<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  FORM 10-Q/A



                                Amendment No. 1


(MARK ONE)
    [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 1-15603

                                NATCO GROUP INC.
             (Exact name of registrant as specified in its charter)

                    DELAWARE                                 22-2906892
  (State or other jurisdiction of incorporation           (I.R.S. Employer
                or organization)                         Identification No.)

              2950 NORTH LOOP WEST
                    7TH FLOOR
                 HOUSTON, TEXAS                                 77092
    (Address of principal executive offices)                 (Zip Code)

                                  713-683-9292
              (Registrant's telephone number, including area code)

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

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

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:

      As of October 29, 2004, $0.01 par value per share, 15,833,793 shares

================================================================================

<PAGE>

Explanatory Note

This amendment number 1 on Form 10-Q/A amends the Company's Quarterly Report on
Form 10-Q as of the nine months ended September 30, 2004, as filed by us on
November 9, 2004, and is being filed to correct errors in the September 30, 2004
Unaudited Condensed Statements of Cash Flows contained in Part I, Item 1, to add
Note 17 to "Notes to Unaudited Condensed Consolidated Financial Statements" in
Part I, Item 1, to correct the corresponding amounts reported under "Liquidity
and Capital Resources" in Part I, Item 2, "Management's Discussion and Analysis
of Financial Results of Operations - Liquidity and Capital Resources", to update
related information in Item 4, "Controls and Procedures", and to Part II, Item
6, Exhibits, Certifications of the Chief Executive Officer and the Chief
Financial Officer required by Sections 302 and 906 of the Sarbanes-Oxley Act in
2002. The Unaudited Condensed Consolidated Cash Flow Statement for the nine
months ended September 30, 2004 has been revised to correct the errors and
reflects an increase in cash provided by operating activities of $692,000 (from
$2.0 million to $2.7 million), a decrease in net cash used in investing
activities of $2.2 million (from $4.4 million to $2.2 million), a decrease in
cash provided by financing activities of $3.2 million (from $2.5 million
provided to $0.7 million used), change the effect of exchange rate changes by
$0.3 million (from $0.3 million used to $4,000) and to report significant
non-cash transactions related to the repayment of notes receivable from officers
with shares of Company stock. This amendment does not affect the previously
reported unaudited condensed consolidated balance sheet or statement of
operations as of or for the period ended September 30, 2004. This Form 10-Q/A
does not reflect events occurring after the filing of the original Form 10-Q or
modify of update the disclosures in that form in any way other than as required
to reflect these changes.

<PAGE>

                                NATCO GROUP INC.

                                    FORM 10-Q
                    FOR THE QUARTER ENDED SEPTEMBER 30, 2004
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                 NO.
                                                                                ----
<S>                                                                             <C>
PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements                                                   3
           Condensed Consolidated Balance Sheets - September 30, 2004
           (unaudited) and December 31, 2003                                      3
           Unaudited Condensed Statements of Operations - Three and Nine
           Months Ended September 30, 2004 and 2003                               4
           Unaudited Condensed Statements of Cash Flows - Nine Months
           Ended September 30, 2004 and 2003                                      5
           Notes to Unaudited Condensed Consolidated Financial Statements         6

Item 2.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations                                                 17

Item 3.    Quantitative and Qualitative Disclosures About Market Risk            29

Item 4.    Controls and Procedures                                               30

PART II - OTHER INFORMATION
Item 1.    Legal Proceedings                                                     31

Item 6.    Exhibits and Reports on Forms 8-K                                     31

Signatures                                                                       33
</TABLE>

                                       2
<PAGE>

                          PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                        NATCO GROUP INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                         SEPTEMBER 30,         DECEMBER 31,
                                                                                             2004                  2003
                                                                                        --------------         ------------
                                                                                         (UNAUDITED)
<S>                                                                                     <C>                    <C>
                                                           ASSETS

Current assets:
  Cash and cash equivalents.........................................................    $        1,520         $      1,751
  Trade accounts receivable, net of allowance for doubtful accounts of $2.6 million
      and $1.0 million at September 30, 2004 and December 31, 2003,
       respectively.................................................................            76,899               70,902
  Inventories.......................................................................            39,106               34,573
  Prepaid expenses and other current assets.........................................             9,457                7,770
                                                                                        --------------         ------------
        Total current assets........................................................           126,982              114,996
Property, plant and equipment, net..................................................            35,838               37,076
Goodwill, net.......................................................................            80,231               80,097
Deferred income tax assets, net.....................................................             3,357                4,290
Other assets, net...................................................................             1,424                1,269
                                                                                        --------------         ------------
        Total assets................................................................    $      247,832         $    237,728
                                                                                        ==============         ============

                        LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current installments of long-term debt............................................    $        6,526         $      5,617
  Accounts payable..................................................................            39,136               38,976
  Accrued expenses and other........................................................            30,556               30,257
  Customer advances.................................................................            12,348                5,527
                                                                                        --------------         ------------
        Total current liabilities...................................................            88,566               80,377
Long-term debt, excluding current installments......................................            37,976               38,003
Postretirement benefit and other long-term liabilities..............................            12,965               12,771
                                                                                        --------------         ------------
        Total liabilities...........................................................           139,507              131,151
                                                                                        --------------         ------------

Series B redeemable convertible preferred stock
   (aggregate redemption value of $15,000), $0.01
   par value. 15,000 shares authorized, issued and
   outstanding (net of issuance costs)..............................................            14,222               14,101

Stockholders' equity:
  Preferred stock $0.01 par value. Authorized
   5,000,000 shares (of which 500,000 are designated
   as Series A and 15,000 are designated as Series
   B); no shares issued and outstanding (except Series B shares above)..............                --                   --
  Series A preferred stock, $0.01 par value. Authorized 500,000 shares; no
         shares issued and outstanding..............................................                --                   --
  Common stock, $0.01 par value. Authorized 50,000,000 shares; issued and
        outstanding 15,833,793 and 15,854,067 shares as of September 30, 2004
        and December 31, 2003, respectively.........................................               158                  159
  Additional paid-in capital........................................................            97,070               97,351
  Accumulated earnings..............................................................             7,620                8,115
   Treasury stock, 897,060 and 795,692 shares at cost as of September 30,
      2004 and  December 31, 2003, respectively.....................................            (8,504)              (7,182)
  Accumulated other comprehensive loss..............................................            (2,241)              (2,127)
  Notes receivable from officers....................................................                 -               (3,840)
                                                                                        --------------         ------------
        Total stockholders' equity..................................................            94,103               92,476
                                                                                        --------------         ------------

   Total liabilities, redeemable convertible preferred stock and stockholders'
        equity......................................................................    $      247,832         $    237,728
                                                                                        ==============         ============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                       3
<PAGE>

                        NATCO GROUP INC. AND SUBSIDIARIES

            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                              ------------------              -----------------
                                                                                 SEPTEMBER 30,                  SEPTEMBER 30,
                                                                                 -------------                  -------------
                                                                             2004            2003          2004             2003
                                                                          ----------      ----------    ----------      ----------
<S>                                                                       <C>             <C>           <C>             <C>
Revenues..............................................................    $   84,313      $   65,801    $  229,642      $  204,427
Cost of goods sold....................................................        65,353          49,777       176,237         156,045
                                                                          ----------      ----------    ----------      ----------
          Gross profit................................................        18,960          16,024        53,405          48,382
Selling, general and administrative expense...........................        13,290          12,647        40,165          38,291
Depreciation and amortization expense.................................         1,312           1,167         4,051           3,651
Closure, severance and other..........................................         2,677             722         2,762             947
Interest expense......................................................           903             950         2,709           3,089
Write-off of unamortized loan costs...................................            --              --           667              --
Interest cost on postretirement benefit liability.....................           225             209           675             628
Interest income.......................................................            (5)            (42)         (111)           (141)
Other, net............................................................           420             (74)        1,394             830
                                                                          ----------      -----------   ----------      ----------
    Income before income taxes and cumulative
        effect of change in accounting principle......................           138             445         1,093           1,087
Income tax provision .................................................            85             255           463             499
                                                                          ----------      ----------    ----------      ----------
    Net income before cumulative effect of change
        in accounting principle.......................................            53             190           630             588
Cumulative effect of change in accounting principle
      (net of tax benefit of $18 in 2003).............................            --               -            --              34
                                                                          ----------      ----------    ----------      ----------
        Net income....................................................    $       53      $      190    $      630      $      554
 Preferred stock dividends............................................           375             378         1,125             777
                                                                          ----------      ----------    ----------      ----------
        Net loss allocable to common stockholders.....................    $     (322)     $     (188)   $     (495)     $     (223)
                                                                          ==========      ==========    ==========      ==========

Loss per share--basic:
Net loss before cumulative effect of change in accounting principle...    $    (0.02)     $    (0.01)   $    (0.03)     $    (0.01)

Cumulative effect of change in accounting principle...................            --              --            --              --
                                                                          ----------      ----------    ----------      ----------
        Net loss......................................................    $    (0.02)     $   ( 0.01)   $    (0.03)     $    (0.01)
                                                                          ==========      ==========    ==========      ==========

Loss per share--diluted:
Net loss before cumulative effect of change in accounting principle...    $   ( 0.02)     $    (0.01)   $    (0.03)     $    (0.01)

Cumulative effect of change in accounting principle...................            --              --            --              --
                                                                          ----------      ----------    ----------      ----------
        Net loss......................................................    $    (0.02)     $    (0.01)   $    (0.03)     $    (0.01)
                                                                          ==========      ==========    ==========      ==========

Basic weighted average number of shares of
  common stock outstanding............................................        15,770          15,854        15,867          15,836
Diluted weighted average number of shares
  of common stock outstanding.........................................        15,770          15,854        15,867          15,836
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                       4
<PAGE>
                        NATCO GROUP INC. AND SUBSIDIARIES

            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                          NINE MONTHS ENDED
                                                                            SEPTEMBER 30,
                                                                      -------------------------
                                                                         2004           2003
                                                                      (Restated)
                                                                      ----------     ----------
<S>                                                                   <C>            <C>
Cash flows from operating activities:
  Net income ....................................................     $      630     $      554
  Adjustments to reconcile net income to net cash
     (used in) provided by operating activities:
     Cumulative effect of change in accounting principle ........             --             34
     Deferred income tax expense ................................           (528)         1,433
     Depreciation and amortization expense ......................          4,051          3,651
     Non-cash interest income ...................................            (88)          (116)
     Other, net .................................................             64            556
     Write-off of unamortized loan costs and amortization of
        deferred loan costs .....................................            965             --
     Revaluation of warrants and other ..........................             38            (15)
     Interest cost on postretirement benefit liability ..........            675            628
     Gain on the sale of property, plant and equipment ..........           (161)          (265)
     Change in assets and liabilities:
       Decrease(increase) in trade accounts receivable ..........         (6,441)         6,389
       Increase in inventories ..................................         (4,412)        (3,755)
       Increase in prepaid expense and other current
             assets .............................................           (255)          (683)
       Increase in long-term assets .............................            (32)          (299)
       Increase in accounts payable .............................            978          3,039
       Decrease in accrued expenses and other ...................            446         (6,730)
       Increase in customer advances ............................          6,777          2,133
                                                                      ----------     ----------
          Net cash provided by operating activities .............          2,707          6,553
                                                                      ----------     ----------
Cash flows from investing activities:
  Capital expenditures for property, plant and equipment ........         (2,486)        (8,347)
  Proceeds from the sale of property, plant and equipment .......            239            670
                                                                      ----------     ----------
          Net cash used in investing activities .................         (2,247)        (7,677)
                                                                      ----------     ----------
Cash flows from financing activities:
  Net repayments under long-term revolving
    credit facilities ...........................................        (10,041)        (3,877)
  Repayments of long-term debt ..................................        (34,036)        (5,324)
  Borrowings of long-term debt ..................................         45,000             --
  Proceeds from the issuance of preferred stock, net ............            121         14,101
  Proceeds from the stock issuances related to stock options ....          1,817            111
  Dividends paid ................................................           (750)          (399)
  Deferred financing fees .......................................         (1,124)            --
  Change in bank overdrafts .....................................           (294)        (3,450)
  Payments on postretirement benefit liability ..................         (1,380)        (1,338)
                                                                      ----------     ----------
          Net cash used in financing activities .................           (687)          (176)
                                                                      ----------     ----------
Effect of exchange rate changes on cash and cash
   equivalents ..................................................             (4)           745
                                                                      ----------     ----------
Change in cash and cash equivalents .............................           (231)          (555)
Cash and cash equivalents at beginning of period ................          1,751          1,689
                                                                      ----------     ----------
Cash and cash equivalents at end of period ......................     $    1,520     $    1,134
                                                                      ==========     ==========
Cash payments for:
  Interest ......................................................     $    1,755     $    2,260
  Income taxes ..................................................     $      306     $      782
</TABLE>



<TABLE>
<S>                                                                   <C>            <C>
Significant non-cash transactions:
  Repayment of notes receivable from officers ...................     $    3,926             --
  Treasury stock acquired .......................................     $   (3,926)            --
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                       5
<PAGE>

                        NATCO GROUP INC. AND SUBSIDIARIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION


      The accompanying condensed consolidated interim financial statements and
related disclosures are unaudited and have been prepared by NATCO Group Inc.
pursuant to accounting principals generally accepted in the United States ("US
GAAP") for interim consolidated financial statements and the rules and
regulations of the Securities and Exchange Commission. As permitted by these
regulations, certain information and footnote disclosures that would typically
be required in financial statements prepared in accordance with US GAAP have
been condensed or omitted. However, the Company's management believes that these
statements reflect all the normal recurring adjustments necessary for a fair
presentation, in all material respects, of the results of operations for the
periods presented, so that these interim financial statements are not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filing for the year ended
December 31, 2003.


      To prepare financial statements in accordance with US GAAP, the Company's
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements, and reported amounts of
revenues and expenses incurred during the reporting period. Actual results could
differ from those estimates. Furthermore, certain reclassifications have been
made to fiscal year 2003 amounts in order to present these results on a
comparable basis with amounts for fiscal year 2004. These reclassifications had
no impact on net income.

      References to "NATCO" and "the Company" are used throughout this document
and relate collectively to NATCO Group Inc. and its consolidated subsidiaries.

(2) EMPLOYEE STOCK OPTIONS

      The Company accounts for its employee stock incentive plans by applying
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," as permitted by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 allows entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. If
entities continued to apply the provision of APB Opinion No. 25, pro forma net
income and earnings per share disclosures would be required for all employee
stock option grants made in 1995 and subsequent years, as if the fair
value-based method defined in SFAS No. 123 had been applied. SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment to FASB Statement No. 123," issued in December 2002, provided
alternative methods to transition to the fair value method of accounting for
stock-based compensation, on a volunteer basis, and required additional
disclosures at annual and interim reporting dates. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and to provide the pro
forma disclosures required by SFAS No. 123.

      The Company determines pro forma net income and earnings per share by
applying the Black-Scholes Single Option--Reduced Term valuation method. This
valuation model requires management to make highly subjective assumptions about
the volatility of NATCO's common stock, the expected term of outstanding stock
options, the Company's risk-free interest rate and expected dividend payments
during the contractual life of the options.


<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                     SEPTEMBER 30,             SEPTEMBER 30,
                                                                     -------------             -------------
                                                                  2004         2003         2004         2003
                                                               ----------   ----------   ----------   ----------
                                                               (UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                                            <C>          <C>          <C>          <C>
Net loss allocable to common stockholders -- as reported ...   $     (322)  $     (188)  $     (495)  $     (223)

Deduct: Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects ...............         (151)        (118)        (430)        (439)

Add: Total stock-based employee compensation
  expense recognized, net of related tax effect ............           24           --           36           --
                                                               ----------   ----------   ----------   ----------
Pro forma loss .............................................   $     (449)  $     (306)  $     (889)  $     (662)
                                                               ==========   ==========   ==========   ==========

Loss per share:
   Basic -- as reported ....................................   $    (0.02)  $    (0.01)  $    (0.03)  $    (0.01)
   Basic -- pro forma ......................................   $    (0.03)  $    (0.02)  $    (0.06)  $    (0.04)

   Diluted -- as reported ..................................   $    (0.02)  $    (0.01)  $    (0.03)  $    (0.01)
   Diluted -- pro forma ....................................   $    (0.03)  $    (0.02)  $    (0.06)  $    (0.04)
</TABLE>


                                       6
<PAGE>

(3) REDEEMABLE CONVERTIBLE PREFERRED STOCK


      On March 25, 2003, the Company issued 15,000 shares of Series B
Convertible Preferred Stock ("Series B Preferred Shares") and warrants to
purchase 248,800 shares of NATCO's common stock, to Lime Rock Partners II, L.P.,
a private investment fund, for an aggregate price of $15.0 million.
Approximately $99,000 of the aggregate price was allocated to the warrants.
Proceeds from the issuance of these securities, net of related issuance costs of
$679,000, were used to reduce the Company's outstanding revolving debt balances
and for other general corporate purposes.


      Each of the Series B Preferred Shares has a face value of $1,000 and pays
a cumulative dividend of 10% per annum of face value, which is payable
semi-annually on June 15 and December 15 of each year, except the initial
dividend payment which was payable on July 1, 2003. Each of the Series B
Preferred Shares is convertible, at the option of the holder, into (1) a number
of shares of common stock equal to the face value of such Series B Preferred
Share divided by the conversion price, which was $7.805 (or an aggregate of
1,921,845 shares) at September 30, 2004, and (2) a cash payment equal to the
amount of dividends on such shares that have accrued since the prior semi-annual
dividend payment date. The Company paid dividends of $750,000 on the Series B
Preferred Shares on June 15, 2004 related to the period January 1, 2004 through
June 30, 2004, and has accrued an additional $375,000 of dividends payable
relating to the period July 1, 2004 through September 30, 2004.

      In the event of a change in control, as defined in the certificate of
designations for the Series B Preferred Shares, each holder of the Series B
Preferred Shares has the right to convert the Series B Preferred Shares into
common stock or to cause the Company to redeem for cash some or all of the
Series B Preferred Shares at an aggregate redemption price equal to the greater
of (1) the sum of (a) $1,000 (adjusted for stock splits, stock dividends, etc.)
multiplied by the number of shares to be redeemed, plus (b) an amount (not less
than zero) equal to the product of $500 (adjusted for stock splits, stock
dividends, etc.) multiplied by the aggregate number of the Series B Preferred
Shares to be redeemed, less the sum of the aggregate amount of dividends paid in
cash since the issuance date, plus any gain on the related stock warrants, and
(2) the aggregate face value of the Series B Preferred Shares plus the aggregate
amount of dividends that have accrued on such shares since the last dividend
payment date. If the holder of the Series B Preferred Shares converts upon a
change in control occurring on or before March 25, 2006, the holder also would
be entitled to receive cash in an amount equal to the dividends that would have
accrued through March 25, 2006 less the sum of the aggregate amount of dividends
paid in cash through the date of conversion, and the aggregate amount of
dividends accrued in prior periods but not yet paid.

      The Company has the right to redeem the Series B Preferred Shares for cash
on or after March 25, 2008, at a redemption price per share equal to the face
value of the Series B Preferred Shares plus the amount of dividends that have
been accrued but not paid since the most recent semi-annual dividend payment
date.

      Due to the cash redemption features upon a change in control as described
above, the Series B Preferred Shares do not qualify for permanent equity
treatment in accordance with the Emerging Issues Task Force Topic D-98:
"Classification and Measurement of Redeemable Securities," which specifically
requires that permanent equity treatment be precluded for any security with
redemption features that are not solely within the control of the issuer.
Therefore, the Company has accounted for the Series B Preferred Shares as
temporary equity in the accompanying balance sheet, and has not assigned any
value to its right to redeem the Series B Preferred Shares on or after March 25,
2008.

      If the Series B Preferred Shares are converted under contingent redemption
features, any redemption amount greater than carrying value would be recorded as
a reduction of income available to common stockholders when the event becomes
probable.

      If the Company were to fail to pay dividends for two consecutive periods
or any redemption price due with respect to the Series B Preferred Shares for a
period of 60 days following a payment date, the Company would be in default
under the terms of such shares. During a default period, (1) the dividend rate
on the Series B Preferred Shares would increase to 10.25%, (2) the holders of
the Series B Preferred Shares would have the right to elect or appoint a second
director to the Board of Directors and (3) the Company would be restricted from
paying dividends on, or redeeming or acquiring its common or other outstanding
stock, with limited exceptions. If the Company fails to set aside or make
payments in cash of any redemption price due with respect to the Series B
Preferred Shares, and the holders elect, the Company's right to redeem the
shares may be terminated.

                                       7
<PAGE>


      The warrants issued to Lime Rock Partners II, L.P. have an exercise price
of $10.00 per share of common stock and expire on March 25, 2006. The Company
can force the exercise of the warrants if NATCO's common stock trades above
$13.50 per share for 30 consecutive days. The warrants contain a provision
whereby the holder could require the Company to make a net-cash settlement for
the warrants in the case of a change in control. The warrants were deemed to be
derivative instruments and, therefore, the warrants were recorded at fair value
as of the issuance date. Fair value, as agreed with the counter-party to the
warrant agreement, was calculated by applying a pricing model that included
subjective assumptions for stock volatility, expected term that the warrants
would be outstanding, a dividend rate of zero and an overall liquidity factor.
The Company recorded the resulting liability of $99,000 as of the issuance date.
The Company adjusted this liability to $193,000 as of September 30, 2004, as a
result of the change in the fair value of the warrants. Similarly, changes in
fair value in future periods will be recorded in earnings during the period of
the change.


(4) EARNINGS (LOSS) PER SHARE

      The following table presents the computation of basic and diluted earnings
(loss) per common and potential common share for the three and nine months ended
September 30, 2004 and 2003, respectively:


<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED         NINE MONTHS ENDED
                                                          SEPTEMBER 30,             SEPTEMBER 30,
                                                     -----------------------   -----------------------
                                                        2004         2003         2004         2003
                                                     ----------   ----------   ----------   ----------
                                                     (UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                                  <C>          <C>          <C>          <C>
Net loss allocable to common stockholders ........   $     (322)  $     (188)  $     (495)  $     (223)
Basic EPS shares .................................       15,770       15,854       15,867       15,836
Basic EPS ........................................   $    (0.02)  $    (0.01)  $    (0.03)  $    (0.01)
Dilutive shares ..................................            -            -            -            -
Diluted EPS shares ...............................       15,770       15,854       15,867       15,836
Diluted EPS ......................................   $    (0.02)  $    (0.01)  $    (0.03)  $    (0.01)
</TABLE>


    The Company computed basic earnings per share by dividing net loss available
to common stockholders by the weighted average number of shares outstanding for
the period. Net loss available to common stockholders at September 30, 2004,
represented net loss before the cumulative effect of change in accounting
principle, less preferred stock dividends accrued. The Company determined
diluted earnings per common and potential common share at September 30, 2004, as
net loss available to common stockholders divided by the weighted average number
of shares outstanding for the period, after applying the if-converted method to
determine any incremental shares associated with convertible preferred stock,
warrants and restricted stock outstanding. Since the effect of the convertible
preferred stock and related warrants was anti-dilutive at September 30, 2004,
these shares were not considered common and potential common shares for purposes
of calculating earnings per share at September 30, 2004, in accordance with SFAS
No. 128, "Earnings per Share." Outstanding employee stock options and
incremental shares related to restricted stock were considered potential common
shares for purposes of this calculation. For the quarter ended September 30,
2004, potential common shares related to employee stock options and restricted
shares included in diluted weighted average shares were 81,501 shares and 2,621
shares, respectively. Since the Company recorded a net loss available to common
stockholders for the nine months ended September 30, 2004 and for the quarter
and nine months ended September 30, 2003, all common stock equivalents related
to these periods were deemed to be anti-dilutive. Anti-dilutive stock options
were excluded from the calculation of potential common shares. If anti-dilutive
shares were included in the calculations for the three-month and nine-month
periods ended September 30, 2004 and 2003, the impact would have been a
reduction of 163,881 shares and 407,211 shares, respectively, and 203,715 shares
and 495,320 shares, respectively.

(5) INVENTORIES

      Inventories consisted of the following amounts:

<TABLE>
<CAPTION>
                                               SEPTEMBER 30,   DECEMBER 31,
                                                  2004            2003
                                               ------------    ------------
                                               (UNAUDITED)
                                                     (IN THOUSANDS)
<S>                                            <C>             <C>
Finished goods........................         $     11,589    $     11,778
Work-in-process.......................               11,673           8,402
Raw materials and supplies............               18,220          16,168
                                               ------------    ------------
  Inventories at FIFO.................               41,482          36,348
Excess of FIFO over LIFO cost.........               (2,376)         (1,775)
                                               ------------    ------------
                                               $     39,106    $     34,573
                                               ============    ============
</TABLE>

(6) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

    Costs and estimated earnings on uncompleted contracts were as follows:

<TABLE>
<CAPTION>
                                                                              SEPTEMBER 30,    DECEMBER 31,
                                                                                 2004              2003
                                                                              -------------    ------------
                                                                              (UNAUDITED)
                                                                                     (IN THOUSANDS)
<S>                                                                           <C>              <C>
Cost incurred on uncompleted contracts..................................      $      77,731    $     86,076
Estimated earnings......................................................             13,215          22,585
                                                                              -------------    ------------
                                                                                     90,946         108,661
Less billings to date...................................................             82,028          91,288
                                                                              -------------    ------------
                                                                              $       8,918    $     17,373
                                                                              =============    ============
Included in the accompanying balance sheet under the captions:
  Trade accounts receivable.............................................      $      21,147    $     22,375
  Advance payments......................................................            (12,229)         (5,002)
                                                                              -------------    ------------
                                                                              $       8,918    $     17,373
                                                                              =============    ============
</TABLE>

                                       8
<PAGE>

(7) CLOSURE, SEVERANCE AND OTHER

      In September 2004, the Company recorded severance expense of $210,000
related to staff reductions in the North American Operations. As of September
30, 2004, the Company had a liability of $205,000 related to this matter.


      On July 28, 2004, the Company entered into a Separation Agreement with Mr.
Nathaniel A. Gregory, then the Company's CEO, pursuant to which Mr. Gregory
stepped down as Chairman of the Board of Directors on that date and agreed to
resign from the Company on September 7, 2004. During the quarter the Company
recorded expense of approximately $2.5 million related to (1) severance payments
(2) continuation of Mr. Gregory's welfare benefits for a period of 36 months
following separation, (3) extending the exercise dates for Mr. Gregory's
outstanding options to 18 months following the separation date for which the
Company recorded approximately $62,000 for stock based employee compensation
expense, (4) payment of certain of his attorneys' fees in connection with the
Separation Agreement, and (6) reimbursement of certain moving expenses. During
the quarter, the Company paid $1.4 million of this amount. As of September 30,
2004, the Company had a liability of $1.1 million related to the separation
agreement.


      The Company also agreed to (1) accelerate vesting of any of Mr. Gregory's
outstanding options, (2) reimburse certain living and commuting expense through
the separation date consistent with past practice, (3) continue providing
director and officer indemnification insurance for a period of time,(4) pay
bonuses earned through the separation date pursuant to the Company's bonus plan
and (5) continue to reimburse Mr. Gregory's office space in Connecticut through
December 31, 2004. The cost of these items has been or will be expensed in the
period incurred. Under this Agreement, Mr. Gregory agreed to provide advisory
services for a period of one year following the separation date, when and as
requested by the Board, and to release the Company from certain potential
claims. The Company did not incur any cost related to this item during the
quarter and , if incurred, will record as an expense in the period incurred. The
parties also agreed on certain procedures for the repayment of Mr. Gregory's
then outstanding loans to the Company, which were paid in full on July 28, 2004.

      In addition, the Company recorded and paid severance expense of $111,000
in June 2004 associated with staff reductions at a subsidiary in the Automation
and Control Systems business segment and a subsidiary within the North American
Operations business segment.

      In December 2003, the Company's management approved additional
restructuring costs including a plan to close an Engineered Systems location in
Singapore and recorded closure and other expense of $692,000, of which $515,000
related to severance, $35,000 related to the termination of a lease arrangement
and $142,000 related to employee relocation. As of September 30, 2004, the
Company had a liability of $163,000 related to this restructuring plan.

      In September 2003, the Company recorded expenses of $722,000 associated
with a management-approved restructuring plan, which included the involuntary
termination of certain administrative and operating personnel in connection with
the closure of a manufacturing facility in Covington, Louisiana, at the
Company's corporate headquarters, at the Company's research and development
facility in Tulsa, Oklahoma, and related to the consolidation of operations in
the U.K. Of the total expense recognized under this restructuring plan, $640,000
related to post-employment benefits, which were accounted for in accordance with
SFAS No. 112, "Employers' Accounting for Post-employment Benefits, an amendment
of FASB Statements No. 5 and 43," and $82,000 related to consultant's fees,
equipment moving costs and employee relocations, which were accounted for in
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." During the nine months ended September 30, 2004, the
Company incurred an additional $51,000 of expense related to this restructuring
plan, offset by accrual reversals as a result of changes in the assessment of
liability under this plan totaling $77,000, resulting in an increase in net
income of $26,000 for the period. The Company had a liability of $31,000 related
to this restructuring plan as of September 30, 2004.

      As of December 31, 2002, the Company had recorded a liability totaling
$304,000 related to certain restructuring costs incurred in connection with the
closure of a manufacturing facility in Edmonton, Alberta, Canada. Through
September 30, 2004, this liability was increased to $351,000 due to exchange
rate changes of $47,000 and reduced by $217,000 related to amounts paid and
$126,000 related to a change in the assessment of liability under the lease
arrangement for the facility. As of September 30, 2004, the Company had a
liability of approximately $8,000 related to this restructuring plan, primarily
associated with lease commitments. In addition, the Company recorded closure and
other expense associated with this Canadian restructuring plan of $230,000
during the nine months ended September 30, 2003, which were not included as part
of the December 31, 2002 restructuring reserve. These costs included equipment
moving costs and employee relocations, including severance costs of $129,000
that were not identified as restructuring costs as of the plan measurement date.

                                       9
<PAGE>

(8) LONG-TERM DEBT

      The Company had the following consolidated borrowings as of the date
indicated:

<TABLE>
<CAPTION>
                                                                                          SEPTEMBER 30,        DECEMBER 31,
                                                                                              2004                2003
                                                                                          -------------       --------------
                                                                                           (UNAUDITED)
                                                                                          (IN THOUSANDS, EXCEPT PERCENTAGES)
<S>                                                                                       <C>                 <C>
BANK DEBT
2004 term loan with variable interest rate (4.69% at September 30, 2004) and
   quarterly payments of principal ($1,607) and interest, due
   March 31, 2007.....................................................................    $      41,786       $           --
2004 revolving credit bank loans with variable interest rate (6.50% at
   September 30, 2004) and quarterly interest payments, due
   March 31, 2007.....................................................................            1,500                   --
2001 term loan with variable interest rate (3.91% at December 31, 2003) and
   quarterly payments of principal ($1,750) and interest, due
   March 31, 2006.....................................................................               --               30,750
2001 revolving credit bank loans with variable interest rate (4.88% at
   December 31, 2003) and quarterly interest payments, due
   March 31, 2004.....................................................................               --               10,881
Promissory note with variable interest rate (4.92% at September 30, 2004 and
   4.40% at December 31, 2003) and quarterly payments of principal ($24) and
   interest, due February 8, 2007........................                                         1,216                1,289
Revolving credit bank loans (export sales facility) with variable interest rate
   (6.50% at September 30, 2004) and monthly interest payments, due
    March 31, 2007...........................................                                        --                   --
Revolving credit bank loans (export sales facility) with variable interest rate
   (4.75% and 4.00% at June 30, 2004 and December 31, 2003, respectively) and
   monthly interest payments, due July 23, 2004.......................................               --                  700
                                                                                          -------------       --------------
      Total...........................................................................    $      44,502       $       43,620
      Less current installments.......................................................           (6,526)              (5,617)
                                                                                          -------------       --------------
          Long-term debt..............................................................    $      37,976       $       38,003
                                                                                          =============       ==============
</TABLE>

      On July 23, 2004, the Company and two of its subsidiaries entered into an
international revolving credit agreement with Wells Fargo HSBC Trade Bank, N.A.
providing for loans of up to $10 million, subject to borrowing base limitations.
This working capital facility for export sales is secured by specific project
inventory and receivables, as well as certain other inventory, accounts
receivable and equipment, and is partially guaranteed by the U.S. Export-Import
Bank. Loans under this facility mature on March 31, 2007, and bear interest at
either (1) a Base Rate, as defined in the agreement, less .25% or (2) the London
Interbank Offered Rate ("LIBOR") plus 2.00%, at the Company's election. This
facility replaced a similar export sales credit facility that terminated on July
23, 2004. No letters of credit were outstanding under this facility as of
September 30, 2004. This facility had fees related to letters of credit of
approximately 1.00% of the outstanding balance for the period July 23, 2004 to
September 30, 2004.

      On March 15, 2004, the Company replaced its term loan and revolving
facilities agreement with a new term loan and revolving facilities agreement,
referred to as the 2004 term loan and revolving credit facilities, which
provides for a term loan of $45.0 million, a U.S. revolving facility with a
borrowing capacity of $20.0 million, a Canadian revolving facility with a
borrowing capacity of $5.0 million and a U.K. revolving facility with a
borrowing capacity of $10.0 million. All of the borrowing capacities under the
2004 revolving facilities agreement are subject to borrowing base limitations.

      The Company recorded a charge of $667,000 in March 2004 to expense
unamortized loan costs related to the 2001 term loan and revolving credit
facilities, and incurred an additional $886,000 of deferred loan costs related
to the 2004 term loan and revolving credit facilities, which will be amortized
as interest expense through the term of the facilities in March 2007.

      The 2004 term loan and revolving facilities agreement provides for
interest at a rate based upon the ratio of Funded Debt to EBITDA, as defined in
the credit facility ("EBITDA"), and ranging from, at the Company's election, (1)
a high LIBOR plus 2.75% to a low of LIBOR plus 2.00% or (2) a high of a base
rate plus 1.75% to a low of a base rate plus 1.00%. The Company will pay
commitment fees related to this agreement on the undrawn portion of the
facility, depending upon the ratio of Funded Debt to EBITDA, which were
calculated at 0.50% at September 30, 2004.

                                       10
<PAGE>

      Borrowings of $41.8 million were outstanding under the term loan portion
of the 2004 term loan and revolving credit facilities at September 30, 2004, and
bore interest at 4.67%. Borrowings outstanding under the revolving credit
portion of the 2004 term loan and revolving credit facility at September 30,
2004 were $1.5 million and bore interest at 6.50%. The Company had letters of
credit outstanding under these revolving facilities of $24.9 million. Fees
related to these letters of credit were approximately 2.50% of the outstanding
balance at September 30, 2004. These letters of credit support contract
performance and warranties and expire at various dates through February 2008.

      The 2004 term loan and revolving facilities agreement is secured by a
first lien or first priority security interest in or pledge of substantially all
of the assets of the borrowers, including accounts receivable, inventory,
equipment, intangibles, equity interests in U.S. subsidiaries and 66?% of the
equity interest in active, non-U.S. subsidiaries. Assets of the Company and its
active U.S. subsidiaries secure the U.S., Canadian and U.K. revolving
facilities, assets of the Company's Canadian subsidiary also secure the Canadian
facility and assets of the Company's U.K. subsidiaries also secure the U.K.
facility. The U.S. facility is guaranteed by each U.S. subsidiary of the
Company, while the Canadian and U.K. facilities are guaranteed by NATCO Group
Inc., each of its U.S. subsidiaries and the Canadian subsidiary or the U.K.
subsidiaries, as applicable.

      The Company paid commitment fees of 0.50% for the quarter ended September
30, 2004 on the undrawn portion of the 2004 term loan and revolving credit
facilities.

      The 2004 term loan and revolving facilities agreement contains restrictive
covenants including, among others, those that limit the amount of Funded Debt to
EBITDA, impose a minimum fixed charge coverage ratio and impose a minimum net
worth requirement. On September 30, 2004, the Company was in compliance with all
restrictive debt covenants under its loan agreements.

      Prior to March 15, 2004, the Company maintained a credit facility that
consisted of a $50.0 million term loan, a $30.0 million U.S. revolving facility,
a $10.0 million Canadian revolving facility and a $10.0 million U.K. revolving
facility, referred to as the 2001 term loan and revolving facilities. The 2001
term loan and revolving facilities were terminated on March 15, 2004 and
replaced by the 2004 term loan and revolving facilities.

      In July 2002, the Company's lenders approved the amendment of various
provisions of the 2001 term loan and revolving facilities agreement, effective
April 1, 2002. This amendment revised certain restrictive debt covenants,
modified certain defined terms, allowed for future capital investment in the
Company's Sacroc CO2 processing facility in West Texas, facilitated the issuance
of up to $7.5 million of subordinated indebtedness, increased the aggregate
amount of operating lease expense allowed during a fiscal year and permitted an
increase in borrowings under the export sales credit facility, without further
lender consent, up to a maximum of $20.0 million. These modifications resulted
in higher commitment fee percentages and interest rates than in the original
loan agreement, based on the Funded Debt to EBITDA ratio, as defined in the
underlying agreement, as amended.

      In July 2003, the Company's lenders approved an amendment of the 2001 term
loan and revolving facilities agreement, effective April 1, 2003. The amendment
modified several restrictive covenant terms, including the Fixed Charge Coverage
Ratio and Funded Debt to EBITDA Ratio, each as defined in the agreement, as
amended. Under the Company's 2001 term loan and revolving facilities agreement,
certain debt covenants became more restrictive during the fourth quarter of
2003, and the Company was required to obtain a waiver of the covenants related
to net worth, Funded Debt to EBITDA ratio and Fixed Charge Coverage Ratio
through March 31, 2004, subject to the Company meeting a minimum EBITDA
threshold, in order to remain in compliance with the agreement, as amended. The
Company met this threshold requirement and was in compliance with all covenant
requirements, as amended.

      Amounts borrowed under the 2001 revolving facilities portion of the
agreement bore interest at a rate based upon the ratio of Funded Debt to EBITDA
and ranging from, at the Company's election, (1) a high of LIBOR plus 3.00% to a
low of LIBOR plus 1.75% or (2) a high of a base rate plus 1.50% to a low of a
base rate plus 0.25%.

      The Company paid commitment fees of 0.30% to 0.625% per year after 2002 on
the undrawn portion of the 2001 revolving credit facilities agreement, depending
upon the ratio of Funded Debt to EBITDA. Prior to retirement of this facility in
March 2004, the Company's commitment fees were calculated at a rate of 0.625%
during the quarter.

      On February 6, 2002, the Company borrowed $1.5 million under a long-term
promissory note to finance the purchase of a manufacturing facility in Magnolia,
Texas. This note accrues interest at the 90-day LIBOR plus 3.25%, and requires
quarterly payments of principal of approximately $24,000 and interest for five
years beginning May 2002, with a final balloon payment due February 2007. The
outstanding balance of this note was $1.2 million at September 30, 2004 and bore
interest at 4.92%. This promissory note is collateralized by the manufacturing
facility in Magnolia, Texas.

                                       11

<PAGE>

      The Company previously maintained a working capital facility for export
sales that provided for aggregate borrowings of $10.0 million, subject to
borrowing base limitations, which matured on July 23, 2004 and was replaced by a
similar facility on that date. The export sales credit facility was secured by
specific project inventory and receivables, and was partially guaranteed by the
U.S. Export-Import Bank. The Company had fees related to letters of credit under
this facility which were approximately 1% of the outstanding balance for the
period from January 1, 2004 to July 23, 2004.

      The Company also had unsecured letters of credit and bonds totaling
$660,000 at September 30, 2004.

(9) INCOME TAXES

      NATCO's effective income tax rate for the nine months ended September 30,
2004 was 42%, which exceeded the amount that would have resulted from applying
the U.S. federal statutory tax rate due to the impact of state income taxes,
foreign income tax rate differentials, losses in foreign subsidiaries, changes
in valuation allowances recorded and certain permanent book-to-tax differences.
There are certain tax returns for certain years currently under review. Although
we believe we have adequately provided for income taxes, the ultimate tax
outcome may differ from the amounts recorded in our financial statements. Such
determinations could materially affect our financial results in that period or
periods for which such determination is made.

(10) INDUSTRY SEGMENTS

      The Company's operations are organized into three separate business
segments: North American Operations, which primarily provides traditional,
standard and small custom production equipment and components, replacement
parts, used equipment and components, equipment servicing and field operating
support (including operations of our domestic membrane facility); Engineered
Systems, which primarily provides customized and more complex technological
equipment, large scale integrated oil and gas production systems, and equipment
and services provided by certain international operations (including Axsia); and
Automation and Control Systems, which provides control panels and systems that
monitor and control oil and gas production, as well as installation and start-up
and other field services related to instrumentation and electrical systems.

      The accounting policies of the reportable segments were consistent with
the policies used to prepare the Company's condensed consolidated financial
statements for the respective periods presented. The Company evaluates the
performance of its operating segments based on income before net interest
expense, income taxes, depreciation and amortization expense, closure and other,
write-off of unamortized loan costs, other, net and accounting changes.

      In September 2003, the Company changed the presentation of its reportable
segments by reclassifying certain research and development costs and bonus
expenses among the business segments from the "Corporate and Other" segment. In
addition, Other, net was excluded from the determination of segment profit
(loss). These changes were made as a result of a change in management's internal
reporting to better state total costs and profits of each segment and have been
retroactively reflected in all periods presented.

      Consistent with restructuring efforts in late 2003 and to more closely
align the Company's segment presentation to the internal reporting presentation
used by the Company's management, the Company changed the presentation of its
reportable segments in December 2003, by reclassifying certain manufacturing
plants and related assets from the Engineered Systems segment to the North
American Operations segment. As a result of this reclassification, total assets,
capital expenditures and depreciation and amortization expense increased for the
North American Operations segment for the quarter ended September 30, 2003 by
$13.3 million, $15,000 and $244,000, respectively, and for the nine months ended
September 30, 2003 by $13.3 million, $65,000 and $724,000, respectively, with
corresponding decreases in the Engineered Systems segment, in order to present
these amounts on a comparable basis with the segment results for the quarter and
nine months ended September 30, 2004. Summarized segment results for the
quarters and nine-month periods ended September 30, 2004 and 2003 were as
follows:

                                       12

<PAGE>

<TABLE>
<CAPTION>
                                                NORTH                    AUTOMATION
                                              AMERICAN     ENGINEERED     & CONTROL    CORPORATE &
                                             OPERATIONS     SYSTEMS        SYSTEMS        OTHER         TOTAL
                                             ----------     -------        -------        -----         -----
                                                               (UNAUDITED, IN THOUSANDS)
<S>                                          <C>           <C>           <C>           <C>            <C>
THREE MONTHS ENDED
  SEPTEMBER 30, 2004

Revenues from unaffiliated customers..       $   50,454    $   20,689    $   13,170    $        --    $ 84,313
Inter-segment revenues ...............              455            49           973         (1,480)         --
Segment profit (loss) ................            6,753           624           816         (2,526)      5,670
Total assets .........................          126,784        95,108        19,714          6,226     247,832
Capital expenditures .................              564            58           187             76         885
Depreciation and amortization ........              944           194            94             81       1,313
THREE MONTHS ENDED
  SEPTEMBER 30, 2003

Revenues from unaffiliated customers..       $   32,553    $   20,528    $   12,720    $        --    $ 65,801
Inter-segment revenues ...............              165           308           684         (1,157)         --
Segment profit (loss) ................            2,891           192         1,254           (960)      3,377
Total assets .........................          113,624        90,238        21,521          9,808     235,191
Capital expenditures .................            1,631           333             2              4       1,970
Depreciation and amortization ........              913           131            28             95       1,167
NINE MONTHS ENDED
  SEPTEMBER 30, 2004

Revenues from unaffiliated customers..       $  129,429    $   67,307    $   32,906    $        --    $229,642
Inter-segment revenues ...............            1,065           213         2,537         (3,815)         --
Segment profit (loss) ................           16,911         1,028         1,767         (6,466)     13,240
Total assets .........................          126,784        95,108        19,714          6,226     247,832
Capital expenditures .................            1,723           273           242            134       2,372
Depreciation and amortization ........            2,830           643           296            282       4,051
NINE MONTHS ENDED
  SEPTEMBER 30, 2003

Revenues from unaffiliated customers..       $   91,297    $   73,769    $   39,361    $        --    $204,427
Inter-segment revenues ...............              992           375         3,291         (4,658)         --
Segment profit (loss) ................            6,923         2,250         3,821         (2,903)     10,091
Total assets .........................          113,624        90,238        21,521          9,808     235,191
Capital expenditures .................            7,099         1,092           132             24       8,347
Depreciation and amortization ........            2,555           588           223            285       3,651
</TABLE>

      The following table reconciles total segment profit to net income before
cumulative effect of change in accounting principle:

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                SEPTEMBER 30,               SEPTEMBER 30,
                                                             --------------------       --------------------
                                                              2004         2003          2004         2003
                                                             -------      -------       -------      -------
                                                                         (UNAUDITED, IN THOUSANDS)
<S>                                                          <C>          <C>           <C>          <C>
Total segment profit ..................................      $ 5,670      $ 3,377       $13,240      $10,091
Net interest expense ..................................        1,123        1,117         3,273        3,576
Depreciation and amortization .........................        1,312        1,167         4,051        3,651
Closure, severance and other ..........................        2,677          722         2,762          947
Write-off of unamortized loan costs ...................           --           --           667           --
Other, net ............................................          420          (74)        1,394          830
                                                             -------      -------       -------      -------
Net income before income taxes and cumulative effect of
   change in accounting principle .....................          138          445          1093        1,087
  Income tax provision ................................           85          255           463          499
                                                             -------      -------       -------      -------
    Net income before cumulative effect of change in
     accounting principle .............................      $    53      $   190       $   630      $   588
                                                             =======      =======       =======      =======
</TABLE>

                                       13
<PAGE>

(11) PENSION AND OTHER POSTRETIREMENT BENEFITS


      The Company maintains a postretirement benefit plan that provides health
care and life insurance benefits for retired employees of a predecessor company.
This plan is accounted for in accordance with SFAS No. 106, "Employer's
Accounting for Postretirement Benefits Other Than Pensions." The Company has
recorded a liability for the actuarially determined accumulated postretirement
benefit obligation associated with this plan.


      On December 31, 2003, the President of the United States signed into law
the Medicare Prescription Drug Improvement and Modernization Act of 2003. In May
2004, the Financial Accounting Standards Board issued FSP FAS 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003." This pronouncement requires the
Company to determine whether or not the benefit provided under its plan is
"actuarially equivalent" to the Medicare prescription drug-benefit. If the
benefit provided is actuarially equivalent and this federal subsidy is deemed a
significant event, the Company is required to account for the federal subsidy
attributable to past services as an actuarial gain under FSP SFAS No. 106 and to
reduce the accumulated postretirement benefit obligation. For the portion of the
federal subsidy attributable to current or future service, the Company is
required to reduce net periodic postretirement benefit cost while the employee
provides the service. The Company's actuary made a preliminary assessment that
the benefits provided under its postretirement benefit plan are actuarially
equivalent and that this law could reduce the Company's overall accumulated
postretirement benefit obligation by $1.9 million, and thereby reduce the annual
net periodic benefit cost associated with this plan. Based on this preliminary
assessment, for the nine months ended September 30, 2004, net periodic benefit
cost was reduced by approximately $222,000, of which $87,000 related to a
reduction of interest cost and $135,000 related to a reduction of the
amortization of the cumulative experience loss, to reflect the most recent
estimate of the Company's net periodic benefit cost under this postretirement
benefit plan. The Company intends to continue to review its assessment of the
impact of this law on its postretirement benefit plan during 2004, and expects
to adjust net periodic benefit cost accordingly.

      The following table summarizes the components of net periodic benefit cost
under the Company's postretirement benefit plan as of September 30, 2004 and
2003, respectively:

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED             NINE MONTHS ENDED
                                            SEPTEMBER 30                  SEPTEMBER 30,
                                       ---------------------          ---------------------
                                        2004           2003            2004           2003
                                       -----          ------          ------         ------
                                                    (UNAUDITED, IN THOUSANDS)
<S>                                    <C>            <C>             <C>            <C>
Unrecognized prior service cost        $(146)         $(146)          $ (438)        $(438)
Interest cost                            221            227              663           682
Unrecognized loss                        150            128              450           384
                                       -----          -----           ------         -----
   Net periodic benefit cost           $ 225          $ 209           $  675         $ 628
                                       =====          =====           ======         =====
</TABLE>

      During the three and nine months ended September 30, 2004, there were no
significant modifications or changes to the level of contributions provided to
the plan by the Company or the plan participants.

      Prior to plan termination, the Company maintained a plan that provided
pension benefits to certain union employees in Canada. In August 2001, the
participants of the plan voted to terminate contributions to the plan and
receive actuarially determined cash distributions. The plan was formally
terminated in December 2002, with distributions paid in early 2003. In February
2003, the Company purchased an annuity contract, and effective April 2003, all
liability for any future claims related to this plan were transferred to the
contract insurer. For the nine months ended September 30, 2003, net periodic
benefit cost under this plan was $9,000 attributable primarily to interest cost.

(12) GOODWILL AND INTANGIBLE ASSETS

      In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company evaluates intangible assets with indefinite lives, including
goodwill, on an impairment basis, while intangible assets with a defined term,
such as patents, are amortized over the useful life of the asset.

                                       14

<PAGE>

      Intangible assets subject to amortization as of September 30, 2004 and
2003 were:

<TABLE>
<CAPTION>
                                  AS OF SEPTEMBER 30, 2004        AS OF SEPTEMBER 30, 2003
                                  ------------------------        ------------------------
                                    GROSS                            GROSS
                                  CARRYING     ACCUMULATED         CARRYING    ACCUMULATED
TYPE OF INTANGIBLE ASSET           AMOUNT     AMORTIZATION          AMOUNT     AMORTIZATION
------------------------          --------    ------------         --------    ------------
                                                (UNAUDITED, IN THOUSANDS)
<S>                               <C>         <C>                 <C>          <C>
Deferred financing fees            $  973        $ 173             $ 3,528        $ 2,520
Patents                               165           54                 160             33
Other                                 534          304                 361            254
                                  -------        -----             -------        -------
  Total                           $ 1,672        $ 531             $ 4,049        $ 2,807
                                  =======        =====             =======        =======
</TABLE>

      Amortization and interest expense of $109,000 and $209,000 were recognized
related to these assets for the three months ended September 30, 2004 and 2003,
respectively, and $370,000 and $637,000 for the nine months ended September 30,
2004 and 2003, respectively. In addition, the Company recorded expense of
$667,000 related to the write-off of deferred financing fees, resulting from the
retirement of the 2001 term loan and revolving credit facilities. See Note 8,
Long-term Debt. The estimated aggregate amortization and interest expense for
these assets for each of the following five fiscal years, excluding the
write-off of deferred financing fees mentioned above, is: 2004 -- $424,000; 2005
-- $339,000; 2006 -- $334,000; 2007 -- $101,000; and 2008 -- $28,000. For
segment reporting purposes, these intangible assets and the related amortization
expense were recorded under "Corporate and Other."

      Net goodwill of $80.2 million was the Company's only intangible asset that
did not require periodic amortization as of September 30, 2004. The $0.1 million
increase in the value of goodwill during the nine months ended September 30,
2004 related entirely to currency exchange rate fluctuations.


      In accordance with SFAS No. 142, the Company tested each reporting unit
for impairment of goodwill at December 31, 2003, and, based upon the results of
this testing, management determined that goodwill was not impaired. The Company
will test each reporting unit for goodwill impairment annually, as required by
the pronouncement, or more frequently if there are indications of goodwill
impairment. No additional testing was performed during the nine months ended
September 30, 2004, as management noted no indications of goodwill impairment.
However, the Company is reviewing incremental growth and cost management
initiatives to be implemented over the next several months. Such initiatives may
include the repositioning of certain business operations in their markets that
could, in turn, have a negative impact on the valuation of goodwill. The Company
is unable to estimate the impact, if any, of such initiatives until such time as
its plans are finalized and approved by the Board of Directors and goodwill
impairment is tested.


(13) CHANGE IN ACCOUNTING PRINCIPLE

      Effective January 1, 2003, NATCO recorded the cumulative effect of change
in accounting principle related to the adoption of SFAS No. 143, "Accounting for
Asset Retirement Obligations." This standard required the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which a legal obligation associated with the retirement of tangible long-lived
assets that result from acquisition, construction, development and/or normal use
of the assets, was incurred. In addition, the standard requires the Company to
record a corresponding asset that will be depreciated over the life of the asset
that gave rise to the liability. Subsequent to the initial measurement of the
asset retirement obligation, the Company will be required to adjust the related
liability at each reporting date to reflect changes in estimated retirement cost
and the passage of time. The Company recorded a loss of $34,000, net of tax, as
of January 1, 2003, as a result of this change in accounting principle. The
related asset retirement obligation and asset cost of $96,000 was associated
with an obligation to remove certain leasehold improvements upon termination of
lease arrangements, including concrete pads and equipment. The asset cost will
be depreciated over the remaining useful life of the related assets. There was
no significant change in the asset or liability during the nine months ended
September 30, 2004.

                                       15

<PAGE>

(14) RELATED PARTY TRANSACTIONS

      Under the terms of an employment agreement in effect prior to 1999, the
Company loaned its Chief Executive Officer $1.2 million in July 1999 to purchase
136,832 shares of common stock. During February 2000, after the Company
completed the initial public offering of its Class A common stock, also pursuant
to the terms of that employment agreement, the Company paid this executive
officer a bonus equal to the principal and interest accrued under this note
arrangement and recorded compensation expense of $1.3 million. The officer used
the proceeds of this settlement, net of tax, to repay the Company approximately
$665,000. In addition, on October 27, 2000, the Company's board of directors
agreed to provide a full-recourse loan to this executive officer to facilitate
the exercise of certain outstanding stock options. The amount of the loan was
equal to the cost to exercise the options plus any personal tax burdens that
resulted from the exercise. The maturity of these loans was July 31, 2003, and
interest accrued at rates ranging from 6% to 7.8%. As of September 30, 2002,
these outstanding notes receivable totaled $3.4 million, including principal and
accrued interest. Effective July 1, 2002, the notes were reviewed by the
Company's board and amended to extend the maturity dates to July 31, 2004, and
to require interest to be calculated at an annual rate based on LIBOR plus 300
basis points, adjusted quarterly, applied to the notes balances as of September
30, 2002, including previously accrued interest. These loans to this executive
officer, which were made on a full recourse basis in prior periods to facilitate
direct ownership in the Company's common stock, were subject to and in
compliance with provisions of the Sarbanes-Oxley Act of 2002 at all times prior
to their repayment.

      As previously agreed in 2001, the Company loaned its President $216,000 on
April 15, 2002, under a full-recourse note arrangement which accrued interest at
6% and was to mature on July 31, 2003. The funds were used to pay the exercise
cost and personal tax burdens associated with stock options exercised during
2001. Effective July 1, 2002, the note was amended to extend the maturity date
to July 31, 2004, and to require interest to be calculated at an annual rate
based on LIBOR plus 300 basis points, adjusted quarterly, applied to the note
balance as of September 30, 2002, including previously accrued interest. This
loan to this executive officer, which was made on a full recourse basis in prior
periods to facilitate direct ownership in the Company's common stock, was
subject to and in compliance with provisions of the Sarbanes-Oxley Act of 2002
at all times prior to their repayment.

      As approved by the Company's Board of Directors, on July 28, 2004, the
Company repurchased an aggregate of 498,670 shares of NATCO Group Inc. common
stock from two executive officers at a price of $7.859 per share, which
represented the 15-trading day average of the closing price of the Company's
common stock as reported on the New York Stock Exchange for the period ended
July 23, 2004. These officers used these proceeds and other funds to repay in
full all outstanding loans to the Company that were scheduled to mature on July
31, 2004.

(15) LITIGATION


      Magnum Transcontinental Corp. Arbitration and Petroserv, S.A. v. National
Tank Company, 165th Jud. Dist. Ct., Harris Co., TX (Cause No. 200418769). These
matters stem from an agreement among NATCO Group, Magnum Transcontinental
Corporation, the U.S. procurement arm of Petroserv S.A., and Zephyr Offshore,
Inc., a Petroserv subsidiary, to manufacture and install a processing plant on a
Petroserv rig, and Petroserv's agency agreement with NATCO for certain projects
in Brazil. NATCO claims Magnum owes it $418,990 under the plant manufacturing
agreement for additional work performed in excess of the days agreed in the
contract. NATCO submitted the matter to binding American Arbitration Association
arbitration on October 29, 2003. In the arbitration, Magnum originally
counter-claimed for $4,685,000, alleging breach of contract. Magnum amended its
answer and counter-claim in the arbitration on July 16, 2004, reducing its total
amount claimed to $1,304,000. At an arbitration hearing held in October 2004,
Magnum further reduced its counterclaim by $570,000. NATCO disputes the
remaining amounts claimed by Magnum, and intends to vigorously pursue its claims
while defending against the counterclaim. NATCO has not recorded an accrual
related to this matter as of September 30, 2004 because it does not believe the
loss is probable. The arbitration proceeding is expected to be completed in
November or December 2004.



      After NATCO filed its request for arbitration, Petroserv submitted a
mediation request under its representation agreement with NATCO, claiming unpaid
agency fees on several contracts, including the Magnum contract. No resolution
resulted from the mediation, which was held on January 23, 2004. NATCO believes
any fees owed to Petroserv under the agency agreement are offset by NATCO's
claims against Magnum. NATCO disputes that it owes any fees for the Magnum work
or any work obtained in Brazil after the representation agreement terminated in
early 2003. Petroserv served a collections suit in state court in May 2004,
seeking over $731,323, plus attorneys' fees, interest and court costs,
representing amounts allegedly due under the representation agreement on several
contracts, including the Magnum Transcontinental contract. NATCO has filed a
counterclaim in this action, claiming breach of the agency agreement and
fiduciary obligations Petroserv owed to NATCO. A second unsuccessful mediation
was held in the case in August 2004.


                                       16

<PAGE>

      The Company and its subsidiaries are defendants or otherwise involved in a
number of other legal proceedings in the ordinary course of business. While the
Company insures against the risk of these proceedings to the extent deemed
prudent by management, NATCO can offer no assurance that the type or value of
this insurance will meet the liabilities that may arise from any pending or
future legal proceedings related to business activities. While the Company
cannot predict the outcome of any legal proceedings with certainty, in the
opinion of management, ultimate liability with respect to these pending lawsuits
is not expected to have a significant or material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.

(16) RECENT ACCOUNTING PRONOUNCEMENTS

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement provides guidance on how to classify and measure certain financial
instruments that have characteristics of both liabilities and equity, and
generally requires treatment of these instruments as liabilities, including
certain obligations that the issuer can or must settle by issuing its own equity
securities. This pronouncement, which was effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise became
effective on July 1, 2003, required cumulative effect of a change in accounting
principle treatment upon adoption. The Company adopted this pronouncement on
July 1, 2003, with no material impact on its financial condition or results of
operation.

      In December 2003, the FASB issued an amendment of SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
amendment, which was effective at December 31, 2003, requires additional annual
disclosures about pension or postretirement plan assets and liabilities, as well
as investment policies and strategies for plan assets, basis for expected rate
of return on assets and total accumulated benefit obligation. In addition, this
amendment requires interim disclosures of the components of net periodic benefit
cost in tabular format and contributions paid or expected to be paid during the
current fiscal year. Effective December 31, 2004, the Company will be required
to disclose benefits expected to be paid in each of the next five years under
each pension or postretirement plan, and an aggregate amount expected to be paid
for the succeeding five-year period under these arrangements. The Company
adopted this amendment to SFAS No. 132 on December 31, 2003.

      In April 2004, the FASB issued SFAS No. 129-1, "Disclosure Requirements
under FASB Statement No. 129, Disclosure of Information about Capital Structure,
Relating to Contingently Convertible Securities." This statement confirmed that
SFAS No. 129 applied to all contingently convertible securities and requires the
Company to explain all pertinent rights and privileges of these contingently
convertible securities including conversion or exercise prices, rates, pertinent
data, sinking-fund requirements, unusual voting rights and significant terms of
contracts to issue additional shares. This statement became effective on April
9, 2004 and was adopted by the Company with no material impact on financial
condition or results of operation.

      In May 2004, the FASB issued FSP FAS No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." This pronouncement requires the Company to determine
whether or not the benefit provided is "actuarially equivalent" to the Medicare
prescription drug-benefit. If the benefit provided is actuarially equivalent and
the subsidy is deemed a significant event, the Company is required to account
for the federal subsidy attributable to past services as an actuarial gain under
SFAS No. 106 and to reduce the accumulated post retirement benefit obligation.
For the portion of the federal subsidy attributable to current or future
service, the Company is required to reduce net periodic postretirement benefit
cost while the employee provides the service. This pronouncement became
effective for interim or annual reporting periods beginning after June 15, 2004.
The Company adopted this pronouncement on June 30, 2004. The required interim
disclosures have been incorporated into this Quarterly Report on Form 10-Q. See
Note 11, Pension and Other Postretirement Benefits.


(17) CORRECTIONS AND RESTATEMENT TO CONDENSED CONSOLIDATED STATEMENT OF CASH
     FLOWS

      Management identified errors in the previously reported September 30, 2004
Unaudited Condensed Consolidated Statement of Cash Flows. The cash flow
statement has been revised to correct the errors and reflects an increase in
cash provided by operating activities of $692,000 (from $2.0 million to $2.7
million), a decrease in net cash used in investing activities of $2.2 million
(from $4.4 million to $2.2 million), a decrease in cash provided by financing
activities of $3.2 million (from $2.5 million provided to $0.7 million used),
and change in the effect of exchange rate changes by $0.3 million (from $0.3
million used to $4,000) and to report significant non-cash transactions related
to the repayment of notes receivable from officers with shares of Company stock.
The changes affected various lines within the cash flow statement.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


CORRECTIONS RELATED TO CASH FLOW RESTATEMENT

      As described in Footnote 17 to the Financial Statements, the Unaudited
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 has been restated. Discussions below in the section entitled
"Liquidity and Capital Resources" reflect corrections resulting from the
restatement.




FORWARD-LOOKING STATEMENTS

      Management's Discussion and Analysis includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"believe," "expect," "plan," "intend," "estimate," "project," "will," "could,"
"may" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements in this document include, but are not
limited to, discussions regarding possible future growth and cost initiatives
(See "-Overview") indicated trends in the level of oil and gas exploration and
production and the effect of such conditions on the Company's results of
operations (see " -- Industry and Business Environment"), future uses of and
requirements for financial resources (see " -- Liquidity and Capital
Resources"), and backlog levels in 2004 (see " -- Liquidity and Capital
Resources"). Our views about the future of our business, customer spending, oil
and gas prices and our business environment are only our expectations regarding
these matters. Actual results may differ materially from those expressed in the
forward-looking statements for reasons including, but not limited to: market
factors such as pricing and demand for petroleum related products, the level of
petroleum industry exploration and production expenditures, the effects of
competition, world economic conditions, the level of drilling activity,

                                       17

<PAGE>

the legislative environment in the United States and other countries, policies
of OPEC, conflict involving the United States or in major petroleum producing or
consuming regions, acts of terrorism, the development of technology that could
lower overall finding and development costs, weather patterns and the overall
condition of capital and equity markets for countries in which we operate.

      The following discussion should be read in conjunction with the financial
statements, related notes and other financial information appearing elsewhere in
this Quarterly Report on Form 10-Q. Readers also are urged to review and
consider carefully the various disclosures advising interested parties of the
factors that affect our business, including but not limited to, the disclosures
made under the caption "Risks Relating to our Business" and the other factors
and risks discussed in our Annual Report on Form 10-K for the year ended
December 31, 2003, and in subsequent reports filed with the Securities and
Exchange Commission. We expressly disclaim any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement to
reflect any change in our expectations or any change in events, conditions or
circumstances on which any forward-looking statement is based.

RISK FACTORS

      We have disclosed risk factors related to our business and operations in
our Annual Report on Form 10-K for the year ended December 31, 2003 and in
subsequent reports filed with the Securities and Exchange Commission. Readers
should refer to the disclosures made in Part I, Item 1 of the Form 10-K under
the caption "Risks Relating to Our Business" and the other factors and risks
discussed in the Form 10-K and subsequent filings. In addition, you should
consider the following risks related to our business and operations.

      WHILE WE BELIEVE THAT WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL
PROCEDURES IN PLACE, WE ARE STILL EXPOSED TO INCREASED COSTS AND RISKS
ASSOCIATED WITH COMPLYING WITH CORPORATE GOVERNANCE AND DISCLOSURE STANDARDS.

      We are evaluating our internal controls systems in order to allow
management to report on, and our Registered Independent Public Accounting Firm
to attest to, our internal controls, as required by Section 404 of the
Sarbanes-Oxley Act. We have prepared a plan of action for compliance and we are
performing the system and process evaluation and testing required in an effort
to comply with the management certification and auditor attestation requirements
of Section 404. Towards that end, we have incurred significant added expenses
and diverted a substantial amount of management's time. While we anticipate
being able to fully implement the requirements relating to internal controls and
all other aspects of Section 404 in a timely fashion, we cannot be certain as to
the timing of completion of our evaluation, testing and remediation actions.
Furthermore, we cannot be certain that the result of any or all such actions
will be adequate to assure our timely compliance given that there is not
precedent available by which to measure compliance adequacy. If we are not able
to implement the requirements of Section 404 in a timely manner or with adequate
compliance, we might be subject to punitive actions by regulatory authorities,
such as the Securities and Exchange Commission or the New York Stock Exchange.
The effect of any such action by the regulatory authorities on the Company is
unknown at this time.

OVERVIEW

      References to "NATCO," "we" and "our" are used throughout this document
and relate collectively to NATCO Group Inc. and its consolidated subsidiaries.

      We offer products and services as either integrated systems or individual
components primarily through three business lines:

      -     traditional production equipment and services, through which we
            provide standardized components, replacement parts and used
            components and equipment servicing;

      -     engineered systems, through which we provide customized, large scale
            integrated oil, gas and water production and processing systems; and

      -     automation and control systems, through which we provide control
            panels and systems that monitor and control oil and gas production,
            as well as repair, testing and inspection services for existing
            systems.

      We report three separate business segments: North American Operations,
Engineered Systems and Automation and Control Systems.

      On July 28, 2004, the Company announced the resignation of its former
Chairman and CEO, Mr. Gregory, to be effective July 28 and September 7, 2004,
respectively. At the same time, the Company announced that one of its
independent directors had been elected Chairman of the Board and would become
Interim CEO upon the departure of Mr. Gregory. The Company also announced that
it had begun a search for a permanent CEO with the assistance of a nationally
recognized executive recruiting firm.

                                       18

<PAGE>

      The Company also announced on November 4, 2004 that it is reviewing
incremental growth and cost initiatives to be implemented over the next several
months. The Company intends to provide guidance with respect to these
initiatives and 2005 earnings before year-end.

CRITICAL ACCOUNTING POLICIES

      The preparation of our consolidated financial statements requires us to
make certain estimates and assumptions that affect the results reported in our
condensed consolidated financial statements and accompanying notes. These
estimates and assumptions are based on historical experience and on our future
expectations that we believe to be reasonable under the circumstances. Note 2 to
the consolidated financial statements filed in our Annual Report on Form 10-K
for the year ended December 31, 2003, contains a summary of our significant
accounting policies. We believe the following accounting policies are the most
critical in the preparation of our condensed consolidated financial statements:

      Revenue Recognition: Percentage-of-Completion Method. We recognize
revenues from significant contracts (greater than $250,000 and longer than four
months in duration) and certain automation and control systems contracts and
orders on the percentage-of-completion method of accounting. Earned revenue is
based on the percentage that costs incurred to date relate to total estimated
costs of the project, after giving effect to the most recent estimates of total
cost. The timing of costs incurred, and therefore recognition of revenue, could
be affected by various internal or external factors including, but not limited
to: changes in project scope (change orders), changes in productivity,
scheduling, the cost and availability of labor, the cost and availability of raw
materials, the weather, client delays in providing approvals at benchmark stages
of the project and the timing of deliveries from third-party providers of key
components. The cumulative impact of revisions in total cost estimates during
the progress of work is reflected in the period in which these changes become
known. Earned revenues reflect the original contract price adjusted for agreed
claims and change order revenues, if applicable. Losses expected to be incurred
on the jobs in progress, after consideration of estimated probable minimum
recoveries from claims and change orders, are charged to income as soon as such
losses are known. Claims for additional contract revenue are recognized if it is
probable that the claim will result in additional revenue and the amount can be
reliably estimated. We generally recognize revenue and earnings to which the
percentage-of-completion method applies over a period of two to six quarters. In
the event a project is terminated by the customer before completion, our
customer is liable for costs incurred under the contract. We believe
that our operating results should be evaluated over a term of several years to
evaluate performance under long-term contracts, after all change orders, scope
changes and cost recoveries have been negotiated and realized. We record
revenues and profits on all other sales as shipments are made or services are
performed.

      Impairment Testing: Goodwill. As required by Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
we evaluate goodwill annually for impairment by comparing the fair value of
operating assets to the carrying value of those assets, including any related
goodwill. As required by SFAS No. 142, we identify separate reportable units for
purposes of this evaluation. In determining carrying value, we segregate assets
and liabilities that, to the extent possible, are clearly identifiable by
specific reportable unit. Certain corporate and other assets and liabilities,
that are not clearly identifiable by specific reportable unit, are allocated in
accordance with the standard. Fair value is determined by discounting projected
future cash flows at our cost of capital rate, as calculated. The fair value is
then compared to the carrying value of the reportable unit to determine whether
or not impairment has occurred at the reportable unit level. In the event an
impairment is indicated, an additional test is performed whereby an implied fair
value of goodwill is determined through an allocation of the fair value to the
reporting unit's assets and liabilities, whether recognized or unrecognized, in
a manner similar to a purchase price allocation, in accordance with SFAS No.
141, "Business Combinations." Any residual fair value after this purchase price
allocation would be assumed to relate to goodwill. If the carrying value of the
goodwill exceeded the residual fair value, we would record an impairment charge
for that amount. Net goodwill was $80.2 million at September 30, 2004. The
decrease in the value of goodwill for the nine months ended September 30, 2004
related entirely to currency exchange rate fluctuations.

      In accordance with SFAS No. 142, the Company tested each reporting unit
for impairment of goodwill at December 31, 2003, and, based upon the results of
this testing, management determined that goodwill was not impaired. The Company
will test each reporting unit for goodwill impairment annually, as required by
the pronouncement, or more frequently if there are indications of goodwill
impairment. No additional testing was performed during the nine months ended
September 30, 2004, as management noted no indications of goodwill impairment.
However, the Company is reviewing incremental growth and cost management
initiatives to be implemented over the next several months. Such initiatives may
include the repositioning of certain business operations in their markets that
could, in turn, have a negative impact on the valuation of segment goodwill. The
Company is unable to estimate the impact, if any, of such initiatives until such
time as its plans are finalized and approved by the Board of Directors and
goodwill impairment is tested.

                                       19

<PAGE>


      Deferred Income Tax Assets: Valuation Allowance. We account for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No.
109 requires us to provide a valuation allowance for any deferred income tax
assets that are not considered to be more likely than not realizable. For the
most recent fiscal years, our Canadian subsidiary has recorded net losses, as
consolidated, partially due to certain restructuring efforts undertaken in late
2002 and early 2003, and the impact of foreign currency transactions. As a
result of these losses, we maintain a $287,000 valuation allowance as of
September 30, 2004 to fully reserve for the net deferred tax asset at this
subsidiary. In addition, we have a $258,000 valuation allowance related to the
realizability of certain net operating losses related to Axsia, and another
$165,000 related to other foreign subsidiaries. Based upon the level of
historical taxable income and projected future taxable income over the periods
to which our deferred tax assets are deductible, we believe it is more likely
than not that we will realize the benefits of these deductible differences, net
of the existing valuation allowances at September 30, 2004. However, the Company
is reviewing incremental growth and cost management initiatives to be
implemented over the next several months which could impact future income
projections and change the amount of deferred tax asset, and thus the valuation
allowances, considered realizable or could require additional valuation
allowance as a result. Any change in valuation allowances may affect the
Company's effective tax rate and results of operation.


RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard provides guidance on reporting and
accounting for obligations associated with the retirement of long-lived tangible
assets and the related retirement costs. This standard is effective for
financial statements issued for fiscal years beginning after June 15, 2002. On
January 1, 2003, we adopted this pronouncement and recorded a loss of $34,000,
net of tax effect, as the cumulative effect of change in accounting principle.
In addition, we recorded an asset retirement obligation liability and asset cost
of $96,000, associated with an obligation to remove certain leasehold
improvements upon termination of lease arrangements. We will depreciate the
asset cost over the remaining useful life of the related assets.

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement provides guidance on how to classify and measure certain financial
instruments that have characteristics of both liabilities and equity, and
generally requires treatment of these instruments as liabilities, including
certain obligations that the issuer can or must settle by issuing its own equity
securities. This pronouncement, which was effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise became
effective on July 1, 2003, required cumulative effect of a change in accounting
principle treatment upon adoption. We adopted this pronouncement on July 1,
2003, with no material impact on our financial condition or results of
operation.

      In December 2003, the FASB issued an amendment of SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
amendment, which was effective at December 31, 2003, requires additional annual
disclosures about pension or postretirement plan assets and liabilities, as well
as investment policies and strategies for plan assets, basis for expected rate
of return on assets and total accumulated benefit obligation. In addition, this
amendment requires interim disclosures of the components of net periodic benefit
cost in tabular format and contributions paid or expected to be paid during the
current fiscal year. Effective December 31, 2004, we will be required to
disclose benefits expected to be paid in each of the next five years under each
pension or postretirement plan, and an aggregate amount expected to be paid for
the succeeding five-year period under these arrangements. We adopted this
amendment to SFAS No. 132 on December 31, 2003, and have incorporated the
required interim disclosures into this Quarterly Report on Form 10-Q.

      In April 2004, the FASB issued SFAS No. 129-1, "Disclosure Requirements
under FASB Statement No. 129, Disclosure of Information about Capital Structure,
Relating to Contingently Convertible Securities." This statement confirmed that
SFAS No. 129 applied to all contingently convertible securities and requires us
to explain all pertinent rights and privileges of these contingently convertible
securities including conversion or exercise prices, rates, pertinent data,
sinking-fund requirements, unusual voting rights and significant terms of
contracts to issue additional shares. We adopted this pronouncement on its
effective date, April 9, 2004, with no material impact on financial condition or
results of operation.

      In May 2004, the FASB issued FSP FAS No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." This pronouncement requires us to determine whether
or not the benefit provided is "actuarially equivalent" to the Medicare
prescription drug-benefit. If the benefit provided is actuarially equivalent and
is deemed a significant event, we are required to account for the federal
subsidy attributable to past services as an actuarial gain under SFAS No. 106
and to reduce the accumulated post retirement benefit obligation. For the
portion of the federal subsidy attributable to current or future service, we are
required to reduce net periodic postretirement benefit cost while the employee
provides the service. This pronouncement became effective for interim or annual
reporting periods beginning after June 15, 2004. We adopted this pronouncement
on June 30, 2004. The required interim disclosures have been incorporated into
this Quarterly Report on Form 10-Q.

                                       20

<PAGE>

INDUSTRY AND BUSINESS ENVIRONMENT

      As a leading provider of wellhead process equipment, systems and services
used in the production of crude oil and natural gas, our revenues and results of
operations are closely tied to demand for oil and gas products and spending by
oil and gas companies for exploration and development of oil and gas reserves.
These companies have historically invested more in exploration and development
efforts during periods of favorable oil and gas commodity prices, and have
invested less during periods of unfavorable oil and gas prices. As supply and
demand change, commodity prices fluctuate, producing cyclical trends in the
industry. During periods of lower demand, revenues for providers such as NATCO
generally decline, as existing projects are completed and new projects are
postponed. During periods of recovery, revenues for providers can lag behind the
industry due to the timing of new project awards.

      Changes in commodity prices have impacted our business over the past
several years. The following table summarizes the average price of domestic
crude oil per barrel and the average wellhead price of natural gas per thousand
cubic feet ("mcf") for the nine months ended September 30, 2004 and 2003, as
well as averages for the years ended December 31, 2003 and 2002, derived from
published reports by the U.S. Department of Energy, and the rotary rig count, as
published by Baker Hughes Incorporated.

<TABLE>
<CAPTION>
                                                                      NINE MONTHS ENDED           YEAR ENDED
                                                                         SEPTEMBER 30,            DECEMBER 31,
                                                                   -----------------------    -------------------
                                                                     2004           2003        2003        2002
                                                                   -------         -------    -------     -------
<S>                                                                <C>             <C>        <C>         <C>
Average price of crude oil per barrel in the U.S.                  $ 39.18         $ 31.07    $ 27.56     $ 22.51
Average wellhead price of natural gas per mcf in the U.S.          $  5.41 (a)     $  5.16    $  4.97     $  2.95
Average U.S. rig count                                               1,171           1,006      1,030         830
</TABLE>

      (a) Calculated using published data from the U.S. Department of Energy for
the eight months ended August 31, 2004; data for the month of September 2004 was
not yet available.

      At September 30, 2004, the spot price of West Texas Intermediate crude oil
was $45.94 per barrel, the price of Henry Hub natural gas was $6.43 per mcf per
the New York Mercantile Exchange ("NYMEX") and the U.S. rig count was 1,240, per
Baker Hughes Incorporated. At October 29, 2004, the spot price of West Texas
Intermediate crude oil was $53.28 per barrel, the price of Henry Hub natural gas
was $6.44 per mcf, and the U.S. rig count was 1,240. These spot prices reflect
the overall volatility of oil and gas commodity prices in the current and recent
periods.

      Historically, we have viewed operating rig counts as a benchmark of
spending in the oil and gas industry for exploration and development efforts.
Our traditional equipment sales and services business generally correlates to
changes in rig activity, but tends to lag behind the North American rig count
trend. From a longer-term perspective, the U.S. Department of Energy estimates
that U.S. demand for and consumption of petroleum and natural gas products will
increase through 2025, with higher consumption rates expected worldwide, driven
by demand for refined products and the use of natural gas to power plants that
generate electricity. As demand grows and reserves in the U.S. decline,
producers and service providers in the oil and gas industry may continue to rely
more heavily on global sources of energy and expansion into new markets. The
industry continues to seek more innovative and technologically efficient means
to extract hydrocarbons from existing fields, as production profiles change. As
a result, additional and more complex equipment may be required to produce oil
and gas from these fields, especially since many new oil and gas fields produce
lower quality or contaminated hydrocarbon streams, requiring more complex
production equipment. In general, these trends should increase the demand for
our products and services.

      Our Engineered Systems business is impacted largely by the timing of
awarding and completion of larger, more complex oil and gas projects, primarily
for international offshore locations. These projects typically have a longer
bidding, evaluation, awarding and construction period than our traditional
equipment and services business and are more subject to our customers' long-term
view of the oil and gas supply and demand outlook for the related region, as
well as expected commodity prices and political or governmental situations. In
recent periods, we have experienced the absence of or delays in large
international projects, which has impacted our Engineered Systems business.
However, bookings for the Engineered Systems business segment were $62.4 million
for the nine months ended September 30, 2004 compared to $51.3 million for the
nine months ended September 30, 2003, indicating an increase in activity in 2004
related to these projects.

      Beginning in late 2002 and extending through September 30, 2004, we have
taken steps to streamline certain of our operations to decrease excess capacity
and be more responsive to current market trends. To this end, we closed
facilities in Edmonton, Alberta, Canada and Covington, Louisiana. In addition,
we reallocated various internal resources, consolidated certain Engineered
Systems operations in the U.K., and closed an Engineered Systems business
development office in Singapore. During 2004, we reduced headcount at all of our
operating units.

                                       21

<PAGE>

      Improved performance in our CO2 operations business, primarily due to the
expansion of our Sacroc gas-processing facility, has contributed favorably to
our results for the North American Operations business segment through September
30, 2004. We expect this expansion to continue to improve our earnings and cash
flows in 2004 compared to 2003. In comparison to our other business segments, we
expect the North American Operations business segment to contribute a larger
percentage of our revenues and margins in 2004 due to the impact of higher
bookings and the Sacroc expansion.

      The following discussion of our historical results of operations and
financial condition should be read in conjunction with our condensed
consolidated financial statements and related notes.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003 (unaudited)

      Revenues. Revenues of $84.3 million for the three months ended September
30, 2004 increased $18.5 million, or 28%, from $65.8 million for the three
months ended September 30, 2003. This increase in revenues was primarily due to
increased sales of traditional equipment and services. The following table
summarizes revenues by business segment for the three-month periods ended
September 30, 2004 and 2003, respectively.

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                                                        SEPTEMBER 30,
                                                               -------------------------------                          PERCENTAGE
                                                                   2004               2003              CHANGE            CHANGE
                                                               ------------       ------------       ------------       ----------
                                                                                            (UNAUDITED)
                                                                              (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
<S>                                                            <C>                <C>                <C>                <C>
North American Operations..............................        $     50,912       $     32,718       $     18,194          56%
Engineered Systems.....................................              20,738             20,836                (98)         (0%)
Automation and Control Systems.........................              14,143             13,404                739           6%
Corporate and Other....................................              (1,480)            (1,157)              (323)        (28%)
                                                               ------------       ------------       ------------
          Total........................................        $     84,313       $     65,801       $     18,512          28%
                                                               ============       ============       ============
</TABLE>

      North American Operations revenues increased $18.2 million, or 56%, for
the three months ended September 30, 2004, compared to the three months ended
September 30, 2003, due to increased exploration and development activity in the
North American oil and gas industry as well as a large contract from a Russian
oil company received by our Canadian subsidiary. The average number of operating
rotary rigs in the U.S. increased from 1,088 for the third quarter of 2003 to
1,229 for the third quarter of 2004, and Canadian rig counts decreased from 383
in the third quarter of 2003 to 326 in the third quarter of 2004. Overall
increases in North American rig counts are an indicator of increased exploration
and production activity, which resulted in higher sales of our traditional
equipment and services and finished goods, as well as our parts and services. In
addition, our CO2 operations business provided $4.2 million of revenue during
the third quarter of 2004, compared to $2.7 million for the third quarter of
2003, due largely to the expansion of our gas-processing operation at Sacroc
placed in service in December 2003. Inter-segment revenues for this business
segment were $457,000 for the three months ended September 30, 2004, compared to
$165,000 for the three months ended September 30, 2003.

      Revenues for the Engineered Systems segment decreased $0.1 million for the
three months ended September 30, 2004, compared to the three months ended
September 30, 2003. Engineered Systems revenues of $20.7 million for the three
months ended September 30, 2004 included no significant inter-segment revenues,
and only $308,000 of inter-segment revenues for the three months ended September
30, 2003.

      Revenues for the Automation and Control Systems segment increased $0.7
million, or 6%, for the three months ended September 30, 2004, compared to the
three months ended September 30, 2003. This increase for the third quarter of
2004 was due to a large international project but was partially offset by
continued weakness in the Gulf of Mexico market, and the loss of several days of
call-out service due to storm-related work stoppages. Inter-segment sales
increased from $684,000 for the three months ended September 30, 2003 to
$973,000 for the three months ended September 30, 2004.

      The change in revenues for Corporate and Other represents the elimination
of inter-segment revenues discussed above.

      Gross Profit. Gross profit for the three months ended September 30, 2004
increased $2.9 million, or 18%, to $19.0 million, compared to $16.0 million for
the three months ended September 30, 2003. As a percentage of revenue, gross
profit decreased from 24% in 2003 to 23% in 2004. The following table summarizes
gross profit by business segment for the periods indicated:

                                       22

<PAGE>

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED
                                                                       SEPTEMBER 30,
                                                               -----------------------------                           PERCENTAGE
                                                                   2004              2003              CHANGE            CHANGE
                                                               ------------       ----------         ----------        ----------
                                                                                            (UNAUDITED)
                                                                              (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
<S>                                                            <C>                <C>                <C>               <C>
North American Operations..............................        $     12,590       $    8,566         $    4,024            47%
Engineered Systems.....................................               4,456            5,029               (573)          (11%)
Automation and Control Systems.........................               1,914            2,429               (515)          (21%)
                                                               ------------       ----------         ----------
          Total........................................        $     18,960       $   16,024         $    2,936            18%
                                                               ============       ==========         ==========
</TABLE>

      Gross profit for the North American Operations business segment increased
$4.0 million, or 47%, for the three months ended September 30, 2004, compared to
the three months ended September 30, 2003, primarily due to a 56% increase in
revenues between the respective periods and greater throughput at the Company's
CO2 separation facility where additional capacity was added in December 2003.
This was partially offset by higher manufacturing costs on traditional equipment
including increased steel prices. As a percentage of revenue, gross margins were
25% for the three months ended September 30, 2004 compared to 26% for the three
months ended September 30, 2003.

      Gross profit for the Engineered Systems segment for the three months ended
September 30, 2004 decreased $0.6 million, or 11%, compared to the three months
ended September 30, 2003, due to a slight decline in revenues between the
respective periods and from under-performance on several jobs by the Company's
U.K.-based subsidiary. Gross margin as a percentage of revenues for Engineered
Systems was 22% and 24% for the three-month periods ended September 30, 2004 and
2003, respectively.

      Gross profit for the Automation and Control Systems segment decreased $0.5
million, or 21%, for the three months ended September 30, 2004 compared to the
three months ended September 30, 2003 primarily from reduced activity levels in
the Gulf of Mexico and due to lower average gross margin percentage resulting
from a higher mix of lower margin sales of equipment in segment revenues,
partially offset by a 6% increase in revenues for the segment during the period.
Gross margin, as a percentage of revenue for the three months ended September
30, 2004 and 2003, was 14% and 18%, respectively.

      Selling, General and Administrative Expense. Selling, general and
administrative expense of $13.3 million for the three months ended September 30,
2004, increased $0.6 million, or 5%, compared to the three months ended
September 30, 2003. This increase during 2004 relates primarily to an increase
in expenses for outside services primarily associated with the Company's
Sarbanes-Oxley Act Section 404 implementation efforts and for variable
compensation based on operating results.

      Depreciation and Amortization Expense. Depreciation and amortization
expense of $1.3 million for the three months ended September 30, 2004, increased
$0.1 million, or 12%, compared to the results for the three months ended
September 30, 2003, primarily due to capital expenditures of $11.5 million for
the year ended December 31, 2003, the majority of which related to the expansion
of our Sacroc gas-processing facility placed in service during the fourth
quarter of 2003.

      Closure, Severance and Other. We incurred closure, severance and other
expense of $2.7 million for the three months ended September 30, 2004 for
severance costs related primarily to separation expenses for the Company's
former Chief Executive Officer. We incurred closure, severance and other expense
of $0.7 million during the three months ended September 30, 2003 associated with
our closure of the manufacturing facility in Covington, Louisiana and the
consolidation of operations in the UK and restructuring efforts in Canada.

      Interest Expense. Interest expense of $0.9 million for the three months
ended September 30, 2004, decreased $47,000, or 5%, compared to the three months
ended September 30, 2003, due to the repayment of higher-priced revolving credit
facilities in March 2004 with borrowings under a new term loan arrangement and
due to a lower debt level at September 30, 2004 compared to September 30, 2003.
Borrowings under the revolving credit facilities of the term loan and revolving
credit agreement represented only $1.5 million of the total debt balance at
September 30, 2004 compared to $9.9 million of the total debt balance at
September 30, 2003. In addition, expense recognized in 2004 related to deferred
financing fees declined as a result of the retirement of the 2001 term loan and
revolving debt facilities. This decrease in interest expense was partially
offset by an increase in interest rates in 2004 compared to 2003.

      Interest Cost on Postretirement Benefit Liability. Interest cost on
postretirement liability of $225,000 for the three months ended September 30,
2004 increased $16,000, or 8%, compared to the three months ended September 30,
2003, due to a change in the actuarial assumptions used to determine our
obligation under a postretirement benefit arrangement, partially offset by the
projected favorable impact of changes to the Medicare laws enacted by the U.S.
Congress in December 2003.

                                       23

<PAGE>

      Other, Net. Other, net was a loss of $0.4 million and a gain of $74,000
for the three months ended September 30, 2004 and 2003, respectively, and was
related primarily to net realized and unrealized foreign exchange transaction
losses.

      Provision for Income Taxes. Income tax expense for the three months ended
September 30, 2004 was $85,000 compared to $255,000 for the three months ended
September 30, 2003. The change in tax expense was attributable to the change in
net income before taxes and preferred stock dividends from $0.4 million for the
three months ended September 30, 2003 to $0.1 million for the three months ended
September 30, 2004. The effective tax rate was 62% and 57% for the three-month
periods ended September 30, 2004 and 2003, respectively, reflecting an increase
in the annual effective tax rate in both quarters.

Nine months Ended September 30, 2004 Compared to Nine months Ended September 30,
2003 (unaudited)

      Revenues. Revenues of $229.6 million for the nine months ended September
30, 2004 increased $25.2 million, or 12%, from $204.4 million for the nine
months ended September 30, 2003. This increase in revenues was primarily due to
increased sales of traditional equipment and services and a larger contribution
from our CO(2) operations business, primarily associated with our Sacroc
facility expansion placed in service in December 2003. These increases in
revenues were partially offset by a decline in revenues provided by our
Engineered Systems and Automation and Control Systems business segments. The
following table summarizes revenues by business segment for the nine-month
periods ended September 30, 2004 and 2003, respectively.

<TABLE>
<CAPTION>
                                                                       NINE MONTHS ENDED
                                                                        SEPTEMBER 30,
                                                               -------------------------------                           PERCENTAGE
                                                                   2004               2003              CHANGE             CHANGE
                                                               ------------       ------------       ------------        ----------
                                                                                            (UNAUDITED)
                                                                              (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
<S>                                                            <C>                <C>                <C>                 <C>
North American Operations..............................        $    130,494       $     92,289       $     38,205             41%
Engineered Systems.....................................              67,520             74,144             (6,624)            (9%)
Automation and Control Systems.........................              35,443             42,652             (7,209)           (17%)
Corporate and Other....................................              (3,815)            (4,658)               843             18%
                                                               ------------       ------------       ------------
          Total........................................        $    229,642       $    204,427       $     25,215             12%
                                                               ============       ============       ============
</TABLE>

      North American Operations revenues increased $38.2 million, or 41%, for
the nine months ended September 30, 2004, compared to the nine months ended
September 30, 2003, due to increased exploration and development activity in the
North American oil and gas industry. The average number of operating rotary rigs
in the U.S. increased from 1,006 for the first nine months of 2003 to 1,171 for
the first nine months of 2004, with Canadian rig counts decreasing from an
average of 360 in 2003 to 352 in 2004. This increase in activity contributed to
improved sales of our traditional equipment and services and finished goods, as
well as our parts and services. In addition, our CO2 operations business
provided an additional $5.1 million of revenue during the first nine months of
2004, due primarily to the expansion placed in service in December 2003.
Inter-segment revenues for this business segment were $1.1 million for the nine
months ended September 30, 2004, compared to $992,000 for the nine months ended
September 30, 2003.

      Revenues for the Engineered Systems segment decreased $6.6 million, or 9%,
for the nine months ended September 30, 2004, compared to the nine months ended
September 30, 2003. This decrease was primarily due to a lower level of larger
international production system jobs in process in 2004 relative to the
comparable period in 2003, including a job in West Africa that was substantially
complete prior to June 30, 2004 but contributed revenues of $13.3 million during
the nine months ended September 30, 2003. Engineered Systems revenues of $67.5
million for the nine months ended September 30, 2004 included approximately
$213,000 of inter-segment revenues, compared to $375,000 of inter-segment
revenues for the nine months ended September 30, 2003.

      Revenues for the Automation and Control Systems segment decreased $7.2
million, or 17%, for the nine months ended September 30, 2004, compared to the
nine months ended September 30, 2003. Activity levels for the first nine months
of 2004 declined compared to 2003, due to continued weakness in the Gulf of
Mexico market and the run-off of several large projects in 2003. Inter-segment
sales decreased from $3.3 million for the nine months ended September 30, 2003
to $2.5 million for the nine months ended September 30, 2004.

      The change in revenues for Corporate and Other represents the elimination
of inter-segment revenues discussed above.

      Gross Profit. Gross profit for the nine months ended September 30, 2004
increased $5.0 million, or 10%, to $53.4 million, compared to $48.4 million for
the nine months ended September 30, 2003. As a percentage of revenue, gross
profit decreased to 23% from 24% for the nine-month periods ended September 30,
2004 and 2003, respectively. The following table summarizes gross profit by
business segment for the periods indicated:

                                       24

<PAGE>

<TABLE>
<CAPTION>
                                                                     NINE MONTHS ENDED
                                                                       SEPTEMBER 30,
                                                               -----------------------------                           PERCENTAGE
                                                                   2004              2003              CHANGE            CHANGE
                                                               ------------       ----------         ----------        -----------
                                                                                            (UNAUDITED)
                                                                              (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
<S>                                                            <C>                <C>                <C>               <C>
North American Operations..............................        $     34,965       $   24,180         $   10,785            45%
Engineered Systems.....................................              13,260           16,819             (3,559)          (21%)
Automation and Control Systems.........................               5,180            7,383             (2,203)          (30%)
                                                               ------------       ----------         ----------
          Total........................................        $     53,405       $   48,382         $    5,023            10%
                                                               ============       ==========         ==========
</TABLE>

      Gross profit for the North American Operations business segment increased
$10.8 million, or 45%, for the nine months ended September 30, 2004, compared to
the nine months ended September 30, 2003, primarily due to a 41% increase in
revenues between the respective periods and greater throughput at the Company's
CO2 separation facility where additional capacity was added in December 2003. As
a percentage of revenue, gross margin was 27% and 26% for the nine-month periods
ended September 30, 2004 and 2003, respectively.

      Gross profit for the Engineered Systems segment for the nine months ended
September 30, 2004 decreased $3.6 million, or 21%, compared to the nine months
ended September 30, 2003, due to a 9% decline in revenues between the respective
periods, from under-performance on several jobs by the Company's U.K.-based
subsidiary and due to the completion of a large job in West Africa prior to
September 30, 2004, which contributed favorable margin contributions to the
results for the nine months ended September 30, 2003. Gross margin as a
percentage of revenues for Engineered Systems was 20% and 23% for the nine-month
periods ended September 30, 2004 and 2003, respectively.

      Gross profit for the Automation and Control Systems segment decreased $2.2
million, or 30%, for the nine months ended September 30, 2004 compared to the
nine months ended September 30, 2003, due to a 17% decrease in revenues for the
segment during the period and a relative increase in production expense due to
the reduced level of activity, primarily during the first quarter of 2004, and
as a result of lower activity levels in the Gulf of Mexico and more competitive
pricing of quote jobs. This increase was partially offset by reduced costs in
the latter part of the second quarter, resulting from cost saving initiatives
implemented during the quarter. Gross margin as a percentage of revenue for the
nine months ended September 30, 2004 and 2003, was 15% and 17%, respectively.

      Selling, General and Administrative Expense. Selling, general and
administrative expense of $40.2 million for the nine months ended September 30,
2004, increased $1.9 million, or 5%, compared to the nine months ended September
30, 2003. This increase in expense during 2004 relates to higher expenses for
outside services primarily associated with the Company's Sarbanes-Oxley Act
Section 404 implementation efforts, an increase in variable compensation based
on operating results and expense associated with the write-down of a certain
foreign receivable, partially offset by cost savings due to worldwide
restructuring activities begun in late 2002 and continuing throughout 2004.

      Depreciation and Amortization Expense. Depreciation and amortization
expense of $4.1 million for the nine months ended September 30, 2004, increased
$0.4 million, or 11%, compared to the results for the nine months ended
September 30, 2003, primarily due to capital expenditures of $11.5 million for
the year ended December 31, 2003, the majority of which related to the expansion
of our Sacroc gas-processing facility.

      Closure, Severance and Other. We incurred closure and other expense of
$2.8 million for the nine months ended September 30, 2004, for severance costs
primarily related to separation expenses for the Company's former Chief
Executive Officer. We incurred closure, severance and other expense of $0.9
million during the nine months ended September 30, 2003 associated with our
closure of the manufacturing facility in Covington, Louisiana and the
consolidation of operations in the UK and restructuring efforts in Canada.

      Interest Expense. Interest expense of $2.7 million for the nine months
ended September 30, 2004, decreased $0.4 million, or 12%, compared to the nine
months ended September 30, 2003, due to the repayment of higher-priced revolving
credit facilities in March 2004 with borrowings under a new term loan facility.
Borrowings under the revolving credit facilities of the term loan and revolving
credit agreement represented $1.5 million of the total debt balance at September
30, 2004 compared to $9.9 million of the total debt balance at September 30,
2003. In addition, expense recognized in 2004 related to deferred financing fees
declined as a result of the retirement of the 2001 term loan and revolving debt
facilities. This decrease in interest expense was partially offset by an
increase in interest rates in 2004 compared to 2003.

                                       25

<PAGE>

      Write-off of Unamortized Loan Costs. We recorded a write-off of
unamortized loan costs of $667,000 in March 2004 related to the retirement of
our 2001 term loan and revolving credit facilities.

      Interest Cost on Postretirement Benefit Liability. Interest cost on
postretirement benefit liability of $0.7 million for the nine months ended
September 30, 2004 increased $47,000, or 8%, compared to the nine months ended
September 30, 2003, due to a change in the actuarial assumptions used to
determine our obligation under a postretirement benefit arrangement, partially
offset by the projected favorable impact of changes to the Medicare laws enacted
by the U.S. Congress in December 2003.

      Other, Net. Other, net was $1.4 million and $0.8 million for the nine
months ended September 30, 2004 and 2003, respectively, and related primarily to
net realized and unrealized foreign exchange transaction losses.

      Provision for Income Taxes. Income tax expense for the nine months ended
September 30, 2004 was $0.5 million compared to $0.5 million for the nine months
ended September 30, 2003. The effective tax rate was 42% and 46% for the
nine-month periods ended September 30, 2004 and 2003, respectively.

LIQUIDITY AND CAPITAL RESOURCES

      As of September 30, 2004, we had cash and working capital of $1.5 million
and $38.4 million, respectively, as compared to cash and working capital of $1.8
million and $34.6 million, respectively, at December 31, 2003.


      Net cash provided by operating activities for the nine months ended
September 30, 2004 was $2.7 million, compared to cash provided by operations of
$6.6 million for the nine months ended September 30, 2003. Factors that
contributed to the increase in cash used for operating activities during 2004
included an increase in trade accounts receivable and inventory. This increase
in the use of cash was partially offset by an increase in advance payments
related to jobs in progress, as jobs were billed at benchmark stages as agreed
under the contract terms, and an increase in trade accounts payable.



      Net cash used in investing activities for the nine months ended September
30, 2004 was $2.2 million, which related primarily to capital expenditures. For
the nine months ended September 30, 2003, cash used in investing activities was
$7.7 million, which related to capital expenditures primarily associated with
the expansion of our Sacroc gas-processing facility, partially offset by
proceeds from the sale of a building in the U.K. of $649,000 and other
miscellaneous disposals.



      Net cash used in financing activities for the nine months ended
September 30, 2004 was $0.7 million. The primary source of funds for financing
activities was borrowings of $45.0 million under our 2004 term loan and
revolving credit facilities, used to retire borrowings under our 2001 term loan
and revolving credit facilities, including net repayments of $10.0 million under
revolving credit arrangements and $34.0 million under the term loan portion of
the 2001 agreement. In addition, we incurred $886,000 of deferred financing fees
associated with this new arrangement $238,000 of deferred financing costs
associated with the renegotiation of our international revolving credit
agreement and paid benefits of $1.4 million under our postretirement benefit
arrangement. Net cash used for financing activities for the nine months ended
September 30, 2003 was $0.2 million. The primary source of funds for these
financing activities was net proceeds of $14.1 million from the issuance of our
Series B Convertible Preferred Shares, offset by repayments of long-term debt
totaling $5.3 million and repayment of bank overdrafts totaling $3.5 million.


      On February 6, 2002, we borrowed $1.5 million under a long-term promissory
note arrangement to finance the purchase of a manufacturing facility in
Magnolia, Texas. This note accrues interest at the 90-day London Inter-bank
Offered Rate ("LIBOR") plus 3.25%, and requires quarterly payments of principal
of approximately $24,000 and interest for five years beginning May 2002, with a
final balloon payment due February 2007. This promissory note is collateralized
by our manufacturing facility in Magnolia, Texas.

      On March 15, 2004, we replaced our 2001 term loan and revolving facilities
agreement with a new agreement, referred to as the 2004 term loan and revolving
facilities agreement, which provides for a term loan of $45.0 million, a U.S.
revolving facility with a borrowing capacity of $20.0 million, a Canadian
revolving facility with a borrowing capacity of $5.0 million and a U.K.
revolving facility with a borrowing capacity of $10.0 million. All of the
borrowing capacities under the 2004 revolving facilities agreement are subject
to borrowing base limitations.

      We recorded a charge of $667,000 in March 2004 to expense unamortized loan
costs related to our 2001 term loan and revolving credit facilities, and
incurred an additional $886,000 of deferred loan costs related to the 2004 term
loan and revolving credit facilities, which will be amortized as interest
expense through maturity of the facilities in March 2007.

                                       26

<PAGE>

      The 2004 term loan and revolving facilities agreement provides for
interest at a rate based upon the ratio of Funded Debt to EBITDA, as defined in
the credit facility ("EBITDA"), and ranging from, at our election, (1) a high of
LIBOR plus 2.75% to a low of LIBOR plus 2.00% or (2) a high of a base rate plus
1.75% to a low of a base rate plus 1.00%. We will pay commitment fees related to
this agreement on the undrawn portion of the facility, depending upon the ratio
of Funded Debt to EBITDA, which were calculated at 0.50% as of September 30,
2004.

      We had borrowings of $41.8 million outstanding under the term loan portion
of the 2004 term loan and revolving credit facilities at September 30, 2004,
which bore interest at 4.67%. Borrowings outstanding under the revolving credit
portion of the 2004 term loan and revolving credit facility at September 30,
2004 were $1.5 million. We had letters of credit outstanding under the 2004
revolving credit facilities of $24.9 million at September 30, 2004. Fees related
to these letters of credit at September 30, 2004 were approximately 2.50% of the
outstanding balance. These letters of credit support contract performance and
warranties and expire at various dates through February 2008.

      We and our operating subsidiaries guarantee our 2004 term loan and
revolving facilities agreement, which is secured by a first lien or first
priority security interest in or pledge of substantially all of the assets of
the borrowers and certain subsidiaries, including accounts receivable,
inventory, equipment, intangibles, equity interests in U.S. subsidiaries and
66-1/3% of the equity interest in active, non-U.S. subsidiaries. Our assets and
our active U.S. subsidiaries secure the U.S., Canadian and U.K. revolving
facilities, assets of our Canadian subsidiary also secure the Canadian facility
and assets of our U.K. subsidiaries also secure the U.K. facility. The U.S.
facility is guaranteed by each of our U.S. subsidiaries, while the Canadian and
U.K. facilities are guaranteed by us, each of our U.S. subsidiaries and the
Canadian subsidiary or the U.K. subsidiaries, as applicable.

      We paid commitment fees of 0.50% for the quarter ended September 30, 2004
on the undrawn portion of the 2004 term loan and revolving credit facilities.

      The 2004 term loan and revolving facilities agreement contains restrictive
covenants including, among others, those that limit the amount of Funded Debt to
EBITDA, impose a minimum fixed charge coverage ratio and a minimum net worth
requirement. We were in compliance with all restrictive debt covenants in our
loan agreements as of September 30, 2004. However, the Company is reviewing
incremental growth and cost management initiatives to be implemented over the
next several months. Such initiatives could have a near-term adverse effect on
our ability to remain in compliance with such restrictive covenants in our loan
agreements. The Company believes that, if necessary, it could obtain waivers or
amendments from its bank group regarding such noncompliance on acceptable terms.

      Prior to March 15, 2004, we maintained the 2001 term loan and revolving
facilities, a credit facility that consisted of a $50.0 million term loan, a
$30.0 million U.S. revolving facility, a $10.0 million Canadian revolving
facility and a $10.0 million U.K. revolving facility. The 2001 term loan and
revolving facilities were terminated on March 15, 2004 and replaced by the 2004
term loan and revolving facilities.

      In July 2002, our lenders approved the amendment of various provisions of
the 2001 term loan and revolving facilities agreement, effective April 1, 2002.
This amendment revised certain restrictive debt covenants, modified certain
defined terms, allowed for future capital investment in our Sacroc CO2
processing facility, facilitated the issuance of up to $7.5 million of
subordinated indebtedness, increased the aggregate amount of operating lease
expense allowed during a fiscal year and permitted an increase in borrowings
under the export sales credit facility, without further lender consent, up to a
maximum of $20.0 million. These modifications resulted in higher commitment fee
percentages and interest rates than in the original loan agreement, based on the
Funded Debt to EBITDA ratio, as defined in the underlying agreement, as amended.

      In July 2003, our lenders approved an amendment of the 2001 term loan and
revolving facilities agreement, effective April 1, 2003. The amendment modified
several restrictive covenant terms, including the Fixed Charge Coverage Ratio
and Funded Debt to EBITDA Ratio, each as defined in the agreement, as amended.
Under our 2001 term loan and revolving facilities agreement, certain debt
covenants became more restrictive during the fourth quarter of 2003, and we were
required to obtain a waiver of the covenants related to net worth, Funded Debt
to EBITDA ratio and Fixed Charge Coverage Ratio through March 31, 2004, subject
to our meeting a minimum EBITDA threshold, in order to remain in compliance with
the agreement, as amended. We met this threshold requirement and were in
compliance with all covenant requirements, as amended, through the date the
facility was retired.

      Amounts borrowed under the 2001 revolving facilities portion of the
agreement bore interest at a rate based upon the ratio of Funded Debt to EBITDA
and ranging from, at our election, (1) a high of LIBOR plus 3.00% to a low of
LIBOR plus 1.75% or (2) a high of a base rate plus 1.50% to a low of a base rate
plus 0.25%.

                                       27

<PAGE>

      We paid commitment fees of 0.30% to 0.625% per year after 2002 on the
undrawn portion of the 2001 revolving facilities agreement, depending upon the
ratio of Funded Debt to EBITDA. Prior to retirement in March 2004, our
commitment fees under the 2001 term loan and revolving credit facilities were
calculated at a rate of 0.625% during the quarter.

      Until July of 2004, we maintained an international revolving credit
agreement, a working capital facility for export sales, that provided for
aggregate borrowings of $10.0 million, subject to borrowing base limitations and
fees related to letters of credit under this facility at 1% of the outstanding
balance during 2004. The export sales credit facility was secured by specific
project inventory and receivables, and was partially guaranteed by the U.S.
Export-Import Bank.

      On July 23, 2004, NATCO Group Inc. and two of its subsidiaries entered
into an international revolving credit agreement with Wells Fargo HSBC Trade
Bank, N.A. providing for loans of up to $10 million, subject to borrowing base
limitations. This working capital facility for export sales is secured by
specific project inventory and receivables, as well as certain other inventory,
accounts and equipment, and is partially guaranteed by the U.S. Export-Import
Bank. Loans under this facility mature on March 31, 2007 and bear interest at
either (1) a Base Rate, as defined in the agreement, less .25% or (2) LIBOR plus
2.00%, at our election.

      At September 30 2004, available borrowing capacity under the 2004 term
loan and revolving credit agreement and the export sales agreement were $9.0
million and $6.9 million, respectively. As of September 30, 2004, we were in
compliance with all restrictive debt covenants in our loan agreements. We have
announced that we are reviewing incremental growth and cost management
initiatives to be implemented over the next several months. Such initiatives
could have a near-term adverse effect on our ability to remain in compliance
with such restrictive covenants in our loan agreements. We believe that, if
necessary, we could obtain waivers or amendments from its bank group regarding
such noncompliance on acceptable terms. Although no assurances can be given, we
believe that our operating cash flow, supported by our borrowing capacity, will
be adequate to fund operations for at least the next twelve months. Should we
decide to pursue acquisition opportunities, the determination of our ability to
finance these acquisitions will be a critical element of the analysis of the
opportunities.

      We had unsecured letters of credit and bonds totaling $660,000 at
September 30, 2004.

      On March 25, 2003, we issued 15,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred Shares"), and warrants to purchase 248,800
shares of our common stock, to Lime Rock Partners II, L.P., a private investment
fund, for an aggregate price of $15.0 million. Approximately $99,000 of the
aggregate purchase price was allocated to the warrants. Proceeds from the
issuance of these securities, net of related issuance costs of $679,000, were
used to reduce our outstanding revolving debt balances and for other general
corporate purposes.

      Each of the Series B Preferred Shares has a face value of $1,000 and pays
a cumulative dividend of 10% of face value, which is payable semi-annually on
June 15 and December 15 of each year, except the initial dividend payment which
was payable on July 1, 2003. Each of the Series B Preferred Shares is
convertible, at the option of the holder, into (1) a number of shares of common
stock equal to the face value of such Series B Preferred Share divided by the
conversion price, which was $7.805 (or an aggregate of 1,921,845 shares at
September 30, 2004), and (2) a cash payment equal to the amount of dividends on
such share that have accrued since the prior semi-annual dividend payment date.
We paid dividends of $750,000 on our Series B Preferred Shares on June 15, 2004
related to the period January 1, 2004 through June 30, 2004, and have accrued an
additional $375,000 of dividends payable relating to the period July 1, 2004
though September 30, 2004.

      In the event of a change in control, as defined in the certificate of
designations for the Series B Preferred Shares, each holder of the Series B
Preferred Shares has the right to convert the Series B Preferred Shares into
common stock or to cause the Company to redeem for cash some or all of the
Series B Preferred Shares at an aggregate redemption price equal to the greater
of (1) the sum of (a) $1,000 (adjusted for stock splits, stock dividends, etc.)
multiplied by the number of shares to be redeemed, plus (b) an amount (not less
than zero) equal to the product of $500 (adjusted for stock splits, stock
dividends, etc.) multiplied by the aggregate number of Series B Preferred Shares
to be redeemed less the sum of the aggregate amount of dividends paid in cash
since the issuance date, plus any gain on the related stock warrants, and (2)
the aggregate face value of the Series B Preferred Shares plus the aggregate
amount of dividends that have accrued on such shares since the last dividend
payment date. If the holder of the Series B Preferred Shares converts upon a
change in control occurring on or before March 25, 2006, the holder would also
be entitled to receive cash in an amount equal to the dividends that would have
accrued through March 25, 2006 less the sum of the aggregate amount of dividends
paid in cash through the date of conversion, and the aggregate amount of
dividends accrued in prior periods but not yet paid.

                                       28

<PAGE>

      We have the right to redeem the Series B Preferred Shares for cash on or
after March 25, 2008, at a redemption price per share equal to the face value of
the Series B Preferred Shares plus the amount of dividends that have been
accrued but not paid since the most recent semi-annual dividend payment date.

      Due to the cash redemption features upon a change in control as described
above, the Series B Preferred Shares do not qualify for permanent equity
treatment in accordance with the Emerging Issues Task Force Topic D-98:
"Classification and Measurement of Redeemable Securities," which specifically
requires that permanent equity treatment be precluded for any security with
redemption features that are not solely within the control of the issuer.
Therefore, we have accounted for the Series B Preferred Shares as temporary
equity in the accompanying balance sheet, and have not assigned any value to our
right to redeem the Series B Preferred Shares on or after March 25, 2008.

      If the Series B Preferred Shares are redeemed under contingent redemption
features, any redemption amount greater than carrying value would be recorded as
a reduction of income available to common shareholders when the event becomes
probable.

      If we were to fail to pay dividends for two consecutive periods or any
redemption price due with respect to the Series B Preferred Shares for a period
of 60 days following the payment date, we would be in default under the terms of
such shares. During a default period, (1) the dividend rate on the Series B
Preferred Shares would increase to 10.25%, (2) the holders of the Series B
Preferred Shares would have the right to elect or appoint a second director to
the Board of Directors and (3) we would be restricted from paying dividends on,
or redeeming or acquiring our common or other outstanding stock, with limited
exceptions. If we fail to set aside or make payments in cash of any redemption
price due with respect to the Series B Preferred Shares, and the holders elect,
our right to redeem the shares may be terminated.

      The warrants issued to Lime Rock Partners II, L.P. have an exercise price
of $10.00 per share of common stock and expire on March 25, 2006. We can force
the exercise of the warrants if our common stock trades above $13.50 per share
for 30 consecutive days. The warrants contain a provision whereby the holder
could require us to make a net-cash settlement for the warrants in the case of a
change in control. The warrants were deemed to be derivative instruments and,
therefore, the warrants were recorded at fair value as of the issuance date.
Fair value, as agreed with the counter-party to the warrant agreement, was
calculated by applying a pricing model that included subjective assumptions for
stock volatility, expected term that the warrants would be outstanding, a
dividend rate of zero and an overall liquidity factor. The resulting liability,
originally recorded at $99,000, was recorded at $193,000 as of September 30,
2004, reflecting the change in the fair value of the warrants. Similarly,
changes in fair value in future periods will be recorded in net income during
the period of the change.

      As approved by the Company's Board of Directors, on July 28, 2004, the
Company repurchased an aggregate of 498,670 shares of NATCO Group Inc. common
stock from two executive officers at a price of $7.859 per share, which
represented the 15-trading day average of the closing price of the Company's
common stock as reported on the New York Stock Exchange for the period ended
July 23, 2004. These officers used these proceeds and other funds to repay in
full all outstanding loans to the Company that were scheduled to mature on July
31, 2004.

      On July 28, 2004, NATCO Group Inc. entered into a Separation Agreement
with Nathaniel A Gregory, pursuant to which Mr. Gregory stepped down as NATCO's
Chairman of the Board of Directors on that date, and resigned as its Chief
Executive Officer and as a director on September 7, 2004. John U. Clarke, an
independent director who has served on our Board of Directors since February
2000, has replaced Mr. Gregory as Chairman of the Board and interim Chief
Executive Officer on September 7, 2004. We incurred expense of approximately
$2.5 million related to this Separation Agreement during the third quarter of
2004.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Our operations are conducted around the world in a number of different
countries. Accordingly, future earnings are exposed to changes in foreign
currency exchange rates. The majority of our foreign currency transactions
relate to operations in Canada and the U.K. In Canada, most contracts are
denominated in Canadian dollars, and most of the costs incurred are in Canadian
dollars, which mitigates risks associated with currency fluctuations. In the
U.K., many of our sales contracts and material purchases are denominated in a
currency other than British pounds sterling, primarily U.S. dollars and euros,
whereas our engineering and overhead costs are principally denominated in
British pounds sterling. Consequently, we have currency risk in our U.K.
operations. We were not party to any forward contracts or other currency-related
derivative hedge arrangements at September 30, 2004.

                                       29

<PAGE>
      The warrants issued to the holders of our Series B Preferred Shares
provide for a net-cash settlement in the event of a change in control, as
defined in the warrants. Consequently, we use derivative accounting to record
the warrant transaction. The liability representing the fair value of this
derivative arrangement was recorded at $99,000 as of the date of issuance, March
25, 2003, and was adjusted to $193,000 as of September 30, 2004, to reflect the
projected change in fair value of the warrants during the period. A cumulative
loss of $94,000 has been recorded related to these warrants since issuance. Fair
value, as agreed with the counter-party to the warrant agreement, was based on a
pricing model that included subjective assumptions concerning the volatility of
our common stock, the expected term that the warrants would be outstanding, an
expected dividend rate of zero and an overall liquidity factor. At each
reporting date, the liability will be adjusted to current fair value, with any
changes in fair value reported in earnings during the period of change. As such,
we may be exposed to certain income fluctuations based upon changes in the fair
market value of this liability due to changes in the price of our common stock,
as well as other factors.

      Our financial instruments are subject to changes in interest rates,
including our revolving credit and term loan facilities and our working capital
facility for export sales. At September 30, 2004, we had borrowings of $41.8
million outstanding under the term loan portion of the 2004 term loan and
revolving credit facilities, at an interest rate of 4.67%. Borrowings
outstanding under the revolving credit portion of these facilities at September
30, 2004 were $1.5 million, and bore interest at 6.50%. There were no borrowings
outstanding under the working capital facility for export sales at September 30,
2004. Borrowings under the long-term arrangement secured by our Magnolia
manufacturing facility totaled $1.2 million and accrued interest at 4.92%.

      Based on past market movements and possible near-term market movements, we
do not believe that potential near-term losses in future earnings, fair values
or cash flows from changes in interest rates are likely to be material. Assuming
our current level of borrowings, a 100 basis point increase in interest rates
under our variable interest rate facilities would decrease our current quarter
net income by $65,000 and decrease our cash flow from operations by $111,000. In
the event of an adverse change in interest rates, we could take action to
mitigate our exposure. However, due to the uncertainty of actions that could be
taken and the possible effects, this calculation assumes no such actions.
Furthermore, this calculation does not consider the effects of a possible change
in the level of overall economic activity that could exist in such an
environment.

ITEM 4. CONTROLS AND PROCEDURES

CONTROLS AND PROCEDURES


Item 4.  Controls and Procedures

Controls and Procedures

    We restated our Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 2004. For a description of the restatement and the
amendment of related disclosures, see the Explanatory Note on the second page of
this Form 10-Q/A and Footnote 17 to the financial statements.

    Members of our management team, including our Chief Executive Officer and
our Chief Financial Officer, have reviewed our disclosure controls and
procedures, as defined by the Securities and Exchange Commission in Rule
13a-15(e) of the Securities Exchange Act of 1934, as of September 30, 2004, in
an effort to evaluate the effectiveness of the design and operation of these
controls. In considering matters relating to the restatement of the Condensed
Consolidated Statement of Cash Flows for the nine months ended September 30,
2004 and the amendment of related disclosures, we determined that a material
weakness (as defined under the standards established by the American Institute
of Certified Public Accountants) existed in our disclosure controls surrounding
the preparation of the Condensed Consolidated Statement of Cash Flows as of
September 30, 2004 only. Specifically, errors and incomplete reviews and
reconciliations resulted in the misclassification of various cash flow items.
Management has revised its control procedures and corrected any errors effective
as of the date of this filing to ensure that all reconciliations and reviews
related to the Cash Flow Statement are completed timely.

    Our independent accounting firm, KPMG LLP, concurred with management's
determination that a material weakness existed in our internal controls
surrounding the preparation of the Condensed Consolidated Statement of Cash
Flows as of September 30, 2004.

    Based on the information obtained during our internal review subsequent to
November 9, 2004, our Chief Executive Officer and Chief Financial Officer
concluded that, because of the material weakness in internal controls over
financial reporting described above, our disclosure controls and procedures as
to the end of the period covered by this Form 10-Q/A report were not effective.

    There have been no other changes in our internal controls over financial
reporting that occurred during the nine months ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.

    We are evaluating our internal controls systems in order to allow management
to report on, and our Registered Independent Public Accounting Firm to attest
to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act.
We have prepared a plan of action for compliance and we are performing the
system and process evaluation and testing required in an effort to comply with
the management certification and auditor attestation requirements of Section
404. Towards that end, we have incurred significant added expenses and diverted
a substantial amount of management time. While we anticipate being able to fully
implement the requirements relating to internal controls and all other aspects
of Section 404 in a timely fashion, we cannot be certain as to the timing of
completion of our evaluation, testing and remediation actions. Furthermore, we
cannot be certain that the result of any or all such actions will be adequate to
assure our timely compliance given that there is not precedent available by
which to measure compliance adequacy. If we are not able to implement the
requirements of Section 404 in a timely manner or with adequate compliance, we
might be subject to punitive actions by regulatory authorities, such as the
Securities and Exchange Commission or the New York Stock Exchange. The effect of
any such action by the regulatory authorities on the Company is unknown at this
time.


                                       30
<PAGE>

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      The only pending legal proceeding involving NATCO or one of its
subsidiaries that management currently believes to be material is the Magnum
Transcontinental Corp. Arbitration and Related Matter, which has been previously
reported in our Annual Report on Form 10-K for the year ended December 31, 2003.
The following provides an update to the discussion in our Form 10-K.


      Magnum Transcontinental Corp. Arbitration and Petroserv, S.A. v. National
Tank Company, 165th Jud. Dist. Ct., Harris Co., TX (Cause No. 200418769). These
matters stem from an agreement among NATCO Group, Magnum Transcontinental
Corporation, the U.S. procurement arm of Petroserv S.A., and Zephyr Offshore,
Inc., a Petroserv subsidiary, to manufacture and install a processing plant on a
Petroserv rig, and Petroserv's agency agreement with NATCO for certain projects
in Brazil. NATCO claims Magnum owes it $418,990 under the plant manufacturing
agreement for additional work performed in excess of the days agreed in the
contract. NATCO submitted the matter to binding American Arbitration Association
arbitration on October 29, 2003. In the arbitration, Magnum originally
counter-claimed for $4,685,000, alleging breach of contract. Magnum amended its
answer and counter-claim in the arbitration on July 16, 2004, reducing its total
amount claimed to $1,304,000. At an arbitration hearing held in October 2004,
Magnum further reduced its counter claim by $570,000. NATCO disputes the
remaining amounts claimed by Magnum, and intends to vigorously pursue its claims
while defending against the counterclaim. NATCO has not recorded an accrual
related to this matter as of September 30, 2004 because it does not believe the
loss is probable. The arbitration proceeding is expected to be completed in
November or December 2004.



      After NATCO filed its request for arbitration, Petroserv submitted a
mediation request under its representation agreement with NATCO, claiming unpaid
agency fees on several contracts, including the Magnum contract. No resolution
resulted from the mediation, which was held on January 23, 2004. NATCO believes
any fees owed to Petroserv under the agency agreement are offset by NATCO's
claims against Magnum. NATCO disputes that it owes any fees for the Magnum work
or any work obtained in Brazil after the representation agreement terminated in
early 2003. Petroserv served a collections suit in state court in May 2004,
seeking over $731,323, plus attorneys' fees, interest and court costs,
representing amounts allegedly due under the representation agreement on several
contracts, including the Magnum Transcontinental contract. NATCO has filed a
counterclaim in this action, claiming breach of the agency agreement and
fiduciary obligations Petroserv owed to NATCO. A second unsuccessful mediation
was held in the case in August 2004.


      NATCO and its subsidiaries are defendants or otherwise involved in a
number of other legal proceedings in the ordinary course of their business.
While we insure against the risk of these proceedings to the extent deemed
prudent by our management, we can offer no assurance that the type or value of
this insurance will meet the liabilities that may arise from any pending or
future legal proceedings related to our business activities. While we cannot
predict the outcome of any legal proceedings with certainty, in the opinion of
management, our ultimate liability with respect to these pending lawsuits is not
expected to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Reports on Form 8-K.

      -     Report on Form 8-K filed November 4, 2004 to report third quarter
            2004 results and revised guidance.

      -     Report on Form 8-K filed September 13, 2004 to report the departure
            of NATCO Group Inc.'s CEO, the appointment of an interim CEO and
            violations of NYSE listing standards related to the size and
            composition of the Company's audit committee.

      -     Report on Form 8-K filed August 4, 2004 to report second quarter
            2004 results.

      -     Report on Form 8-K filed July 29, 2004 to announce the pending
            departure of NATCO Group Inc.'s Chief Executive Officer and other
            management changes and information regarding its bookings, backlog
            and revenues for the 2004 second quarter and reaffirmed prior
            guidance, before various charges, including CEO separation costs.

                                       31

<PAGE>

(b)   Index of Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO.                        DESCRIPTION
-----------  -------------------------------------------------------------------
<S>          <C>
   10.1      --Amendment No. 1 to Employment Agreement dated as of September
               30, 2004 between NATCO Group Inc. and Patrick M. McCarthy

   10.2      --Form of Amendment No. 1 to Senior Management Change in Control
               Agreement entered into between NATCO Group Inc. and the executive
               officers specified in the form

   10.3      --Amendment to Separation Agreement dated October, 2004 entered
               into between NATCO Group Inc. and Nathaniel A. Gregory

   10.4      --First Amendment to Loan Agreement effective as of March 15,
               2004 by and among NATCO Group Inc., NATCO Canada, Ltd. and Axsia
               Group Limited, as Borrowers, and the lenders thereto, Wells Fargo
               Bank, National Association, as U.S. agent, HSBC Bank Canada, as
               Canadian agent, and HSBC Bank PLC, as UK agent

   31.1      --Certification of Chief Executive Officer of NATCO Group Inc.
               pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
               Section 302 of the Sarbanes- Oxley Act of 2002

   31.2      --Certification of Chief Financial Officer of NATCO Group Inc.
               pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
               Section 302 of the Sarbanes- Oxley Act of 2002

   32.1      --Certification of Chief Executive Officer and Chief Financial
               Officer of NATCO Group Inc. pursuant to 18 U.S.C. Section 1350,
               as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
               2002
</TABLE>

                                       32

<PAGE>

                                   SIGNATURES

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

                                NATCO Group Inc.

                                By:  /s/ John U. Clarke
                                    -------------------------------------------
                                    Name: John U. Clarke
                                    Chairman of the Board and
                                    Chief Executive Officer


Date: February 4, 2005


                                By:  /s/ Richard W. FitzGerald
                                    -------------------------------------------
                                    Name: Richard W. FitzGerald
                                    Senior Vice President and Chief Financial
                                    Officer


Date: February 4, 2005


                                       33

<PAGE>

                               INDEX OF EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO.                        DESCRIPTION
-----------  -------------------------------------------------------------------
<S>          <C>
   10.1      --Amendment No. 1 to Employment Agreement dated as of September
               30, 2004 between NATCO Group Inc. and Patrick M. McCarthy

   10.2      --Form of Amendment No. 1 to Senior Management Change in Control
               Agreement entered into between NATCO Group Inc. and the executive
               officers specified in the form

   10.3      --Amendment to Separation Agreement dated October, 2004 entered
               into between NATCO Group Inc. and Nathaniel A. Gregory

   10.4      --First Amendment to Loan Agreement effective as of March 15,
               2004 by and among NATCO Group Inc., NATCO Canada, Ltd. and Axsia
               Group Limited, as Borrowers, and the lenders thereto, Wells Fargo
               Bank, National Association, as U.S. agent, HSBC Bank Canada, as
               Canadian agent, and HSBC Bank PLC, as UK agent

   31.1      --Certification of Chief Executive Officer of NATCO Group Inc.
               pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
               Section 302 of the Sarbanes- Oxley Act of 2002

   31.2      --Certification of Chief Financial Officer of NATCO Group Inc.
               pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
               Section 302 of the Sarbanes- Oxley Act of 2002

   32.1      --Certification of Chief Executive Officer and Chief Financial
               Officer of NATCO Group Inc. pursuant to 18 U.S.C. Section 1350,
               as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
               2002
</TABLE>