  |                   |       |   |  |   |       |  



28



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##### Table of Contents

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.



Critical Accounting Policies and
Estimates



Our discussion and analysis of our financial
condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including our allowance
for uncollectible accounts, inventory valuation and obsolescence, long-lived tangible and intangible assets, income taxes, reserve for warranty obligations, pensions and other post-retirement benefits, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In our annual report on Form 10-K for the year ended December 31, 2003, we identified and disclosed critical accounting
policies, which included reserves of uncollectible accounts receivable, inventory reserves, impairment of long-lived assets and goodwill, product warranties, income taxes, other contingencies and pension and other post retirement benefit
obligations. These critical accounting policies affect significant judgments and estimates used in the preparation of our financial statements. We reviewed our policies in conjunction with the preparation of this report and have determined that
those critical policies remain and have not changed since December 31, 2003.



Overview



We are a leading worldwide
manufacturer and marketer of highly engineered energy infrastructure and oilfield products and services. In 2003, approximately 85% of our revenues were generated from energy infrastructure and oilfield equipment spending. Our customers use our
products for the exploration and production, transportation, and processing, storage and distribution of oil and gas and their by-products. Our principal business segments are flow control, measurement systems and compression and power systems. We
serve the energy industry globally, with an established sales presence in over 100 countries and manufacturing or customer support facilities in over 22 countries. In the nine months ended September 30, 2004, approximately 59% of our revenues were
generated from our operations outside of the United States, and we expect this percentage to increase going forward.



On June 4, 2004, we completed the purchase of the distribution business of Nuovo Pignone S.p.A., a subsidiary of General Electric Company, for
approximately $170 million and approximately $1.5 million in direct acquisition costs. The purchased business includes a retail fueling systems operation, comprised of gasoline, liquefied petroleum gas and compressed natural gas dispenser products
and services, and a gas meters operation, which manufactures and markets certain natural gas meters. This business generated $151.4 of revenues in the year ended December 31, 2003. The acquisition is expected to substantially improve our market
share in retail fueling systems, be complementary from a customer, product and geographical perspective and provide us with substantial cost saving opportunities. To finance the cash consideration related to the acquisition, we obtained additional
borrowings under our credit facility in the amount of $175 million, which included $2.8 million of capitalized financing fees.



Market Forces; Outlook



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



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



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products is affected by overall worldwide economic conditions and by fluctuations in the level of activity and capital
spending by major, national and independent oil and gas companies, gas distribution companies, pipeline companies, power generation companies and petrochemical processing plants, as well as our customers access to capital. Activity levels can
vary substantially in different geographic regions throughout the world. For example, in recent years U.S. markets have been relatively weak while international markets have been relatively strong. The level of oil and gas prices affects all of
these activities and is a significant factor in determining our primary customers level of cash flow. Our business is subject to cyclicality and periodic downturns, which have caused revenue and earnings to decline in the past. Our
customers perception of oil and gas prices in the near-to-long-term will impact our business, and as such, continued expectation of higher prices will correspond to strengthening in our business. See Certain Risk FactorsOur
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. In addition, we are implementing firm-wide lean manufacturing initiatives, a new enterprise resource planning, or ERP, system and a highly disciplined company-wide quality
management and process optimization methodology, known as Six Sigma. See Restructuring and Other Exit Activities below for information related to specific restructuring programs.



Flow Control. Demand for our on/off valves is generally driven by
full-field development of oil and natural gas reserves as well as pipeline construction. In recent years, the U.S. experienced a slowdown in both of these areas which has affected our on/off valves business. There continues to be strong development
activity in international areas such as offshore Brazil, onshore and offshore West Africa, the Middle East, Asia, and Russia. We have been successful in winning many international tenders and have seen a corresponding shift in our on/off valves
business. Some of these projects, such as the $44.0 million Sakhalin I project in 2004, are substantial in size and may cause our revenues to fluctuate significantly from period to period. The transmission market environment in 2004 remains
relatively weak in the U.S. However, the domestic exploration and production market is showing signs of a recovery with increased drilling activity which should translate to additional opportunities for the on/off valves business in the future.
International markets remain strong.



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



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



Measurement Systems New equipment sales to independents, high volume retailers and major oil companies are
stronger during 2004. In North America we are experiencing an upswing in dispenser sales to the major oil companies as they upgrade older sites to improve maintenance costs and performance. In addition, we expect the continuation of point of sale
upgrade programs with several major oil companies to continue through the first quarter of 2005. Sales to high volume retailers and independent marketers continue to be stronger as a result of aggressive building and upgrade programs.
Internationally we see increased market activity from the national oil companies in Latin America, Eastern Europe and Asia, and we have been successful in a number of recent tenders. We continue to benefit from increased sales and incremental
margins from distributors from the acquisition of certain assets of Tokheim North American and its MSI business unit which we purchased in a bankruptcy court auction in 2003.



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



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Compression and Power Systems. During 2004, gas compression-related engine and parts sales have
begun to recover from last years depressed level. U.S. activity is expected to strengthen throughout the remainder of the year, while recent strong Canadian activity is expected to slow down in the next few months. Engine sales into power
generation applications remain relatively strong, although competition based upon price and engine efficiency remains intense in this segment. The domestic power generation market is expected to remain flat while international markets for engines
and parts are relatively strong, especially in Pakistan, Bangladesh and South America.



Restructuring and Other Exit Activities



We
have initiated restructuring programs affecting several business units in an effort to obtain manufacturing efficiencies and cost savings. In 2003, we eliminated five of our manufacturing facilities through consolidations and outsourced
manufacturing at one additional site. We plan to continue to seek opportunities to improve our manufacturing operations, However, we do not expect to incur material charges during the fourth quarter of 2004 or thereafter. At the onset of our
restructuring activities in 2002 and 2003, we estimated we would achieve cost savings of approximately $40 million. Due to the nature of the restructuring activities and other cost initiatives undertaken during 2002 and thereafter, we are unable to
accurately determine cost savings specific to our restructuring activities. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities we recognize costs associated with exit or disposal activities
as incurred rather than at the date of a commitment to an exit or disposal plan.



We incurred $1.6 million and $6.5 million of restructuring charges for the three and nine months ended September 30, 2004 respectively. Restructuring charges of $0.3 million and $0.6 million have been reflected in
cost of revenues for the three and nine months ended September 30, 2004. Restructuring charges of $1.3 million and $5.9 million have been reflected in selling, engineering, general and administrative expenses, for the three and nine months ended
September 30, 2004. During the first nine months of 2004, we incurred costs in connection with the continuation of (1) a consolidation of an instrument operation in Berea, Kentucky with existing operations in Brazil into a new facility in Sao
Caetano, Brazil, (2) a consolidation of a control valve operation in Burlington, Canada into existing facilities, (3) a consolidation of certain flow control operations in Houston, Texas into a single new facility, (4) a consolidation of a retail
fueling dispenser manufacturing operation in Germany into an existing facility in Sweden, and (5) a decision to outsource the manufacturing of certain blowers. The costs associated with these actions for the nine months ended September 30, 2004 are
as follows:



|                                               |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|---------------------------------------------- |  | ------------------- | --- | ------------ | - | ---- | --------------- |  | - | --------------------------- | - |  | - | ---
|Description                                    |  | RestructuringCharge |     | CashPayments |   |      | Non-CashCharges |  |   | Accrued atSeptember 30,2004
|                                               |  | (in millions)      
|Consolidate Berea operations                   |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|Other exit activities                          |  | $                   | 0.3 |              | $ | (0.1 | )               |  | $ | (0.2                        | ) |  | $ |   
|Consolidate Burlington operations              |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|Termination benefits                           |  |                     | 2.6 |              |   | (1.3 | )               |  |   |                            |   |  |   | 1.3
|Consolidate Houston operations                 |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|Termination benefits                           |  |                     | 0.1 |              |   | (0.1 | )               |  |   |                            |   |  |   |   
|Other exit activities                          |  |                     | 3.0 |              |   | (2.9 | )               |  |   |                            |   |  |   | 0.1
|Consolidate German retail fueling operations   |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|Other exit activities                          |  |                     | 0.2 |              |   | (0.2 | )               |  |   |                            |   |  |   |   
|Outsource the manufacturing of certain blowers |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|Termination benefits                           |  |                     | 0.1 |              |   |     |                 |  |   |                            |   |  |   | 0.1
|Other exit activities                          |  |                     | 0.2 |              |   | (0.2 | )               |  |   |                            |   |  |   |   
|                                               |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|Total                                          |  | $                   | 6.5 |              | $ | (4.8 | )               |  | $ | (0.2                        | ) |  | $ | 1.5
|                                               |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    



The restructuring charges by segment
for the nine months ended September 30, 2004 are as follows:



|                              |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|----------------------------- |  | ------------------- | --- | ------------ | - | ---- | --------------- |  | - | --------------------------- | - |  | - | ---
|Segment                       |  | RestructuringCharge |     | CashPayments |   |      | Non-CashCharges |  |   | Accrued atSeptember 30,2004
|                              |  | (in millions)      
|                              |  |                     |     |             
|Flow control                  |  | $                   | 6.0 |              | $ | (4.4 | )               |  | $ | (0.2                        | ) |  | $ | 1.4
|Measurement systems           |  |                     | 0.2 |              |   | (0.2 | )               |  |   |                            |   |  |   |   
|Compression and power systems |  |                     | 0.3 |              |   | (0.2 | )               |  |   |                            |   |  |   | 0.1
|                              |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    
|Total                         |  | $                   | 6.5 |              | $ | (4.8 | )               |  | $ | (0.2                        | ) |  | $ | 1.5
|                              |  |                     |     |              |   |      |                 |  |   |                             |   |  |   |    



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



|                                               |  |                            |     |              |   |      |                             |  |   |    
|---------------------------------------------- |  | -------------------------- | --- | ------------ | - | ---- | --------------------------- |  | - | ---
|                                               |  | Accrued atDecember 31,2003 |     | CashPayments |   |      | Accrued atSeptember 30,2004
|                                               |  | (in millions)             
|Consolidate Berea operations                   |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  | $                          | 1.5 |              | $ | (1.5 | )                           |  | $ |   
|Consolidate German retail fueling operations   |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 3.2 |              |   | (2.6 | )                           |  |   | 0.6
|Outsource the manufacturing of certain blowers |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 1.7 |              |   | (0.2 | )                           |  |   | 1.5
|Other exit activities                          |  |                            | 0.1 |              |   | (0.1 | )                           |  |   |   
|Consolidate Burlington operations              |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 0.8 |              |   | (0.8 | )                           |  |   |   
|Consolidate Houston operations                 |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 1.3 |              |   | (1.3 | )                           |  |   |   
|Company wide reduction in force                |  |                            |     |              |   |      |                             |  |   |    
|Termination benefits                           |  |                            | 0.2 |              |   |     |                             |  |   | 0.2
|                                               |  |                            |     |              |   |      |                             |  |   |    
|Total                                          |  | $                          | 8.8 |              | $ | (6.5 | )                           |  | $ | 2.3
|                                               |  |                            |     |              |   |      |                             |  |   |    



Results of Operations



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



Consolidated



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



|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | --------------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Three months ended September 30,  |      
|                                                          |  | 2004                              |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |      
|                                                          |  |                                   |       |             |       |  
|Revenue                                                   |  | $                                 | 508.3 |             | 100.0 | % |      | $ | 417.5       |  | 100.0 | %        |  | $ | 90.8     |   |  | 21.7  | %
|Cost of revenue                                           |  |                                   | 360.9 |             | 71.0  |   |      |   | 306.1       |  | 73.3  |          |  |   | 54.8     |   |  | 17.9  |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                                   | 147.4 |             | 29.0  |   |      |   | 111.4       |  | 26.7  |          |  |   | 36.0     |   |  | 32.3  |  
|Selling, engineering, administrative and general expenses |  |                                   | 116.7 |             | 23.0  |   |      |   | 88.8        |  | 21.3  |          |  |   | 27.9     |   |  | 31.4  |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                                 | 30.7  |             | 6.0   | % |      | $ | 22.6        |  | 5.4   | %        |  | $ | 8.1      |   |  | 35.8  | %
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Other items:                                              |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                                 | 13.0  |             |       |   |      | $ | 10.3        |  |       |          |  | $ | 2.7      |   |  | 26.2  | %
|Restructuring charges                                     |  |                                   | 1.6   |             |       |   |      |   | 6.5         |  |       |          |  |   | (4.9     | ) |  | (75.4 | )
|Bookings                                                  |  |                                   | 559.9 |             |       |   |      |   | 435.5       |  |       |          |  |   | 124.4    |   |  | 28.6  |  
|Backlog                                                   |  |                                   | 617.5 |             |       |   |      |   | 472.2       |  |       |          |  |   | 145.3    |   |  | 30.8  |  



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Revenues.Revenues in our flow control segment increased $17.3 million primarily due to higher
international demand and favorable product mix in our control valves and pressure relief product lines tempered by lower demand and the 2003 sale of our LVF unit in our on/off product line. Revenues from our measurement systems segment increased
$67.1 million primarily due to the acquisition of the Nuovo Pignone distribution business in June 2004 and higher sales volume related to dispensers and services. Revenues from our compression and power systems segment increased $6.3 million due to
strong demand for our natural gas compression and power generation products tempered by lower sales of aftermarket parts and industrial blowers. Overall, revenue benefited from the favorable effect of changes in foreign currency exchange rates of
approximately $14.4 million.



Gross Profit.Gross profit
increased due to higher volume driven by improved market conditions in our measurement systems and flow control segments. Gross profit in our compression and power systems segment improved due to higher manufacturing productivity, favorable product
mix and cost saving initiatives. Overall, gross profit benefited from the favorable impact of changes in foreign currency exchange rates of approximately $4.0 million. As a percentage of revenues, gross profit increased to 29.0% for the three months
ended September 30, 2004 compared to 26.7% for the comparable 2003 period.



Selling, Engineering, Administrative and General Expenses.Selling, engineering, administrative and general expenses increased primarily due to $12.3 million in expenses related to the purchase of research and
development technology for our natural gas engines business and higher incremental expenses associated with the acquisition of the Nuovo Pignone distribution business of $4.9 million. Also contributing to the increase were higher employee separation
costs and higher administrative and engineering expenses in our flow control segment of $4.8 million and the unfavorable effect of changes in foreign currency exchange rates of approximately $2.6 million. Corporate and other expenses increased $5.5
million primarily due to higher stock option expense of $3.0 million related to an increase in issued stock options during the third quarter of 2004 and higher employee compensation of approximately $1.4 million associated with increased staffing in
our accounting and finance organization.



Interest Expense.Interest expense for the three months ended September 30, 2004 was $20.2 million or $1.0 million lower than the same period in 2003. The increase was due to higher average debt balances partially offset by a reduction in interest rates.



Provision for Income Taxes.Provision for income taxes
for the three months ended September 30, 2004 was $6.1 million, or $4.7 million lower than the same period in 2003. The decrease was due to changes in the distribution of pretax income across geographical jurisdictions with different tax rates and
the use of net operating losses in certain foreign jurisdictions for which a valuation allowance was recorded in prior periods. We have provided a full valuation allowance against our U.S. deferred tax assets and therefore, we have not provided any
tax expense or benefit related to our U.S. operations during the period.



Bookings and Backlog.Bookings increased $66.7 million in our measurement systems segment primarily due to the acquisition of the Nuovo Pignone distribution business in June 2004, $46.3 million in our flow
control segment primarily due to increased project activity resulting from improved market demand and $11.3 million in our compression and power systems segment primarily due to higher demand for natural gas engines and aftermarket parts. Backlog
increased $81.8 million in our measurement systems segment primarily due to the acquisition of the Nuovo Pignone distribution business, $43.1 million in our flow control segment primarily due to increased project activity resulting from improved
market demand and $20.4 million in our compression and power systems segment primarily due to delayed receipt of parts from a supplier and shipment delays resulting from the transition of our packing and shipping operations to a third-party
logistics operator in our aftermarket parts business.



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Flow Control



The following table presents selected financial information regarding results for our flow control segment for the three months ended September 30, 2004
and 2003, respectively.



|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | --------------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Three months ended September 30,  |      
|                                                          |  | 2004                              |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |      
|                                                          |  |                                   |       |             |       |  
|Revenue                                                   |  | $                                 | 271.1 |             | 100.0 | % |      | $ | 253.8       |  | 100.0 | %        |  | $ | 17.3     |   |  | 6.8   | %
|Cost of revenue                                           |  |                                   | 190.0 |             | 70.1  |   |      |   | 185.2       |  | 73.0  |          |  |   | 4.8      |   |  | 2.6   |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                                   | 81.1  |             | 29.9  |   |      |   | 68.6        |  | 27.0  |          |  |   | 12.5     |   |  | 18.2  |  
|Selling, engineering, administrative and general expenses |  |                                   | 59.8  |             | 22.1  |   |      |   | 54.9        |  | 21.6  |          |  |   | 4.9      |   |  | 8.9   |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                                 | 21.3  |             | 7.8   | % |      | $ | 13.7        |  | 5.4   | %        |  | $ | 7.6      |   |  | 55.5  | %
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Other items:                                              |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                                 | 6.1   |             |       |   |      | $ | 5.8         |  |       |          |  | $ | 0.3      |   |  | 5.2   | %
|Restructuring charges                                     |  |                                   | 1.3   |             |       |   |      |   | 5.0         |  |       |          |  |   | (3.7     | ) |  | (74.0 | )
|Bookings                                                  |  |                                   | 298.4 |             |       |   |      |   | 252.1       |  |       |          |  |   | 46.3     |   |  | 18.4  |  
|Backlog                                                   |  |                                   | 388.7 |             |       |   |      |   | 345.6       |  |       |          |  |   | 43.1     |   |  | 12.5  |  



Revenues.Revenues in our control valves and pressure relief product lines increased $14.7 million due to continuing higher demand in Europe and Asia. Higher sales volume and favorable product mix improved revenues in our natural gas solutions product
line by $4.4 million and in our instruments product line by $2.3 million. Revenues in our on/off product line decreased due to lower volume of $9.0 million and the sale of our LVF unit, which contributed $6.3 million of revenue in the third quarter
of 2003. Overall, our flow control segment revenues benefited from the favorable impact of changes in foreign currency exchange rates of approximately $11.0 million.



Gross Profit.Gross profit in our control valves product line increased $2.8 million driven by higher volume, which
was offset slightly by unfavorable product mix. Our instruments product line increased $1.6 million due to higher volume and favorable product mix offset slightly by higher manufacturing costs. Our natural gas solutions product line increased $3.0
million due to reductions in variable costs. Overall, our flow control segment benefited from the favorable impact of changes in foreign currency exchange rates of approximately $3.3 million and lower restructuring charges of $2.2 million. As a
percentage of revenues, gross profit increased to 29.9% for the three months ended September 30, 2004 compared to 27.0% for the comparable 2003 period.



Selling, Engineering, Administrative and General Expenses.Selling, engineering, administrative and general expenses increased $1.5 million due to
higher marketing and promotion activity and commission expenses related to volume growth. Also contributing to the increase were higher employee separation costs and higher administrative and engineering costs of $4.8 million and the unfavorable
impact of changes in foreign currency exchange rates of approximately $2.2 million. Partially offsetting the increase were lower restructuring charges of $1.5 million primarily in our instruments product line and a gain recorded on the sale of a
building of $1.8 million.



Bookings and Backlog.Bookings and backlog increased in our on/off, control valves and pressure relief product lines which benefited from increased project activity due to improved market conditions. These increases were partially offset by the sale of LVF in 2003,
which contributed $6.8 million in bookings and $11.7 million in backlog.



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Measurement Systems



The following table presents selected financial information regarding results for our measurement systems segment for the three months ended September 30,
2004 and 2003, respectively.



|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | --------------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Three months ended September 30,  |      
|                                                          |  | 2004                              |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |      
|                                                          |  |                                   |       |             |       |  
|Revenue                                                   |  | $                                 | 163.1 |             | 100.0 | % |      | $ | 96.0        |  | 100.0 | %        |  | $ | 67.1     |   |  | 69.9  | %
|Cost of revenue                                           |  |                                   | 115.3 |             | 70.7  |   |      |   | 66.7        |  | 69.5  |          |  |   | 48.6     |   |  | 72.9  |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                                   | 47.8  |             | 29.3  |   |      |   | 29.3        |  | 30.5  |          |  |   | 18.5     |   |  | 63.1  |  
|Selling, engineering, administrative and general expenses |  |                                   | 22.9  |             | 14.0  |   |      |   | 16.2        |  | 16.9  |          |  |   | 6.7      |   |  | 41.4  |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                                 | 24.9  |             | 15.3  | % |      | $ | 13.1        |  | 13.6  | %        |  | $ | 11.8     |   |  | 90.1  | %
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Other items:                                              |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                                 | 3.0   |             |       |   |      | $ | 1.2         |  |       |          |  | $ | 1.8      |   |  | 150.0 | %
|Restructuring charges                                     |  |                                   | 0.1   |             |       |   |      |   | 1.4         |  |       |          |  |   | (1.3     | ) |  | (92.9 | )
|Bookings                                                  |  |                                   | 163.4 |             |       |   |      |   | 96.7        |  |       |          |  |   | 66.7     |   |  | 69.0  |  
|Backlog                                                   |  |                                   | 131.0 |             |       |   |      |   | 49.2        |  |       |          |  |   | 81.8     |   |  | 166.3 |  



Revenues.The
increase in revenues was due to the acquisition of the Nuovo Pignone distribution business in June 2004, which contributed $36.7 million, and higher sales volume in the United States related to dispensers and services of $13.3 million. Also
contributing to the increase were higher customer demand in Europe and Brazil of $11.5 million. Changes in foreign currency exchange rates favorably impacted revenues by $3.4 million.



Gross Profit.Gross profit increased primarily due to higher dispenser volume in the United States of $7.9 million,
increased customer demand in Europe and Brazil of $1.6 million and the acquisition of the Nuovo Pignone distribution business, which contributed $4.6 million. As a percentage of revenues, gross profit decreased to 29.3% in the three months ended
September 30, 2004 compared to 30.5% in the comparable 2003 period. The slight decline in margins was primarily attributed to unfavorable product mix in Europe.



Selling, Engineering, Administrative and General Expenses.Selling, engineering, administrative and general expenses increased due to the
acquisition of the Nuovo Pignone distribution business, which contributed $4.9 million and higher spending of $3.1 million primarily related to legal expenses and marketing and new product development costs. The increase was partially offset by
lower restructuring charges of $1.3 million.



Bookings and
Backlog.Bookings increased primarily due to the acquisition of the Nuovo Pignone distribution business, which contributed $48.6 million during the quarter. Also contributing to the increase was additional strong international demand of
approximately $13.8 million. Backlog increased due to the acquisition of the Nuovo Pignone distribution business, which contributed $65.9 million, and additional international demand of $13.7 million.



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##### Table of Contents

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 September 30, 2004 and 2003, respectively.



|                                                          |  |                                   |      |   |              |       |    |      |   |              |  |       |          |  |   |          |   |  |      |  
|--------------------------------------------------------- |  | --------------------------------- | ---- | - | ------------ | ----- | -- | ---- | - | ------------ |  | ----- | -------- |  | - | -------- | - |  | ---- | -
|                                                          |  | Three months ended September 30,  |     
|                                                          |  | 2004                              |      |   | % of Revenue |       |    | 2003 |   | % of Revenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |     
|Revenue                                                   |  | $                                 | 75.8 |   |              | 100.0 | %  |      | $ | 69.5         |  | 100.0 | %        |  | $ | 6.3      |   |  | 9.1  | %
|Cost of revenue                                           |  |                                   | 57.3 |   |              | 75.6  |    |      |   | 56.1         |  | 80.7  |          |  |   | 1.2      |   |  | 2.1  |  
|                                                          |  |                                   |      |   |              |       |    |      |   |              |  |       |          |  |   |          |   |  |      |  
|Gross profit                                              |  |                                   | 18.5 |   |              | 24.4  |    |      |   | 13.4         |  | 19.3  |          |  |   | 5.1      |   |  | 38.1 |  
|Selling, engineering, administrative and general expenses |  |                                   | 23.0 |   |              | 30.3  |    |      |   | 12.1         |  | 17.4  |          |  |   | 10.9     |   |  | 90.1 |  
|                                                          |  |                                   |      |   |              |       |    |      |   |              |  |       |          |  |   |          |   |  |      |  
|Operating (loss) income                                   |  | $                                 | (4.5 | ) |              | (5.9  | )% |      | $ | 1.3          |  | 1.9   | %        |  | $ | (5.8     | ) |  | NM   | %
|                                                          |  |                                   |      |   |              |       |    |      |   |              |  |       |          |  |   |          |   |  |      |  
|Other items:                                              |  |                                   |      |   |              |       |    |      |   |              |  |       |          |  |   |          |   |  |      |  
|Depreciation and amortization                             |  | $                                 | 3.3  |   |              |       |    |      | $ | 2.6          |  |       |          |  | $ | 0.7      |   |  | 26.9 | %
|Restructuring charges                                     |  |                                   | 0.2  |   |              |       |    |      |   |             |  |       |          |  |   | 0.2      |   |  | NM   |  
|Bookings                                                  |  |                                   | 98.0 |   |              |       |    |      |   | 86.7         |  |       |          |  |   | 11.3     |   |  | 13.0 |  
|Backlog                                                   |  |                                   | 97.8 |   |              |       |    |      |   | 77.4         |  |       |          |  |   | 20.4     |   |  | 26.4 |  



Revenues.Revenues increased primarily due to higher engine sales of $10.4 million, based on stronger market demand and increased production capability, which was negatively impacted by strike-related production delays at our Waukesha, Wisconsin
manufacturing plant in 2003. The increase was partially offset by lower aftermarket parts revenues of $3.3 million, which declined due to delayed receipt of parts from a supplier and shipment delays resulting from the transition of our packing and
shipping operations to a third-party logistics operator. In addition, we experienced lower volume in our industrial blowers business of $0.8 million due to timing of product shipments.



Gross Profit.Gross profit increased due to favorable direct manufacturing productivity of $4.3 million, which was
adversely impacted by strike-related production delays in 2003, and favorable product mix and cost savings initiatives related to engine and parts sales of $2.2 million. Partially offsetting the increase were additional charges for excess and
obsolete inventory of $0.7 million and higher employee separation costs of $1.3 million. As a percentage of revenues, gross profit increased to 24.4% in the three months ended September 30, 2004 compared to 19.3% in the comparable 2003 period.



Selling, Engineering, Administrative and General
Expenses. Selling, engineering, administrative and general expenses increased primarily due to $12.3 million in expenses related to the purchase of research and development technology for our natural gas engines business, which was partially
offset by strike-related costs of $0.5 million in 2003.



Bookings and Backlog.Bookings increased due to higher demand in our natural gas engines business of $10.0 million and aftermarket parts by $6.7 million, partially offset by lower bookings in our industrial blowers business of $5.2
million as a result of a large customer order during the third quarter of 2003. Backlog increased primarily due to delayed receipt of parts from a supplier and shipment delays resulting from the transition of our packing and shipping operations to a
third-party logistics operator in our aftermarket parts business of $8.2 million. We also experienced higher demand in our industrial blower business for wastewater treatment and other projects in China, the Middle East and Asia Pacific of $12.1
million. In addition, backlog levels in 2003 were elevated as a result of the strike at Waukesha.



36



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##### Table of Contents

Nine months ended September 30, 2004 compared to the nine months ended September 30, 2003



Consolidated



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



|                                                          |  |                                   |         |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | --------------------------------- | ------- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Nine months ended September 30,   |        
|                                                          |  | 2004                              |         | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |        
|Revenue                                                   |  | $                                 | 1,440.4 |             | 100.0 | % |      | $ | 1,183.8     |  | 100.0 | %        |  | $ | 256.6    |   |  | 21.7  | %
|Cost of revenue                                           |  |                                   | 1,025.2 |             | 71.2  |   |      |   | 871.4       |  | 73.6  |          |  |   | 153.8    |   |  | 17.6  |  
|                                                          |  |                                   |         |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                                   | 415.2   |             | 28.8  |   |      |   | 312.4       |  | 26.4  |          |  |   | 102.8    |   |  | 32.9  |  
|Selling, engineering, administrative and general expenses |  |                                   | 325.2   |             | 22.6  |   |      |   | 272.5       |  | 23.0  |          |  |   | 52.7     |   |  | 19.3  |  
|                                                          |  |                                   |         |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                                 | 90.0    |             | 6.2   | % |      | $ | 39.9        |  | 3.4   | %        |  | $ | 50.1     |   |  | 125.6 | %
|                                                          |  |                                   |         |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Other items:                                              |  |                                   |         |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                                 | 35.6    |             |       |   |      | $ | 31.7        |  |       |          |  | $ | 3.9      |   |  | 12.3  | %
|Restructuring charges                                     |  |                                   | 6.5     |             |       |   |      |   | 15.8        |  |       |          |  |   | (9.3     | ) |  | (58.9 | )
|Bookings                                                  |  |                                   | 1,514.0 |             |       |   |      |   | 1,299.2     |  |       |          |  |   | 214.8    |   |  | 16.5  |  
|Backlog                                                   |  |                                   | 617.5   |             |       |   |      |   | 472.2       |  |       |          |  |   | 145.3    |   |  | 30.8  |  



Revenues.Revenues in our flow control segment increased $93.3 million primarily due to stronger international demand in our control valves and pressure relief product lines and higher volume and favorable product mix in our remaining product lines.
Revenues in our measurement systems segment increased $127.5 million primarily due to the acquisition of the Nuovo Pignone distribution business in June 2004 and higher sales volumes related to dispensers and services. Revenues from our compression
and power systems segment increased $36.5 million primarily due to strengthening demand for natural gas compression and power generation products and aftermarket parts. Overall, revenue benefited from a favorable effect of changes in foreign
currency exchange rates of approximately $54.2 million.



Gross Profit.Gross profit increased due to higher volume in our flow control segment and improved manufacturing productivity, favorable mix and cost savings initiatives in our compression and power systems segment. Our measurement
systems segment was positively impacted by cost reduction efforts and the favorable mix of system software products. Overall, gross profit benefited from the favorable impact of changes in foreign currency exchange rates of approximately $11.6
million. As a percentage of revenue, gross profit increased to 28.8% for the nine months ended September 30, 2004 compared to 26.4% in the comparable 2003 period.



Selling, Engineering, Administrative and General Expenses.Selling, engineering, administrative and general expenses
increased primarily due to $12.3 million in expenses related to the purchase of research and development technology for our natural gas engines business and higher incremental expenses associated with the acquisition of the Nuovo Pignone
distribution business of $6.6 million. Also contributing to the increase were higher employee separation costs, higher commissions and increased marketing and promotion activity in our flow control segment of $18.2 million. Corporate and other
expenses increased $6.3 million due to higher consulting, auditing and legal fees incurred in connection with the audit of our financial statements, costs associated with the retirement, of our former chief executive officer and other senior
management of $3.7 million and stock option expenses of $3.4 million related to an increase in issued stock options during the third quarter of 2004. Overall, selling, engineering, administrative and general expenses were unfavorably impacted by
changes in foreign currency exchange rates of $7.3 million.



Interest Expense.Interest expense for the nine months ended September 30, 2004 was $74.7 million or $11.8 million higher than the same period in 2003. The increase was due to the write-off of $16.6 million of unamortized deferred
financing fees in March 2003 partially offset by a reduction in interest rates.



Provision for Income Taxes.Provision for income taxes for the nine months ended September 30, 2004 was $13.3 million, or $7.7 million lower than the same period in 2003. The decrease was due to changes in the
distribution of pretax income across geographical jurisdictions with different tax rates and use of net operating losses in certain foreign jurisdictions for which a valuation allowance was recorded in prior periods. We have provided a full
valuation allowance against our U.S. deferred tax assets and therefore, we have not provided any tax expense or benefit related to our U.S. operations during the period.



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##### Table of Contents

Bookings and Backlog.Bookings increased $137.6 million in our measurement systems segment
primarily due to the acquisition of the Nuovo Pignone distribution business in June 2004 and stronger demand for dispensers, systems and parts, $48.8 million in our flow control segment primarily due to improved market conditions, and $28.4 million
in our compression and power systems segment primarily due to higher demand for natural gas engines and aftermarket parts. Backlog increased $81.8 million in our measurement systems segment primarily due to the acquisition of the Nuovo Pignone
distribution business, $43.1 million in our flow control segment primarily due to increased project activity resulting from improved market demand and $20.4 million in our compression and power systems segment primarily due to delayed receipt of
parts from a supplier and shipment delays resulting from the transition of our packing and shipping operations to a third-party logistics operator in our aftermarket parts business.



Flow Control



The following table presents selected financial information regarding results for our flow control segment for the nine months ended September 30, 2004
and 2003, respectively.



|                                                          |  |                                   |       |              |       |   |      |   |              |  |       |          |  |   |          |   |  |       |   
|--------------------------------------------------------- |  | --------------------------------- | ----- | ------------ | ----- | - | ---- | - | ------------ |  | ----- | -------- |  | - | -------- | - |  | ----- | --
|                                                          |  | Nine months ended September 30,   |      
|                                                          |  | 2004                              |       | % of Revenue |       |   | 2003 |   | % of Revenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |      
|Revenue                                                   |  | $                                 | 822.6 |              | 100.0 | % |      | $ | 729.3        |  | 100.0 | %        |  | $ | 93.3     |   |  | 12.8  | % 
|Cost of revenue                                           |  |                                   | 580.9 |              | 70.6  |   |      |   | 523.8        |  | 71.8  |          |  |   | 57.1     |   |  | 10.9  |   
|                                                          |  |                                   |       |              |       |   |      |   |              |  |       |          |  |   |          |   |  |       |   
|Gross profit                                              |  |                                   | 241.7 |              | 29.4  |   |      |   | 205.5        |  | 28.2  |          |  |   | 36.2     |   |  | 17.6  |   
|Selling, engineering, administrative and general expenses |  |                                   | 188.5 |              | 22.9  |   |      |   | 161.8        |  | 22.2  |          |  |   | 26.7     |   |  | 16.5  |   
|                                                          |  |                                   |       |              |       |   |      |   |              |  |       |          |  |   |          |   |  |       |   
|Operating income                                          |  | $                                 | 53.2  |              | 6.5   | % |      | $ | 43.7         |  | 6.0   | %        |  | $ | 9.5      |   |  | 21.7  | % 
|                                                          |  |                                   |       |              |       |   |      |   |              |  |       |          |  |   |          |   |  |       |   
|Other items:                                              |  |                                   |       |              |       |   |      |   |              |  |       |          |  |   |          |   |  |       |   
|Depreciation and amortization                             |  | $                                 | 17.4  |              |       |   |      | $ | 17.8         |  |       |          |  | $ | (0.4     | ) |  | (2.2  | )%
|Restructuring charges                                     |  |                                   | 6.0   |              |       |   |      |   | 8.4          |  |       |          |  |   | (2.4     | ) |  | (28.6 | ) 
|Bookings                                                  |  |                                   | 848.2 |              |       |   |      |   | 799.4        |  |       |          |  |   | 48.8     |   |  | 6.1   |   
|Backlog                                                   |  |                                   | 388.7 |              |       |   |      |   | 345.6        |  |       |          |  |   | 43.1     |   |  | 12.5  |   



Revenues.Revenues in our control valves and pressure relief product line increased $26.3 million due to continued strengthening demand in Europe and Asia. Our on/off product line revenues increased $20.1 million due to higher sales volume and favorable
product mix partially offset by the sale of our LVF unit, which contributed $18.1 million during 2003. Higher sales volume and favorable product mix improved revenues in our natural gas solutions product line by $11.6 million and in our instruments
product line by $2.2 million. Overall, our flow control segment revenues benefited from the favorable impact of changes in foreign currency exchange rates of $35.8 million.



Gross Profit.Gross profit in our on/off product line increased $11.9 million due to higher volume partially offset
by increased material costs and fixed costs. Our control valves product line and pressure relief product line increased $12.0 million due to higher volume and lower materials costs. Overall, our flow control segment benefited from the favorable
impact of changes in foreign currency exchange rates of approximately $7.9 million and lower restructuring charges of $2.8 million. As a percentage of revenues, gross profit increased to 29.4% for the nine months ended September 30, 2004 compared to
28.2% for the comparable 2003 period.



Selling, Engineering,
Administrative and General Expenses.Selling, engineering, administrative and general expenses increased due to higher marketing and promotion activity and commission expenses related to volume growth of $7.2 million. Also contributing to the
increase were higher employee separation costs and administrative and engineering costs of $11.0 million, the unfavorable impact of changes in foreign currency exchange rates of approximately $5.1 million and higher restructuring charges of $0.4
million. Partially offsetting the increase was the write-off of $2.4 million in software costs in 2003 that became impaired based on a decision to implement a global ERP system.



Bookings and Backlog.Bookings and backlog increased in our on/off, control valves and pressure relief product lines
which benefited from increased project activity due to improved market conditions. These increases were partially offset by the sale of LVF in 2003, which contributed $20.3 million in bookings and $11.7 million in backlog.



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##### Table of Contents

Measurement Systems



The following table presents selected financial information regarding results for our measurement systems segment for the nine months ended September 30,
2004 and 2003, respectively.



|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|--------------------------------------------------------- |  | --------------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | - | -------- | - |  | ----- | -
|                                                          |  | Nine months ended September 30,   |      
|                                                          |  | 2004                              |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  |   | % Change |  
|                                                          |  | (in millions, except percentages) |      
|Revenue                                                   |  | $                                 | 390.5 |             | 100.0 | % |      | $ | 263.0       |  | 100.0 | %        |  | $ | 127.5    |   |  | 48.5  | %
|Cost of revenue                                           |  |                                   | 277.8 |             | 71.1  |   |      |   | 196.5       |  | 74.7  |          |  |   | 81.3     |   |  | 41.4  |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Gross profit                                              |  |                                   | 112.7 |             | 28.9  |   |      |   | 66.5        |  | 25.3  |          |  |   | 46.2     |   |  | 69.5  |  
|Selling, engineering, administrative and general expenses |  |                                   | 57.5  |             | 14.7  |   |      |   | 49.3        |  | 18.7  |          |  |   | 8.2      |   |  | 16.6  |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Operating income                                          |  | $                                 | 55.2  |             | 14.2  | % |      | $ | 17.2        |  | 6.6   | %        |  | $ | 38.0     |   |  | NM    | %
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Other items:                                              |  |                                   |       |             |       |   |      |   |             |  |       |          |  |   |          |   |  |       |  
|Depreciation and amortization                             |  | $                                 | 6.0   |             |       |   |      | $ | 4.0         |  |       |          |  | $ | 2.0      |   |  | 50.0  | %
|Restructuring charges                                     |  |                                   | 0.2   |             |       |   |      |   | 7.2         |  |       |          |  |   | (7.0     | ) |  | (97.2 | )
|Bookings                                                  |  |                                   | 404.4 |             |       |   |      |   | 266.8       |  |       |          |  |   | 137.6    |   |  | 51.6  |  
|Backlog                                                   |  |                                   | 131.0 |             |       |   |      |   | 49.2        |  |       |          |  |   | 81.8     |   |  | 166.3 |  



Revenue.The
increase in revenues was primarily due to the acquisition of the Nuovo Pignone distribution business, which contributed $50.2 million since June 2004, and higher sales volume in the United States related to dispensers and services of $35.3 million.
Also contributing to the increase were higher customer demand in Europe and Brazil of $19.5 million and the favorable impact of foreign currency exchange rates of $18.4 million.



Gross Profit.Gross profit was positively impacted by higher volume in the United Sates, Europe and Brazil of $26.2
million. Also contributing to the increase were cost reduction efforts in North America and Europe of $3.0 million, a favorable mix of systems software products in the United States and Germany of $4.1 million and the acquisition of the Nuovo
Pignone distribution business, which contributed $6.8 million since June 2004. In addition, 2003 was negatively impacted by transition services costs of $3.2 million associated with our acquisition of certain assets of Tokheim North America. Gross
profit was positively impacted by favorable foreign currency exchange rates of $3.7 million. As a percentage of revenues, gross profit increased to 28.9% in the nine months ended September 30, 2004 compared to 25.3% in the comparable 2003 period.



Selling, Engineering, Administrative and General Expenses.Selling, engineering, administrative and general expenses increased due to legal expenses and marketing and new product development costs of $3.1 million, the acquisition of the Nuovo Pignone distribution business, which contributed $6.6 million
since June 2004, and the unfavorable impact of changes in foreign currency exchange rates of $2.2 million. Partially offsetting the increase were lower restructuring expenses of $7.0 million.



Bookings and Backlog.Bookings increased primarily due to the
acquisition of the Nuovo Pignone distribution business, which contributed $61.0 million since June 2004 and stronger demand for dispensers, systems and parts both domestically and internationally of $76.6 million. Backlog increased due to the
acquisition of the Nuovo Pignone distribution business, which contributed $ 65.9 million since June 2004, and higher additional international demand of $13.7 million.



39



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##### Table of Contents

Compression and Power Systems



The following table presents selected financial information regarding results for our compression and power systems segment
for the nine months ended September 30, 2004 and 2003, respectively.



|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |          |      |  |       |  
|--------------------------------------------------------- |  | --------------------------------- | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -------- |  | -------- | ---- |  | ----- | -
|                                                          |  | Nine months ended September 30,   |      
|                                                          |  | 2004                              |       | % ofRevenue |       |   | 2003 |   | % ofRevenue |  |       | $ Change |  | % Change |     
|                                                          |  | (in millions, except percentages) |      
|Revenue                                                   |  | $                                 | 232.1 |             | 100.0 | % |      | $ | 195.6       |  | 100.0 | %        |  | $        | 36.5 |  | 18.7  | %
|Cost of revenue                                           |  |                                   | 171.2 |             | 73.8  |   |      |   | 155.2       |  | 79.3  |          |  |          | 16.0 |  | 10.3  |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |          |      |  |       |  
|Gross profit                                              |  |                                   | 60.9  |             | 26.2  |   |      |   | 40.4        |  | 20.7  |          |  |          | 20.5 |  | 50.7  |  
|Selling, engineering, administrative and general expenses |  |                                   | 48.4  |             | 20.9  |   |      |   | 35.8        |  | 18.3  |          |  |          | 12.6 |  | 35.2  |  
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |          |      |  |       |  
|Operating income                                          |  | $                                 | 12.5  |             | 5.3   | % |      | $ | 4.6         |  | 2.4   | %        |  | $        | 7.9  |  | 171.7 | %
|                                                          |  |                                   |       |             |       |   |      |   |             |  |       |          |  |          |      |  |       |  
|Other items:                                              |  |                                   |       |             |       |   |      |   |             |  |       |          |  |          |      |  |       |  
|Depreciation and amortization                             |  | $                                 | 10.2  |             |       |   |      | $ | 8.2         |  |       |          |  | $        | 2.0  |  | 24.4  | %
|Restructuring charges                                     |  |                                   | 0.3   |             |       |   |      |   | 0.3         |  |       |          |  |          |     |  |      |  
|Bookings                                                  |  |                                   | 261.4 |             |       |   |      |   | 233.0       |  |       |          |  |          | 28.4 |  | 12.2  |  
|Backlog                                                   |  |                                   | 97.8  |             |       |   |      |   | 77.4        |  |       |          |  |          | 20.4 |  | 26.4  |  



Revenues.Revenues increased $13.1 million for our natural gas compression products and $15.3 million for our power generation products, both of which benefited from strengthening demand during 2004. In addition, revenues in 2003 were adversely affected
by strike-related production delays at our Waukesha plant. Higher demand for aftermarket parts increased revenues by $7.0 million, although recent months have been negatively impacted by delayed receipt of parts from a supplier and shipment delays
resulting from the transition of our packing and shipping operations to a third-party logistics operator. Our industrial blowers business increased revenue by $1.0 million primarily due to market growth in China, the Far East and the Middle East.



Gross Profit.Gross profit improved $15.8 million due
to increased volume, favorable mix and cost savings initiatives related to engine and parts sales and manufacturing productivity of $9.2 million, which was adversely impacted by strike-related delays in 2003. Partially offsetting the increase were
unfavorable materials sourcing variances of $1.9 million due to higher metal prices, freight costs and subcontracting costs, higher manufacturing capacity costs of $4.0 million due to purchased services and additional charges for excess and obsolete
inventory of $0.7 million. As a percentage of revenues, gross profit increased to 26.2% in the nine months ended September 30, 2004 compared to 20.7% in the comparable 2003 period.



Selling, Engineering, Administrative and General Expenses.Selling, engineering, administrative and general expenses
increased primarily due to $12.3 million in expenses related to the purchase of research and development technology for our natural gas engines business. Also contributing to the increase were higher employee separation and retirement costs of $1.3
million and higher materials costs related to research and development projects of $1.3 million. Partially offsetting the increase was a gain of $1.7 million recorded in 2004 on the sale of land. Additionally, 2003 was negatively impacted by
strike-related costs of $1.6 million.



Bookings and Backlog.Bookings increased due to higher demand in our natural gas engines business of $14.1 million, higher aftermarket parts by $11.2 million and increased demand for waste water treatment and other municipal projects in our blowers business of $2.8
million. Backlog increased primarily due to delayed receipt of parts from a supplier and shipment delays resulting from the transition of our packing and shipping operations in our aftermarket parts business of $8.2 million. We also experienced
higher demand in our industrial blowers business for wastewater treatment and other projects in China, the Middle East and Asia Pacific of $12.1 million. In addition, backlog levels in 2003 were elevated as a result of the strike at our Waukesha
plant.



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Liquidity and Capital Resources



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



Cash and cash equivalents were $102.0 million and $108.0 million as of
September 30, 2004 and 2003, respectively. A significant portion of our cash and cash equivalents is utilized in our international operations and may not be immediately available to service debt in the United States.



Net cash flows provided by operating activities were $31.7 million for the
nine months ended September 30, 2004 due to growth in cash-based earnings and a non-cash charge of $16.6 million related to deferred financing costs associated with the refinancing of our Tranche B term loan. Operating cash was also positively
impacted by an increase in accounts payable and accrued expenses related to employee compensation and interest payments subsequently made on October 15, 2004. Partially offsetting the increase in cash flow from operations were higher accounts
receivable related to sales and volume growth across our segments.



Net cash flows used in investing activities were $207.9 million for the nine months ended September 30, 2004, resulting from capital expenditures of $36.5 million and the acquisition of the Nuovo Pignone distribution business in June 2004
for $171.5 million. Capital expenditures increased $18.7 million compared to the same period of 2003.



Net cash flows provided by financing activities were $129.9 million for the nine months ended September 30, 2004, resulting primarily from the $175
million add-on to our Tranche C term loan in June 2004 partially offset by $45 million in prepayments of our Tranche C term loan.



|                                                                                      |  |               |        
|------------------------------------------------------------------------------------- |  | ------------- | -------
|                                                                                      |  | (in millions)
|Total long-term debt, including current maturities outstanding at September 30, 2004: |  |               |        
|Tranche C term loan                                                                   |  | $             | 390.0  
|Senior unsecured term loan                                                            |  |               | 125.0  
|93/8%
senior subordinated notes                                                       |  |               | 550.0  
|Other debt                                                                            |  |               | 10.5   
|                                                                                      |  |               |        
|Total long-term debt, including current maturities                                    |  | $             | 1,075.5
|                                                                                      |  |               |        



In March 2004, we
completed a refinancing of approximately $382 million of our Tranche B term loan under our existing senior secured credit facility with a new six-year $125 million senior unsecured term loan, and a new $260 million Tranche C term loan under our
senior secured credit facility. The Tranche B term loan was paid in full with the completion of the refinancing. The $125 million senior unsecured term loan bears an interest rate of LIBOR (three-month LIBOR was 2.02% at September 30, 2004) plus
3.5% and the Tranche C term loan bears an interest rate of LIBOR plus 2.5%. We elected to prepay $25 million of our Tranche C term loan at the time the refinancing was completed. The covenants contained in the agreement governing our new senior
unsecured term loan are similar to those included in the indenture governing our senior subordinated notes. In connection with the refinancing, we expensed approximately $16.6 million in deferred financing costs associated with the Tranche B term
loan, which is reflected in interest expense in our condensed consolidated statement of operations for the nine months ended September 30, 2004.



In June 2004, in conjunction with the Nuovo Pignone distribution business acquisition we obtained an additional $175 million of borrowings under our
Tranche C term loan, which included approximately $2.8 million in capitalized financing fees. In July and August 2004, we made optional prepayments of $10 million each to our Tranche C term loan. In October 2004, we made another $10 million
prepayment on our Tranche C term loan. As a result of these optional prepayments, no mandatory principal payments are due on our Tranche C term loan until March 31, 2008. Required payments of outstanding debt consist of $0.9 million in 2004, $3.7
million in 2005, $1.9 million in 2006, $5.3 million in 2007, $195.1 million in 2008 and $868.6 million thereafter. In addition, we have a $100 million revolving credit facility, of which $43.3 million was available subject to certain conditions, and
$56.7 million was utilized for letters of credit as of September 30, 2004.



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



Our long-term ability to make payments and to refinance our indebtedness,
including our existing credit facility and our senior subordinated notes, to achieve specified ratios required under our credit agreement, and to fund future acquisitions, planned capital expenditures and research and development efforts will depend
on our ability to achieve cost savings and generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond



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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 borrowing capacity under 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 existing credit facility or our senior
subordinated notes, or to fund our acquisition strategy or meet our other liquidity needs. If we are unable to achieve the financial ratios specified in our credit facility, we could be required to seek approval from our senior lenders to modify
these ratios. In the past, we have had to seek approval for the modification of these financial ratios. In addition, if we consummate an acquisition, our debt service requirements could increase, which could adversely impact our future earnings. We
may need to refinance all or a portion of our indebtedness, including our senior subordinated notes on or before maturity. We cannot be assured that we will be able to refinance any of our indebtedness, including our credit facility and our senior
subordinated notes, on commercially reasonable terms or at all. See Certain Risk FactorsRestrictive covenants in our senior secured credit facility, the indenture governing our senior subordinated notes and our senior unsecured
term loan may restrict our ability to pursue our business strategies.



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



Recent Accounting Pronouncements



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
The statement establishes standards for how an issuer classifies and measures certain financial instruments that are within its scope as a liability. Many of those instruments were previously classified as equity. SFAS No. 150 is to be implemented
by reporting a cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted the statement in accordance with the pronouncement. The statement had
no material impact on our results of operations or financial condition.



In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements
(FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued FIN 46 (revised December 2003) Consolidation of Variable Interest
Entities (FIN 46R), to address certain FIN 46 implementation issues. FIN 46R provides guidance related to evaluating, identifying and reporting of variable interest entities, or VIEs, including entities commonly referred to as
special purpose entities, or SPEs. FIN 46R requires us to consolidate certain VIEs if we are deemed to be the primary beneficiary, defined in FIN 46R, as the entity that absorbs a majority of the VIEs expected losses, receives a majority of the
entitys expected residual returns or both.



The
provisions of FIN 46R became effective for us as of the date of the initial filing of Form S-1 for all VIEs subject to FIN 46R. Based on our evaluation, we do not believe we have ownership in any variable interest entities. Therefore, the adoption
of FIN 46R had no impact on our financial position, results of operations or cash flows. However, in future periods we will apply the consolidation or disclosure requirements of FIN 46R if we should own any interest deemed to be a variable interest.



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



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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 may incur net losses in the future.



Since 2001, we have had a history of net losses. During 2001, 2002 and 2003, we reported net losses of approximately $44.8 million, $23.2 million and
$44.7 million, respectively and as of September 30, 2004, we had an accumulated stockholders deficit of $308.5 million. For the nine-month period ended September 30, 2004, we reported net income of $3.8 million. However, we cannot assure you
that we will become profitable or sustain 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
expenditure budgets of our customers, which in turn, adversely affected demand for and pricing of our products and services. In addition, because we only compete in some segments of the energy infrastructure and 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 affect our business, results of operations and financial condition.



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



For the nine months ended September 30, 2004, our largest customer represented approximately 2.6% of our total revenues, and our top ten customers
collectively represented approximately 14.1% of our total revenues. The loss of any of these customers, or class of customers, or decreases in these customers capital expenditures, could decrease our cash flow, market share and profits. As a
result of industry consolidation, especially among natural gas compression and major oil companies, our largest customers have become larger and, as a result, account for a greater percentage of our sales. We could also lose a large customer as a
result of a merger or consolidation. Major oil companies and national oil companies have moved toward creating alliances and preferred supplier relationships with suppliers. In addition, these customers are increasingly pursuing arrangements with
suppliers that can meet a larger portion of their needs on a more global basis. Typically, a customer can terminate these arrangements at any time. The loss of a customer, or the award of a contract to a competitor, could significantly reduce our
cash flow, market share and profits.



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



We encounter intense competition in all areas of our business. Some of our
competitors have greater financial and other resources than we do. Competition in our primary business segments is based on a number of considerations including product performance, customer service, product lead times, global reach, brand
reputation, breadth of product line, quality of aftermarket service and support and price. Additionally, customers for our products are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. Our
customers increasingly demand more technologically advanced and integrated products and we 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



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



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



During the past two years, we have identified a number of material weaknesses and reportable conditions in our internal financial
controls. Some of these weaknesses resulted in errors in our historical financial statements, which in turn resulted in a restatement of our financial statements for 1999 through 2001 and our financial statements for periods prior to 2001 became
unaudited. In addition, we disclosed significant fourth quarter adjustments in 2001 and 2003.



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



In June 2004, the Public Company Accounting Oversight Board, or PCAOB, adopted rules for purposes of implementing Section 404 of the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, which include revised definitions of material weaknesses and significant deficiencies in internal control over financial reporting. The PCAOB defined a material weakness as a significant deficiency, or a
combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Although we are not currently subject to
Section 404, we have examined the definitions contained in the PCAOB pronouncement. The new rules describe certain circumstances as being both significant deficiencies and strong indicators that a material weakness in internal control over financial
reporting exists. In reviewing our internal control over financial reporting, we have identified a number of these specified circumstances, including (a) identification by our auditors of material misstatements in internal drafts of our financial
statements that were not initially identified by our internal control process, (b) an ineffective internal audit function, and (c) an ineffective control environment. We have evaluated these deficiencies and determined that an additional material
weakness in our internal control over financial reporting exists with respect to our ability to properly monitor and account for non-routine transactions and to apply U.S. GAAP in transactions subject to new or complex accounting pronouncements.



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



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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. With the assistance of outside counsel, we commenced a full investigation of the Dubai branchs transactions with sanctioned countries. On July 9, 2004, we submitted preliminary
voluntary disclosures of the Dubai branch transactions to the Commerce and Treasury departments under their voluntary disclosure programs and committed to submit to the departments a report concerning the results of our investigation when it is
concluded.



Thereafter, we expanded the investigation to
include other Dresser affiliated offices that have since January 1999 engaged in transactions relating to U.S.-sanctioned countries (including those countries mentioned as well as Libya (prior to late 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 has to date identified a significant number of sales by certain of our other foreign affiliates to sanctioned countries (in addition to
such sales by the Dubai branch) that appear to have been performed without the required U.S. governmental authorizations. In some of these transactions, current and former employees of several foreign and U.S. entities (including the Dubai branch)
appear to have understood that the sales were wrongful and in some instances took steps to conceal information about them.



The investigation to date has also found evidence of potential violations by the Company and certain of its U.S. operations in connection with sanctioned
country sales. These include issuing bank guarantees, entering into agreements with foreign representatives, referring sales to foreign affiliates, and providing technical, business or other assistance or support in connection with foreign affiliate
sales.



As part of its Management Integrity Initiative, the
Company has commenced a comprehensive remedial program that is designed to prevent the risk of further unlawful transactions or unlawful facilitations of otherwise legal transactions by our foreign affiliates involving sanctioned countries. Actions
that we have initiated include adoption of a requirement that the U.S. corporate legal department conduct a legal review of all pending or new sales by the Companys foreign affiliates to sanctioned countries to determine whether such sales are
permissible under applicable U.S. export control laws, issuance of further guidance to, and additional training of, our employees concerning the application of U.S. foreign trade controls, and reorganization of the Companys management team
that oversees compliance with these controls. At the conclusion of the investigation, we expect to take appropriate disciplinary action against personnel who willfully engaged in wrongful conduct.



If we are found in violation of the applicable Commerce and Treasury
Department regulations restricting dealings with Iran, Sudan, Cuba and Syria (and in the past, Iraq and Libya) we may 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. Because the investigation is ongoing, we are unable to determine at this time the extent of violations or the exact nature of the penalties to which we may be subjected
as a result of any unauthorized dealings with U.S.-sanctioned countries. As a result, we cannot currently predict whether the ultimate resolution of this matter will materially adversely affect us financially, or our business including our ability
to do business outside the United States. See Part II. Item 1  Legal Proceedings.



Economic, political and other risks or negative events in the international market where we have sales and operations could adversely affect our business.



Since we manufacture and sell our products worldwide, our business is subject to risks associated with doing business
internationally. Our sales outside the United States for the nine month ended September 30, 2004, were 59%. 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;
| | - | -------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



Fluctuations in the
value of the U.S. dollar may affect our results of operations. Because our financial results are reported in dollars, if we generate sales or earnings in other currencies, the translation of those results into dollars can result in a significant
increase or decrease in the amount of those sales or earnings. In addition, our debt service requirements are primarily in U.S. dollars even though a significant percentage of our cash flow is generated in Euros or other foreign currencies.
Significant changes in the value of the Euro relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar denominated debt. In 2003, foreign
currency appreciation (particularly the value of the Euro relative to the U.S. dollar) significantly increased our revenues and backlog. In the future, any foreign currency depreciation relative to the U.S. dollar would decrease our revenues and
backlog.



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



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 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 name and could have an adverse
effect on our business, financial condition and results of operations.



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



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



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



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



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



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



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



Acts of war and/or acts of terrorism could have a material adverse impact on our business, results of operations and
financial condition. The threat of terrorism, war, heightened security and military response to this threat, or any future acts of terrorism, may cause further disruption to the economies of the countries in which we do business and create further
uncertainties. Because we operate in the Middle East and continue to have strong development activity there, the continued deterioration of the political climate in the Middle East could directly impact our facilities and could affect our sales, our
supply chain, our production capability and our 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.



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 affect 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



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substance releases. We must conform our operations and properties to these laws and adapt to regulatory requirements in
all relevant jurisdictions in which we operate as these requirements change.



We have incurred, and 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.



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



As of September 30, 2004, we had approximately 8,900 employees. Approximately 31% of our workforce in the United States is represented by labor unions.
Currently, of our eight material collective bargaining agreements, three will expire in 2005, two will expire in 2006, two will expire in 2008 and one will expire in 2009. Although we believe that our relations with our employees are generally good,
we cannot assure you that we will be successful in negotiating new collective bargaining agreements. The renegotiation of our existing collective bargaining agreements could result in significant increases in our labor costs. In addition, a
breakdown in such negotiations could result in the disruption of our operations, which could have a material adverse affect our business, financial condition and results of operations. For example, in May 2003, our labor agreement with the
International Association of Machinists & Aerospace Workers, AFL-CIO District 10 at our Waukesha, Wisconsin manufacturing plant expired and we failed to reach agreement on a new labor contract at that time. The bargaining unit voted in favor of
a strike on May 2, 2003. On July 23, 2003, we announced the signing of a new three-year labor agreement, and our union shop employees resumed work on July 28, 2003. The strike adversely affected our operating results for 2003.



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



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



We rely on 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 affect our business,
financial condition and results of operations.



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 at current price levels or at all.



We require substantial amounts of raw materials that we purchase from outside sources. Raw materials comprised 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 affect our operating results.



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



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



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



We rely on independent distributors 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 cancelled 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 your interests.



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



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



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



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



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.



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



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



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



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



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



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



|Our | substantial indebtedness could adversely affect our financial condition.
|--- | ------------------------------------------------------------------------



We are a highly leveraged company. As of September 30, 2004, we had $1,075.5 million of outstanding long-term indebtedness,
including the current portion, $8.7 million of short-term notes and shareholders deficit of $308.5 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;
| | - | ----------------------------------------------------------------------------



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



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



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



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



The terms of our credit facility, the indenture governing our subordinated notes and our new $125 million senior unsecured term loan facility do not prohibit us from incurring significant additional indebtedness in
the future, including indebtedness for acquisitions. As of September 30, 2004, we had $43.3 million available for additional borrowing under the revolving credit facility, subject to certain conditions. All borrowings under the credit facility are
senior to the notes.



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Your right to receive payments on the notes will be junior to the borrowings under our credit facility, our senior
unsecured term loan facility and possibly all future borrowings.



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



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



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



As of September 30, 2004, the notes and the subsidiary guarantees are subordinated to $515 million of long-term indebtedness, including the current
portion, and approximately $43.3 million would have been available for borrowing as additional senior indebtedness under the credit facility, subject to certain conditions. We will be permitted to borrow substantial additional indebtedness,
including senior indebtedness, in the future under the terms of the indenture.



Restrictive covenants in 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.



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We have substantial NOLs, which may not be available to us if we experience an ownership change in the future.



As of December 31, 2003 we had U.S. federal net
operating loss carryforwards, or NOLs, of approximately $166.3 million, which are due to expire in the years 2020 through 2023. We expect to generate additional U.S. federal net operating losses in the current taxable year, which may be used to
offset future taxable income 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. If we experience an ownership change, our ability to use our NOLs would be subject to the Section 382 Limitation. Moreover, even if we do not experience an
ownership change, it is possible that as a result of the issuance 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.



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



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



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



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



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



During the ordinary course of our
business, we are from time to time threatened with, or may become a party to, legal actions and other proceedings. While we are currently involved in a number of legal proceedings, we believe the results of these proceedings will not have a material
effect on our business, financial condition or results of operations. However, any material litigation or litigations that are material in the aggregate, and for which we are not indemnified, may have a material adverse impact our future results of
operations.



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



We may be faced with unexpected product claims or regulations, which could be costly, 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.



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



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



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



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



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



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



Generally, an entity will be considered insolvent if:



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



| |  | the present fair value of its assets is less than the amount that it will be required to pay on its existing debts as they become due; or it cannot pay its debts as they become due.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



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



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



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



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|                                      |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | ---- |  | - | ---- | - |  | ---- | ---- | - | ---------- | - | ----- | ----- |  | ---------- | ----- | - | -------------- | - | ----- | ---------- | - | ----- | - |  | - | -------- | - |  | - | ----- | -
|                                      |  | September 30, 2004 |          |   | December 31, 2003 |  
|                                      |  | 2004               |          |   | 2005              |   |          | 2006 |  |   | 2007 |   |  | 2008 |      |   | Thereafter |   |       | Total |  | Fair Value |       |   | CarryingAmount |   |       | Fair Value |  
|                                      |  | (in millions)      |          |   |                   |   |          |      | 
|Related forward contracts to sell USD |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Japanese Yen                          |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 1.5      |   |                   | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 1.5   |            | $ |      |   |  | $ |         |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 110.9036 |   |                   |   |         |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   |         |   |  |   |       |  
|Euro                                  |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 21.3     |   |                   | $ | 26.8     |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 48.1  |            | $ | (0.2  | ) |  | $ | 53.5     |   |  | $ | 4.0   |  
|Avg. Contract Rate                    |  |                    | 1.2073   |   |                   |   | 1.2129   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   | 1.1507   |   |  |   |       |  
|Related forward contracts to buy GBP  |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Euro                                  |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 0.9      |   |                   | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 0.9   |            | $ |      |   |  | $ |         |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 0.6741   |   |                   |   |         |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   |         |   |  |   |       |  
|Related forward contracts to buy USD  |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|South African Rand                    |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 1.1      |   |                   | $ | 1.0      |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 2.1   |            | $ | (0.1  | ) |  | $ | 0.5      |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 6.8368   |   |                   |   | 6.6347   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   | 6.9107   |   |  |   |       |  
|Euro                                  |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 1.8      |   |                   | $ | 3.4      |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 5.2   |            | $ |      |   |  | $ | 6.4      |   |  | $ | (0.4  | )
|Avg. Contract Rate                    |  |                    | 1.1823   |   |                   |   | 1.1459   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   | 1.1598   |   |  |   |       |  
|Japanese Yen                          |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 2.0      |   |                   | $ | 17.0     |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 19.0  |            | $ |      |   |  | $ | 0.1      |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 107.4829 |   |                   |   | 107.4013 |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   | 110.3356 |   |  |   |       |  
|British Pound                         |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 2.1      |   |                   | $ | 2.6      |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 4.7   |            | $ |      |   |  | $ |         |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 1.6671   |   |                   |   | 1.4900   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   |         |   |  |   |       |  
|Canadian Dollar                       |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 3.4      |   |                   | $ | 21.1     |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 24.5  |            | $ |      |   |  | $ |         |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 1.3371   |   |                   |   | 1.3415   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   |         |   |  |   |       |  
|Related forward contracts to buy EUR  |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|South African Rand                    |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 0.2      |   |                   | $ | 0.1      |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 0.3   |            | $ |      |   |  | $ | 0.5      |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 8.0441   |   |                   |   | 8.1775   |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   | 8.3851   |   |  |   |       |  
|British Pound                         |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 0.2      |   |                   | $ |         |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 0.2   |            | $ |      |   |  | $ |         |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 0.6700   |   |                   |   |         |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   |         |   |  |   |       |  
|Japanese Yen                          |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Contract Amount                       |  | $                  | 0.1      |   |                   | $ | 1.0      |      |  | $ |     |   |  | $    |     |   |            | $ |      |       |  | $          |      |   |                | $ | 1.1   |            | $ |      |   |  | $ |         |   |  | $ |      |  
|Avg. Contract Rate                    |  |                    | 131.3400 |   |                   |   | 132.1200 |      |  |   |     |   |  |      |     |   |            |   |      |       |  |            |      |   |                |   |      |            |   |      |   |  |   |         |   |  |   |       |  
|Long-term debt                        |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|U.S. Dollar Functional Currency       |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Fixed Rate                            |  |                    | 0.7      |   |                   |   | 2.7      |      |  |   | 0.9  |   |  |      | 0.7  |   |            |   | 0.7   |       |  |            | 551.5 |   |                |   | 557.2 |            |   | 608.0 |   |  |   | 559.1    |   |  |   | 602.8 |  
|Average Interest Rate                 |  |                    | 9.30     | % |                   |   | 9.31     | %    |  |   | 9.32 | % |  |      | 9.34 | % |            |   | 9.34  | %     |  |            | 9.36  | % |                |   |       |            |   |       |   |  |   | 9.33     | % |  |   |       |  
|Variable Rate                         |  |                    |         |   |                   |   |         |      |  |   |     |   |  |      | 4.0  |   |            |   | 194.0 |       |  |            | 317.0 |   |                |   | 515.0 |            |   | 522.9 |   |  |   | 381.6    |   |  |   | 381.6 |  
|Average Interest Rate                 |  |                    |         |   |                   |   |         |      |  |   |     |   |  |      | 5.77 | % |            |   | 6.06  | %     |  |            | 6.68  | % |                |   |       |            |   |       |   |  |   | 8.59     | % |  |   |       |  
|Euro Functional Currency              |  |                    |          |   |                   |   |          |      |  |   |      |   |  |      |      |   |            |   |       |       |  |            |       |   |                |   |       |            |   |       |   |  |   |          |   |  |   |       |  
|Fixed Rate                            |  |                    | 0.2      |   |                   |   | 1.0      |      |  |   | 1.1  |   |  |      | 0.6  |   |            |   | 0.4   |       |  |            |      |   |                |   | 3.3   |            |   | 3.4   |   |  |   | 3.4      |   |  |   | 3.5   |  
|Average Interest Rate                 |  |                    | 4.17     | % |                   |   | 4.20     | %    |  |   | 4.26 | % |  |      | 4.44 | % |            |   | 4.50  | %     |  |            |      |   |                |   |       |            |   |       |   |  |   | 8.49     | % |  |   |       |  



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Item 4. Controls and Procedures



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



In the course of the preparation of our financial statements for the year ended December 31, 2003, management identified a material weakness and a
reportable condition regarding various elements of our system of internal controls.



We noted a material control weakness with respect to our on/off valve operations located in Houston, Texas, pertaining to three areas of accounting: general accounting, inventory reconciliation and correction and
contract accounting for large projects. In the general accounting area, customer receivables, accounts payable and accrual accounts were not adequately and completely reconciled to the general ledger, and supporting materials for some manual journal
entries, as well as for credits for billing errors, were insufficient. With respect to inventory accounting, controls over inventory reconciliation were weak, delays existed in the accounting recognition of inventory movement and errors existed in
recording inventory movement. Additionally, our on/off valve operations located in Houston, Texas did not have adequate accounting practices or procedures establishing internal controls over large projects. Accounting for projects, which involves
the administration of larger customer contracts with unique terms, would initially be recorded without respect to specific contract terms in a manner separate from the operations other accounting systems and without adequate accounting
oversight. This necessitated significant manual entries to obtain appropriate recognition of the transactions relating to projects on the general ledger.



We also noted a reportable condition with respect to the operation of our finance organization. This condition resulted in part from significant
complexity in our consolidation process, particularly with respect to complexity of accounting among legal entities and operational units. Also contributing to the condition was a lack of rigor in the application of company policy, including the
reconciliation of accounts to the general ledger, and inconsistent application of company policy with respect to inventory costing, bad debts, sales allowances, inventory reserves, property, warranty and various expense accruals. In addition, the
finance organization experienced difficulty in responding to more complex areas of accounting and financial reporting, including those involving related party and company stock transactions.



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



In
addition, in April 2004, we received allegations that the Dubai branch of one of our U.S. subsidiaries may have engaged in transactions involving the sale of control valves and related parts to Iraq without required authorization. Upon initial
investigation, we found transactions by the branch relating to Iraq, Iran and Sudan that appeared to have been undertaken without the required prior U.S. governmental authorizations. A short time after the Dubai branch investigation commenced, we
expanded the investigation to include other Dresser affiliated offices that have since January 1999 engaged in transactions relating to U.S.-sanctioned countries (including those mentioned as well as 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 has to date identified a significant number of sales by certain of our other foreign
affiliates to sanctioned countries (in addition to such sales by the Dubai branch) that appear to have been performed without required U.S. government authorization. We have already commenced a comprehensive remedial program that is designed to
prevent the risk of further unlawful transactions or unlawful facilitations of otherwise legal transactions by our foreign affiliates involving sanctioned countries. At the conclusion of the investigation, we expect to take appropriate disciplinary
action against personnel



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who willfully engaged in wrongful conduct. See Part II. Item 1  Legal Proceedings.



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



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



| |  | We have established enhanced corporate oversight of the accounting at our Houston on/off valve operation, and expect to continue this oversight throughout 2004. Additionally, we
have conducted quarterly physical inventories at this location during the first two quarters of 2004 and on a limited basis in the third quarter of 2004. We expect to perform a full physical inventory at the end of 2004.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have significantly increased the number and skills of management and staff personnel in our accounting and finance organization to increase our depth of experience in accounting,
SEC reporting matters and internal audit, and have recently implemented processes to identify and review all significant or non-routine issues.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have appointed new controllers at six of our eight principal operating units, and have recently hired a Director of Accounting in our corporate office. Additionally, we have
recently hired a new Director of Internal Audit from outside our company. He reports to our Chief Executive Officer and the Audit Committee, and is working with management to enhance the effectiveness of our internal audit function. We are
continuing to monitor and review the overall adequacy of our personnel and expect to make additional changes.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | We have undertaken a plan to adopt an enterprise resource planning system solution to replace the current variety of systems we used for operating and financial reporting throughout
our global organization. We have installed this system at our corporate accounting department and have completed the global design of the system for our operating units. We expect to complete an initial pilot implementation of this system in our
U.S. retail fueling operation in 2004.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



Foreign Trade
Controls Investigation



In April 2004, we received
allegations that the Dubai branch of one of our U.S. subsidiaries may have engaged in transactions involving the sale of control valves and related parts to Iraq without required authorization. Upon initial investigation, we found transactions by
the branch relating to Iraq, Iran and Sudan that appeared to have been undertaken without the required prior U.S. governmental authorizations. With the assistance of outside counsel, we commenced a full investigation of the Dubai branchs
transactions with sanctioned countries. On July 9, 2004, we submitted preliminary voluntary disclosures of the Dubai branch transactions to the Commerce and Treasury Departments under their voluntary disclosure programs and committed to submit to
these departments a report concerning the results of our investigation when it is concluded.



Thereafter, we expanded the investigation to include other Dresser affiliated offices that have since January 1999 engaged in transactions relating to U.S.-sanctioned countries (including those countries mentioned as
well as Libya (prior to late 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 Audit Committee of the Board of Directors assumed oversight of the
investigation in early October 2004. We currently expect the investigation will be completed and our final reports to the Commerce and Treasury Departments will be submitted during the first quarter of 2005.



The investigation has to date identified a significant number of sales by
certain of our other foreign affiliates to sanctioned countries (in addition to such sales by the Dubai branch) that appear to have been performed without the required U.S. governmental authorizations. In some of these transactions, current and
former employees of several foreign and U.S. entities (including the Dubai branch) appear to have understood that the sales were wrongful and in some instances took steps to conceal information about them.



The investigation to date has also found evidence of potential violations by
the Company and certain of its U.S. operations in connection with sanctioned country sales. These include issuing bank guarantees, entering into agreements with foreign representatives, referring sales to foreign affiliates, and providing technical,
business or other assistance or support in connection with foreign affiliate sales.



As part of its Management Integrity Initiative, the Company has commenced a comprehensive remedial program that is designed to prevent the risk of further unlawful transactions or unlawful facilitations of otherwise
legal transactions by our foreign affiliates involving sanctioned countries. Actions that we have initiated include adoption of a requirement that the U.S. corporate legal department conduct a legal review of all pending or new sales by the
Companys foreign affiliates to sanctioned countries to determine whether such sales are permissible under applicable U.S. export control laws, issuance of further guidance to, and additional training of, our employees concerning the
application of U.S. foreign trade controls, and reorganization of the Companys management team that oversees compliance with these controls. At the conclusion of the investigation, we expect to take appropriate disciplinary action against
personnel who willfully engaged in wrongful conduct.



Violations of the applicable Commerce and Treasury Department regulations restricting dealings with Iran, Sudan, Cuba and Syria (and, in the past, Iraq and Libya) may result in 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. Because the investigation is ongoing, we are unable to determine at this time the extent of the violations or the exact
nature of the penalties to which the Company may be subjected as a result of any unauthorized dealings with U.S.-sanctioned countries. As a result, we cannot currently predict whether the ultimate resolution of this matter will materially adversely
affect us financially, or our business including our ability to do business outside the United States. At this time, we have made no provision in our financial statements for any fines or penalties that might be incurred in this matter.



The Company is involved in various legal proceedings, none of which is
deemed material for reporting purposes. Information relating to various commitments and contingencies is described in Note 11 of the financial statements of this Form 10-Q.



Item 6. Exhibits



|a.) | 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: November 15, 2004 |  | By: |  | /S/ STEVEN G. LAMB                                                   
|                        |  |     |  | Steven G. Lamb Chief Executive Officer and President                 
|                        |  |    
|                        |  |     |  | /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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