<PAGE>
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(MARK ONE)
  [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                               EXCHANGE ACT OF 1934

            FOR THE QUARTERLY PERIOD ENDED JUNE 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 July 31, 2004, $0.01 par value per share, 15,588,354 shares

================================================================================
<PAGE>

                                NATCO GROUP INC.

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

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                        NO.
                                                                       ----
<S>                                                                    <C>
PART I -- FINANCIAL INFORMATION

Item 1.     Financial Statements.....................................    3
            Condensed Consolidated Balance Sheets -- June 30,
            2004 (unaudited) and December 31, 2003...................    3
            Unaudited Condensed Consolidated Statements of
            Operations -- Three and Six Months Ended June 30,
            2004 and 2003............................................    4
            Unaudited Condensed Consolidated Statements of Cash
            Flows-- Six Months Ended June 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......................   20

Item 3.     Quantitative and Qualitative Disclosures About Market
            Risk.....................................................   32

Item 4.     Controls and Procedures..................................   33

PART II -- OTHER INFORMATION

Item 1.     Legal Proceedings........................................   34

Item 4.     Submission of Matters to a Vote of Security Holders......   34

Item 5.     Other Events.............................................   35

Item 6.     Exhibits and Reports on Form 8-K.........................   35

Signatures...........................................................   37
</TABLE>

                                       2
<PAGE>

                          PART I--FINANCIAL INFORMATION

ITEM1. FINANCIAL STATEMENTS

                        NATCO GROUP INC. AND SUBSIDIARIES

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

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

Current assets:
  Cash and cash equivalents........................................  $    1,979     $      1,751
  Trade accounts receivable, net of allowance for
  doubtful accounts of $1.6 million and $1.0 million
  at June 30, 2004 and December 31, 2003, respectively.............      75,419           70,902
  Inventories......................................................      38,593           34,573
  Prepaid expenses and other current assets........................       8,249            7,770
                                                                     ----------     ------------
        Total current assets.......................................     124,240          114,996
Property, plant and equipment, net.................................      36,008           37,076
Goodwill, net......................................................      79,875           80,097
Deferred income tax assets, net....................................       3,435            4,290
Other assets, net..................................................       1,294            1,269
                                                                     ----------     ------------
        Total assets...............................................  $  244,852     $    237,728
                                                                     ==========     ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current installments of long-term debt...........................  $   10,026     $      5,617
  Accounts payable.................................................      32,441           38,976
  Accrued expenses and other.......................................      28,606           30,257
  Customer advances................................................      16,446            5,527
                                                                     ----------     ------------
        Total current liabilities..................................      87,519           80,377
Long-term debt, excluding current installments.....................      38,919           38,003
Postretirement benefit and other long-term liabilities.............      12,208           12,771
                                                                     ----------     ------------
        Total liabilities..........................................     138,646          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  15,922,661 and
    15,854,067  shares as of June 30, 2004 and
    December 31, 2003, respectively................................         159              159

  Additional paid-in capital.......................................      97,790           97,351
  Accumulated earnings.............................................       7,942            8,115
  Treasury stock, 795,692 shares at cost as of June 30, 2004
    and December 31, 2003..........................................      (7,182)          (7,182)

  Accumulated other comprehensive loss.............................      (2,811)          (2,127)
  Notes receivable from officers...................................      (3,914)          (3,840)
                                                                     ----------     ------------
        Total stockholders' equity.................................      91,984           92,476
                                                                     ----------     ------------
Commitments and contingencies
        Total liabilities and stockholders' equity.................  $  244,852     $    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       SIX MONTHS ENDED
                                                                  JUNE 30,                 JUNE 30,
                                                          ----------------------    ----------------------
                                                            2004         2003          2004        2003
                                                          ---------    ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>          <C>
Revenues ..............................................   $  73,347    $  70,613    $ 145,331    $ 138,626
Cost of goods sold ....................................      55,716       54,066      110,885      106,268
                                                          ---------    ---------    ---------    ---------
          Gross profit ................................      17,631       16,547       34,446       32,358
Selling, general and administrative expense ...........      13,584       12,999       26,879       25,643
Depreciation and amortization expense .................       1,364        1,254        2,738        2,484
Closure and other .....................................          85            -           85          230
Interest expense ......................................         871        1,077        1,806        2,139
Write-off of unamortized loan costs ...................          --           --          667           --
Interest cost on postretirement benefit liability .....         225          210          450          419
Interest income .......................................         (44)         (50)        (106)         (99)
Other, net ............................................         518          553          972          899
                                                          ---------    ---------    ---------    ---------
   Income before income taxes and cumulative
      effect of change in accounting principle ........       1,028          504          955          643
Income tax provision ..................................         407          194          378          244
                                                          ---------    ---------    ---------    ---------
     Net income before cumulative effect of change
         in accounting principle ......................         621          310          577          399
Cumulative effect of change in accounting
   principle (net of tax benefit of $18 in 2003) ......          --            -           --           34
                                                          ---------    ---------    ---------    ---------
          Net income ..................................   $     621    $     310    $     577    $     365
 Preferred stock dividends ............................         375          374          750          399
                                                          ---------    ---------    ---------    ---------
          Net income (loss) available to common
                stockholders ..........................   $     246    $     (64)   $    (173)   $     (34)
                                                          =========    =========    =========    =========

Earnings (loss) per share--basic:
Net income (loss) before cumulative effect of
   change in accounting principle .....................   $    0.02    $    0.00    $   (0.01)   $    0.00
Cumulative effect of change in accounting principle ...          --           --           --           --
                                                          ---------    ---------    ---------    ---------
          Net income (loss) ...........................   $    0.02    $    0.00    $   (0.01)   $    0.00
                                                          =========    =========    =========    =========

Earnings (loss) per share--diluted:
Net income (loss) before cumulative effect of
   change in accounting principle .....................   $    0.02    $    0.00    $   (0.01)   $    0.00

Cumulative effect of change in accounting principle ...          --           --           --           --
                                                          ---------    ---------    ---------    ---------
          Net income (loss) ...........................   $    0.02    $    0.00    $   (0.01)   $    0.00
                                                          =========    =========    =========    =========
Basic weighted average number of shares of
  common stock outstanding ............................      15,923       15,849       15,915       15,804
Diluted weighted average number of shares
  of common stock outstanding .........................      16,033       15,849       15,915       15,804
</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>
                                                                 SIX MONTHS ENDED
                                                                     JUNE 30,
                                                               --------------------
                                                                 2004        2003
                                                               --------    --------
<S>                                                            <C>         <C>
Cash flows from operating activities:
  Net income ...............................................   $    577    $    365
  Adjustments to reconcile net income to net
     cash used in operating activities:
     Cumulative effect of change in
        accounting principle ...............................         --          34
     Deferred income tax expense ...........................       (159)        190
     Depreciation and amortization expense .................      2,738       2,484
     Non-cash interest income ..............................        (74)        (79)
     Non-cash interest expense .............................        237         377
     Write-off of unamortized loan costs ...................        667          --
     Revaluation of warrants and other .....................         14          32
     Interest cost on postretirement benefit liability .....        450         419
     (Gain) loss on the sale of property, plant and
       equipment ...........................................         (9)       (208)
     Change in assets and liabilities:
       (Increase) decrease in trade accounts receivable ....     (4,450)      1,227
       Increase in inventories .............................     (4,136)     (2,683)
       Increase in prepaid expense and other current
         assets ............................................       (574)       (566)
       (Increase) decrease in long-term assets .............        (64)         35
       Increase (decrease) in accounts payable .............     (7,825)      1,315
       Decrease in accrued expenses and other ..............     (1,747)     (4,763)
       Increase in customer advances .......................     10,889       1,485
                                                               --------    --------
          Net cash used in operating activities ............     (3,466)       (336)
                                                               --------    --------
Cash flows from investing activities:
  Capital expenditures for property, plant and
      equipment ............................................     (1,487)     (6,656)
  Proceeds from the sale of property, plant and
      equipment ............................................         23         649
                                                               --------    --------
          Net cash used in investing activities ............     (1,464)     (6,007)
                                                               --------    --------
Cash flows from financing activities:
  Net repayments under long-term revolving
    credit facilities ......................................     (7,229)     (1,603)
  Repayments of long-term debt .............................    (32,405)     (3,549)
  Borrowings of long-term debt .............................     45,000          --
  Proceeds from the issuance of preferred stock, net .......        121      14,101
  Issuance related to employee stock options ...............        359         111
  Dividends paid ...........................................       (750)         --
  Deferred financing fees ..................................       (886)         --
  Change in bank overdrafts ................................      1,454      (3,374)
  Payments on postretirement benefit liability .............       (884)       (916)
                                                               --------    --------
          Net cash provided by financing activities ........      4,780       4,770
                                                               --------    --------
Effect of exchange rate changes on cash and cash
   equivalents .............................................        378         680
                                                               --------    --------
Change in cash and cash equivalents ........................        228        (893)
Cash and cash equivalents at beginning of period ...........      1,751       1,689
                                                               --------    --------
Cash and cash equivalents at end of period .................   $  1,979    $    796
                                                               ========    ========
Cash payments for:
  Interest .................................................   $  1,133    $  1,788
  Income taxes .............................................   $    239    $  1,026
</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 generally accepted accounting principles for interim 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 generally accepted accounting principles 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 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 generally accepted
accounting principles, 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 option 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.

                                       6
<PAGE>

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED        SIX MONTHS ENDED
                                                                    JUNE 30, 2004           JUNE 30, 2004
                                                                2004         2003        2004          2003
                                                              ---------   ---------    ---------    ----------
                                                              (UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>         <C>          <C>          <C>
Net income (loss) available to common stockholders - as
   reported ...............................................   $     246   $     (64)   $    (173)   $      (34)
Deduct:  Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects ..............        (141)       (177)        (290)         (322)
                                                              ---------   ---------    ---------    ----------
Pro forma income (loss) ...................................   $     105   $    (241)   $    (463)   $     (356)
                                                              ---------   ---------    ---------    ----------
Income (loss) per share:
   Basic - as reported ....................................   $    0.02   $    0.00    $   (0.01)   $     0.00
   Basic - pro forma ......................................   $    0.01   $   (0.02)   $   (0.03)   $    (0.02)

   Diluted - as reported ..................................   $    0.02   $    0.00    $   (0.01)   $     0.00
   Diluted - pro forma ....................................   $    0.01   $   (0.02)   $   (0.03)   $    (0.02)
</TABLE>

(3) CAPITAL STOCK AND 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 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 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 June 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.

         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.

                                       7
<PAGE>
         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.

         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
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 $155,000 as of June 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 net income during the period of the
change.

(4) EARNINGS (LOSS) PER SHARE

         The Company computed basic earnings per share by dividing net income
(loss) available to common stockholders by the weighted average number of shares
outstanding for the period. Net income available to common stockholders at June
30, 2004, represented net income 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 June 30,
2004, as net income 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 June 30, 2004, these shares were not considered common and
potential common shares for purposes of calculating earnings per share at June
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 June 30, 2004, potential common shares related to employee stock
options and restricted shares included in diluted weighted average shares were
109,961 shares and 733 shares, respectively. Since the Company recorded a net
loss available to common stockholders for the six months ended June 30, 2004 and
for the quarter and six months ended June 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
six-month periods ended June 30, 2004 and 2003, the impact would have been a
reduction of 232,898 shares and 223,168 shares, respectively, and 487,231 shares
and 476,474 shares, respectively. The following table presents the computation
of basic and diluted earnings (loss) per common and potential common share for
the three and six months ended June 30, 2004 and 2003, respectively:

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED JUNE 30, 2004       THREE MONTHS ENDED JUNE 30, 2003
                                             -------------------------------------  -------------------------------------
                                                INCOME       SHARES      PER-SHARE     INCOME       SHARES      PER-SHARE
                                             (NUMERATOR)  (DENOMINATOR)   AMOUNT    (NUMERATOR)  (DENOMINATOR)   AMOUNT
                                             -----------  -------------  ---------  -----------  -------------  ---------
                                                              (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                          <C>          <C>            <C>        <C>          <C>            <C>
Net income before cumulative effect
  of change in accounting principle          $      621                            $      310
Less:  Preferred stock dividends accrued
  and paid                                          375                                   374
                                             ----------                             ---------
Basic EPS:
Income (loss) available to common
  stockholders before cumulative effect
  of change in accounting principle          $      246       15,923     $   0.02   $      (64)     15,849      $   0.00
                                                                         ========                               ========

Effect of dilutive securities:
Stock options                                        --          110                        --          --
                                             ----------       ------                ----------      ------

Diluted EPS:
Income (loss) available to common
   stockholders before cumulative effect
   of change in accounting principle +
   assumed conversions                       $      246       16,033     $   0.02   $      (64)     15,849      $   0.00
                                             ==========       ======     ========   ==========      ======      ========
</TABLE>

<TABLE>
<CAPTION>
                                                SIX MONTHS ENDED JUNE 30, 2004         SIX MONTHS ENDED JUNE 30, 2003
                                             -------------------------------------  -------------------------------------
                                                INCOME       SHARES      PER-SHARE     INCOME       SHARES      PER-SHARE
                                             (NUMERATOR)  (DENOMINATOR)   AMOUNT    (NUMERATOR)  (DENOMINATOR)   AMOUNT
                                             -----------  -------------  ---------  -----------  -------------  ---------
                                                              (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                          <C>          <C>            <C>        <C>          <C>            <C>
Net income before cumulative effect
  of change in accounting principle          $      577                             $      399
Less: Preferred stock dividends
  accrued and paid                                  750                                    399
                                             ----------                             -----------
Basic EPS:
Income (loss) available to common
  stockholders before cumulative effect
  of change in accounting principle          $     (173)     15,915      $  (0.01)  $       --       15,804     $   0.00
                                                                         ========                               ========
Effect of dilutive securities:
Stock options                                        --          --                         --           --
                                             ----------      ------                 ----------       ------

Diluted EPS:
Income (loss) available to common
   stockholders before cumulative effect
   of change in accounting principle +
   assumed conversions                       $     (173)      15,915     $  (0.01)  $       --        15,804    $   0.00
                                             ==========       ======     ========   ==========        ======    ========
</TABLE>

(5) INVENTORIES

    Inventories consisted of the following amounts:
<TABLE>
                                  JUNE 30,   DECEMBER 31,
                                    2004         2003
                                  --------   ------------
                                      (UNAUDITED)
<S>                               <C>        <C>
                                      (IN THOUSANDS)
Finished goods..................  $ 10,563    $  11,778
Work-in-process.................    11,145        8,402
Raw materials and supplies......    19,171       16,168
                                  --------    ---------
  Inventories at FIFO...........    40,879       36,348
Excess of FIFO over LIFO cost...    (2,286)      (1,775)
                                  --------    ---------
                                  $ 38,593    $  34,573
                                  ========    =========
</TABLE>

                                       9
<PAGE>

(6) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

    Cost and estimated earnings on uncompleted contracts were as follows:

<TABLE>
<CAPTION>
                                                          JUNE 30,     DECEMBER 31,
                                                            2004           2003
                                                        -------------  ------------
                                                        (UNAUDITED)
                                                                 (IN THOUSANDS)
<S>                                                     <C>            <C>
Cost incurred on uncompleted contracts...............   $   66,832     $     86,076
Estimated earnings...................................       16,873           22,585
                                                        ----------     ------------
                                                            83,705          108,661
Less billings to date................................       80,139           91,288
                                                        ----------     ------------
                                                        $    3,566     $     17,373
                                                        ==========     ============
Included in the accompanying balance sheet under
   the captions:
   Trade accounts receivable.........................   $   17,309     $     22,375
   Advance payments..................................      (13,743)          (5,002)
                                                        ----------     ------------
                                                        $    3,566     $     17,373
                                                        ==========     ============
</TABLE>

(7) CLOSURE AND OTHER

         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 six months ended June 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 June 30, 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 June 30, 2004, the Company
had a liability of $163,000 related to this restructuring plan.

         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 June
30, 2004, this liability was reduced by $306,000, of which $180,000 related to
amounts paid and $126,000 related to a change in the assessment of liability
under the lease arrangement for the facility, with an increase in the accrual of
$47,000 related to exchange rate changes. As of June 30, 2004, the Company had a
liability of $45,000 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
six months ended June 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.

                                       10
<PAGE>

(8) LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                               JUNE 30,     DECEMBER 31,
                                                                                2004            2003
                                                                             -----------    ------------
                                                                             (UNAUDITED)
                                                                               (IN THOUSANDS, EXCEPT
                                                                                   PERCENTAGES)
<S>                                                                          <C>            <C>
BANK DEBT
2004 term loan with variable interest rate (3.94% at June 30, 2004) and
   quarterly payments of principal ($1,607) and interest, final payment
   due March 31, 2007.....................................................   $    43,393    $         --
2004 revolving credit bank loans with variable interest rate (6.00% at
   June 30, 2004) and quarterly interest payments, due
   March 31, 2007.........................................................           812              --
2001 term loan with variable interest rate (3.91% at December 31, 2003)
   and quarterly payments of principal ($1,750) and interest, repaid
   March 15, 2004.........................................................            --          30,750
2001 revolving credit bank loans with variable interest rate (4.88% at
   December 31, 2003) and quarterly interest payments, repaid
   March 15, 2004.........................................................            --          10,881
Promissory note with variable interest rate (4.38% at June 30, 2004 and
   4.40% at December 31, 2003) and quarterly payments of principal
   ($24) and interest, due February 8, 2007...............................         1,240           1,289
Revolving credit bank loans (export sales facility) with variable
   interest rate (4.25%  and 4.00% at June 30, 2004 and
   December 31, 2003, respectively) and monthly interest payments,
   due July 23, 2004......................................................         3,500             700
                                                                                --------    ------------
        Total.............................................................      $ 48,945    $     43,620
        Less current installments.........................................       (10,026)         (5,617)
                                                                                --------    ------------
           Long-term debt.................................................      $ 38,919    $     38,003
                                                                                ========    ============
</TABLE>

         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 of the London Inter-bank Offered Rate ("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 June 30, 2004.

         Borrowings of $43.4 million were outstanding under the term loan
portion of the 2004 term loan and revolving credit facilities at June 30, 2004,
and bore interest at 3.94% per annum. Borrowings outstanding under the revolving
credit portion of the 2004 term loan and revolving credit facility at June 30,
2004 were $812,000 and bore interest at 6.00%. The Company had letters of credit
outstanding under these revolving facilities of $20.6 million. Fees related to
these letters of credit were approximately 2.75% of the outstanding balance at
June 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 guaranteed by
the Company and its operating subsidiaries and 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 1/3% 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 June
30, 2004 on the undrawn portion of the 2004 term loan and revolving credit
facilities.

                                       11
<PAGE>

         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, a minimum
asset coverage ratio and a minimum net worth requirement. On June 30, 2004, the
Company was in compliance with all restrictive debt covenants under its loan
agreements.

         Prior to March 15, 2004, the Company maintained the 2001 term loan and
revolving credit facilities 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, 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% per
annum, 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 June 30,
2004 and bore interest at 4.38%. This promissory note is collateralized by the
manufacturing facility in Magnolia, Texas.

         The Company maintains a working capital facility for export sales that
provides for aggregate borrowings of $10.0 million, subject to borrowing base
limitations, under which borrowings of $3.5 million were outstanding at June 30,
2004, and which bore interest at 4.25% per annum. No letters of credit were
outstanding under this facility as of June 30, 2004. During the six months ended
June 30, 2004, fees related to letters of credit under this facility were
calculated at approximately 1% of the outstanding balance. The export sales
credit facility is secured by specific project inventory and receivables, and is
partially guaranteed by the U.S. Export-Import Bank. The facility loans matured
on July 23, 2004, and were replaced by a similar facility on that date. See Note
17, Subsequent Events.

         The Company also had unsecured letters of credit and bonds totaling
$594,000 and performance guarantees totaling $41.3 million at June 30, 2004.
These guarantees were primarily associated with certain large international jobs
related to its U.K.-based operations and a recently awarded job for the
Automation and Control Systems business segment in Kazakhstan, and generally
extend for less than one year.

(9) INCOME TAXES

         NATCO's effective income tax rate for the six months ended June 30,
2004 was 40%, 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.

                                       12
<PAGE>

(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 June 30, 2003 by $13.3
million, $3,000 and $241,000, respectively, and for the six months ended June
30, 2003 by $13.3 million, $50,000 and $480,000, 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
six months ended June 30, 2004. Summarized segment results for the quarters and
six-month periods ended June 30, 2004 and 2003 were as follows:

<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
  JUNE 30, 2004
Revenues from unaffiliated customers ...   $    41,742   $    22,683    $     8,922   $     --    $    73,347
Inter-segment revenues .................           334            (9)           760     (1,085)            --
Segment profit (loss) ..................         5,310           584            563     (2,410)         4,047
Total assets ...........................       118,339        97,999         17,491     11,023        244,852
Capital expenditures ...................           512            78              8         51            649
Depreciation and amortization ..........           938           225            101        100          1,364
THREE MONTHS ENDED
  JUNE 30, 2003
Revenues from unaffiliated customers ...   $    30,778   $    27,226    $    12,609   $     --    $    70,613
Inter-segment revenues .................           177            36          1,398     (1,611)            --
Segment profit (loss) ..................         2,488           817          1,249     (1,006)         3,548
Total assets ...........................       111,576        96,635         20,618     10,374        239,203
Capital expenditures ...................         3,217           317             31         19          3,584
Depreciation and amortization ..........           828           223            102        101          1,254
SIX MONTHS ENDED
  JUNE 30, 2004
Revenues from unaffiliated customers ...   $    78,976   $    46,619    $    19,736   $     --    $   145,331
Inter-segment revenues .................           608           163          1,564     (2,335)            --
Segment profit (loss) ..................        10,149           410            951     (3,943)         7,567
Total assets ...........................       118,339        97,999         17,491     11,023        244,852
Capital expenditures ...................         1,159           215             55         58          1,487
Depreciation and amortization ..........         1,886           449            202        201          2,738
SIX MONTHS ENDED
  JUNE 30, 2003
Revenues from unaffiliated customers ...   $    58,743   $    53,242    $    26,641   $     --    $   138,626
Inter-segment revenues .................           827            66          2,607     (3,500)            --
Segment profit (loss) ..................         4,033         2,058          2,567     (1,943)         6,715
Total assets ...........................       111,576        96,635         20,618     10,374        239,203
Capital expenditures ...................         5,747           759            130         20          6,656
Depreciation and amortization ..........         1,642           457            195        190          2,484
</TABLE>

                                       13
<PAGE>

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

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED JUNE 30,  SIX MONTHS ENDED JUNE 30,
                                        ---------------------------  -------------------------
                                             2004        2003            2004          2003
                                          ---------   ---------        --------     ---------
                                                      (UNAUDITED, IN THOUSANDS)
<S>                                     <C>           <C>            <C>            <C>
Total segment profit                      $   4,047   $   3,548        $  7,567     $   6,715
Net interest expense                          1,052       1,237           2,150         2,459
Depreciation and amortization                 1,364       1,254           2,738         2,484
Closure and other                                85          --              85           230
Write-off of unamortized loan costs              --          --             667            --
Other, net                                      518         553             972           899
                                          ---------   ---------        --------     ---------

  Net income before income taxes and
   cumulative effect of change in
   accounting principle                       1,028         504             955           643
  Income tax provision                          407         194             378           244
                                          ---------   ---------        --------     ---------
    Net income before cumulative
      effect of change in
      accounting principle              $       621   $     310        $    577     $     399
                                        ===========   =========        ========     =========
</TABLE>

         The following table summarizes the impact on segment profit (loss) of
the September 2003 change in measurement method used for the three and six
months ended June 30, 2003:

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED JUNE 30, 2003
                                 ---------------------------------------------------------------
                                 NORTH AMERICAN  ENGINEERED    AUTOMATION &   CORPORATE
                                   OPERATIONS     SYSTEMS    CONTROL SYSTEMS  & OTHER     TOTAL
                                 --------------  ----------  ---------------  ---------  -------
                                                     (UNAUDITED, IN THOUSANDS)
<S>                              <C>             <C>         <C>              <C>        <C>
Original segment
  profit (loss):                   $   2,371      $    293      $    1,249        (918)    2,995
Other expense, net and closure           300           171              --          82       553
T&PD and other                          (183)          353              --        (170)       --
                                   ---------      --------      ----------    --------   -------
 Segment profit (loss)             $   2,488      $    817      $    1,249    $ (1,006)  $ 3,548
                                   =========      ========      ==========    ========   =======
</TABLE>

<TABLE>
<CAPTION>
                                                   SIX MONTHS ENDED JUNE 30, 2003
                                 ---------------------------------------------------------------
                                 NORTH AMERICAN  ENGINEERED    AUTOMATION &   CORPORATE
                                   OPERATIONS     SYSTEMS    CONTROL SYSTEMS   & OTHER    TOTAL
                                 --------------  ----------  ---------------  ---------  -------
                                                     (UNAUDITED, IN THOUSANDS)
<S>                              <C>             <C>            <C>           <C>        <C>
Original segment
  profit (loss):                   $   3,635     $    1,265     $    2,568    $ (1,882)  $ 5,586
Other expense, net and closure           753             84             --         292     1,129
T&PD and other                          (355)           709             (1)       (353)       --
                                   ---------     ----------     ----------    --------   -------
 Segment profit (loss)             $   4,033     $    2,058     $    2,567    $ (1,943)  $ 6,715
                                   =========     ==========     ==========    ========   =======
</TABLE>

(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. 132, "Employer's
Accounting for Pensions and Other Postretirement Benefits." 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 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 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. Although

                                       14
<PAGE>

the Company has not made a final determination as to whether or not the benefits
provided under its postretirement benefit plan are actuarially equivalent, the
Company's actuaries made a preliminary assessment 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 six months ended June 30,
2004, net periodic benefit cost was reduced by approximately $148,000, of which
$59,000 related to a reduction of interest cost and $89,000 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 June 30, 2004 and
2003, respectively:

<TABLE>
<CAPTION>
                                  THREE MONTHS ENDED JUNE 30,    SIX MONTHS ENDED JUNE 30,
                                  ---------------------------    -------------------------
                                     2004           2003            2004          2003
                                  ----------     ------------    -----------   -----------
                                              (UNAUDITED, IN THOUSANDS)
<S>                               <C>            <C>            <C>           <C>
Unrecognized prior service cost   $    (146)     $    (146)     $    (292)     $  (292)
Interest cost                           221            228            442          455
Unrecognized loss                       150            128            300          256
                                  ---------      ---------      ---------      -------
   Net periodic benefit cost      $     225      $     210      $     450      $   419
                                  =========      =========      =========      =======
</TABLE>

         During the three and six months ended June 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 six months ended June 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.

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

<TABLE>
<CAPTION>
                               AS OF JUNE 30, 2004     AS OF JUNE 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     $    885      $   81     $  3,308     $   2,340
Patents                          165          44          155            29
Other                            534         297          365           229
                            --------      ------     --------      --------
  Total                     $  1,584      $  422     $  3,828      $  2,598
                            ========      ======     ========      ========
</TABLE>

         Amortization and interest expense of $80,000 and $209,000 were
recognized related to these assets for the three months ended June 30, 2004 and
2003, respectively, and $261,000 and $428,000 for the six months ended June 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."

                                       15
<PAGE>

         Net goodwill of $79.9 million was the Company's only intangible asset
that did not require periodic amortization as of June 30, 2004. The $222,000
decrease in the value of goodwill during the six months ended June 30, 2004
related entirely to currency exchange rate fluctuations.

         In accordance with SFAS No. 142, the Company tested each business
segment 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 business segment 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 six months
ended June 30, 2004, as management noted no indications of goodwill impairment.

(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 six months ended June 30, 2004.

(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% per annum. As of June 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
June 30, 2002, including previously accrued interest. As of June 30, 2004, the
balance of the notes (principal and accrued interest) due from this officer
under these loan arrangements was $3.7 million. 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 as of June 30,
2004. See Note 17, Subsequent Events.

         As previously agreed in 2001, the Company loaned an employee who is an
executive officer and director $216,000 on April 15, 2002, under a full-recourse
note arrangement which accrued interest at 6% per annum 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 June 30,
2002, including previously accrued interest. As of June 30, 2004, the balance of
the note (principal and interest) due from this officer under this loan
arrangement was approximately $238,000. 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 as of June 30, 2004. See Note 17,
Subsequent Events.

                                       16
<PAGE>

(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 approximately
$419,000 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 approximately $4.7 million,
alleging breach of contract. Magnum amended its answer and counter-claim in the
arbitration on July 16, 2004, reducing its total amount claimed to approximately
$1.3 million. NATCO disputes the amounts claimed by Magnum, and intends to
vigorously pursue its claims while defending against the counterclaim.
Therefore, NATCO has not recorded an accrual related to this matter as of June
30, 2004. An arbitrator has been selected in the matter, and arbitration is
scheduled in Houston, Texas during October 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 $731,000, 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.

         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.

                                       17
<PAGE>

         In May 2004, the FASB issued SFAS 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 becomes
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) SUBSEQUENT EVENTS

         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 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) LIBOR plus 2.00%, at the Company's election. This facility replaces a
similar export sales credit facility that terminated on July 23, 2004.

         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 Mr. Nathaniel A. Gregory, pursuant to which Mr. Gregory has stepped down as
NATCO's Chairman of the Board of Directors, and will resign as its Chief
Executive Officer and as a director on September 7, 2004. John U. Clarke, an
independent director who has served on the Company's Board of Directors since
February 2000, has replaced Mr. Gregory as Chairman of the Board and will
replace Mr. Gregory as interim Chief Executive Officer on September 7, 2004. The
Company will incur expense of approximately $2.4 million related to this
Separation Agreement during the third quarter of 2004.

                                       18
<PAGE>

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

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 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 expectations about our business outlook, customer spending, oil
and gas prices, our business environment and that of the industry in general 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, 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 "Risk Factors" 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.

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.

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

                                       19
<PAGE>

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 $79.9 million at June 30, 2004. The decrease
in the value of goodwill for the six months ended June 30, 2004 related entirely
to currency exchange rate fluctuations.

         In accordance with SFAS No. 142, the Company tested each business
segment 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 business segment 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 six months
ended June 30, 2004, as management noted no indications of goodwill impairment.

         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 net deferred income tax
assets that we believe will not be utilized through future operations. 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 $474,000 valuation allowance as of June
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 $201,000 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 June 30, 2004. However, the amount of the deferred tax
asset considered realizable, and thus the amount of these valuation allowances,
could change if future taxable income differs from our projections.

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, including concrete pads and
equipment. We will depreciate the asset cost over the remaining useful life of
the related assets.

                                       20
<PAGE>

         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 SFAS 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 becomes 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.

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 service providers
such as NATCO generally decline, as existing projects are completed and new
projects are postponed. During periods of recovery, revenues for service
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 six months ended June 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.

                                       21
<PAGE>

<TABLE>
<CAPTION>
                                                      SIX MONTHS ENDED         YEAR ENDED
                                                         JUNE 30,              DECEMBER 31,
                                                    -------------------    ------------------
                                                       2004       2003      2003       2002
                                                    -------     -------    -------   --------
<S>                                                 <C>         <C>        <C>       <C>
Average price of crude oil per barrel in the U.S.   $ 31.91(a)  $ 27.88    $ 27.56   $  22.51
Average wellhead price of natural gas per mcf in
  the U.S.                                          $  5.21(a)  $  5.27    $  4.97   $   2.95
Average U.S. rig count                                1,141         963      1,030        830
</TABLE>

------------
(a)      Calculated using published data from the U.S. Department of Energy for
         the four months ended April 30, 2004; data for May 2004 and June 2004
         was not yet available.

         At June 30, 2004, the spot price of West Texas Intermediate crude oil
was $36.92 per barrel, the price of Henry Hub natural gas was $6.05 per mcf per
the New York Mercantile Exchange ("NYMEX") and the U.S. rig count was 1,176, per
Baker Hughes Incorporated. At July 30, 2004, the spot price of West Texas
Intermediate crude oil was $43.72 per barrel, the price of Henry Hub natural gas
was $6.02 per mcf, and the U.S. rig count was 1,219. 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 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, delays in, or lack of large
international projects with favorable economic terms, which has impacted our
Engineered Systems business. However, bookings for the Engineered Systems
business segment were $56.6 million for the six months ended June 30, 2004
compared to $40.4 million for the six months ended June 30, 2003, indicating an
increase in activity in 2004 related to these projects.

         Beginning in late 2002 and extending through June 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 our
Automation and Control Systems business segment as well as at our Latin American
operations.

         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 June
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 the Sacroc
expansion, favorable rig counts and higher bookings experience during the six
months ended June 30, 2004.

                                       22
<PAGE>

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

      Revenues. Revenues of $73.3 million for the three months ended June 30,
2004 increased $2.7 million, or 4%, from $70.6 million for the three months
ended June 30, 2003. This increase in revenues was primarily due to increased
sales of traditional equipment and services and a larger contribution from our
CO2 operations business, primarily associated with our Sacroc facility expansion
placed in service during December 2003, offset by a decline in sales related to
large engineered systems jobs and our Automation and Control Systems equipment.
The following table summarizes revenues by business segment for the three-month
periods ended June 30, 2004 and 2003, respectively.

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED
                                             JUNE 30,
                                       -------------------                PERCENTAGE
                                         2004       2003        CHANGE      CHANGE
                                       --------   --------     --------   ----------
                                                       (UNAUDITED)
                                        (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
<S>                                    <C>        <C>          <C>        <C>
North American Operations.........     $ 42,076   $ 30,956     $11,120       36%
Engineered Systems................       22,674     27,261      (4,587)     (17%)
Automation and Control Systems....        9,682     14,007      (4,325)     (31%)
Corporate and Other...............       (1,085)    (1,611)        526      (33%)
                                       --------   --------     -------
          Total...................     $ 73,347   $ 70,613     $ 2,734        4%
                                       ========   ========     =======
</TABLE>

      North American Operations revenues increased $11.1 million, or 36%, for
the three months ended June 30, 2004, compared to the three months ended June
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 1,028 for the second quarter of 2003 to 1,163 for the
second quarter of 2004, with Canadian rig counts remaining consistent at an
average of approximately 200. 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 $3.6 million of revenue during the second quarter of 2004, compared to
$1.9 million for the second 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 $334,000 for the three
months ended June 30, 2004, compared to $177,000 for the three months ended June
30, 2003.

      Revenues for the Engineered Systems segment decreased $4.6 million, or
17%, for the three months ended June 30, 2004, compared to the three months
ended June 30, 2003. This decrease was primarily due to a lower level of larger
international production system jobs in progress in 2004 relative to the
comparable period in 2003, as well as the completion of equipment related to a
large job in West Africa, which contributed revenues of $7.2 million during the
three months ended June 30, 2003. These revenue declines were partially offset
by an increase in revenues provided by our operations in Southeast Asia.
Engineered Systems revenues of $22.7 million for the three months ended June 30,
2004 included no significant inter-segment revenues, and only $36,000 of
inter-segment revenues for the three months ended June 30, 2003.

      Revenues for the Automation and Control Systems segment decreased $4.3
million, or 31%, for the three months ended June 30, 2004, compared to the three
months ended June 30, 2003. Activity levels for the second quarter of 2004
declined compared to 2003, due to the timing of project awards, decreased level
of activity in the Gulf of Mexico and the run-off of several large projects in
2003. We expect growth in international sales for this business segment based on
recent bookings. Inter-segment sales decreased from $1.4 million for the three
months ended June 30, 2003 to $760,000 for the three months ended June 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 June 30, 2004
increased $1.1 million, or 7%, to $17.6 million, compared to $16.5 million for
the three months ended June 30, 2003. As a percentage of revenue, gross profit
increased from 23% in 2003 to 24% in 2004. The following table summarizes gross
profit by business segment for the periods indicated:

                                       23
<PAGE>

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED
                                             JUNE 30,
                                       -------------------                PERCENTAGE
                                         2004       2003        CHANGE      CHANGE
                                       --------   --------     --------   ----------
                                                       (UNAUDITED)
                                          (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
<S>                                    <C>        <C>          <C>        <C>
North American Operations.........     $ 11,357   $  8,261     $ 3,096       37%
Engineered Systems................        4,556      5,918      (1,362)     (23%)
Automation and Control Systems....        1,718      2,368        (650)     (27%)
                                       --------   --------     -------
          Total...................     $ 17,631   $ 16,547     $ 1,084        7%
                                       ========   ========     =======
</TABLE>

      Gross profit for the North American Operations business segment increased
$3.1 million, or 37%, for the three months ended June 30, 2004, compared to the
three months ended June 30, 2003, primarily due to a 36% increase in revenues
between the respective periods, including a larger percentage of higher-margin
revenues, primarily associated with our CO2 operations, partially offset by
slightly lower margins on traditional equipment, partially due to an increase in
the cost of steel, a primary raw material used in our manufacturing process. As
a percentage of revenue, gross margins were 27% for the three-month periods
ended June 30, 2004 and 2003.

      Gross profit for the Engineered Systems segment for the three months ended
June 30, 2004 decreased $1.4 million, or 23%, compared to the three months ended
June 30, 2003, due to a 17% decline in revenues between the respective periods
and lower margins as a result of unfavorable performance on certain jobs at our
U.K.-based operations. Gross margin as a percentage of revenues for Engineered
Systems was 20% and 22% for the three-month periods ended June 30, 2004 and
2003, respectively.

      Gross profit for the Automation and Control Systems segment decreased
$650,000, or 27%, for the three months ended June 30, 2004 compared to the three
months ended June 30, 2003, due to a 31% decrease in revenues for the segment
during the period and reduced activity levels in the Gulf of Mexico. The
decrease was partially offset by a favorable mix of higher-margin quote jobs
during the second quarter of 2004 compared to the second quarter of 2003 and
reduced costs in the latter part of the second quarter of 2004, resulting from
cost saving initiatives implemented during the quarter. Gross margin as a
percentage of revenue for the three months ended June 30, 2004 and 2003, was 18%
and 17%, respectively.

      Selling, General and Administrative Expense. Selling, general and
administrative expense of $13.6 million for the three months ended June 30,
2004, increased $585,000, or 5%, compared to the three months ended June 30,
2003. This increase in expense during 2004 relates primarily to an increase in
technology and product development projects, variable compensation based on
operating results, outside service costs associated with public company
compliance efforts and expense associated with the write-down of a certain
foreign receivable, partially offset by cost savings due to restructuring
activities in the U.S., Canada and U.K., begun in late 2002.

      Depreciation and Amortization Expense. Depreciation and amortization
expense of $1.4 million for the three months ended June 30, 2004, increased
$110,000, or 9%, compared to the results for the three months ended June 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 and Other. We incurred closure and other expense of $85,000 for
the three months ended June 30, 2004 for severance costs related to staff
reductions at our Automation and Control Systems segment and at our Latin
American operations.

      Interest Expense. Interest expense of $871,000 for the three months ended
June 30, 2004, decreased $206,000, or 19%, compared to the three months ended
June 30, 2003, due to the repayment of higher-rate revolving credit facilities
in March 2004 with borrowings under a new term loan arrangement. Borrowings
under the revolving credit facilities of the term loan and revolving credit
agreement represented only $812,000 of the total debt balance at June 30, 2004
compared to $10.9 million of the total debt balance at June 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 June 30, 2004
increased $15,000, or 7%, compared to the three months ended June 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 a loss of $518,000 and $553,000 for the three
months ended June 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
June 30, 2004 was $407,000 compared to $194,000 for the three months ended June
30, 2003. The change in tax expense was attributable to the change in net income
before taxes and preferred stock dividends from $504,000 for the three months
ended June 30, 2003 to $1.0 million for the three months ended June 30, 2004.
The effective tax rate was 40% and 38% for the three-month periods ended June
30, 2004 and 2003, respectively.

                                       24
<PAGE>

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
(unaudited)

      Revenues. Revenues of $145.3 million for the six months ended June 30,
2004 increased $6.7 million, or 5%, from $138.6 million for the six months ended
June 30, 2003. This increase in revenues was primarily due to increased sales of
traditional equipment and services and a larger contribution from our CO2
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 business and
our Automation and Control Systems business segment. The following table
summarizes revenues by business segment for the six-month periods ended June 30,
2004 and 2003, respectively.

<TABLE>
<CAPTION>
                                        SIX MONTHS ENDED
                                            JUNE 30,
                                       -------------------               PERCENTAGE
                                         2004       2003        CHANGE     CHANGE
                                       --------   --------     --------  ----------
                                                       (UNAUDITED)
                                          (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
<S>                                    <C>        <C>          <C>        <C>
North American Operations.........     $ 79,584   $ 59,571     $20,013       34%
Engineered Systems................       46,782     53,307      (6,525)     (12%)
Automation and Control Systems....       21,300     29,248      (7,948)     (27%)
Corporate and Other...............       (2,335)    (3,500)      1,165      (33%)
                                       --------   --------     -------
          Total...................     $145,331   $138,626     $ 6,705        5%
                                       ========   ========     =======
</TABLE>

      North American Operations revenues increased $20.0 million, or 34%, for
the six months ended June 30, 2004, compared to the six months ended June 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 963 for the first six months of 2003 to 1,141 for the
first six months of 2004, with Canadian rig counts increasing from an average of
345 to 355. 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 $3.6
million of revenue during the first six months of 2004, due primarily to the
expansion placed in service in December 2003. Inter-segment revenues for this
business segment were $608,000 for the six months ended June 30, 2004, compared
to $827,000 for the six months ended June 30, 2003.

      Revenues for the Engineered Systems segment decreased $6.5 million, or
12%, for the six months ended June 30, 2004, compared to the six months ended
June 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 $13.2 million during
the six months ended June 30, 2003. These revenue declines were partially offset
by an increase in revenues provided by our operations in Southeast Asia.
Engineered Systems revenues of $46.8 million for the six months ended June 30,
2004 included approximately $163,000 of inter-segment revenues, compared to
$66,000 of inter-segment revenues for the six months ended June 30, 2003.

      Revenues for the Automation and Control Systems segment decreased $7.9
million, or 27%, for the six months ended June 30, 2004, compared to the six
months ended June 30, 2003. Activity levels for the first six months of 2004
declined compared to 2003, due to the timing of project awards, decreased level
of activity in the Gulf of Mexico and the run-off of several large projects in
2003. We expect growth in international sales for this business segment based
upon recent bookings. Inter-segment sales decreased from $2.6 million for the
six months ended June 30, 2003 to $1.6 for the six months ended June 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 six months ended June 30, 2004
increased $2.0 million, or 6%, to $34.4 million, compared to $32.4 million for
the six months ended June 30, 2003. As a percentage of revenue, gross profit
increased to 24% from 23% for the six-month periods ended June 30, 2004 and
2003, respectively. The following table summarizes gross profit by business
segment for the periods indicated:

                                       25
<PAGE>

<TABLE>
<CAPTION>
                                       SIX MONTHS ENDED
                                           JUNE 30,
                                      -------------------                PERCENTAGE
                                        2004       2003        CHANGE      CHANGE
                                      --------   --------     --------   ----------
                                                     (UNAUDITED)
                                        (IN THOUSANDS, EXCEPT PERCENTAGE CHANGE)
<S>                                    <C>        <C>         <C>        <C>
North American Operations.........    $ 22,376   $ 15,614     $ 6,762        43%
Engineered Systems................       8,804     11,790      (2,986)      (25%)
Automation and Control Systems....       3,266      4,954      (1,688)      (34%)
                                      --------   --------     -------
          Total...................    $ 34,446   $ 32,358     $ 2,088         6%
                                      ========   ========     =======
</TABLE>

      Gross profit for the North American Operations business segment increased
$6.8 million, or 43%, for the six months ended June 30, 2004, compared to the
six months ended June 30, 2003, primarily due to a 34% increase in revenues
between the respective periods and a favorable product mix that included a
larger percentage of higher-margin revenues, primarily associated with our CO2
operations, as the result of the start-up of our Sacroc facility expansion in
December 2003. As a percentage of revenue, gross margins were 28% and 26% for
the six-month periods ended June 30, 2004 and 2003, respectively.

      Gross profit for the Engineered Systems segment for the six months ended
June 30, 2004 decreased $3.0 million, or 25%, compared to the six months ended
June 30, 2003, due to a 12% decline in revenues between the respective periods
as a result of unfavorable performance on certain jobs at our U.K.-based
operations, and due to the substantial completion of a large job in West Africa
prior to June 30, 2004, which contributed favorable margin contributions to the
results for the six months ended June 30, 2003. Gross margin as a percentage of
revenues for Engineered Systems was 19% and 22% for the six-month periods ended
June 30, 2004 and 2003, respectively.

      Gross profit for the Automation and Control Systems segment decreased $1.7
million, or 34%, for the six months ended June 30, 2004 compared to the six
months ended June 30, 2003, due to a 27% 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 due
to more competitive pricing of quote jobs as a result of lower activity levels
in the Gulf of Mexico. This increase was partially offset by reduced costs in
the latter part of the second quarter of 2004, resulting from cost saving
initiatives implemented during the quarter. Gross margin as a percentage of
revenue for the six months ended June 30, 2004 and 2003, was 15% and 17%,
respectively.

      Selling, General and Administrative Expense. Selling, general and
administrative expense of $26.9 million for the six months ended June 30, 2004,
increased $1.2 million, or 5%, compared to the results for the six months ended
June 30, 2003. This increase in expense during 2004 relates primarily to
variable compensation based on operating results, outside service costs
associated with public company compliance efforts and expense associated with
the write-down of a certain foreign receivable, partially offset by cost savings
due to restructuring activities in the U.S., Canada and U.K., begun in late 2002
and continuing throughout 2003.

      Depreciation and Amortization Expense. Depreciation and amortization
expense of $2.7 million for the six months ended June 30, 2004, increased
$254,000, or 10%, compared to the results for the six months ended June 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 and Other. We incurred closure and other expense of $85,000 for
the six months ended June 30, 2004, for severance costs related to personnel
reductions in our Automation and Control Systems segment and at our Latin
American operations. We incurred closure and other expense of $230,000 during
the six months ended June 30, 2003 associated with our restructuring efforts in
Canada in late 2002 for equipment moving costs, employee relocations and
severance.

      Interest Expense. Interest expense of $1.8 million for the six months
ended June 30, 2004, decreased $333,000, or 16%, compared to the six months
ended June 30, 2003, due to the repayment of higher-rate 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 only $812,000 of the total debt balance at June 30,
2004 compared to $10.9 million of the total debt balance at June 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.

      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 $450,000 for the six months ended June 30,
2004 increased $31,000, or 7%, compared to the six months ended June 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.

                                       26
<PAGE>

      Other, net. Other, net was $972,000 and $899,000 for the six months ended
June 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 six months ended
June 30, 2004 was $378,000 compared to $244,000 for the six months ended June
30, 2003. The change in tax expense was attributable to the change in income
before taxes, cumulative effect of change in accounting principle and preferred
stock dividends, which was $643,000 for the six months ended June 30, 2003 and
$955,000 for the six months ended June 30, 2004. The effective tax rate was 40%
and 38% for the six-month periods ended June 30, 2004 and 2003, respectively.

LIQUIDITY AND CAPITAL RESOURCES

      As of June 30, 2004, we had cash and working capital of $2.0 million and
$36.7 million, respectively, as compared to cash and working capital of $1.8
million and $34.6 million, respectively, at December 31, 2003.

      Net cash used in operating activities for the six months ended June 30,
2004 was $3.5 million, compared to $336,000 for the six months ended June 30,
2003. Factors that contributed to the increase in cash used for operating
activities during 2004 included an increase in trade accounts receivable,
inventory and a decrease in trade accounts payable financed by borrowing funds
under our credit facilities and through increased receivable collection efforts
during the six months ended June 30, 2004. 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.

      Net cash used in investing activities for the six months ended June 30,
2004 was $1.5 million, which related primarily to capital expenditures. For the
six months ended June 30, 2003, cash used in investing activities was $6.0
million, which related to capital expenditures of $6.7 million, 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.

      Net cash provided by financing activities for the six months ended June
30, 2004 was $4.8 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 $7.2 million under revolving
credit arrangements and $32.4 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, paid benefits of $884,000 under our
postretirement benefit arrangement and benefited from an increase in our cash
overdraft position of $1.5 million. Net cash provided by financing activities
for the six months ended June 30, 2003 was $4.8 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 $5.1 million and repayment of bank overdrafts totaling
$3.4 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% per annum, 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.

      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 June 30, 2004.

                                       27
<PAGE>

      We had borrowings of $43.4 million outstanding under the term loan portion
of the 2004 term loan and revolving credit facilities at June 30, 2004, which
bore interest at 3.94% per annum. Borrowings outstanding under the revolving
credit portion of the 2004 term loan and revolving credit facility at June 30,
2004 were $812,000. We had letters of credit outstanding under the 2004
revolving credit facilities of $20.6 million at June 30, 2004. Fees related to
these letters of credit at June 30, 2004 were approximately 2.75% 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 June 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, a minimum asset coverage
ratio and a minimum net worth requirement. We were in compliance with all
restrictive debt covenants in our loan agreements as of June 30, 2004.

      Prior to March 15, 2004, we maintained the 2001 term loan and revolving
credit facilities 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 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, 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%.

      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.

      We maintain an international revolving credit agreement, a working capital
facility for export sales, that provides for aggregate borrowings of $10.0
million, subject to borrowing base limitations, under which borrowings of $3.5
million were outstanding as of June 30, 2004, which bore interest at 4.25% per
annum. No letters of credit were outstanding under this facility at June 30,
2004. During the six months ended June 30, 2004, fees related to letters of
credit under this facility were calculated at 1% of the outstanding balance. The
export sales credit facility is secured by specific project inventory and
receivables, and is partially guaranteed by the U.S. Export-Import Bank. The
facility loans matured on July 23, 2004, and were replaced by a similar facility
on that date.

      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

                                       28
<PAGE>

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. This facility replaces a similar export sales credit facility that
terminated on July 23, 2004, as discussed previously.

      We had unsecured letters of credit and bonds totaling $594,000 and
guarantees totaling $41.3 million at June 30, 2004. These guarantees were
primarily associated with certain large international jobs primarily related to
our U.K.-based operations and a recently awarded job for our Automation and
Control Systems business segment in Kazakhstan, and generally extend for less
than one year.

      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% 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 June 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.

      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.

      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

                                       29
<PAGE>

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 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 $155,000 as of June 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 Mr. Nathaniel A. Gregory, pursuant to which Mr. Gregory has stepped down as
NATCO's Chairman of the Board of Directors, and will resign 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 will replace Mr.
Gregory as interim Chief Executive Officer on September 7, 2004. We will incur
expense of approximately $2.4 million related to this Separation Agreement
during the third quarter of 2004.

      At June 30, 2004, available borrowing capacity under the 2004 term loan
and revolving credit agreement and the export sales credit agreement were $9.9
million and $4.3 million, respectively. 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.

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 June 30, 2004, and we do not currently intend
to enter into such contracts or arrangements as part of our currency risk
management strategy.

      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 $155,000 as of June 30, 2004, to reflect the
projected change in fair value of the warrants during the period. A cumulative
loss of $56,000 has been recorded related to these warrants since issuance. Fair
value, as agreed with the counter-party to the 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 June 30, 2004, we had borrowings of $43.4 million
outstanding under the term loan portion of the 2004 term loan and revolving
credit facilities, at an interest rate of 3.94%. Borrowings outstanding under
the revolving credit portion of these facilities at June 30, 2004 were $812,000,
and bore interest at 6.00% per annum. Borrowings of $3.5 million were
outstanding under the working capital facility for export sales at June 30,
2004, and bore interest at 4.25%. Borrowings under the long-term arrangement
secured by our Magnolia manufacturing facility totaled $1.2 million and accrued
interest at 4.38%.

      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

                                       30
<PAGE>

income by $73,000 and decrease our cash flow from operations by $122,000. 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

      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 June 30, 2004, in an
effort to evaluate the effectiveness of the design and operation of these
controls. Based upon this review, our management has determined that, as of the
end of the period covered by this Quarterly Report on Form 10-Q, our disclosure
controls and procedures operate such that important information is collected in
a timely manner, provided to management and made known to our Chief Executive
Officer and Chief Financial Officer to allow timely decisions regarding
disclosure in our public filings.

      There has been no change in our internal controls over financial reporting
that occurred during the three months ended June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.

                                       31
<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 approximately $419,000 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 approximately $4.7 million, alleging
breach of contract. Magnum amended its answer and counter-claim in the
arbitration on July 16, 2004, reducing its total amount claimed to approximately
$1.3 million. NATCO disputes the amounts claimed by Magnum, and intends to
vigorously pursue its claims while defending against the counterclaim. An
arbitrator has been selected in the matter, and arbitration is scheduled in
Houston, Texas during October 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 $731,000, 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.

      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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      The annual meeting of stockholders of NATCO Group Inc. was held on June
15, 2004 in Houston, Texas. At the annual meeting, the holders of 14,770,839
shares of NATCO common stock out of 16,692,234 common shares entitled to vote as
of the record date and holders of 15,000 shares of preferred stock having voting
power equivalent to 1,921,845 shares of common stock out of 15,000 preferred
shares entitled to vote as of the record date were represented in person or by
proxy, constituting a quorum. Holders of common stock and preferred stock voted
as a single class on all proposals, resulting in 16,692,684 total voting shares
present at the meeting and 18,614,079 total voting shares as of the record date.

      Proposals submitted to a vote of security holders included the following:

      (1)   Election of two Class III members of the Board of Directors, each
            to hold office for a three-year term expiring at the annual meeting
            of stockholders in 2007.

<TABLE>
<CAPTION>
                                              NUMBER OF VOTING SHARES
                                   ---------------------------------------------
                                      FOR          WITHHELD       BROKER NON-VOTE
                                   ----------      ---------      ---------------
<S>                                <C>             <C>            <C>
Nathaniel A. Gregory               14,477,446      2,222,878            --
Herbert S. Winokur, Jr.            14,515,148      2,185,176            --
</TABLE>

                                       32
<PAGE>

            (2)   Ratification of KPMG LLP as our independent public accountants
                  for the fiscal year beginning January 1, 2004.

<TABLE>
<CAPTION>
         NUMBER OF VOTING SHARES
----------------------------------------
   FOR          WITHHELD       ABSTAINED
----------      ---------      ---------
<S>             <C>            <C>
16,571,050       127,153         2,121
</TABLE>

            (3)   Approval of the NATCO Group Inc. 2004 Stock Incentive Plan:

<TABLE>
<CAPTION>
         NUMBER OF VOTING SHARES
----------------------------------------
   FOR          WITHHELD       ABSTAINED
----------      ---------      ---------
<S>             <C>            <C>
10,448,315      3,390,729      1,127,223
</TABLE>

      Each of the proposals were approved by the requisite number of votes
necessary for their adoption.

      On July 28, 2004, NATCO Group Inc. entered into a Separation Agreement
with Mr. Gregory, pursuant to which Mr. Gregory has stepped down as NATCO's
Chairman of the Board of Directors and will resign 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.

      Mr. Clarke and Mr. Patrick M. McCarthy will continue to serve as our Class
I directors, each with a term expiring at the annual meeting of stockholders in
2005. Mr. Keith K. Allan and Mr. George K. Hickox, Jr., will continue to serve
as our Class II directors, each with a term expiring at the annual meeting of
stockholders in 2006. Following September 7, 2004, Mr. Winokur will serve as the
sole Class III director, until such time as the Board names a replacement for
Mr. Gregory in that class. Mr. Thomas R. Bates, Jr. was elected by the holders
of our Series B Convertible Preferred Stock to serve as an unclassified
director, and will continue in office until a successor has been elected by the
holders of the Series B Convertible Preferred Stock or until less than 50% of
such series remains outstanding.

ITEM 5. OTHER EVENTS

      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. This facility replaces a similar export sales credit
facility that terminated on July 23, 2004. Copies of the international revolving
credit agreement and related documents are included as exhibits to this document
and are incorporated into this document by reference.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Reports on Form 8-K.

    -     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.

    -     Report on Form 8-K filed May 5, 2004 to report First Quarter 2004
          Results.

(b) Index of Exhibits

                                       33
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.                               DESCRIPTION
-----------                               -----------
<S>              <C>
   10.1          --International Revolving Credit Agreement entered into as of
                   July 23, 2004 among NATCO Group Inc, National Tank Company
                   and Total Engineering Services Team, Inc., and Wells Fargo
                   HSBC Trade Bank, N.A.

   10.2          --International Security Agreement dated as of July 23, 2004,
                   by and among NATCO Group Inc, National Tank Company and Total
                   Engineering Services Team, Inc., and Wells Fargo HSBC Trade
                   Bank, N.A.

   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>

                                       34
<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/ Nathaniel A. Gregory
                                             -----------------------------------
                                             Name: Nathaniel A. Gregory
                                             Chairman of the Board and
                                             Chief Executive Officer

Date: August 9, 2004

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

Date: August 9, 2004

                                       35
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                               DESCRIPTION
-----------                               -----------
<S>              <C>
   10.1          --International Revolving Credit Agreement entered into as of
                   July 23, 2004 among NATCO Group Inc, National Tank Company
                   and Total Engineering Services Team, Inc., and Wells Fargo
                   HSBC Trade Bank, N.A.

   10.2          --International Security Agreement dated as of July 23, 2004,
                   by and among NATCO Group Inc, National Tank Company and Total
                   Engineering Services Team, Inc., and Wells Fargo HSBC Trade
                   Bank, N.A.

   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>

                                       36