DRESSER INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR END DECEMBER 31, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-60778

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DRESSER, INC.
(Exact name of registrant as specified in its charter)

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

15455 DALLAS PARKWAY, SUITE 1100 75001
ADDISON, TEXAS (zip code)
(Address of principal executive offices)

(972) 361-9800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

There is currently no established publicly traded market for the common
equity of the Company held by non-affiliates.

The number of shares outstanding of Class A and Class B Common Stock (par
value $.001 per share) as of March 18, 2002 was 10,488,222 and 909,486,
respectively.
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TABLE OF CONTENTS

PART I
Item 1. Business.................................................... A-3
Item 2. Properties.................................................. A-12
Item 3. Legal Proceedings and Environmental......................... A-19
Item 4. Submission of Matters to a Vote of Security Holders......... A-21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... A-21
Item 6. Selected Financial Data..................................... A-21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. A-23
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... A-34
Item 8. Financial Statements and Supplementary Data................. A-36
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure...................................... A-36
PART III
Item 10. Directors and Executive Officers............................ A-37
Item 11. Executive Compensation...................................... A-39
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ A-44
Item 13. Certain Relationships and Related Party Transactions........ A-45
PART IV
Item 14. Exhibits, Financial Statements and Schedules and Reports on
Form 8-K.................................................. A-48

2

PART I

ITEM 1. BUSINESS

GENERAL BUSINESS DEVELOPMENT

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

In connection with a recapitalization in April 2001, we made payments to
Halliburton Company of approximately $1.3 billion to redeem our common equity
and purchase stock of certain of our foreign subsidiaries. The recapitalization
transaction and related expenses were financed through the issuance of $300.0
million of senior subordinated notes, or the "2001 notes," $720.0 million of
borrowings under the credit facility, and approximately $400.0 million of common
equity contributed by DEG Acquisition, LLC, an entity owned by First Reserve
Corporation and Odyssey Investment Partners, LLC. See "Part II--Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Recapitalization Transaction."

OVERVIEW

We are a worldwide leader in the design, manufacture and marketing of
highly engineered equipment and services sold primarily to customers in the
energy industry. Our products include valves, instruments, meters, natural gas
fueled engines, retail fuel dispensers and software and related control systems.
In 2001, approximately 83% of our revenues came from energy infrastructure
spending. Two of our largest end markets are natural gas and power generation.
We are a global business, with an established sales presence in over 100
countries and manufacturing or customer support facilities in over 22 countries.
Many of our businesses have been in operation for 100 years or more. As a result
of our long operating history and leading market positions, we have a
substantial installed base which provides us with significant recurring
aftermarket revenues. In 2001, we generated revenues of $1.55 billion, operating
income of $166.7 million and EBITDA (as defined) of $225.5 million.

We sell our products and services to more than 10,000 customers, including
most of the world's major oil companies, multinational engineering and
construction companies and other Fortune 500 firms, through a global sales and
service network of over 400 account representatives, 900 independent
distributors and 300 authorized service centers. Our top 10 customers in 2001
included Shell, ExxonMobil and BP. Our principal business segments are flow
control, measurement systems and power systems. Our total revenues by geographic
region in 2001 consisted of North America (58.1%), Europe/Africa (20.7%), Latin
America (7.7%), Asia (9.6%) and the Middle East (3.9%). We have pursued a
strategy of customer, geographic and product diversity to mitigate the impact on
our business of an economic downturn in any one part of the world or in any
single business segment.

We offer our customers highly engineered products and services used to
produce, transport, process, store and distribute oil and gas and their
by-products. Because many of our products are used in mission-critical
applications, our customers often require us to meet internal, government and
industry standards, an expensive process that can take years, in order to reduce
the likelihood of costly system failures. Our products are often developed and
engineered in cooperation with our customers for specific applications. The
purchasing decisions for these customized products are driven primarily by
product performance, technical specifications and the ability to deliver service
and support rather than solely by price. We are increasingly combining our
products and services to develop integrated solutions to meet our customers'
needs.

We believe that our installed base of energy infrastructure equipment is
one of the largest in the world in the markets we serve. This significant
installed base provides us with a recurring demand for replacement parts and
equipment upgrades and a substantial platform to expand our aftermarket service
business. A significant portion of replacement equipment, parts and maintenance
services in our businesses is awarded to the original

equipment manufacturer. Aftermarket parts and services typically carry higher
margins than our original equipment sales, and accounted for approximately 26%
of our revenues in 2001.

BUSINESS OVERVIEW

We believe that our global presence and diversified product and service
offerings position us to improve our market share in developed markets, expand
our sales in emerging markets and capitalize on our customers' demand for
integrated solutions. Our principal business segments are flow control,
measurement systems and power systems.

Flow Control. Our flow control segment, which generated 40% of our
revenues, designs, manufactures and markets valves and actuators. These products
are used to start, stop and control the flow of liquids and gases and to protect
process equipment from excessive pressure. Our flow control segment markets its
products under well recognized brand names, including Masoneilan(R), Grove(R),
Consolidated(R) and Ledeen(TM). The critical functions for which these products
are used require them to be highly reliable and often custom engineered. For
example, we designed and built a unique valve for emergency shutdown of high
pressure gas for Statoil's Troll project--the premier natural gas development in
the North Sea. This valve, which we believe to be the largest ever built at a
unit weight of 80 metric tons, is designed to withstand a load value of 2,800
metric tons at maximum working pressure over a 50-year life cycle. Similar
designs were subsequently used on Statoil's Aasgard and Europipe II projects. We
enhance our product offerings with service capabilities including preliminary
design, application engineering, design testing, production and installation,
project management, operation and maintenance training, preventative/predictive
maintenance programs and inventory management services. Our flow control segment
also provides aftermarket parts and services through a global sales and service
network of over 260 account representatives, 80 independent local distributors,
100 Green Tag(R) and Masoneilan(R) authorized repair centers and ten
company-owned service centers.

Measurement Systems. The measurement systems segment, which generated 37%
of our revenues, consists of two primary product groups. The first, retail
fueling, is a leading supplier of fuel dispensers, pumps, peripherals,
point-of-sale and site monitoring systems and software for the retail fueling
industry. The second, measurement, is a leading supplier of natural gas meters,
regulators, digital and analog pressure and temperature gauges and transducers
and specialty couplings and connectors. These systems and other products are
used to measure and monitor liquids and gases. Our measurement systems group
markets its products and services under well recognized brand names including
Wayne(R), Ashcroft(R), Mooney(TM), Roots(TM) and Dresser(R), and has a long
history of technical innovations. Our Dresser Wayne product group is a leading
manufacturer of retail fueling systems, and was the first to develop fuel
blending dispensers and pay-at-the-pump technologies, including Speedpass(R) (a
registered trademark of ExxonMobil). As a result of Wayne's advanced products
and systems, we have also become the leading supplier of retail fueling
solutions to domestic high volume retailers, including Sam's Club, Kroger and
Safeway. Our Roots(R) rotary natural gas meters are the industry standard for
high accuracy natural gas custody transfer. Our measurement systems segment also
offers a comprehensive array of services ranging from the design of integrated
natural gas regulating and metering stations to on-site maintenance and repair.

Power Systems. Our power systems segment, which generated 23% of our
revenues, designs, manufactures and markets natural gas fueled engines used
primarily in natural gas compression and power generation applications and
rotary blowers and vacuum pumps. Our power systems group markets its products
under well recognized brand names, including Waukesha(R) and Roots(TM). These
products are used in mission-critical applications such as providing standby
power for Chicago's 911 Emergency Communications Center and driving compressors
at a remote gas storage facility in Aitken Creek, British Columbia. Our
Waukesha(R) engines have set industry standards for reliability and low
lifecycle cost of ownership. For example, our VHP(TM) engine model typically
operates for over 40,000 hours between major overhauls at a rated uptime of 98%.
This reliability makes our products suitable for use in remote areas, critical
service applications and situations requiring long lifecycles. Our customers
typically spend many times the initial purchase price of one of our engines in
service upgrades and maintenance costs over its lifetime. We currently maintain
a significant market share on our aftermarket parts as customers tend to be more
focused on reliability and predictability versus price when servicing our
engines.

COMPETITIVE STRENGTHS

We believe the following competitive strengths position us to enhance our
growth and profitability:

-- Worldwide Market Leader. Originally founded in 1880, Dresser has a
long history of leadership and innovation in the energy
infrastructure industry. We believe that we have a leading market
position in most of our served markets. We operate in over 100
countries worldwide through a global sales and service network of
over 400 account representatives, 900 independent distributors and
300 authorized service centers. Our brands are well-known for
superior quality and high performance. We have developed many of the
technological and product breakthroughs in our markets, and produce
some of the most advanced products available in each of our
businesses. These products typically command higher margins than our
other products and help us maintain a strong market position. Our
brand identities have earned customer loyalty in each business
segment, help us capture aftermarket business and assist us in
obtaining additional business, particularly as our customers look to
procure from fewer manufacturers who can supply and service them
globally.

-- Established Approved Vendor Status. The majority of our revenues are
derived from products that are used in processes involving volatile
or hazardous gases and liquids where the consequences of product
failure can be severe. Because of the potential impact of failures,
our customers often limit the number of their approved vendors and
require that products complete extensive testing and qualification
programs before being used. Also, our customers are reluctant to
replace proven equipment designs with those of new or unknown
manufacturers. Completing the required testing and qualification for
placement on approved vendor or product lists can take several years
and require large capital expenditures. Our products hold over 120
regulatory and industry approvals or certifications worldwide and are
approved for use by almost all major energy customers. We believe
that our reputation and history of previous qualification and
certification as an approved vendor provides us with a substantial
competitive advantage.

-- Benefits of a Large Installed Base. We believe that our global
installed base of products is among the largest in each of our
business segments. Many of our product lines require ongoing
maintenance and parts replacement, which provides us with a recurring
source of revenues that typically carry higher margins than our
original equipment sales. Our aftermarket business accounted for
approximately 26% of our revenues in 2001 and enables us to maintain
strong customer relationships and increase our understanding of our
customers' needs.

-- Well Positioned to Provide Global Integrated Solutions. With a
manufacturing, sales or service presence in over 100 countries, we
believe that our global reach and broad product offering provide a
significant advantage in competing for business from large,
multinational customers. Our customers are increasingly seeking to
outsource the service, maintenance and management of their facilities
and equipment, as they redefine their core competencies away from
building and maintaining fixed assets and seek to reduce their total
costs of ownership. We believe that our comprehensive array of
products and services and global presence allow us to compete more
successfully for a broader range of multinational projects and
provide the design, engineering and aftermarket support that our
customers demand.

-- Strong Relationships With Blue Chip Customers. We sell our products
globally to more than 10,000 customers. We have long-standing
relationships with the world's major oil companies, multinational
engineering and construction companies and other Fortune 500 firms.
Our top 10 customers for 2001 included Shell, ExxonMobil and BP. We
often work directly with our customers' design and engineering
departments to develop products to meet specific infrastructure needs
or other customer requirements. For example, we collaboratively
designed, engineered, fabricated and tested several innovative high
pressure control systems for the subsea pipelines that transport oil
and gas produced by TotalFinaElf and Shell operated oil and gas
fields in the North Sea.

BUSINESS STRATEGY

-- Capitalize On Favorable Energy Infrastructure Trends. As a worldwide
market leader, we believe we are well positioned to benefit from the
expected long-term growth in energy infrastructure investment. In
particular, our product and service offerings for our natural gas and
power generation customers position us to benefit from increases in demand
in these sectors.

-- Increase Operational Efficiency and Cash Flow. We believe that in order
to maintain our competitiveness, we need to continue to focus on
increasing operational efficiency and cash flow. This focus includes our
on-going initiatives to increase manufacturing efficiencies, consolidate
raw material sources, increase global procurement and improve working
capital efficiency. We believe these initiatives offer us opportunities to
improve our profitability and cash flow.

-- Expand Our Product Line and Exploit Recently Developed
Products. Throughout our long history, we have worked closely with our
customers to develop products that meet their specific requirements. We
are developing new technologies that transmit control and measurement data
generated by our products that allow our customers to remotely monitor the
performance of their plant and equipment. These technologies can
substantially lower operating costs for our customers. For example,
Transco/British Gas uses our LogMan(TM) software and regulators to
remotely monitor pressure and control natural gas delivery in the United
Kingdom. In addition, we are developing products that remotely transmit
predictive maintenance information to our customers, thereby reducing
unexpected downtime. These technologies are broadly applicable across our
product lines and represent an opportunity for increased revenues from
both new product sales and upgrades to our existing installed base.

PRODUCTS AND SERVICES

We have three business segments: flow control, measurement systems, and
power systems. Our businesses are organized around the products and services
provided to the customers they serve.

FLOW CONTROL

Our flow control segment manufactures control valves, on/off valves,
pressure relief valves and actuators. We serve the oil and gas production,
transportation, storage, refining, petrochemical and power generation sectors of
the energy industry. We believe we produce one of the most complete valve
product lines for the energy infrastructure industry, including both standard
and customized product offerings. Our broad portfolio of products, combined with
a global sales and service network, positions us as one of the preferred global
flow control solutions providers. In addition, our technical expertise and
product knowledge allow us to be one of a select few global vendors who can meet
the needs of our most demanding energy customers, including specially-designed
products for deep-water and severe service applications. Our valve products
compete at unit price levels ranging from $200 to over $500,000.

Historically, demand for our flow control products has been driven by the
dynamics of the energy industry and in particular by energy infrastructure
spending. Demand for valve products has therefore been greatest in
industrialized nations throughout North America and Europe. In the future, we
expect that growth will primarily be driven by upgrading existing products, the
development of new applications and increasing demand in developing regions such
as Latin America, Asia and Africa.

Control valves, which are sold under the Masoneilan(R), Grove(R) and
BPE(TM) brands, are used primarily in applications that require continuous and
accurate control of flow rates. Control valves adjust flow passage size at the
direction of remote signals emanating from an external control system. We are
developing new "smart" technologies that transmit control and measurement data
generated by our products to our customers' service systems that remotely
monitor the performance of their plant and equipment. These technologies can
substantially lower operating costs for our customers. In addition, we are
developing products that remotely transmit predictive maintenance information,
thereby avoiding unexpected downtime. We believe providing smart capabilities to
enhance our existing product lines will be an important driver of growth in our
valve business over the next several years, and a majority of the control valves
we sell are smart units. We are

currently marketing smart valve products with both analog and digital
communication interfaces. Approximately 125,000 analog units are shipped
annually, and we expect demand to increase over the next few years. In parallel,
we expect demand for digital products to grow in the future as this relatively
new communication interface matures. We have established a product development
and marketing alliance with Yokogawa Electric Corporation, a leading Japanese
process control systems provider, in order to offer our customers integrated
valve and control system solutions. These integrated solutions and smart
products typically command higher margins than our standard valve product
offerings.

On/off valves, which are sold under the Control Seal(TM), Grove(R),
Ring-O(TM), TK(R), Wheatley(R) and Texsteam(TM) brand names, are typically used
in applications that either require flow to be completely on or off or have
limited flow adjustment capabilities. Included in this category are: ball, gate,
globe, check and butterfly valves. We have designed and patented hundreds of
specialized on/off valve products. In conjunction with Statoil's Troll project,
the premier natural gas development in the North Sea, we produced what we
believe is the largest valve ever built, with a unit weight of 80 metric tons.
Among other new product development programs, we are designing subsea ball and
check valves for deep-water oil and gas development, fire-proof valves, severe
service valves, liquefied natural gas valves and more cost-effective rising-stem
ball valves. Many of these valves are custom manufactured from specialty
materials to handle the demanding environments in which they will be used and to
meet our customers' stringent specifications.

Pressure relief valves, including both safety and safety relief valve
types, are used to protect process equipment from excessive pressure. We sell
our pressure relief valves to the power generation, oil and gas, and refining
and petrochemical industries under the Consolidated(R) brand name. We are
developing new products for use in growing applications, including enhanced
pilot operated safety valves for use in offshore and liquefied natural gas
applications.

Our flow control segment's other products, sold under the Ledeen(TM),
Texsteam(TM) and Nil-Cor(R) brands, include chemical injection pumps; high-alloy
gate, globe, check and ball valves; compact and linear electric actuators; and
composite ball, butterfly and check valves. Our actuator products, which are
used to control valve movement, are often sold in packages for use with our
other products, such as our subsea actuators used in conjunction with our subsea
on/off valve technology.

Our flow control segment's strength as a product leader is enhanced by its
service capabilities. These services include preliminary design, application
engineering, design testing, production and installation, project management,
operation and maintenance training, preventive/predictive maintenance programs
and inventory management services.

MEASUREMENT SYSTEMS

Our measurement systems segment consists of two primary product groups. The
first, retail fueling, is a leading supplier of fuel dispensers, pumps,
peripherals, point-of-sale and site monitoring systems and software for the
retail fueling industry. The second, measurement, is a leading supplier of
measurement and control products for the energy industry and other end markets.

Retail Fueling

We have marketed our retail fuel systems for approximately 100 years under
the Wayne(R) brand. As an industry pioneer, we were the first to introduce
self-service consoles and fuel blending dispensers to service stations. More
recently, we introduced the first in-pump card readers and cash acceptors, the
first use of microcomputers in fuel processing systems, the first in-pump radio
frequency identification payment systems such as Speedpass(R) (a registered
trademark of ExxonMobil) and the first dispenser mounted touchscreen
payment/communication systems. We also produce regulatory agency approved vapor
recovery systems that reduce gasoline vapor emissions into the atmosphere during
the fueling process. We continue to develop and market innovative technologies
that allow our customers to reduce costs, increase throughput and improve
profits at their locations.

Demand for our systems and other products over recent years has been
affected by a reduced level of capital spending by our customers. We typically
expect our customers to upgrade, reimage or replace their equipment prior to the
end of its useful life. New technology can also drive demand in this market
since technological sophistication and customer convenience features can be a
competitive edge for fuel retailers. Companies with outdated hardware and
under-powered software often elect to replace their equipment in order to remain
competitive, or to comply with new government regulations. Moreover, high volume
retailers, such as Sam's Club, Kroger and Safeway have entered the domestic
retail fuel market, further driving equipment, software and service demand.
These retailers typically utilize twice as many fuel dispensers per location as
traditional retail fueling stations.

Our core product line consists of a wide variety of fuel dispensers. Our
basic fuel dispenser design supports single and multiple hose configurations
that can measure and dispense dedicated or blended fuel. Our fuel dispensing
platforms can be expanded to include card processing terminals, cash acceptors,
bar code scanners, radio frequency identification payment systems, keypads,
printers and graphic displays to allow consumers to purchase and pay for fuel
and other items at the pump. In addition, our dispensers are usually designed
and graphically detailed in collaboration with our customers to meet their
precise image standards. For example, we have been awarded a significant role in
the development of a new fueling dispenser introduced by BP in connection with
its new image campaign. We believe that we are well positioned to be the primary
vendor for this BP program. Our retail fuel dispensers range in price from
$2,800 to over $15,000 per unit.

We also design and market self-service control and point-of-sale systems
for the retail fueling industry. These enterprise software solutions are
designed to support our retail customers' efforts to improve back office
efficiency and record keeping, reduce labor hours and improve retail margins.
For example, our Nucleus(R) system, which is an open architecture, PC based
point-of-sale system, is designed to support larger convenience store formats
that feature a wide selection of in-store merchandise and services. As the hub
of all store operations, the Nucleus(R) system interfaces with a wide variety of
peripherals and systems, enabling cashiers and managers to monitor and manage
store operations efficiently. The Nucleus(R) system also supports back office
functions including inventory control, price book management, employee
management and site administration. In addition, we were one of the first to
introduce a fully integrated point-of-sale system that combined the
functionality of a self-service control console, electronic cash acceptor and
card processing system into a single countertop terminal. Called the Wayne
Plus/3(TM) terminal, we have deployed 10,000 of these systems in over 9,000
locations. Our software systems range in price from $7,000 to over $16,000.

In connection with our product development initiatives, we have entered
into a number of important strategic alliances with technology partners to
enhance and broaden our retail product offerings. For example, our alliance with
Texas Instruments was important in our development of advanced pay-at-the-pump
technologies, including Speedpass(R), which allows consumers to buy fuel with
the wave of a radio frequency key fob.

In order to help our customers derive maximum value from their investment
in our retail fuel solutions, we offer a comprehensive suite of services. These
services include product rollout management, installation, user training and a
24/7 help desk. We also offer 24/7 onsite maintenance and repair, including one
hour response to site emergencies, four hour response to critical problems and
24 hour response to all other concerns. Onsite services are provided by a mix of
our own field support technicians and independent service organizations. All
field support technicians and independent service organizations receive ongoing
technical training and carry an extensive inventory of service parts and
diagnostic equipment.

Measurement

Our measurement group designs, manufactures and markets four primary
product lines: meters, instruments, integrated flow systems and piping
specialties. Demand for these products is driven primarily by natural gas
consumption and infrastructure spending in the hydrocarbon and chemical process
industries. Customer trends such as integration of information technology
systems with "smart" equipment and increased outsourcing of metering and
monitoring services are also expected to drive demand in this market. Demand

has historically been strongest in North America and Europe, with future growth
expected in Latin America, Asia and the Middle East as industrialization
continues.

Meters, pressure regulators and piping specialties, which are sold
primarily to customers in the natural gas industry under the Roots(R),
Mooney(TM) and Dresser(R) brand names, are used for volume measurement and
pressure regulation. These products are sold at unit prices ranging from
approximately $400 to over $82,500. We sell complete, integrated natural gas
control stations that can be used by a utility to regulate distribution of
low-pressure natural gas from high-pressure transmission pipelines. These
control stations typically combine a number of our products such as valves,
meters, pressure sensors and regulators into a complete system solution.
Historically, a utility would have performed the engineering and design
necessary to build these stations to regulate gas pressure and flow, bid out the
component parts and contracted for the assembly and installation. We can provide
utilities with a total system solution at a lower overall cost.

Instrument products consist primarily of pressure and temperature
instrumentation manufactured for oil and gas, refining, chemical, industrial and
commercial customers worldwide. These products are used by our customers to
monitor pressure, temperature, pH levels, and flow rates of gases and liquids.
Our key instrument brands and related products are Ashcroft(R) pressure and
temperature instruments, Heise(R) precision testing and calibration devices and
digital and analog transducers, Ebro(TM) portable electronic instruments and
Ashcroft(R) utility gauges, which are designed specifically for high reliability
of service. Our instrument products range in price from $1 to over $5,500 per
unit.

POWER SYSTEMS

Our power systems segment is a leader in the design, manufacture and
marketing of natural gas fueled engines used primarily for natural gas
compression and distributed power generation. Most natural gas compression
applications involve pressurizing gas for delivery from one point to another,
typically from lower pressure wells to higher pressure gathering and pipeline
systems. Compression is also used to reinject natural gas into oil wells to help
lift liquids to the surface and to inject gas into underground reservoirs.
Distributed power generation is the use of onsite electric generators for
primary, supplemental or back-up power in areas where existing power sources are
unreliable or costly. Our product offering ranges from 85 to 4,500 horsepower
(60-3,300 kilowatts) engines and power generation packages with a base wholesale
price range of $21,000 to over $900,000. We also manufacture a line of rotary
blowers. Our products are sold under the Waukesha(R) and Roots(TM) brand names
both directly to end users and through a network of independent distributors
worldwide. We believe we have the largest installed base of natural gas fueled
industrial engines in the world as a result of our long history and leading
market position.

Demand for our power system products is primarily a function of worldwide
energy consumption and infrastructure spending. We view distributed power
generation as a significant opportunity for future revenue growth in this
segment. We believe favorable environmental, regulatory and cost characteristics
of natural gas compared to other energy sources and the relatively wide
dispersion of gas reserves throughout the world will favor its use in power
generation. The need for "clean" power for high tech equipment, uncertainty
about electrical utility deregulation and lack of infrastructure in
underdeveloped nations are potential sources for growth in demand.

We believe we have developed some of the most reliable and durable engines
in our industry. These products provide our customers with low total cost of
ownership through long intervals between overhauls, high equipment uptimes and
predictable service schedules. We typically expect our VHP(TM) engine model to
operate in excess of 40,000 hours at 98% rated uptime before requiring a major
overhaul. Engine reliability is essential because they are frequently used in
mission-critical applications or in remote locations where the cost of failure
is extremely high. For example, two of our engines provide standby power for
Chicago's 911 Emergency Communications Center and seven of our top-of-the-line
engines drive compressors at a remote gas storage facility in Aitken Creek,
British Columbia.

The aftermarket in both the natural gas compression and distributed power
generation markets is substantial. Our natural gas engines typically run
continuously for years at a time, creating a regular need for maintenance
services and replacements parts. Our customers typically spend many times the
initial purchase

price of one of our engines in service, upgrades and maintenance costs over its
lifetime. As a result, our aftermarket parts and services revenues are an
important part of our business, representing approximately 37% of our total
natural gas engine related revenues in 2001 and are a higher percentage of our
margin and EBITDA. We currently maintain a significant market share for our
aftermarket parts as our customers tend to be more focused on reliability than
price when servicing our engines.

In addition to selling stand-alone engines, we provide our customers with a
variety of services and equipment packages. For example, we offer complete power
generation systems in which we integrate our engines with generators, switchgear
and controls manufactured by other vendors in order to deliver a total solution
to our customers. We also offer our customers technical training, subcontracted
turnkey installation and field troubleshooting worldwide.

COMPETITION

As one of a small group of major competitors in each of our business lines,
we encounter intense competition in all areas of our business. Our businesses
typically are characterized by fewer than ten manufacturers that together
account for the majority of each market and a large number of smaller
competitors who divide the remainder. The primary bases of competition include
product performance, customer service, product lead times, global reach, brand
reputation, breadth of product line, quality of aftermarket service and support
and price. We believe the significant capital required to construct new
manufacturing facilities, the production volumes required to maintain low unit
costs, the need to secure a broad range of reliable raw material and
intermediate material supplies, the significant technical knowledge required to
develop high performance products, applications and processes and the need to
develop close, integrated relationships with customers serve as disincentives
for new market entrants. Some of our existing competitors, however, have greater
financial and other resources than we do.

SALES AND MARKETING

We market our products and services worldwide through our established sales
presence in over 100 countries and a manufacturing or support facility presence
in over 22 countries. We believe our proximity to customers has historically
been an important sales advantage.

Our sales force is comprised of over 400 direct sales and service
representatives and an extensive global network of over 900 independent
distributors and over 300 authorized service centers who sell our products and
provide service and aftermarket support to our installed base. Due to the long
operating history of our business, many of our distributor relationships are
longstanding and exclusive to us. For example, our flow control business is
supported by an independent global network of over 100 Green Tag(TM) and
Masoneilan(R) repair centers, the majority of which represent long-term
relationships. We also offer extensive training programs for our independent
distributors, allowing them to reach increasingly higher levels of
certification. Our most highly qualified independent distributors are often able
to command higher aftermarket service margins as a result of their expertise and
tend to be our most loyal distributors. Most of our distributor agreements are
terminable at any time by either us or the distributor, subject to short notice
periods.

We believe the performance driven nature of our products has fostered close
working relationships with our customers. Our marketing strategy is to leverage
our strong brand reputations and technical expertise to develop new products and
achieve qualification and certification as an approved vendor. For example, our
measurement systems segment has successfully targeted the domestic high volume
retail market for gasoline through a systematic marketing and technology
development effort, securing a majority share of this market. We have recently
begun to enhance our competitive position by aggressively pursuing alliance
relationships with our key customers whereby we work directly with our
customers' design and engineering departments to develop products to meet
specific infrastructure needs or other customer-specific requirements. The power
systems segment has strategically positioned itself with certain customers in
the gas compression market by selling engines directly to them. These customers
include four major gas compression packagers and seven medium size packagers.
All four of the major packagers operate gas compressor lease fleets of their own
or provide contract compression services.

CUSTOMERS

We sell our products and services to more than 10,000 customers, including
most of the world's major oil companies, multinational engineering and
construction companies and other Fortune 500 firms. Many of our customers
purchase products and services from each of our three operating segments. Our
customer base is geographically diverse with 58.1% of 2001 revenues in North
America, 20.7% in Europe/Africa, 7.7% in Latin America, 9.6% in Asia and 3.9% in
the Middle East. Our top 10 customers in 2001 accounted for 16.7% of our
revenues and included Shell, ExxonMobil and BP. Our largest customer accounted
for approximately 3.1% of our revenues in 2001.

BACKLOG

Backlog at the end of 2001 was $419.5 million, a 15.7% increase over a
backlog of $362.7 million at the end of 2000. Of our backlog at year-end 2001,
we expect approximately 99% to be filled within the current fiscal year.

RAW MATERIALS

The main raw materials we use are commodity metals, forgings, castings,
fasteners, and electronic circuitry. Substantially all our raw materials are
purchased from outside sources and are readily available. We seek to purchase
raw materials globally to benefit from low cost sources.

MANUFACTURING

Our manufacturing processes generally consist of fabrication, machining,
component assembly and testing. Many of our products are designed, manufactured
and produced to order and are often built in compliance with specific customer
requirements. To improve quality and productivity we are implementing a variety
of manufacturing strategies including cellular manufacturing and just-in-time
process engineering. In addition, we outsource the fabrication of some
subassemblies and components of our products, particularly in our flow control
segment. Our manufacturing operations are conducted in 47 locations around the
world. We typically own the plants and equipment at our facilities and the
underlying real property. We believe that we have sufficient production capacity
to meet demand over the next several years.

We strive to produce the highest quality products and are committed to
continuous quality and efficiency improvement of our products and processes. To
help achieve our quality goals, we carefully control our manufacturing processes
and materials and have satisfied the standards for ISO-9001 certification at
most of our manufacturing facilities. The International Organization for
Standardization awards ISO-9001 certification on a facility-by-facility basis to
manufacturers who adhere to strict quality standards. Companies must maintain
these standards and supply supporting documentation to retain their ISO
certification, and certified facilities are audited regularly.

RESEARCH AND DEVELOPMENT

It is our policy to invest in research and development each year in order
to maintain or improve the competitiveness of our products. We have developed
many of the technological and product innovations in our markets, and produce
some of the most advanced products available in each of our businesses. We
believe we have significant opportunities for growth by developing new products
and services that offer our customers greater performance and significant cost
savings. These opportunities include developing "smart" valves, instruments and
meters, new retail fuel point-of-sale payment technologies and additional
natural gas fueled engine models operating at greater efficiencies. Potential
end users for these technologies include most of our existing customer base as
well as customers of our competitors.

We are also actively engaged in research and development programs designed
to advance the design of products to meet specific functional and economic
requirements and to improve manufacturing methods. These engineering efforts
span all of our businesses. We have also placed special emphasis on ensuring
that

newly developed products are compatible with, and build upon, our existing
manufacturing and marketing capabilities.

Each of our business segments maintains its own research and development
staff. Our research and development expense was $23.9 million, $24.9 million,
$25.7 million for the years ended December 31, 2001, 2000, and 1999
respectively. We believe current expenditures are adequate to sustain ongoing
research and development activities.

INTELLECTUAL PROPERTY

We rely on a combination of patents, trademark, copyright and trade secret
protection, employee and third-party nondisclosure agreements and license
arrangements to protect our intellectual property. We sell most of our products
under a number of registered trade names, which we believe are widely recognized
in the industry. In addition, many of our products and technologies are
protected by patents. No single patent, trademark or trade name is material to
our business as a whole. We anticipate we will apply for additional patents in
the future as we develop new products and processes.

Any issued patents that cover our proprietary technology may not provide us
with substantial protection or be commercially beneficial to us. The issuance of
a patent is not conclusive as to its validity or its enforceability. Competitors
may also be able to design around our patents. If we are unable to protect our
patented technologies, our competitors could commercialize our technologies.

With respect to proprietary know-how, we rely on trade secret protection
and confidentiality agreements. Monitoring the unauthorized use of our
technology is difficult, and the steps we have taken may not prevent
unauthorized use of our technology. The disclosure or misappropriation of our
intellectual property could harm our ability to protect our rights and our
competitive position.

EMPLOYEES

We had approximately 8,500 employees worldwide as of December 31, 2001. Of
our employees, approximately 56% are located in the U.S. and 44% are outside the
U.S.

Approximately 40% of our employees in the United States and 41% of our
employees worldwide are covered by collective bargaining agreements. We
currently have long-term labor agreements with Teamsters Local 145 in
Connecticut, with PACE Local 5-0399 in Kentucky, Local 470 of the United
Automobile, Aerospace and Agricultural Implement Workers of America in
Massachusetts, District No. 10 of the International Association of Machinists
and Aerospace Workers in Wisconsin, United Steelworkers of America Local 8040 in
Texas, Local 1644 of the International Association of Machinists in Pennsylvania
and Local 1118 of United Automobile, Aerospace and Agricultural Implement
Workers of America in Indiana. In addition, we have labor agreements with Office
& Professional Employees International Union on behalf of Local 465 and Local
Lodge 2518 International Association of Machinists and Aerospace Workers in
Louisiana. Of these agreements, two will expire in 2002, six will expire in
2003, one will expire in 2004 and one will expire in 2005. We believe that our
relations with each of these unions are good. See "--Certain Risk Factors--Our
Business Could Suffer If We Are Unsuccessful In Negotiating New Collective
Bargaining Agreements."

ITEM 2. PROPERTIES

Our corporate headquarters are located in Addison, Texas. The following are
the locations of our principal facilities, the facility types and their square
footage for our industry segments.

CERTAIN RISK FACTORS

Set forth below are important risks and uncertainties that could cause our
actual results to differ materially from those expressed in forward-looking
statements made by our management.

OUR OPERATING RESULTS COULD BE HARMED DURING ECONOMIC OR INDUSTRY DOWNTURNS.

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

THE LOSS OF ONE OF OUR LARGE CUSTOMERS, OR FAILURE TO WIN NATIONAL, REGIONAL AND
GLOBAL CONTRACTS FROM AN EXISTING CUSTOMER, COULD SIGNIFICANTLY REDUCE OUR CASH
FLOW, MARKET SHARE AND PROFITS.

Some of our customers contribute a substantial amount to our revenues. For
the year ended December 31, 2001, our largest customer represented approximately
3.1% of total revenues, and our top ten customers collectively represented
approximately 16.7% of total revenues. The loss of any of these customers, or
class of customers, or decreases in these customers' capital expenditures, could
decrease our cash flow, market share and profits. As a result of industry
consolidation, especially among natural gas compression and major oil companies,
our largest customers have become larger and, as a result, account for a larger
percentage of our sales. We could lose a large customer as a result of a merger
or consolidation. Recently, major oil companies and national oil companies have
moved toward creating alliances and preferred supplier relationships with
suppliers. In addition, these customers are increasingly pursuing arrangements
with suppliers that can meet a larger portion of their needs on a more global
basis. Typically, a customer can terminate these arrangements at any time. The
loss of a customer, or the award of a contract to a competitor, could
significantly reduce our cash flow, market share and profits.

ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS.

Since we manufacture and sell our products worldwide, our business is
subject to risks associated with doing business internationally. Our sales
outside North America, as a percentage of our total sales, was 41.9% for the
year ended December 31, 2001. Accordingly, our future results could be harmed by
a variety of factors, including:

-- changes in foreign currency exchange rates;

-- exchange controls;

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

-- hyperinflation;

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

-- potentially negative consequences from changes in tax laws;

-- difficulty in staffing and managing widespread operations;

-- differing labor regulations;

-- requirements relating to withholding taxes on remittances and other
payments by subsidiaries;

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

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

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

-- unexpected changes in regulatory requirements.

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

Fluctuations in the value of the U.S. dollar may adversely affect our
results of operations. Because our consolidated financial results are reported
in dollars, if we generate sales or earnings in other currencies the translation
of those results into dollars can result in a significant increase or decrease
in the amount of those sales or earnings. In addition, our debt service
requirements are primarily in U.S. dollars even though a significant percentage
of our cash flow is generated in euros or other foreign currencies. Significant
changes in the value of the euro relative to the U.S. dollar could have a
material adverse effect on our financial condition and our ability to meet
interest and principal payments on U.S. dollar denominated debt, including the
notes and borrowings under the credit facility.

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

Our expansion in emerging markets requires us to respond to rapid changes
in market conditions in these countries. Our overall success as a global
business depends, in part, upon our ability to succeed in differing

economic, social and political conditions. We cannot assure you that we will
continue to succeed in developing and implementing policies and strategies that
are effective in each location where we do business.

IF WE ARE NOT ABLE TO APPLY NEW TECHNOLOGY AND SOFTWARE IN OUR PRODUCTS OR
DEVELOP NEW PRODUCTS, WE MAY NOT BE ABLE TO GENERATE NEW SALES.

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

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

WE FACE INTENSE COMPETITION.

We encounter intense competition in all areas of our business. Competition
in our primary business segments is based on a number of considerations
including product performance, customer service, product lead times, global
reach, brand reputation, breadth of product line, quality of aftermarket service
and support and price. Additionally, customers for our products are attempting
to reduce the number of vendors from which they purchase in order to increase
their efficiency. Our customers increasingly demand more technologically
advanced and integrated products and we must continue to develop our expertise
and technical capabilities in order to manufacture and market these products
successfully. To remain competitive, we will need to invest continuously in
research and development, manufacturing, marketing, customer service and support
and our distribution networks. We may have to adjust the prices of some of our
products to stay competitive. We cannot assure you that we will have sufficient
resources to continue to make such investments or that we will maintain our
competitive position. Some of our competitors have greater financial and other
resources than we do.

IF WE LOSE OUR SENIOR MANAGEMENT, OUR BUSINESS MAY BE ADVERSELY AFFECTED.

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

ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.

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

operations and properties to these laws, and adapt to regulatory requirements in
all jurisdictions as these requirements change.

We have experienced, and expect to continue to experience, both operating
and capital costs to comply with environmental laws and regulations, including
potentially substantial costs for remediation and investigation of some of our
properties (many of which are sites of long-standing manufacturing operations).
In addition, although we believe our operations are substantially in compliance
and that we will be indemnified by Halliburton for certain contamination and
compliance costs (subject to certain exceptions and limitations), new laws and
regulations, stricter enforcement of existing laws and regulations, the
discovery of previously unknown contamination, the imposition of new clean-up
requirements, new claims for property damage or personal injury arising from
environmental matters, or the refusal and/or inability of Halliburton to meet
its indemnification obligations could require us to incur costs or become the
basis for new or increased liabilities that could have a material adverse effect
on our business, financial condition or results of operations. See "Part
II -- Legal and Environmental Proceedings."

OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN NEGOTIATING NEW COLLECTIVE
BARGAINING AGREEMENTS.

As of December 31, 2001, we had approximately 8,500 employees.
Approximately 40% of our U.S. workforce and 41% of our global workforce is
represented by labor unions. Of our ten material collective bargaining
agreements, two will expire in 2002, six will expire in 2003, one will expire in
2004 and one will expire in 2005. Although we believe that our relations with
our employees are good, we cannot assure you that we will be successful in
negotiating new collective bargaining agreements, that such negotiations will
not result in significant increases in the cost of labor or that a breakdown in
such negotiations will not result in the disruption of our operations.

WE ARE DEPENDENT ON THE AVAILABILITY OF RAW MATERIALS AND COMPONENTS.

We require substantial amounts of raw materials that we purchase from
outside sources. The availability and prices of raw materials may be subject to
curtailment or change due to, among other things, the supply of, and demand for,
such raw materials, new laws or regulations, suppliers' allocations to other
purchasers, interruptions in production by raw materials or component parts
suppliers, changes in exchange rates and worldwide price levels. Any change in
the supply of, or price for, these raw materials and components could materially
affect our operating results.

WE RELY ON INDEPENDENT DISTRIBUTORS.

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

WE ARE CONTROLLED BY FIRST RESERVE AND ODYSSEY, WHOSE INTERESTS MAY NOT BE
ALIGNED WITH INVESTORS' INTERESTS.

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

The interests of First Reserve, Odyssey and their affiliates could conflict
with your interests. For example, if we encounter financial difficulties or are
unable to pay our debts as they mature, the interests of First

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

OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE COMPARABLE TO FUTURE PERIODS.

The historical financial information included herein for periods prior to
the consummation of the recapitalization transaction may not necessarily reflect
our results of operations, financial position and cash flows in the future or
the results of operations, financial position and cash flows that would have
occurred if we had been a separate, independent entity during the periods
presented. The historical financial information included in this Form 10-K for
those periods does not fully reflect the many significant changes that occurred
in our capital structure, funding and operations as a result of the
recapitalization, the credit facility, the notes offering or the additional
costs we expect to incur in operating as an independent company. For example,
funds required for working capital and other cash needs for those periods were
obtained from Halliburton on an interest-free intercompany basis without any
debt service requirement.

WE MAY BE FACED WITH UNEXPECTED PRODUCT CLAIMS OR REGULATIONS.

Because some of our products are used in systems that handle toxic or
hazardous substances, a failure of any of our products could have material
adverse consequences, and alleged failures of certain of our products have
resulted in, and in the future could result in, claims against us for product
liability, including property damage, personal injury damage and consequential
damages. Further, we may be subject to potentially material liabilities relating
to claims alleging personal injury as a result of hazardous substances
incorporated into our products. Finally, our Dresser Wayne business faces
increasingly stringent regulations in California and elsewhere regarding vapor
recovery from gasoline dispensers. Some of Dresser Wayne's products have been
alleged to contain "defects" that adversely affect vapor recovery, requiring
retrofits, field modifications and/or the payment of administrative penalties in
connection with the affected products. Although the vapor recovery regulations
have not adversely affected us vis-a-vis our competitors to date, there can be
no assurance that changes in these regulations or in California's proposed Clean
Air Plan, or the development of more stringent regulations in other
jurisdictions where vapor recovery is required, will not have a material adverse
effect on our business, financial condition or results of operations.

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

We are a highly leveraged company. As of December 31, 2001, we had $1,025.0
million of outstanding long-term indebtedness, $39.3 million of short term notes
and $6.0 million of capital lease obligations and a stockholders' deficit of
$43.6 million. This level of indebtedness could have important consequences,
including the following:

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

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

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

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

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

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

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

RESTRICTIVE COVENANTS IN THE CREDIT FACILITY AND THE INDENTURE MAY RESTRICT OUR
ABILITY TO PURSUE OUR BUSINESS STRATEGIES.

The credit facility and the indenture limit our ability, among other
things, to:

-- incur additional indebtedness or contingent obligations;

-- pay dividends or make distributions to our stockholders;

-- repurchase or redeem our stock;

-- make investments;

-- grant liens;

-- make capital expenditures;

-- enter into transactions with our stockholders and affiliates;

-- sell assets; and

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

In addition, the credit facility requires us to maintain financial ratios.
We may not be able to maintain these ratios. Covenants in the credit facility
may also impair our ability to finance future operations or capital needs or to
enter into acquisitions or joint ventures or engage in other favorable business
activities.

TO SERVICE OUR INDEBTEDNESS, WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. THE
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.

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

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

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

ITEM 3. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS

During the ordinary course of our business, we are from time to time
threatened with, or may become a party to, legal actions and other proceedings.
While we are currently involved in a number of legal proceedings, we believe the
results of these proceedings will not have a material effect on our business,
financial condition or results of operations. In addition, pursuant to the
recapitalization agreement, we are indemnified by Halliburton for losses arising
out of all legal actions initiated prior to the closing of the recapitalization
transaction and certain legal actions arising after the closing.

Our businesses and some of our products are subject to regulation under
various and changing federal, state, local and foreign laws and regulations
relating to the environment and to employee safety and health.

These environmental laws and regulations govern the generation, storage,
transportation, handling, disposal and emission of various substances. Permits
are required for operation of our businesses, and these permits are subject to
renewal, modification and, in certain circumstances, revocation.

These environmental laws also impose liability for personal injury or
property damage related to releases of hazardous substances. We believe we are
substantially in compliance with these laws and permitting requirements. Our
businesses also are subject to regulation under substantial, various and
changing federal, state, local and foreign laws and regulations which allow
regulatory authorities and private parties to compel (or seek reimbursement for)
cleanup of environmental contamination at sites now or formerly owned or
operated by our businesses and at facilities where their waste is or has been
disposed. Going forward, we expect to incur ongoing capital and operating costs
for investigation and remediation and to maintain compliance with currently
applicable environmental laws and regulations; however, we do not expect those
costs, in the aggregate, to be material.

In April 2001, we completed the recapitalization transaction. Halliburton
originally acquired our businesses as part of its acquisition of Dresser
Industries, Inc. ("Dresser Industries") in 1998. Dresser Industries' operations
consisted of our businesses, as well as other operating units. As Halliburton
has publicly disclosed, it has been subject to numerous lawsuits involving
asbestos claims associated with, among other things, the operating units of
Dresser Industries that were retained by Halliburton or disposed of by Dresser
Industries or Halliburton prior to the recapitalization transaction. These
lawsuits have resulted in significant expense for Halliburton. We have not
historically incurred, and in the future we do not believe that we will incur,
any material liability as a result of the past use of asbestos in products
manufactured by these other units of Dresser Industries, or as a result of the
past use of asbestos in products manufactured by our businesses or any
predecessor entities of our businesses.

Pursuant to the recapitalization agreement, all liabilities related to
asbestos claims arising out of events occurring prior to the consummation of the
recapitalization transaction, are defined to be "excluded liabilities," whether
they resulted from activities of Halliburton, Dresser Industries or any
predecessor entities of any of our businesses. The recapitalization agreement
further provides, subject to certain limitations and exceptions, that
Halliburton will indemnify us and hold us harmless against losses and
liabilities that we actually incur which arise out of or result from "excluded
liabilities," as well as certain other liabilities in existence as of the
closing of the recapitalization transaction. The maximum aggregate amount of
losses indemnifiable by Halliburton pursuant to the recapitalization agreement
is $950.0 million. All indemnification claims are subject to notice and
procedural requirements which may result in Halliburton denying indemnification
claims for some losses. See "--Certain Risk Factors--Environmental Compliance
Costs and Liabilities Could Adversely Affect Our Financial Condition" and "--We
May Be Faced With Unexpected Product Claims Or Regulations."

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

There is no established public market for our common stock.

HOLDERS

As of December 31, 2001, there were approximately 37 record holders of our
class A common stock and 26 record holders of our class B common stock as of
December 31, 2001.

DIVIDENDS

We did not declare or pay any dividends on our common stock since its
issuance. Our current credit facility limits our ability to declare or pay
dividends. For more detailed information on our current credit facility, see
"-- Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Notes to our Consolidated
Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical consolidated financial
information as of and for each of the years in the five-year period ended
December 31, 2001. Prior to 1998, we had a fiscal year-end of October 31. The
fiscal period ending October 31, 1997 reflects our financial information on a
fiscal year-end basis. Our operating results for November and December 1997 are
included as an adjustment to shareholders' equity. The selected consolidated
financial information as of and for each of the years in the four-year period
ended December 31, 2001 has been derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, and our selected consolidated financial information as of and for
the period ended October 31, 1997 has been derived from our unaudited
consolidated financial statements. The financial information prior to March 31,
2001 has been derived from the consolidated financial statements of DEG. The
consolidated financial statements of DEG exclude certain items, which were not
transferred as a result of the recapitalization agreement and any financial
effects from Halliburton's decision to discontinue the business unit. In
addition, certain amounts have been allocated and pushed down from Halliburton
in a consistent manner in order to depict the financial position, results of
operations and cash flows of DEG on a stand-alone basis. However, the financial
position, results of operations and cash flows may not be indicative of what
would have been reported if DEG had been a stand-alone entity or had been
operated as part of the recapitalization agreement during the periods presented.
You should read the following table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our Consolidated
Financial Statements and the accompanying notes.

- ------------
(1) The revenues and net income for the stub period (November and December 1997)
were $243.0 and $13.5 million, respectively.

(2) Total long-term debt excludes $39.3 million of short-term notes and $6.0
million of capital lease obligations.

(3) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA and the related ratios are presented because we believe
they are frequently used by securities analysts, investors and other
interested parties in the evaluation of companies in our industry. However,
other companies in our industry may calculate EBITDA differently than we do.
Therefore, EBITDA is not necessarily comparable to similarly titled measures
of those companies. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
as an alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of our operating
performance or any other measures of performance derived in accordance with
generally accepted accounting principles.

(4) Represents EBITDA as a percentage of revenues.

(5) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include net income (loss) before
taxes and fixed charges (adjusted for interest capitalized during the
period). "Fixed charges" include interest, whether expensed or capitalized,
amortization of debt expense and the portion of rental expense that is
representative of the interest factor in these rentals.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under sec.21E of the Securities and Exchange
Act of 1934, as amended, and the Private Securities Litigation Reform Act of
1995. The words "believe," "expect," "anticipate," "intend," "estimate" and
other expressions which are predictions of or indicate future events and trends
and which do not relate to historical matters identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements. Although forward-looking statements reflect management's
good faith beliefs, reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and other factors,
which may cause our actual results, performance or achievements to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise. These
forward-looking statements are subject to numerous risks and uncertainties,
including, but not limited to, the impact of general economic conditions in the
regions in which we do business; general industry conditions, including
competition and product, raw material and energy prices; changes in exchange
rates and currency values; capital expenditure requirements; access to capital
markets and the risks and uncertainties described in Part I--Business--Certain
Risk Factors.

OVERVIEW

We are a worldwide leader in the design, manufacture and marketing of
highly engineered equipment and services sold primarily to customers in the
energy industry. Our primary business segments are flow control, measurement
systems and power systems. We are a global business, with an established sales
presence in over 100 countries and manufacturing or customer support facilities
in over 22 countries. Many of our businesses have been in operation for 100
years or more. We sell our products and services to more than 10,000 customers,
including most of the world's major oil companies, multinational engineering and
construction companies and Fortune 500 firms, through a global sales and service
network of over 400 account representatives, 900 independent distributors and
300 authorized service centers. Our total revenues by geographic region in 2001
consisted of North America (58.1%), Europe/Africa (20.7%), Latin America (7.7%),
Asia (9.6%) and the Middle East (3.9%). We have pursued a strategy of customer,
geographic and product diversity to mitigate the impact of an economic downturn
on our business in any one part of the world or in any single business segment.

For the year ended December 31, 2001, we generated revenue of $1.55
billion, operating income of $166.7 million and EBITDA of $225.5 million.

MARKET FORCES; OUTLOOK

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

Long-term demand for energy infrastructure equipment and services is driven
by increases in worldwide energy consumption, which is a function of worldwide
population growth and the levels of energy consumption per capita. In the short
term, demand for our products is affected by overall worldwide economic
conditions and by fluctuations in the level of activity and capital spending by
major, national and independent oil and gas companies, gas distribution
companies, pipeline companies, power generation companies and petrochemical
processing plants. The level of oil and gas prices affects all of these
activities and is a significant factor in determining our primary customers'
level of cash flow. Prices for oil and natural gas declined significantly in
2001. In addition, we see surplus capacity in the natural gas compression
industry and expect substantial declines and margin pressure in our power system
segment. We also expect to see additional weakness in the instrument and gas
metering business of our measurement systems segment until the general
industrial economy improves. In light of the difficult market environment we
will be focused throughout 2002 on actions to reduce our cost structure, improve
working capital efficiency and improve margins in flow control.

During the fourth quarter 2001, there was no significant improvement in the
outlook for energy demand or natural gas prices, and the general industrial
economy remained soft. On the whole we estimate that our EBITDA in the first
quarter 2002 will be decreased by at least 10%-20% compared to the first quarter
of 2001. We may also experience a decline in EBITDA in the second quarter of
2002 compared to the second quarter of 2001.

We have not yet completed the preparation of our financial statements for
the first quarter of 2002 and the statements above are estimates only. Actual
results for the first quarter and for future periods may differ from our current
estimates in ways that could be material. See "Part I--Business--Certain Risk
Factors."

We believe that in order to maintain our competitiveness, we need to
continue to focus on increasing operational efficiency and cash flow. This focus
includes our on-going initiatives to increase manufacturing efficiencies,
consolidate raw material sources, increase global procurement and improve
working capital efficiency. We believe these initiatives offer us opportunities
to improve our profitability and cash flow, although we may incur significant
charges to implement these initiatives.

THE RECAPITALIZATION TRANSACTION

In connection with a recapitalization transaction in April 2001, we made
payments to Halliburton Company of approximately $1.3 billion to redeem our
common equity and purchase the stock of certain of our foreign subsidiaries. The
recapitalization transaction and related expenses were financed through the
issuance of $300.0 million of 9 3/8% Senior Subordinated Notes due 2011, $720.0
million of borrowings under the credit facility and approximately $400.0 million
of common equity contributed by DEG Acquisitions, LLC, an entity owned by First
Reserve Corporation and Odyssey Investment Partners, LLC.

The following table contains the actual sources and uses of funds for the
recapitalization transaction:

SOURCES OF FUNDS
- -------------------------
(IN MILLIONS)
Revolver(1).............. $ --
Term loan A.............. 265.0
Term loan B.............. 455.0
2001 notes............... 300.0
--------
Total Debt..... 1,020.0
Common equity............ 400.0
Rollover equity(3)....... 21.5
--------
Total
Sources...... $1,441.5
========
USES OF FUNDS
- -------------------------
(IN MILLIONS)
Cash purchase price(2)... $1,296.3
Rollover equity(3)....... 21.5
Cash..................... 52.4
Transaction fees(4)...... 71.3
--------
Total Uses..... $1,441.5
========

- ------------
(1) Total availability of $100.0 million, subject to certain conditions, of
which $70.7 million was available as of December 31, 2001.

(2) Includes $1,038.4 million to redeem 94.9% of our common equity held by
Halliburton and $257.9 million to purchase the stock of certain of our
foreign subsidiaries.

(3) Attributable to the common equity interests in us that were retained by
Halliburton.

(4) Includes transaction fees paid to affiliates of First Reserve Corporation
and Odyssey Investment Partners, LLC. See "Part III--Certain Relationships
and Related Party Transactions."

STAND-ALONE COMPANY

The consolidated financial information for periods presented prior to March
31, 2001 has been derived from the consolidated financial statements of the
Dresser Equipment Group business unit of Halliburton. The preparation of this
information was based on certain assumptions and estimates including allocations
of costs from Halliburton, which we believe are reasonable. This financial
information may not, however, necessarily reflect the results of operations,
financial positions and cash flows that would have occurred if we had been a
separate, stand-alone entity during the periods presented or our future results
of operations, financial position and cash flows.

In connection with the recapitalization transaction, we incurred
substantial indebtedness, interest expense and repayment obligations. The
interest expense relating to this debt adversely affect our net income. In
addition, the acquisition of certain of our foreign subsidiaries was accounted
for under the purchase method of accounting, which resulted in an increase in
depreciation and amortization above historical levels. Upon consummation of the
recapitalization transaction, we incurred a number of one-time fees and expenses
of approximately $71.3 million.

EFFECTS OF CURRENCY FLUCTUATIONS AND INFLATION

We conduct operations in over 100 countries around the world. Therefore,
our results of operations are subject to both currency transaction risk and
currency translation risk. We incur currency transaction risk whenever we or one
of our subsidiaries enter into either a purchase or sales transaction using a
currency other than the functional currency of the transacting entity. With
respect to currency translation risk, our financial condition and results of
operations are measured and recorded in the relevant local currency and then
translated into U.S. dollars for inclusion in our consolidated financial
statements. Exchange rates between these currencies and U.S. dollars in recent
years have fluctuated significantly and may do so in the future. The majority of
our revenues and costs are denominated in U.S. dollars, with Euro-related and
other currencies also being significant. Historically, we have engaged in
hedging strategies from time to time to reduce the effect of currency
fluctuations on specific transactions.

We have not, however, sought to hedge currency translation risk. We expect
to continue these hedging policies going forward. Significant depreciation in
the value of the Euro relative to the U.S. dollar could have a material adverse
effect on our financial condition and our ability to meet interest and principal
payments on U.S. dollar denominated debt, including the notes and borrowings
under the credit facility, if not offset by pricing in those markets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue as products are shipped and services
are rendered. We do not provide our distributors with price protection rights.
If items are shipped with rights to return, revenue is not recorded until the
customer has approved and written acceptance is received. We maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.

We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

We provide for the estimated cost of product warranties at the time revenue
is recognized. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality from our
suppliers, our warranty obligation is affected by product failure rates,
material usage and

service delivery costs incurred in correcting a product failure. Should actual
product failure rates, material usage or service delivery costs differ from our
estimates, revisions to the estimated warranty liability would be required.

We record a valuation allowance to reduce our deferred tax assets to the
amount that is likely to be realized. While we have considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event we were to determine that we
would be able to realize our deferred tax assets in the future in excess of our
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, should we determine
that we would not be able to realize all or part of our net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.

REVENUES

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

COST OF REVENUES

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

GROSS MARGIN

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

SELLING, ENGINEERING, ADMINISTRATIVE AND GENERAL EXPENSES

Selling expenses consist of costs associated with marketing and sales.
Engineering expenses are costs attributable to research and development and
engineering. Administrative and general expenses are primarily management,
accounting, treasury and legal costs. Selling, engineering, administrative and
general expenses also include costs associated with health, safety and
environmental administration and retiree medical and pension benefits. Research
and development expenses are costs associated with product or customer
initiatives or with projects that seek improvements in manufacturing processes.
Research and development expenses are expensed as incurred. Our distributors are
typically compensated through a discount from the list price of our products
they purchase. These discounts are accounted for as a reduction in revenues
versus classifying them as selling expenses.

DEPRECIATION AND AMORTIZATION

Property, plant and equipment are reported at cost less accumulated
depreciation, which is generally provided using the straight-line method over
the estimated useful lives of the assets. Expenditures for improvements that
extend the life of the asset are generally capitalized. Intangible assets
primarily consist of goodwill and patents. Goodwill resulting from business
acquisitions represents the excess of purchase price over fair value of net
assets acquired and is amortized over a period from 4 to 40 years using the
straight-line method. Patents are amortized over their estimated useful lives.
Depreciation and amortization was $58.8 million, $49.2 million and $48.5 million
for the years ended December 31, 2001, 2000 and 1999, respectively. In 2002, we
will adopt Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill
and Other Intangible Assets." The statement, among other items, will eliminate
the amortization of goodwill. The amortization expense for goodwill was $14.2
million for the year ended December 31, 2001.

INCOME TAXES

Historically, our operations have been included in the tax returns
submitted by various Halliburton operating companies. The tax amounts reflected
in our historical results have been allocated based on the amounts expected to
be paid to or received from the various Halliburton operating companies filing
tax returns in which our operations were included. In connection with the
recapitalization transaction, we made a Section 338(h)(10) election to allow the
recapitalization of our domestic businesses to be treated as an acquisition of
assets for tax purposes. Accordingly, for tax purposes our U.S. assets were
stepped up to their fair market value and we will be able to depreciate those
assets using a higher basis than the historical amount. We expect that these tax
assets will result in a substantial decrease in our cash taxes, and therefore
increase our cash available for debt service or investment in our business over
the next few years.

INTEREST EXPENSE

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

RESULTS OF OPERATIONS

YEARLY INFORMATION

The following table presents selected financial information regarding each
of our segments for the years ended 2001, 2000 and 1999. Revenue and operating
income by segment are also presented as a percentage of their respective totals.
The four columns under year-to-year change show the dollar and percentage change
from 2001 to 2000 and from 2000 to 1999.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

Consolidated

Revenues. Revenues increased by $137.3 million, or 9.7%, to $1,545.8
million in 2001 from $1,408.5 million in 2000. Revenues increased in all three
of our business segments. Our flow control segment revenue was positively
impacted by acquisitions we made in 2001 and 2000. Entech and Elliot Valve,
which were acquired in the second and third quarter of 2001, accounted for
approximately $39.5 million of the increase in revenue. The purchase of the
remaining 50% interest in the NIMCO joint venture in April 2000, accounted for
an $8.5 million increase in revenue. Prior to its acquisition in April 2000, we
owned 50% of that joint

venture and accounted for it on an equity basis, so that only a 50% share of
NIMCO's earnings were reflected in our revenue. In addition, we experienced
strong growth in our power systems segment, resulting from increased demand for
natural gas engines used for gas compression and power generation.

Cost of Revenues. Cost of revenues as a percentage of revenues increased
to 69.6% in 2001 from 68.4% in 2000. Manufacturing inefficiencies and an
unfavorable product mix adversely affected margins in our flow control segment.
In addition, the acquisition of Entech, which positively impacted revenues, had
product margins lower than the existing flow control business. We also
experienced lower margins in our measurement segment due to lower price levels
as a result of the weakness in the general industrial economy.

Gross Profit. Gross profit increased by $25.4 million, or 5.7%, to $470.6
from $445.2 million in 2000 and decreased to 30.4% of revenues in 2001 from
31.6% in 2000, due to the factors mentioned above.

Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses increased as a percentage of
revenues and in dollar terms, accounting for 19.7% of revenues in 2001 and 19.5%
of revenues in 2000. In dollar terms, selling, engineering, administrative and
general expenses increased by $29.2 million to $303.9 million from $274.7
million in 2000 due to the acquisition of Entech which accounted for $8.0
million of the increase and the remainder primarily resulting from higher
selling, engineering, administrative and general expenses associated with
increased sales volume.

Operating Income. Operating income decreased by $3.8 million, or 2.2%, to
$166.7 million in 2001 from $170.5 million in 2000. The decrease is primarily
attributable to the factors contributing to the decreased gross margin and
higher selling, engineering, administrative and general expenses, as discussed
above.

Income Tax Expense. Our effective tax rate was 42.9% for 2001 and 38.5% in
2000. The effective tax rate utilized in 2000, and for part of 2001 was
reflective of our operations being reported as part of Halliburton's
consolidated tax returns.

Bookings and Backlog. Bookings include orders placed during the period
whether or not filled. Backlog as of any date represents the number of orders
left unfilled as of that date. Bookings during the period of $1,598.7 million
were 10.9% above 2000, and backlog at the end of 2001 was $419.5 compared to
$362.7 million at the end of 2000, a 15.7% increase. Backlog as of December 31,
2001 was $21.0 million lower than backlog as at September 30, 2001.

SEGMENT ANALYSIS

Flow Control

Revenues increased by $73.5 million, or 13.4%, to $622.8 million in 2001
from $549.3 million in 2000. Revenues were positively affected by acquisitions
we made in both 2000 and 2001. Entech and Elliot Valve, which were acquired in
the second and third quarter of 2001, accounted for approximately $39.5 million
of the increase. In addition, the purchase of the remaining 50% interest in the
NIMCO joint venture in April 2000, accounted for an $8.5 million increase in
revenues. Prior to its acquisition in April 2000, we owned 50% of that joint
venture and accounted for it on an equity basis, so that only a 50% share of
NIMCO's earnings were reflected in our revenues. The remaining increase in
revenues can be attributed to favorable market conditions.

Although revenues increased, operating income decreased by $9.7 million, or
12.6%, to $67.4 million in 2001 from $77.1 million in 2000. As a percentage of
segment revenues, operating income decreased to 10.8% in 2001 from 14.0% in
2000. Although the acquisition of Entech increased revenues significantly, its
impact to operating income was marginal because its product margins were lower
than those of our existing flow control business. In addition, operating income
was impacted by an unfavorable product mix and manufacturing inefficiencies.

Bookings during the period of $702.1 million were 28.6% above 2000, and
backlog at the end of the year was $295.2 million, or 45.6% above 2000. Both
were positively impacted by the acquisitions described above in addition to
favorable market conditions.

Measurement Systems

Revenues increased by $10.5 million, or 1.9%, to $573.3 million in 2001
from $562.8 million in 2000. Revenues remained relatively stable between periods
with increases in revenues in our retail fueling business offsetting lower
revenues in our instrument and gas metering businesses. We expect to see
continuing weakness in this segment which could negatively impact our revenues
for 2002 until market conditions improve.

Operating income decreased by $7.3 million, or 11.4%, to $56.7 million in
2001 from $64.0 million in 2000. Operating income was negatively impacted by
lower margins due in part to competitive pricing. Operating income was also
impacted by a charge of $4.0 million in 2001 related to the closure and
relocation of the Salisbury, Maryland retail fuel dispenser facility to Austin,
Texas. This was offset in part by a reduction in head count and improved
efficiency following closure of that plant.

Bookings during the period of $579.8 million were 1.9% above 2000, and
backlog at year-end was $76.5 million, or 7.9% above 2000. Backlog primarily
reflects the unfilled orders of retail fuel dispensers as the meter and
instrument product lines consist primarily of products that are shipped within
days of a customer's order.

Power Systems

Revenues increased by $54.1 million, or 18.0%, to $355.3 million from
$301.2 million in 2000. Revenues were positively impacted by increased sales to
the gas compression market. However, in 2001, energy demand and natural gas
prices declined significantly. During the fourth quarter of 2001, there was no
significant improvement in the outlook for energy demand or natural gas prices
and the general industrial economy remained soft. As a result, we see surplus
capacity in the natural gas compression industry and expect to see substantial
revenue declines and margin pressure in this segment for 2002.

Operating income increased by $17.8 million, or 42.4%, to $59.8 million in
2001 from $42.0 million in 2000. As a percentage of revenues, operating income
increased to 16.8% in 2001 from 13.9% in 2000. Operating income was positively
impacted by increased volumes in our higher margin products and services and
favorable volume related reductions in manufacturing costs.

Bookings during 2001 were $316.8 million or 2.8% below 2000, and bookings
in the fourth quarter of 2001 declined substantially from bookings in the fourth
quarter of 2000, as a result of the decline in the market outlook for the
natural gas compression industry described above. Backlog at the end of 2001 was
$51.4 million, or 42.3% below 2000.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

Consolidated

Revenues. Revenues decreased by $24.1 million, or 1.7%, to $1,408.5
million in 2000 from $1,432.6 million in 1999. Sales volume for many of our
valve and measurement systems products decreased during this period due to
reduced capital spending by our customers and a delay in new project
initiatives. These decreases were partially offset by an increase in demand for
our power systems products and the impact of our purchase of the remaining 50%
interest in the NIMCO joint venture in April 2000, which increased revenues in
2000 by $52.6 million. Prior to April 2000, our interest in the NIMCO joint
venture was accounted for using the equity method and only our share of its
earnings was included in our revenues.

Cost of Revenues. Cost of revenues as a percentage of revenues improved to
68.4% in 2000 from 69.4% in 1999. This improvement was due to a more favorable
product mix and increased manufacturing efficiencies achieved through
outsourcing, manufacturing productivity initiatives, work force and capacity
rationalization efforts and favorable raw material costs. Cost of revenues in
2000 includes approximately $4.0 million related to facility closures, primarily
consisting of our facility in Connersville, Indiana.

Gross Profit. Gross profit increased by $6.3 million, or 1.4%, to $445.2
million in 2000 from $438.9 million in 1999 and increased to 31.6% of revenues
in 2000 from 30.6% in 1999, due to the factors mentioned above.

Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses improved as a percentage of
revenues and in dollar terms accounted for 19.5% of revenues in 2000 and 20.5%
of revenues in 1999. In dollar terms, selling, engineering, administrative and
general expenses fell by $19.2 million to $274.7 million in 2000 from $293.9
million in 1999 due to increased efficiencies.

Operating Income. Operating income increased by $25.5 million, or 17.6%,
to $170.5 million in 2000 from $145.0 million in 1999. The increase is primarily
attributable to the factors contributing to the increased gross margin and lower
selling, engineering, administrative and general expenses, as discussed above.

Income Tax Expense. Our effective tax rate was 38.5% in both 2000 and
1999. The effective tax rate utilized was reflective of our operations being
reported as part of Halliburton's consolidated tax returns.

Bookings and Backlog. Bookings include orders placed during the period
whether or not filled. Backlog as of any date represents the number of orders
left unfilled as of that date. Bookings during the period of $1,441.0 million
were 0.6% above 1999, and backlog at the end of 2000 was $362.7 million compared
to $317.7 million at the end of 1999, a 14.2% increase.

SEGMENT ANALYSIS

Flow Control. Revenues decreased by $8.3 million, or 1.5%, to $549.3
million in 2000 from $557.6 million in 1999. Strong results in aftermarket parts
and services were more than offset by reduced valve sales, which was due to
reduced energy industry spending. Flow control was positively affected by our
purchase of the remaining 50% of interest in the NIMCO joint venture and the May
2000 acquisition of a small valve company, which together accounted for $59.4
million of 2000 revenues. The closure of our manufacturing operations in
Scotland in December 1999 accounted for a $21.6 million reduction in revenues
versus 1999. Currency fluctuations, primarily reflected by continued
depreciation in the euro, caused revenues on a U.S. dollar basis to decrease by
$21.5 million.

Operating income increased by $2.8 million, or 3.8%, to $77.1 million in
2000 from $74.3 million in 1999. As a percentage of segment revenues, operating
income increased to 14.0% in 2000 from 13.3% in 1999, primarily due to the
impact of higher aftermarket parts and service sales and benefits of the
restructuring activities implemented in 1999.

Bookings during the period of $545.9 million were 1.8% above 1999, and
backlog at the end of the year was $202.7 million, or 9.6% above 1999. Bookings
were affected negatively by industry factors, but were offset by contributions
from the acquired NIMCO operations.

Measurement Systems. Revenues decreased by $42.4 million, or 7.0%, to
$562.8 million in 2000 from $605.2 million in 1999. This decrease reflects a
decline in sales of retail fuel dispensers, partially offset by an increase in
sales of meters. Sales of retail fuel dispensers were impacted by lower volumes
due to recent merger activity by a few of our top customers, such as ExxonMobil,
as orders for pumps and related systems were delayed pending the consolidation
of capital spending budgets. Lower revenue from our traditional retail fuel
dispenser customers, particularly in international markets, was partially offset
by an increase in unit sales to high volume retailers. The meters business
experienced an increase in sales volume due to growth in the demand for natural
gas and the ongoing effects of utility industry deregulation which resulted in
an increased demand for gas meters and related products to meet increased
custody transfer requirements.

Operating income increased by $1.7 million, or 2.7% to $64.0 million in
2000 from $62.3 million in 1999. Despite the decline in revenues, operating
income as a percentage of segment revenues increased to 11.4% in 2000 from 10.3%
in 1999 due to cost control initiatives, manufacturing and operating
efficiencies, a more favorable product mix and favorable currency translation
adjustments.

Bookings during the period of $569.0 million were 5.2% below 1999, and
backlog at year-end was $70.9 million, or 3.9% below 1999. Backlog primarily
reflects the unfilled orders of retail fuel dispensers as the meter and
instrument product lines consist primarily of products that are shipped within
days of a customer's order.

Power Systems. Revenues increased by $26.9 million, or 9.8%, to $301.2
million in 2000 from $274.3 million in 1999. Revenues were positively affected
by increased prices for natural gas that drove higher levels

of customer spending. Revenues were particularly strong for aftermarket parts
and upgrade kits as customers in the gas compression industry experienced
increased utilization in their engines. Demand for new engines and aftermarket
parts used in distributed power applications also experienced growth.

Operating income increased by $22.1 million, or 111.1%, to $42.0 million in
2000 from $19.9 million in 1999. As a percentage of revenues, operating income
increased to 13.9% in 2000 from 7.3% in 1999 due almost entirely to the increase
in gross profit, as well as increased cost control initiatives.

Bookings during the period of $326.0 million were 10.2% above 1999, and
backlog ended the year at $89.1 million, or 50.9% above 1999. Bookings were
affected positively by increased demand for natural gas engines used for gas
compression and power generation.

LIQUIDITY AND CAPITAL RESOURCES

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

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

Cash and cash equivalents were $97.2 million, $19.7 million and $33.7
million for the years ended December 31, 2001, 2000, and 1999, respectively. A
significant portion of our cash and cash equivalent balances is utilized in our
international operations and may not be immediately available for debt service
in the United States.

Net cash flow provided by operating activities was $136.7 million, $91.5
million and $141.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively, mainly from profitable results of operations and changes in
working capital.

Net cash flow used in investing activities for the year ended December 31,
2001 was $1,363.7 million resulting from capital expenditures of $36.0 million
and cash used to complete the recapitalization transaction. Net cash flow used
in investing activities was $28.9 million and $37.7 million for the years ended
2000 and 1999, respectively, resulting mainly from capital expenditures of $27.3
million and $38.4 million in 2000 and 1999, respectively.

Net cash flow provided by financing activities was $1,305.8 million for the
year ended December 31, 2001, resulting from the proceeds of the 2001 notes and
borrowings under the credit facility, along with cash from the investors, which
were used to complete the recapitalization transaction. Net cash flow used in
financing activities was $86.3 million and $95.3 million for the years ended
December 31, 2000 and 1999, respectively, representing the impact of net
distributions to Halliburton and receipts from Halliburton.

In April 2001, we incurred approximately $1,020.0 million in debt, which
was used primarily to finance the recapitalization transaction and pay certain
related costs and expenses.

On April 10, 2001, we sold $300.0 million of 9 3/8% Senior Subordinated
Notes due 2011 in a private placement. The notes bear interest at 9.375% per
annum, payable semi-annually in arrears on April 15 and October 15. The notes
may be redeemed beginning April 15, 2006. The initial redemption price is
104.688% of the principal amount plus accrued interest. The redemption price
will decline each year after 2006 and will be 100.0% of the principal amount,
plus accrued interest, beginning on April 15, 2009. In addition, before April
15, 2004, we may redeem up to 35% of the notes at a redemption price of 109.375%
of their principal amount, plus accrued interest, with the net proceeds of
certain equity offerings. Upon a change of control, we will be required to make
an offer to repurchase the notes at a price equal to 101% of their principal
amount plus accrued interest. Our wholly owned domestic subsidiaries guarantee
the notes.

We also obtained $720.0 million in term loans under the credit facility.
The credit facility provides for the following:

(1) a six-year $165.0 million Tranche A U.S. term loan facility, a
six-year Tranche A Euro term loan facility in an amount equivalent, as of
the closing date, to $100.0 million which was borrowed by a foreign
subsidiary of ours, and an eight-year $455.0 million Tranche B term loan
facility. The Tranche A term loans will amortize with annual reductions of
5% in year 1, 10% in year 2, 15% in year 3, 20% in year 4 and 25% in each
of years 5 and 6. The Tranche B term loans will be repaid in the final year
of the loans in equal quarterly amounts, subject to amortization of
approximately 1% per year in each prior year. Interest rates range from
LIBOR or Euribor plus margins of 2.0% to 3.25% for the Tranche A term loans
and LIBOR plus 3.0% to 3.75% for the Tranche B term loans, depending on our
leverage ratio, and

(2) a six-year $100.0 million revolving credit facility to be
utilized solely for our and our subsidiaries' working capital requirements
and other general corporate purposes. As of December 31, 2001, we had $70.7
million available under the revolving credit facility as we had $29.3
million outstanding under letters of credit.

At our request, and so long as (a) no default or event of default has
occurred and is continuing under the credit facility and (b) our lenders or
other financial institutions are willing to lend such incremental amounts, the
Tranche B term loan facility may be increased from time to time in an amount, in
the aggregate, not to exceed $95.0 million, and upon the consummation of the
planned offering and the execution of the proposed amendment to the credit
facility, as described below, the Tranche B term loan facility may be increased
from time to time in an amount, in the aggregate, not to exceed $195.0 million.

The credit agreement documentation contains certain customary
representations and warranties and contains customary covenants restricting our
ability to, among others: (i) declare dividends or redeem or repurchase capital
stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and engage in
sale-leaseback transactions; (iv) make loans and investments; (v) incur
additional indebtedness; (vi) amend or otherwise alter debt and other material
agreements; (vii) make capital expenditures; (viii) engage in mergers,
acquisitions and asset sales; (ix) transact with affiliates; and (x) alter the
business we conduct. We are required to indemnify the agent and lenders and
comply with specified financial and affirmative covenants including a total debt
to EBITDA ratio and an Interest Coverage Ratio (as defined). As of December 31,
2001, we were in compliance with these covenants.

On March 19, 2002, we announced our intention to sell an additional $200.0
million of 9 3/8% Senior Subordinated Notes due 2011 under the indenture that
governs the 2001 notes. These notes will rank pari passu with the 2001 notes and
will be treated as a single class of notes with the 2001 notes under the
indenture. The net proceeds from the offering are estimated to be $194.0
million, net of expenses and excluding accrued interest to be paid to us on the
closing date in connection with the scheduled interest payment on the notes due
April 15, 2002 (with interest accruing from October 15, 2001). The net proceeds
would be used to repay a portion of the term loans under the credit facility.
The credit facility permits each of the lenders under the Tranche B term loan to
decline their ratable share of any prepayment under such facility. We expect
that lenders under the Tranche B term loan will waive their right to receive
their ratable share of the net proceeds from the planned offering, in which
event, the amount offered to them will be applied to repay the Tranche A term
loan. The prepayment would be credited first to repay the next four quarterly
installments of principal in order of maturity and thereafter to the remaining
amortization of principal on a pro rata basis.

In connection with the issuance of additional senior subordinated notes, we
are seeking an amendment to the credit facility to revise certain financial
covenants to provide us with greater operating flexibility.

The following tables set forth debt and lease obligations and commitments
for the next several years without giving effect to the planned notes offering:

The following tables set forth debt and lease obligations and commitments
for the next several years giving effect to the planned notes offering, assuming
that the net proceeds from such offering are used solely to repay a significant
portion of the Tranche A term loan:

Our capital expenditures were $36.0 million, $27.3 million and $38.4
million for the years ended December 31, 2001, 2000 and 1999. The credit
agreement limits our ability to make capital expenditures; the limitation for
the fiscal year end 2001 was $48.0 million plus a defined percentage. The
limitation increases each year reaching $62.0 million plus a defined percentage
in 2006. In light of the current economic climate, we anticipate making capital
expenditures of approximately $25.0 million in fiscal year 2002 primarily for
maintenance expenditures. We have budgeted significantly higher capital
expenditures for fiscal year 2003 and subsequent years to support anticipated
revenue growth.

Our ability to make payments on and to refinance our indebtedness and to
fund planned capital expenditures and research and development efforts will
depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Based on our current level of
operations and anticipated cost savings and operating improvements, we believe
our cash flow from operations, available cash and available borrowings under the
credit facility will be adequate to meet our future liquidity needs for at least
the next few years. We cannot assure you, however, that our business will
generate sufficient cash flow from operations, that currently anticipated cost
savings and operating improvements will be realized on schedule or that future
borrowings will be available to us under the revolving credit portion of the
credit facility in an amount sufficient to enable us to pay our indebtedness or
to fund our other liquidity needs. If we consummate an acquisition, our debt
service requirements could increase. We may need to refinance all or a portion
of our indebtedness on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness on commercially reasonable terms or at
all. See "Part I--Business--Certain Risk Factors."

EURO CONVERSION

On January 1, 1999, eleven European Union member states (Germany, France,
the Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the euro as their

common national currency. On January 1, 2001, Greece adopted the euro as its
common national currency. Until January 1, 2002, either the euro or a
participating country's national currency were accepted as legal tender.
Beginning January 1, 2002, euro-denominated bills and coins were issued, and
beginning February 28, 2002, only the euro is accepted as legal tender. We do
not expect the euro conversion to materially affect our consolidated position,
results of operations or cash flow.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued two
new statements, SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets."

SFAS No. 141 supersedes Accounting Principles Board Opinion No. 16,
"Business Combinations" and eliminates the pooling-of-interests method of
accounting for business combinations and modifies the application of the
purchase accounting method. SFAS No. 141 is effective for all transactions
completed after June 30, 2001, except transactions using the
pooling-of-interests method that were initiated prior to July 1, 2001. As we
have no business combination transaction in process or otherwise initiated that
contemplated pooling-of-interests, adoption of SFAS No. 141 will not have an
impact on our consolidated financial statements.

SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets" and eliminates the requirement to amortize goodwill and
indefinite-lived assets, addresses the amortization of intangible assets with a
defined life and requires impairment testing and recognition of goodwill and
intangible assets. SFAS No. 142 became effective for us beginning January 1,
2002. As a result of the adoption of SFAS No. 142, amortization will decrease by
approximately $14.2 million. We are currently evaluating the impact this
statement will have on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002. An entity shall recognize
the cumulative effect of adoption of SFAS No. 143 as a change in accounting
principle. We are currently evaluating the impact this statement will have on
our financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 primarily addresses significant issues
relating to the implementation of SFAS No. 121 and develops a single accounting
model for long-lived assets to be disposed of, whether previously held and used
or newly acquired. The provisions of SFAS No. 144 will be effective for fiscal
years beginning after December 15, 2001. We are currently evaluating the impact
this statement will have on our financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We are exposed to foreign currency fluctuation as a result of our
international sales, production and investment activities. Our foreign currency
risk management objective is to reduce the variability in the amount of expected
future cash flows from sales and purchases that are the result of changes in
exchange rates relative to the business unit's functional currency. We use
forward exchange contracts to hedge certain firm commitments and the related
receivables and payables. Generally, all firmly committed and forecasted
transactions that are hedged are to be recognized within twelve months. Through
December 31, 2001, hedged

transactions are principally denominated in French Franc, South African Rand,
Italian Lira and British Pound. Effective January 1, 2002, the French Franc and
Italian Lira contracts are denominated in euros.

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The independent auditors' reports, financial statements and financial
statement schedules listed in the accompanying index are filed as part of this
report. See Index to Financial Statements and Financial Statement Schedules on
page F-1.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Patrick M. Murray is President, Chief Executive Officer and a Director of
Dresser, Inc. Mr. Murray previously served as President of Dresser Equipment
Group Inc., Vice President, Strategic Initiatives of Dresser Industries, and
Vice President, Operations of Dresser Industries. Mr. Murray has also served as
the President of Sperry-Sun Drilling Services and the Controller of NL
Industries. Mr. Murray joined NL Industries in 1973 as a Systems Application
Consultant and has served in a variety of increasingly senior management
positions with NL Industries, Baroid Corporation and Dresser Industries. Mr.
Murray is currently a director of Benton Oil and Gas Company. Mr. Murray is {58}
years old.

James A. Nattier is Executive Vice President, Chief Financial Officer and a
Director of Dresser, Inc. Mr. Nattier previously served as Vice President Shared
Services for Dresser Equipment Group Inc., Vice President, Shared Services for
Halliburton Energy Services and Vice President, Industrial Products for Baroid
Drilling Fluids. Mr. Nattier joined NL Industries in 1978 and has served in a
variety of technical, operations, marketing and senior management positions with
NL Industries, Baroid Corporation, Dresser Industries and Halliburton. Mr.
Nattier is 40 years old.

William E. O'Connor is a Vice President of Dresser, Inc. and President of
Waukesha Engine. Mr. O'Connor previously served as President of the Dresser
Waukesha Engine Division and as Managing Director of Mono Pumps. He has worked
in the industry since 1969 in application engineering, sales, and marketing. Mr.
O'Connor is 55 years old.

John P. Ryan is a Vice President of Dresser, Inc. and President of Dresser
Wayne. Mr. Ryan previously served as President of Dresser Wayne. Mr. Ryan joined
us as a National Accounts Sales Manager in 1987, worked in Field Sales and
National Sales and became the Vice President of Sales in 1991. Prior to working
at Dresser Wayne, Mr. Ryan worked for 10 years with Goulds Pumps Inc. in various
sales capacities in Singapore and the United States. Mr. Ryan is 49 years old.

Charles S. Wolley is a Vice President of Dresser, Inc. and President of
Dresser Measurement. In 1996, Mr. Wolley joined Dresser Valve and Controls and
served in several positions in the division. From 1999 until 2001, Mr. Wolley
served as president and chief executive officer of Van Leeuwen Pipe and Tube. In
2001, Mr. Wolley joined Dresser Measurement as a senior vice president. Mr.
Wolley is 47 years old.

Frank P. Pittman is Vice President, General Counsel and Secretary of
Dresser, Inc. Mr. Pittman previously served as Vice President--Law for Dresser
Equipment Group, Inc., Vice President & Associate General Counsel of Halliburton
Energy Services, Inc., and as Senior Counsel of Dresser Industries and its
affiliate, Dresser-Rand Company. Mr. Pittman joined Dresser Industries in 1979.
Mr. Pittman is 55 years old.

Dale B. Mikus is Vice President-Finance and Chief Accounting Officer of
Dresser, Inc. Mr. Mikus previously served as Vice President and Chief Financial
Officer of Dresser Equipment Group, Inc. Mr. Mikus joined Dresser Industries in
1997 as Manager--Corporate Accounting. Prior to joining Dresser Industries, Mr.
Mikus was Director of Audit and Business Advisory Services for
PricewaterhouseCoopers. Mr. Mikus is 37 years old.

James F. Riegler is Vice President--Human Resources of Dresser, Inc. Mr.
Riegler previously served as Director--Human Resources of Dresser Equipment
Group, Inc., and Director of Employee Relations of Dresser Industries. Mr.
Riegler joined Dresser Industries in 1981. Mr. Riegler is 52 years old.

Richard T. Kernan is Treasurer of Dresser, Inc. Mr. Kernan previously
served as International Treasurer of Trinity Industries, Inc., Assistant
Treasurer-International of Dresser Industries, and Treasurer for Dresser-Rand
Company. Prior to his joining Dresser-Rand Company in 1987, Mr. Kernan held
various financial positions with Abbott Laboratories. Mr. Kernan is 54 years
old.

Stanley E. McGlothlin is Assistant Secretary and Assistant General Counsel
of Dresser, Inc. Mr. McGlothlin previously served as Secretary and Senior
Counsel of Dresser Equipment Group, Inc. and

Assistant Secretary and Senior Counsel of Dresser Industries. Mr. McGlothlin
joined Dresser Industries in 1984. Mr. McGlothlin is 46 years old.

William E. Macaulay is Chairman of the Board of Directors of Dresser, Inc.
Mr. Macaulay is the Chairman and Chief Executive Officer of First Reserve
Corporation and has been with that firm since 1983. Prior to joining First
Reserve in 1983, Mr. Macaulay was a co-founder of Meridien Capital Company, a
private equity buyout firm. From 1972 to 1982, Mr. Macaulay was with Oppenheimer
& Co., Inc., where he served as Director of Corporate Finance, with
responsibility for investing Oppenheimer's capital in private equity
transactions, as a General Partner and member of the Management Committee of
Oppenheimer & Co., as well as President of Oppenheimer Energy Corporation. Mr.
Macaulay is currently a director of Weatherford International, Inc. National
Oilwell, Inc., Pride International, Inc., Maverick Tube Corporation and Chicago
Bridge & Iron Company N.V. Mr. Macaulay is 57 years old.

Paul D. Barnett is a Director of Dresser, Inc. Mr. Barnett was one of the
founders of and has been a Managing Principal with Odyssey Investment Partners,
LLC since 1997. Mr. Barnett was also a Principal in the equity investing group
at Odyssey Partners from 1993 to 1997. Prior to joining Odyssey Partners, Mr.
Barnett was a Managing Director of Mancuso & Company, a New York-based private
equity investor, from 1990 to 1993. From 1984 to 1990, Mr. Barnett was in the
corporate finance department of Kidder, Peabody & Co., where he was involved
primarily in structured finance, high yield capital markets and merchant
banking. Mr. Barnett is 40 years old.

Bernard J. Duroc-Danner is a Director of Dresser, Inc. Mr. Duroc-Danner
currently holds the position of Chairman, President and Chief Executive Officer
of Weatherford International, Inc. Prior to Weatherford's merger with EVI, Inc.,
Mr. Duroc-Danner was the President and Chief Executive Officer of EVI, Inc. In
prior years, Mr. Duroc-Danner held positions at Arthur D. Little and Mobil Oil,
Inc. (now ExxonMobil). In addition, Mr. Duroc-Danner is a director of Grant
Prideco, Inc., Universal Compression Holdings, Inc., Cal Dive International,
Inc. and Parker Drilling Company. Mr. Duroc-Danner is 48 years old.

Ben A. Guill is a Director of Dresser, Inc. Mr. Guill is President of First
Reserve Corporation and joined that firm in 1998. Prior to joining First
Reserve, Mr. Guill spent 18 years with Simmons & Company International, an
investment banking firm, where he served as Managing Director and Co-Head of
Investment Banking. Prior to that time he was with Blyth Eastman Dillon &
Company. Mr. Guill is a director of National Oilwell, Inc., Superior Energy
Services, Inc., TransMontaigne, Inc., Chicago Bridge & Iron Company N.V. and T-3
Energy Services, Inc. Mr. Guill is 51 years old.

Will Honeybourne is a Director of Dresser, Inc. Mr. Honeybourne is a
Managing Director of First Reserve Corporation and joined that firm in 1999.
Prior to joining First Reserve, Mr. Honeybourne served as Senior Vice President
of Western Atlas International. Prior to that time, he served as President and
Chief Executive Officer of Alberta based Computalog. Mr. Honeybourne's earlier
career was primarily with Baker Hughes, including positions as Vice President
and General Manager at INTEQ and President of EXLOG. Mr. Honeybourne is a
director of CiDRA Corporation, CNOOC Limited and several foreign public and
private companies. Mr. Honeybourne is 50 years old.

Muzzafar Mirza is a Director of Dresser, Inc. Mr. Mirza was one of the
founders of and has been a Managing Principal with Odyssey Investment Partners,
LLC since 1997. Mr. Mirza also was a Principal in the private equity investing
group at Odyssey Partners from 1993 to 1997. Prior to joining Odyssey Partners,
Mr. Mirza was head of merchant banking at GE Capital Corp., where he was
responsible for all the company's cash flow lending and investing. Mr. Mirza
spent five years at Marine Midland Bank and was a member of the bank's first LBO
finance group. Mr. Mirza is a director of TransDigm Inc. and Velocita Corp. Mr.
Mirza is 43 years old.

Gary L. Rosenthal is a Director of Dresser, Inc. Mr. Rosenthal is
co-founder and President of Heaney Rosenthal Inc., a private investment company,
a position he has held since October 1994. From July 1998 to September 2000, Mr.
Rosenthal also served as Chairman of the Board and Chief Executive Officer of
AXIA Incorporated, a diversified manufacturing company, and until May 2001 as
President. In prior years, Mr. Rosenthal served as Chairman and then President
and Chief Executive Officer of Wheatley TXT Corp.,

as a Senior Vice President of Cain Chemical Inc., and as a partner in The
Sterling Group, Inc., a private equity firm. He currently serves as a director
of Oil States International, Inc. Pioneer Companies, Inc., Jackson Products,
Inc. and Texas Petrochemicals L.P. Mr. Rosenthal is 52 years old.

Salvatore Ruggeri's employment with us as Vice President and President,
Dresser Flow Control terminated in October, 2001. We are in the process of
exploring management alternatives for our flow control segment. Among the
alternatives under consideration is a realignment of product lines between our
flow control segment and our measurement systems segment.

BOARD COMMITTEES

Our Board of Directors has an Executive Committee, Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee. The
Executive Committee may exercise any of the Board's authority between meetings
of the Board. The members of the Executive Committee are Mr. Murray, Mr.
Macaulay and Mr. Barnett. The Audit Committee recommends the engagement of the
independent public accountants; reviews the professional services provided by,
and the fees charged by, the independent public accountants; reviews the scope
of the internal and external audit; and reviews financial statements and matters
pertaining to the audit. The members of the Audit Committee are Mr. Barnett and
Mr. Rosenthal. The Compensation Committee is responsible for assuring that the
executive officers and other key management are effectively compensated and that
compensation is internally equitable and externally competitive. The members of
the Compensation Committee are Mr. Guill and Mr. Mirza. The Nominating and
Corporate Governance Committee oversees the nomination of candidates for the
Board and delegates authority to the various committees of the Board. The
members of the Nomination and Governance Corporate Committee are Mr. Macaulay
and Mr. Duroc-Danner.

BOARD COMPENSATION

The members of the Board of Directors of Dresser, Inc. will be reimbursed
for their out-of-pocket expenses. In addition, non-employee non-affiliate
members of the Board of Directors will be compensated for $5,000 for each Board
meeting and $1,000 for each Committee meeting attended by such director.
Compensation will be in the form of class A common stock.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the 2001, 2000 and 1999 compensation of our
Chief Executive Officer and each of our four other most highly compensated
executive officers.

SUMMARY COMPENSATION TABLE

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(1) Bonuses with respect to 2001 includes a sales and retention bonus associated
with the sale of DEG; a Halliburton business performance incentive paid for
in the first quarter of 2001, and a Dresser business performance incentive
for the final nine months. Bonuses reported with respect to 2000 were paid
pursuant to Halliburton Company's incentive bonus plan in February 2001
based on financial performance in 2000. The reported 2000 bonuses were paid
in restricted stock of Halliburton at a value of $43.1505 per share when
awarded in 2001.

(2) In connection with the recapitalization transaction, we have agreed to
assume the value of Halliburton's liability with respect to cash payments
for the value of Halliburton restricted stock held by Messrs. Murray,
Nattier, O'Connor, and Ryan as to which the restrictions had not lapsed as
of April 10, 2001. See "-- Treatment of Halliburton Restricted Stock" below.

(3) Payouts were made under Performance Stock Unit Plans, Incentive Stock Unit
Plans and the Long Term Performance Incentive Plan of Baroid Corporation in
2001 and 2000 based on plan cycles partially applicable to prior years.

(4) Amounts in this column for 2001 represent company match on qualified and
nonqualified plans; pension plan equalization award, patent award, tax
preparation fees, and premiums paid for executive life insurance. Amounts
for 2000 and 1999 represent matching contributions paid under Halliburton
401(k) plans.

(5) Mr. Ruggeri's compensation was paid in Italian lira, which has been
converted to U.S. dollars at a rate of 2,149.9778 lira per $1.00 for 2001
stated compensation. For previous years, appropriate exchange rates from
these time periods were utilized. Mr. Ruggeri's employment with us
terminated on October 26, 2001. Mr. Ruggeri's compensation in 2001 does not
include amounts payable pursuant to the severance agreement entered into at
the time of his termination of employment.

(6) Mr. Luke's employment with us terminated on February 28, 2002.

OPTION GRANTS IN THE LAST FISCAL YEAR

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(1) Options to purchase a total of 642,000 shares of common stock were granted
to employees in 2001, of which 618,000 remain outstanding as of December 31,
2001.

(2) The amounts under the columns labeled "5%" and "10%" are included by Dresser
pursuant to certain rules promulgated by the Securities and Exchange
Commission (the "Commission") and are not intended to forecast future
appreciation, if any, in the price of the common stock. Such amounts are
based on the assumption that the named person holds the options for the full
term of the options. The actual value of the options will vary in accordance
with the value of the common stock.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table shows aggregate exercises of options to purchase
Dresser, Inc. common stock in the fiscal year ended December 31, 2001 by the
executive officers named in the Summary Compensation Table.

- ------------
(1) Values are determined by aggregating, for each option exercise in 2001, the
amount calculated by multiplying (i) an amount calculated by subtracting the
exercise price paid for each such exercise from the closing price of the
common stock as of the date of such exercise by (ii) the number of shares
acquired upon such exercise.

(2) Based upon a price per common share of $40.00 on December 31, 2001.

(3) None of the options are in the money.

EMPLOYMENT AGREEMENTS

We have entered into employment agreements with each of the executive
officers named in the Summary Compensation Table. These agreements became
effective as of April 10, 2001. Each of the employment agreements provides
generally:

-- The annual base salary, which may be increased by our Board of
Directors in its discretion for each of the executive officers named
in the Summary Compensation Table, is as follows:

Patrick M. Murray........................................... $500,000
James A. Nattier............................................ 220,000
Albert G. Luke.............................................. 255,000
William E. O'Connor......................................... 225,000
John P. Ryan................................................ 214,000

-- Each executive officer is entitled to participate in our annual
incentive plan and in our various other employee benefit plans and
arrangements that are applicable to senior officers.

-- If an executive officer is terminated without "cause", or if he
resigns for "good reason" (each as defined in the respective
employment agreements), he is entitled to receive his incentive bonus
and annual base salary for 24 months and to continue coverage under
our medical, dental and life insurance programs for 18 months on the
same basis as he was entitled to participate prior to his
termination. In addition, all unvested options, other than
performance based options, will become immediately vested upon the
date of such termination and the restrictions will lapse on
previously awarded shares of restricted stock.

-- Each executive officer has agreed not to compete with us during the
term of his employment and for one year following termination of his
employment.

Mr. Murray's employment agreement is substantially identical to the other
agreements described above, although it differs in the following respects:

-- If he is terminated without cause, he is entitled to receive his
incentive bonus and annual base salary for 36 months.

-- He has agreed not to compete with us for two years following
termination of his employment.

We have also entered into severance agreements with approximately 29 of our
executives, not including the 11 executive officers with whom we have signed
employment agreements. Generally, the severance agreements provide that if the
executive's employment is terminated under certain circumstances described in
the agreements within two years after the completion of the recapitalization
transaction, the executive is entitled to receive various benefits, including
the following:

-- Cash payments equal to 100% of the executive's then current base
salary;

-- the executive's full prior year bonus, if not already paid, and the
executive's targeted bonus for the year in which the termination
occurs; and

-- continuation of basic medical, dental, life and disability insurance
for six months.

Additionally, each executive has agreed not to compete with us during the
six month period following a termination of the executive's employment, if it
occurs within the period during which benefits are payable under the severance
agreements.

STOCK PLAN

We adopted the Dresser, Inc. 2001 Stock Incentive Plan effective as of
April 10, 2001. This stock plan permits the grant of a variety of equity based
compensation awards, including non-qualified stock options, incentive stock
options, restricted stock awards, phantom stock, stock appreciation rights and
other rights with respect to our common stock. Common stock shares of 710,101
(which may be either Class A common stock, par value $0.001, or Class B common
stock, par value $0.001) are issuable under the stock plan (subject to
adjustment for events such as stock dividends, stock splits, recapitalizations,
mergers and reorganizations). Our employees, consultants and directors are
eligible to receive awards under the stock plan.

We granted options to purchase common stock to certain management
employees, including the executives named in the management table. The per share
exercise price of each such option is anticipated to be 100% of the fair market
value of shares of common stock as of the date of grant. The options shall
generally have one of the following three vesting schedules.

-- Certain options will vest 20% on the first anniversary of the date of
the grant and 1/48 of the remaining 80% per month for each month
thereafter until the option is fully vested. Vesting of these options
will accelerate if the employee leaves for good reason, is terminated
by us without cause, dies or suffers a permanent disability.

-- Other options will vest, if at all, if our majority shareholder
realizes a 35% annualized internal rate of return on their initial
investment in us and is able to liquidate their initial investment in
us at a price equal to at least 450% of the price paid for their
initial investment (as adjusted for stock splits and other
recapitalizations).

-- The final group of options will vest if the employee is still
employed after nine and one-half years, but vesting will accelerate
if we achieve predetermined financial performance milestones. The
vesting of these options will also be accelerated if the options
discussed in the preceding paragraph vest.

If the employee retires, is terminated for cause, or resigns (without good
reason) then the option is immediately terminated with respect to all unvested
shares, and with respect to all vested shares is terminated at the end of the
later of: (i) 60 days, or (ii) the minimum time period the employee has to cause
us to repurchase the vested shares at fair market value under the terms of his
or her employment agreement and the investor rights agreement. See "--Certain
Relationships and Related Party Transactions."

Certain terms of options which may be granted to our non-employee directors
are set forth in the stock plan. In particular, the stock plan contains a
maximum limit on the number of options that may be granted to an independent
director in any year. In addition, each non-employee director option will
generally have a per share exercise price equal to the fair market value per
share of common stock as of the date of grant and will generally vest upon the
occurrence of certain corporate transactions.

Shares of common stock purchased or acquired under the stock plan are
generally subject to restrictions on transfer, repurchase rights, and other
limitations set forth in the investor rights agreement (or in an option
agreement, stockholders' agreement or other similar agreement that we may enter
into with the stock plan participant).

2001 MANAGEMENT EMPLOYEE EQUITY PURCHASE PLAN

In connection with the consummation of the recapitalization transaction, we
have adopted the new 2001 Management Employee Equity Purchase Plan effective as
of April 10, 2001. The new equity purchase plan provides for certain of our
employees, directors and consultants to purchase shares of common stock. Up to
87,500 shares of our Class A common stock, par value $.001, and up to 762,523
shares of our Class B common stock, par value $0.001, may be purchased under the
plan.

Our board of directors (or a committee of the board authorized to
administer the plan) will authorize certain of our employees, directors and
consultants to purchase common stock under the plan. Each purchaser will enter
into a subscription agreement, which will set forth certain terms related to the
purchase and sale of shares of common stock, including the number of shares of
common stock that a purchaser elects to purchase, the date on which such
purchase will take place and the purchase price per share of common stock.

Each purchaser will also enter into an investor rights agreement upon the
purchase of common stock under the plan, which will set forth certain terms and
conditions relating to the resale of the common stock, including restrictions on
a participant's transfer of the common stock to third parties, rules relating to
our repurchase of the common stock following a participant's termination of
employment, and terms of a participant's inclusion in sales of common stock to
third parties. See "--Certain Relationships and Related Party Transactions."

The per share purchase price for such shares will be $40.00, which equaled
fair market value on the date of the transaction. The $40.00 per share strike
price was determined by dividing total equity value by the number of shares to
be issued. The number of shares that each employee will be eligible to purchase
will be between 625 and 25,000, subject to the overall limitation on the number
of shares that may be purchased under the plan.

DEFERRED COMPENSATION PLANS

We adopted the Dresser, Inc. Senior Executives' Deferred Compensation Plan,
the Dresser, Inc. Management Deferred Compensation Plan, and the Dresser, Inc.
Short Term Deferred Compensation Plan and the Dresser, Inc. Elective Deferral
Plan effective as of April 10, 2001. The new deferred compensation plans are not
tax qualified retirement plans. The new deferred compensation plans allow
certain of our employees to elect to defer salary or other compensation. In
connection with the establishment of such plans, liabilities from certain
Halliburton deferred compensation plans and supplemental executive retirement
plans and certain existing Dresser deferred compensation plans have been
transferred to the newly established plans. In addition, certain of our
employees who were eligible to receive retention bonuses, cash payments pursuant
to Halliburton restricted stock, or other payments from Halliburton elected, in
advance to defer the receipt of such payments under the new deferred
compensation plans. Amounts deferred under the new deferred compensation plans
shall be general liabilities of Dresser and shall be represented by bookkeeping
accounts maintained on behalf of the participants. Participants will generally
be able to elect to have such accounts deemed to be invested either in units
which are valued based upon the value of our common stock or in an interest
bearing account. Distributions shall generally be made from the new deferred
compensation plans to a participant over time following his or her retirement or
other termination of employment.

In addition to establishing the new deferred compensation plans, we adopted
the Dresser, Inc. ERISA Excess Benefit Plan, the Dresser, Inc. Senior
Executives' Excess Plan and the Dresser, Inc. Elective Deferral Plan effective
as of April 10, 2001 for the benefit of certain of our employees. These plans
provide accruals to certain highly paid employees based on the benefits those
employees would have received under our retirement plans, except for certain
Internal Revenue Code limitations.

RETIREMENT PLANS

In connection with the recapitalization transaction, we adopted, as of
April 10, 2001, the Dresser, Inc. Consolidated Salaried Retirement Plan (the
"Pension Plan"). The purpose of the Pension Plan is to preserve accrued benefits
made available to certain of our employees under the Dresser Industries, Inc.
Consolidated Salaried Retirement Plan, which was frozen to new participants and
benefit accruals on May 31, 1995. The Pension Plan generally provides a benefit
equal to a certain percentage of final average earnings, adjusted to reflect,
among other things, variations among participants in social security benefits,
credited service, retirement dates, and participation in other defined benefit
pension plans.

We adopted, as of April 10, 2001, the Dresser, Inc. Retirement and Savings
Plan (the "401(k)" Plan), which is intended to be the primary plan to provide
retirement benefits to our participating employees. The 401(k) Plan provides a
dollar of company matching contributions for every dollar of employee
contributions up to a maximum of 4% of the "compensation" any employee elects to
defer. "Compensation" for this purpose was limited to $170,000 in 2001 by
Internal Revenue Code Section 401(a)(17). In connection with the
recapitalization transaction, we have agreed to make additional contributions to
the 401(k) Plan. Such additional contributions mirror contributions made to
certain of our employees under the Halliburton Retirement and Savings Plan, and
are intended to make up for benefits lost pursuant to the freezing of the
Dresser Industries, Inc. Consolidated Salaried Retirement Plan, as described
above.

TREATMENT OF HALLIBURTON OPTIONS

We have not agreed to assume, replace, roll-over, or otherwise reimburse
our employees for any options to purchase Halliburton stock that they held prior
to the recapitalization transaction. Accordingly, any such options outstanding
as of April 10, 2001 will remain outstanding until they expire according to the
terms of the Halliburton option plans and option agreements governing such
options. As discussed in more detail above, we provided certain employees with
options to purchase our stock under a new stock incentive plan, which we have
adopted in accordance with the recapitalization transaction. No options to
purchase Halliburton stock were granted to any of the executive officers named
in the Summary Compensation Table during the fiscal years ended December 31,
2000 and December 31, 2001.

TREATMENT OF HALLIBURTON RESTRICTED STOCK

In connection with the recapitalization transaction, we agreed to assume
the value of Halliburton's liability for certain individuals with respect to
cash payments for the value of Halliburton's restricted stock as to which the
restrictions had not lapsed as of April 10, 2001. Certain of our employees,
including Messrs. Murray, Nattier, O'Connor, and Ryan, have elected to roll over
these cash payments into new deferred compensation arrangements which we have
adopted in accordance with the recapitalization transaction.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of our common shares immediately following the recapitalization
transaction with respect to each Person who is a beneficial owner of more than
5% of our outstanding common stock and beneficial ownership of our common stock
by each director and each executive officer named in the Summary Compensation
Table and all directors and executive officers as a group:

To calculate a shareholder's percentage of beneficial ownership, we must
include in the numerator and denominator those shares underlying certain of the
options beneficially owned by that shareholder. Options

held by other shareholders, however, are disregarded in this calculation.
Therefore, the denominator used in calculating beneficial ownership among our
shareholders may differ.

- ------------
* Signifies less than 1%. Also, does not include shares held by DEG
Acquisitions, LLC, which could be attributed to certain of these
individuals.

(1) 75% of the equity interests in DEG Acquisitions, LLC are held by First
Reserve Corporation and its affiliates and co-investors, and 25% are held by
Odyssey Investment Partners, LLC and its affiliates and co-investors.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

TRADEMARK ASSIGNMENT AND LICENSE AGREEMENT

Pursuant to agreements with Halliburton, we own all right, title and
interest in and to the marks "Dresser" and "Dresser and Design" and other
trademarks and servicemarks in the U.S. and in various jurisdictions throughout
the world. We have granted back to Halliburton a non-exclusive license to use
these marks during a transition period of up to three years while various
Halliburton entities are re-named or liquidated. We have also granted back to
Halliburton a perpetual, exclusive license to use the name "Dresser Industries"
provided the name is not used in connection with raising capital, or the sale,
promotion, design or manufacture of goods or services that would create market
confusion affecting Dresser. We also granted to Halliburton the use of the name
"Dresser Industries, Inc." for use as a holding company name. In addition, we
have agreed not to use the Dresser name for seven years in certain businesses
where Halliburton operates, or to directly compete with Halliburton for three
years.

SPONSOR RIGHTS AGREEMENT

The Sponsor Rights Agreement, among affiliates of First Reserve and Odyssey
who hold all of the equity interests in DEG Acquisitions, LLC, which in turn
holds 92.5% of our equity, provides that there will be a board of directors of
DEG Acquisitions consisting of nine directors, five of whom will be designated
by First Reserve, two of whom will be designated by Odyssey and two of whom will
be members of our management. The Sponsor Rights Agreement also provides that
unless at least one director nominated by each of First Reserve and Odyssey
agrees, the board will be prohibited from allowing us to take certain actions
including incurring certain indebtedness, consummating certain acquisitions or
asset dispositions, and making certain changes in our management. The Sponsor
Rights Agreement also contains other customary provisions, including
registration rights.

TAX SHARING AGREEMENT

Pursuant to a tax sharing agreement between us and DEG Acquisitions, LLC,
(a) DEG Acquisitions will file consolidated, combined or unitary federal, state,
local and foreign income tax returns on behalf of itself and its subsidiaries,
including us, to the extent it is permitted to do so under the relevant law, and
(ii) we are obligated to pay to DEG Acquisitions a portion of the total income
tax liability of DEG Acquisitions and its subsidiaries, in an amount equal to
the excess of (a) the relevant income tax liability of DEG Acquisitions and its
subsidiaries for a taxable period over (b) the corresponding consolidated,
combined or unitary income tax liability of DEG Acquisitions and its
subsidiaries that DEG Acquisitions would have incurred if we and our
subsidiaries had not been subsidiaries of DEG Acquisitions.

INVESTOR RIGHTS AGREEMENT

In April 2001, we entered into an Investor Rights Agreement with DEG
Acquisitions, LLC, Halliburton and certain members of our management who are
also shareholders. Material provisions of that agreement that relate to us are
as follows:

Registration Rights. Under the terms of the Investor Rights
Agreement, we have agreed to register the shares of our common stock owned
by DEG Acquisitions, LLC, Halliburton and those members of our management
who are parties to the agreement under the following circumstances:

-- Demand Rights. Upon written request from DEG Acquisitions, LLC or
Halliburton, we will register shares of common stock specified in
such request for resale under an appropriate registration
statement filed and declared effective by the SEC. No demand may
be made until 180 days after our initial public offering. DEG
Acquisitions, LLC is entitled to six such requests, and
Halliburton is entitled to one such request. We may defer a demand
for registration by 90 days if our Board of Directors deems it to
be materially detrimental for us to file a registration statement.
We may only make such a deferral twice in any 12-month period.

-- Piggyback Rights. If at any time we file a registration statement
for the purposes of making a public offering of our common stock,
or register outstanding shares of common stock for resale on
behalf of any holder of our common stock, the other parties to the
Investor Rights Agreement may elect to include in such
registration any shares of common stock such person holds. If the
offering is an underwritten offering, the managing underwriter may
exclude all or a part of the shares if market factors dictate.

-- Lockup. In consideration of these registration rights, DEG
Acquisitions, LLC, Halliburton and the members of management who
are parties to the agreement have agreed not to sell shares of
common stock for a period of 90 days following any exercise of the
registration rights.

-- Termination. Our obligations to register the shares of common
stock of any of these stockholders terminates with respect to such
stockholder on the date on which all remaining shares of common
stock can be sold in any single transaction in reliance on Rule
144 of the Securities Act.

Right of First Offer. Until the closing of our initial public
offering, if Halliburton desires to sell any of its shares of us to a third
party, then it must give us a notice of such intent to sell and an
opportunity to buy those shares on the same terms as were offered to the
third party. If we do not decide to purchase such shares, Halliburton must
give the same notice and opportunity to buy the shares to DEG Acquisitions,
LLC and those members of management who are parties to the agreement.

Repurchase of Employee Shares. If a member of management who is a
party to this agreement leaves for good reason, is terminated by us without
cause, dies or suffers a permanent disability, then such employee will,
pursuant to a right granted in the employee's employment agreement, be
permitted to cause us to repurchase their vested shares that they have held
for at least six months at fair market value. If an employee retires, is
terminated for cause, or resigns (without good reason), or leaves for the
reasons enumerated in the prior sentence but fails to "put" their shares to
us for repurchase, then we will have the right to repurchase their shares
at fair market value (with a discount for minority ownership in the case of
a retirement, termination by us for cause, or resignation without good
reason).

Corporate Opportunity. The Investor Rights Agreement includes an
acknowledgment by us and our stockholders that our stockholders and their
affiliates may engage in other businesses that compete with ours.

THE ENTECH ACQUISITION

In the second quarter of 2001, we completed the acquisition of Entech
Industries, Inc., a valve manufacturer with operations based in four west
European countries, for approximately $74.4 million. The acquisition was valued
at approximately $70.0 million not including approximately $4.4 million in
incremental costs. Entech consists of five business units engaged in the design,
manufacture and distribution of valves engineered for the oil & gas production
and transmission, petrochemical and power industries. The Entech business lines
were merged into our flow control segment. Entech was acquired from an affiliate
of First Reserve Corporation.

TRANSITION AGREEMENTS

On April 10, 2001, Halliburton executed a transition services agreement
with us whereby Halliburton provided us with certain transition services at its
cost, which we believe did not exceed the fair market value of those services.
This transition services agreement has expired. The services covered by this
agreement included certain human resources and employee benefit administration
services, certain information technology services and certain real estate
support services at facilities that we shared with Halliburton.

Certain of the foreign operations that we acquired pursuant to the
recapitalization transaction are located in jurisdictions where governmental
consents are required for the transfer of ownership and were not obtained by the
time of closing of the recapitalization transaction. Pursuant to a closing
agreement and waiver executed on April 10, 2001, Halliburton has agreed to
operate these entities for our benefit and to effect the transfer as soon as
practicable. In the event that Halliburton cannot effect the transfer of these
entities within one year, the purchase price for our foreign subsidiaries will
be adjusted accordingly. The operations in these jurisdictions are not material
to our financial condition or results of operations taken as a whole. In
addition, Halliburton has agreed to operate certain foreign facilities for our
benefit until the leases related to these facilities can be assigned to us.
These facilities are not, individually or in the aggregate, material to our
financial condition or results of operations taken as a whole.

LEASE AGREEMENT

Pursuant to a lease agreement with Halliburton Energy Services, Inc. that
expired on February 28, 2002, we leased approximately 76,000 square feet of
office space in Houston, Texas to Halliburton for a period of twelve months.

TRANSACTION FEES

First Reserve and Odyssey did not engage any investment banking firm in
connection with the recapitalization transaction and received a $30.4 million
fee for their assistance in evaluating, structuring and facilitating these
transactions. Additionally, they were reimbursed for all reasonable
out-of-pocket expenses incurred in connection with the transactions and will be
reimbursed for reasonable expenses incurred in connection with the ongoing
ownership and management of Dresser.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K

(a) The index to the audited financial statements and the financial
statement schedules is included on page F-1 of this report. The
financial statements included herein at pages F-1 through F-38:

Schedule II--Valuation and Qualifying Accounts

All other schedules for which provision is made in Regulation S-X are
either not required to be included herein under the related
instructions or are inapplicable or the related information is
included in the footnotes to the applicable financial statement and
therefore have been omitted.

(b) Reports on Form 8-K for the quarter ended December 31, 2001

None.

(c) Exhibits

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

(1) Filed previously as an exhibit to our Registration Statement on Form S-4,
dated May 11, 2001 as amended (file No. 333-60778), and incorporated by
reference here in.

(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the
period ended September 30, 2001 filed November 14, 2001, and incorporated
herein by reference.

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.

Dated: March 19, 2002

DRESSER, INC.

By: /s/ PATRICK M. MURRAY
------------------------------------
Patrick M. Murray
President, Chief Executive Officer
and Director

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED

DRESSER, INC.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors
of Dresser, Inc.:

We have audited the accompanying consolidated balance sheets of Dresser,
Inc. (the "Company" or "Dresser") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' (deficit) equity
and cash flows for the three years ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dresser as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Dallas, Texas,
February 28, 2002

F-2

DRESSER, INC.

CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE INFORMATION)

The accompanying notes are an integral part of these financial statements.
F-3

DRESSER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)

The accompanying notes are an integral part of these financial statements.
F-4

DRESSER, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)

The accompanying notes are an integral part of these financial statements.
F-5

DRESSER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

The accompanying notes are an integral part of these financial statements.
F-6

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

1. ORGANIZATION AND BASIS OF PRESENTATION:

Dresser, Inc. was originally incorporated in 1998, under the name of
Dresser Equipment Group, Inc. ("DEG") under the laws of the state of Delaware.
The certificate of incorporation was amended and restated on April 9, 2001. As
used in this report, the terms "Dresser" and the "Company" refer to Dresser,
Inc. and its predecessors, subsidiaries and affiliates unless the context
indicates otherwise.

In January 2001, Halliburton Company ("Halliburton"), together with its
wholly owned subsidiary Dresser B.V. signed an Agreement and Plan of
Recapitalization (the "Agreement") with DEG Acquisitions, LLC, to effect the
sale of its businesses relating to, among other things, the design, manufacture
and marketing of flow control, measurement systems and power systems for
customers primarily in the energy industry. Halliburton originally acquired the
businesses as part of its acquisition of Dresser Industries, Inc. in 1998.
Dresser Industries' operations consisted of the Company's businesses and certain
other operating units retained by Halliburton following the consummation of the
recapitalization transactions. In order to accomplish this transaction,
Halliburton effected the reorganization of various legal entities that comprised
the Dresser Equipment Group ("DEG") business segment of Halliburton.

In connection with the recapitalization in April 2001, Dresser made
payments to Halliburton Company of approximately $1,300 to redeem common equity
and purchase the stock of foreign subsidiaries. The recapitalization
transactions and related expenses were financed through the issuance of $300 of
senior subordinated debt, $720 of borrowings under the credit facility, and
approximately $400 of common equity contributed by DEG Acquisition LLC, an
entity owned by First Reserve Corporation and Odyssey Investment Partners Fund,
LP.

The consolidated financial statements of the Company for periods presented
prior to March 31, 2001 have been prepared by management on a carve-out basis
and reflect the consolidated financial position, results of operations and cash
flows of Dresser in accordance with accounting principles generally accepted in
the United States. The consolidated financial statements exclude certain items,
which were not transferred as a result of the Agreement and any financial
effects from Halliburton's decision to discontinue this business segment. In
addition, certain amounts in the financial statements have been estimated,
allocated and pushed down from Halliburton in a consistent manner in order to
depict the financial position, results of operations and cash flows of Dresser
on a stand-alone basis. However, the financial position, results of operations
and cash flows may not be indicative of what would have been reported if Dresser
had been a stand-alone entity or had been operated in accordance with the
Agreement during the periods presented prior to March 31, 2001.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

USE OF ESTIMATES

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Significant items subject to such estimates and assumptions include the
carrying value of long-lived assets; valuation allowances for receivables and
inventories.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and corporations, and limited liability companies
in which the Company owns a controlling interest, after

F-7

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

the elimination of all significant intercompany accounts and transactions. The
condition for control of corporations and limited liability companies is the
ownership of a majority of voting interest. Prior to the recapitalization
transactions, the financial statements reflect intercompany amounts with
Halliburton as components of divisional equity.

REVENUES AND INCOME RECOGNITION

Revenues are recognized as products are shipped and services are rendered.
The distinction between product sales and services is based upon the overall
activity of the particular business operation. Service revenues were immaterial
for all years presented. All known or anticipated losses on contracts are
provided for currently. Claims and change orders which are in the process of
being negotiated with customers for extra work or changes in the scope of work
are included in revenue when collection is deemed probable.

None of the Company's product distributors is given price protection
rights. If items are shipped with rights to return, revenue is not recorded
until the customer has approved the shipment and written acceptance is received.
The Company does have arrangements with certain customers whereby the customers
have formal acceptance provisions; however, customer acceptance is generally
part of the testing phase and occurs prior to the product being approved for
shipment. Revenue is not recorded until the latter occurs: customer acceptance
or final shipment. Software sales are not a significant component of the
Company's total sales.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense as incurred. Research
and development costs, recorded as a component of selling, engineering,
administrative and general expenses in the consolidated financial statements,
were $23.9, $24.9 and $25.7 for the years ended December 31, 2001, 2000 and
1999, respectively.

CASH AND EQUIVALENTS

All highly liquid investments at acquisition with a maturity of three
months or less are considered to be cash equivalents.

RECEIVABLES

Accounts receivable are stated at their net realizable value. Included in
receivables are notes receivable of $7.6 and $10.6 as of December 31, 2001 and
2000, respectively.

INVENTORIES

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

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are reported at cost less accumulated
depreciation, which is generally provided using the straight-line method over
the estimated useful lives of the assets of 10 to 30 years for buildings and 3
to 17 years for machinery and equipment. Some assets are depreciated using
accelerated methods. Expenditures for maintenance and repairs are expensed as
incurred. Expenditures for improvements that extend the life of the asset are
generally capitalized. Upon sale or retirement of an asset, the related costs
and accumulated depreciation are removed from the accounts, and any gain or loss
is recognized.

F-8

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed. The estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash value is required.

EQUITY INVESTMENTS

The Company holds various equity investments ranging from 25% to 50%
ownership. The investments are included in "Investments in Unconsolidated
Subsidiaries" in the accompanying financial statements and are accounted for
using the equity method of accounting. Under the equity method, the original
investments are recorded at cost and adjusted by the Company's share of
undistributed earnings or losses of the entities.

Equity in earnings of unconsolidated affiliates, accounted for using the
equity method, have been included in revenues in the consolidated financial
statements and were $2.1, $0.8, and $1.3 for the years ended December 31, 2001,
2000 and 1999, respectively.

INTANGIBLE ASSETS

Intangible assets primarily consist of goodwill and patents, which are
shown net of accumulated amortization. Goodwill resulting from business
acquisitions represents the excess of purchase price over fair value of net
assets acquired and is being amortized over 4 to 40 years using the
straight-line method. Goodwill was $408.7 and $252.7, net of accumulated
amortization of $67.6 and $53.4 as of December 31, 2001 and 2000, respectively.

Patents are being amortized over their estimated useful lives, ranging from
5 to 40 years. Patents and other intangible assets were $5.8 and $5.4 net of
related accumulated amortization of $13.3 and $12.9 as of December 31, 2001 and
2000, respectively.

The Company reevaluates goodwill and other intangibles based on
undiscounted operating cash flows whenever significant events or changes occur
which might impair recovery of recorded asset costs. The Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 142, effective for fiscal years beginning after December 15, 2001,
which will require the amortization of goodwill to cease and the testing of
goodwill for impairment at transition, annually, and at interim periods if an
event or circumstance might result in an impairment. The Company will adopt this
statement effective January 1, 2002.

INCOME TAXES

Deferred income tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to reverse.

Prior to the recapitalization, the Company was part of Halliburton's
consolidated tax-reporting group for U.S. income tax purposes. Halliburton does
not record specific tax assets and liabilities to its business units, but
instead allocates each business unit a tax expense based on its consolidated tax
position. The income tax provision shown in the consolidated financial
statements is based upon the Company's estimate of the effective tax rate of
38.5% for the periods ending December 31, 2000 and 1999, respectively. The
Company believes that the income tax charge in 2000 and 1999 was calculated in a
manner consistent with a reasonable estimate of future tax expense (see Note
12).

F-9

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

DERIVATIVE INSTRUMENTS

On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
No. 138. As a result of the adoption of SFAS No. 133, as amended, the Company
recognizes all derivative financial instruments, such as interest rate swap
contracts and foreign exchange contracts, in the consolidated financial
statements at fair value. Changes in the fair value of derivative financial
instruments are either recognized in income or in shareholders' equity as a
component of comprehensive income depending on whether the derivative financial
instrument qualifies for hedge accounting. Changes in fair values of derivatives
accounted for as cash flow hedges, to the extent they are effective as hedges,
are recorded in other comprehensive income net of deferred taxes. Changes in
fair value of derivatives not qualifying as hedges are reported in income. The
Company did not reflect the transition in a separate line item as a change in
accounting principle, net of tax, due to the minimal impact of $3.3 on the
Company's results of operations.

FOREIGN CURRENCY TRANSLATION

Foreign entities whose functional currency is the United States dollar
translate monetary assets and liabilities at year-end exchange rates and
nonmonetary items at historical rates. Revenue and expense amounts are
translated at the average rates in effect during the year, except for
depreciation and cost of product sales, which are translated at historical
rates. Gains or losses from changes in exchange rates are recognized in the
consolidated statement of operations in the year of occurrence. Foreign entities
whose functional currency is the local currency translate net assets at year-end
rates and revenue and expense amounts at average exchange rates. Adjustments
resulting from these translations are reflected in the consolidated financial
statements as a component of other comprehensive income in shareholders' equity.

RECLASSIFICATIONS

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

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued two new statements, SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."

SFAS No. 141 supersedes Accounting Principles Board Opinion No. 16,
"Business Combinations," eliminates the pooling-of-interests method of
accounting for business combinations and modifies the application of the
purchase accounting method. SFAS No. 141 is effective for all transactions
completed after June 30, 2001, except transactions using the
pooling-of-interests method that were initiated prior to July 1, 2001. As the
Company had no business combination transactions in process or otherwise
initiated that contemplated pooling-of-interests, adoption of SFAS No. 141 will
not have an impact on the Company's consolidated financial statements.

SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets," and eliminates the requirement to amortize goodwill and
indefinite-lived assets, addresses the amortization of intangible assets with a
defined life and requires impairment testing and recognition of goodwill and
intangible assets. SFAS No. 142 will be effective for the Company beginning
January 1, 2002. As a result of the adoption of SFAS No. 142, amortization will
decrease by approximately $14.2. The Company is currently evaluating the impact
this statement will have on the Company's financial position or results of
operations.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the
F-10

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 will be effective for
financial statements issued for fiscal years beginning after June 15, 2002. An
entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a
change in accounting principle. The Company is currently evaluating the impact
this statement will have on the Company's financial position or results of
operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 primarily addresses significant issues
relating to the implementation of SFAS No. 121 and develops a single accounting
model for long-lived assets to be disposed of, whether previously held and used
or newly acquired. The provisions of SFAS No. 144 will be effective for fiscal
years beginning after December 15, 2001. The Company is currently evaluating the
impact this statement will have on the Company's financial position or results
of operations.

3. INVENTORIES:

Inventories on the last-in, first out (LIFO) method represented $91.0 and
$76.4 of the Company's inventories as of December 31, 2001 and 2000,
respectively. The excess of FIFO costs over LIFO costs as of December 31, 2001
and 2000, were $72.2 and $70.4, respectively. Inventories are summarized as
follows:

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2001 and 2000, consisted
of the following:

Depreciation expense totaled $44.2, $40.5, and $39.9 for the years ended
December 31, 2001, 2000, and 1999, respectively.

F-11

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

5. OTHER ASSETS

Other Assets at December 31, 2001 and 2000, consisted of the following:

Deferred financing costs are amortized to interest expense on a
straight-line basis (which approximates the effective interest method) over the
term of the related loans, which range from six to ten years.

6. ACCRUED EXPENSES

Accrued expenses at December 31, 2001 and 2000, consisted of the following:

7. ACQUISITIONS:

In the second quarter of 2001, the Company completed the acquisition of
Entech Industries, Inc. ("Entech"), a valve manufacturer with operations based
in four European countries, for approximately $74.4, which consisted of
approximately $29.5 in cash, $16.3 in assumed debt and $28.6 in equity. The
acquisition was valued at approximately $70 million not including $4.4 million
in cash attributable to incremental transaction costs. Entech consists of five
business units engaged in the design, manufacture and distribution of valves
engineered for the oil & gas production and transmission, petrochemical and
power industries. Entech's business lines are reflected in our flow control
segment. In connection with the acquisition, the Company recorded goodwill of
approximately $50.7, which is being amortized on a straight-line basis over 20
years.

On April 1, 2000, we acquired the remaining 50% interest in the NIMCO joint
venture that had been owned by our joint venture partner. Prior to the
acquisition on April 1, 2000, our interest in the NIMCO joint venture was
accounted for using the equity method and only our share of its earnings was
included in our revenues.

8. DEBT:

SHORT-TERM NOTES PAYABLE

At December 31, 2001 and 2000, the Company had $39.3 and $18.7,
respectively, of notes payable to various banks with interest rates ranging from
1.1% to 15.5% and 5.2% to 8.05%, respectively. The weighted average interest
rate at December 31, 2001 was approximately 3.7%.
F-12

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

LONG-TERM DEBT

In connection with the recapitalization transactions, the Company issued
$300.0 in notes and obtained a new credit facility.

The Company sold $300.0 of notes in April 2001 in a private placement. In
September 2001, under a registration statement, the Company exchanged the notes.
The exchanged notes were identical except that the old notes were not registered
under the Securities Act. The notes may be redeemed beginning April 15, 2006.
The initial redemption price is 104.688% of the principal amount plus accrued
interest. The redemption price will decline each year after 2006 and will be
100.0% of the principal amount, plus accrued interest, beginning on April 15,
2009. In addition, before April 15, 2004, the Company may redeem up to 35% of
the notes at a redemption price of 109.375% of their principal amount, plus
accrued interest. The Company may redeem the notes only if after such
redemption, at least 65% of the aggregate principal amount of the notes
originally issued remain outstanding. Upon a change of control, the Company will
be required to make an offer to repurchase the notes at a price equal to 101% of
their principal amount plus accrued interest. The wholly owned domestic
subsidiaries of Dresser, Inc. guarantee the notes.

The new credit facility provides a six-year $165.0 Tranche A U.S. term loan
facility, a six-year Tranche A Euro term loan facility in an amount equivalent,
as of the closing date, to $100.0 which was borrowed by a foreign subsidiary,
and an eight-year $455.0 Tranche B term loan facility, each of which was drawn
to partially finance the recapitalization transactions and pay certain related
costs and expenses. In addition, the new credit facility provides for a six-year
$100.0 revolving credit facility to be utilized by the Company for working
capital requirements and other general corporate purposes. As of December 31,
2001, there was $70.7 available under the revolving credit facility; amounts
outstanding under letters of credit were $29.3.

The loans and other obligations under the credit facilities are guaranteed
by the Company's parent and all of the Company's existing and future direct and
indirect wholly owned domestic subsidiaries. The Company's obligations and the
guarantees are secured by (a) all or substantially all of the material property
and assets, real or personal now owned or hereafter acquired by the Company or
the guarantors, and (b) all proceeds and products of the property and assets
described in clause (a) above. The obligations of our foreign subsidiary that
borrowed under the Tranche A Euro term loan facility are secured by certain of
the assets of that foreign subsidiary.

At the Company's request, and so long as (a) no default or event of default
has occurred and is continuing under the credit facility and (b) the lenders or
other financial institutions are willing to lend such incremental amounts, the
Tranche B term loan facility may be increased from time to time in an amount, in
the aggregate, not to exceed $95.0.

The credit agreement documentation contains certain customary
representations and warranties and contains customary covenants restricting our
ability to, among others: (i) declare dividends or redeem or repurchase capital
stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and engage in
sale-leaseback transactions; (iv) make loans and investments; (v) incur
additional indebtedness; (vi) amend or otherwise alter debt and other material
agreements; (vii) make capital expenditures; (viii) engage in mergers,
acquisitions and asset sales; (ix) transact with affiliates; and (x) alter the
business the Company conducts. The Company is required to indemnify the agent
and lenders and comply with specified financial and affirmative covenants
including a total debt to EBITDA ratio and an interest coverage ratio. The
Company was in compliance with these covenants at December 31, 2001.

F-13

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

Outstanding long term borrowing consist of the following:

- ------------
(1) The Tranche A term loans will amortize with annual reductions of 5% in year
one, 10% in year two, 15% in year three, 20% in year four and 25% in years
five and six.

(2) The interest rate margin can range from 2.0%-3.25% depending on the
Company's leverage ratio. At December 31, 2001, the 3 month LIBOR rate and
Euribor rate was 1.88% and 3.29%, respectively.

(3) The Tranche B term loans will amortize 1% for years one through seven, with
the remainder to be repaid in quarterly amounts in year eight.

(4) The interest rate margin can range from 3.0%-3.75% depending on the
Company's leverage ratio. At December 31, 2001, the 3-month LIBOR rate was
1.88%.

(5) The interest rates range from 2.175% to 8.11%.

(6) Maturity dates of the loans range from 2002 to 2008.

Minimum principal payments on long-term debt subsequent to 2001 are as
follows:

2002..................................................... $ 25.0
2003..................................................... 47.3
2004..................................................... 51.9
2005..................................................... 65.1
2006..................................................... 71.8
Thereafter............................................... 763.9
--------
$1,025.0
========

9. FINANCIAL INSTRUMENTS:

DERIVATIVE FINANCIAL INSTRUMENTS

The Company only uses derivatives for hedging purposes. The following is a
summary of the Company's risk management strategies and the effect of these
strategies on the Company's consolidated financial statements.

CASH FLOW HEDGING STRATEGY

The Company selectively hedges significant exposures to potential foreign
exchange losses considering current market conditions, future operating
activities and the cost of hedging exposure in relation to the perceived risk of
loss. The purpose of the foreign currency hedging activities is to protect the
Company from the risk that the cash flow resulting from the sale or purchase of
products and services in foreign currencies will be adversely affected by
changes in exchange rates. The Company uses forward exchange contracts to

F-14

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

manage its exposures to movements in foreign exchange rates. The use of these
financial instruments modifies exposure and reduces the risk of cash flow
variability to the Company. As of December 31, 2001, the Company had
approximately $93.8 of foreign exchange risk hedged using forward exchange
contracts.

The Company has entered into interest rate swap agreements that effectively
convert a portion of its variable rate debt to a fixed rate basis for the next 2
years, thus reducing the impact of interest rate changes on future interest
expense. As of December 31, 2001, the Company had entered into two interest rate
swaps. The notional amounts were $115.0 and $99.3 with fixed rates of 4.49% and
4.46%, respectively.

As of December 31, 2001, the net accumulated derivative loss in accumulated
other comprehensive income was $2.5. During the twelve months ended December 31,
2001, $1.1 of accumulated net derivative losses was reclassified from
accumulated other comprehensive income into earnings, as a result of the
recognition of the forecasted transactions. When the hedged item is realized,
the gain or loss included in other comprehensive income is reported on the same
line in the consolidated statement of operations. Other disclosures related to
hedge ineffectiveness, gains/(losses) excluded from the assessment of hedge
ineffectiveness, and gain/(losses) resulting from the disqualification of hedge
accounting have been omitted due to the insignificance of these amounts.

As of December 31, 2001, the Company had a net liability of $4.7, which
approximates fair value, related to its interest rate swaps, which are reflected
in accrued expenses in the consolidated balance sheet. In addition, the Company
had assets of $2.4 and a liability of $0.2 related to its foreign currency
forward contracts. These amounts, which approximate fair value, are reflected in
other current assets on our consolidated balance sheet.

At December 31, 2001, the Company expects to reclassify $1.0 of net losses
on derivative instruments from accumulated other comprehensive income to
earnings during the next twelve months.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash, investments, trade accounts
receivable, and derivatives. The Company maintains cash and cash equivalents and
investments with various financial institutions. Trade receivables are generated
from a diverse group of customers with no significant concentrations of
receivables from any single customer. The Company maintains an allowance for
losses based upon the expected collectibility of all trade accounts receivable.

There are no significant concentrations of credit risk with any individual
counterparty or group of counterparties related to the Company's derivative
contracts. The Company selects counterparties based on creditworthiness, which
is continually monitored, and the counterparties' ability to perform their
obligations under the terms of the transactions. The Company does not expect any
counterparties to fail to meet their obligation under these contracts given
their high credit ratings; therefore, the Company considers the credit risk
associated with the derivative contracts to be minimal.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

Management estimates the fair value of (i) accounts receivable, accounts
payable, accrued expense and short term debt approximate carrying value due to
the relatively short maturity of these instruments; (ii) notes receivable
approximate carrying value based upon effective borrowing rates for issuance of
debt with similar terms and remaining maturities; and (iii) the borrowings under
the term loans and various other notes approximate carrying value because these
borrowings accrue interest at variable interest rates based on market rates. The
Company estimates the fair value of its fixed rate debt for its 9 3/8% notes
based on market prices and for the remainder its fixed rate debt generally using
discounted cash flow analysis based on the Company's
F-15

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

current borrowing rates for debts with similar maturities. The estimated fair
value of the fixed rate debt at December 31, 2001 was approximately $306.8. The
carrying value of the fixed rate debt is approximately $302.2. See Note 9, for
the fair value of the Company's derivative instruments.

11. RELATED-PARTY TRANSACTIONS

On April 10, 2001, Halliburton executed a transition services agreement
with the Company whereby Halliburton agreed to provide transition services for
up to nine months at its cost, which the Company believes approximated the fair
market value of those services. The services covered by this agreement included
certain human resources and employee benefit administration services, certain
information technology services and certain real estate support services at
facilities that we shared with Halliburton. Payments made to Halliburton under
this agreement during 2001 were approximately $1.8.

During 2001, the Company leased certain space to Halliburton on a month to
month basis. The Company received $0.5, and subsequent to December 31, 2001,
Halliburton has vacated the space.

In connection with the acquisition of Entech, the Company issued 440,955
shares of class B common stock valued at $17.6 to entities affiliated with First
Reserve Corporation.

Prior to the recapitalization transactions, DEG used and was charged
directly for, certain services that Halliburton provides to its business units.
Halliburton also allocated a certain portion of its non-corporate expenses to
each business unit. These services included, among others, information systems
support, human resources, tax, procurement, communications, real estate and both
internal and external legal services. Halliburton allocated the costs for some
of these services to its business units based on factors such as number of
employees, revenues and assets, or directly charged for some services on an as
used basis. The related expenses for these services for the years ended December
31, 2000 and 1999 were approximately $9.3 and $10.6, respectively. Management
believes that these allocation methods were reasonable. In addition, Halliburton
also administered DEG's risk management programs. The insurance program included
a broad all-risk coverage for real and personal property and third-party
liability coverage, employer's liability coverage, automobile liability, general
product liability, workers' compensation liability and other standard liability
coverage. Expenses of $14.3 and $6.7 have been allocated by Halliburton to DEG
for these risk management coverages for the years ended December 31, 2000 and
1999, respectively. Halliburton also allocated benefit costs associated with
retired and divested business employees' corporate-related pension and employee
benefit charges and union-related pension and employee benefit charges.

All of the charges described above have been included as costs of DEG's
operations in the consolidated financial statements. The Company's management
believes that it is possible that the terms of these transactions may differ
from those that would result from transactions among third parties. Such
allocations are not necessarily indicative of actual results. However,
management believes that the methods used to charge for services provided by
Halliburton were reasonable.

F-16

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

12. INCOME TAXES

The federal and state income tax provision is summarized as follows:

A reconciliation of the provision for income taxes with amounts determined
by applying the statutory U.S. federal income tax rate to income before income
taxes is as follows:

F-17

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

The Company has a net operating loss ("NOL") carryforward for U.S. federal
tax purposes of approximately $78.6 expiring in 2021. If certain substantial
changes in the Company's ownership should occur, there would be an annual
limitation on the amount of the NOL carryforward that can be utilized. The
Company believes that future taxable income may not be sufficient to realize all
deferred tax assets. Accordingly, management believes that the deferred tax
assets, net of a $79.5 valuation allowance, are considered realizable with
sufficient certainty.

The Company has not recorded deferred income taxes applicable to
undistributed earning of foreign subsidiaries that are indefinitely reinvested
in foreign operations. Undistributed earnings amounted to approximately $26.0 at
December 31, 2001. If the earnings of such foreign subsidiaries were not
indefinitely reinvested, a deferred tax liability of approximately $1.0 would
have been required at December 31, 2001.

For the years ended December 31, 2000 and 1999, the Company was a part of
the Halliburton consolidated tax-reporting group for U.S. income tax purposes.
Halliburton does not record specific tax assets and liabilities to its business
units, but instead allocates each business unit a tax expense based on its
consolidated tax position. As such, the effects of temporary and permanent
differences, as well as any valuation allowances relating to any tax assets are
not separately determinable and therefore not included for the year ended
December 31, 2000. The historical amounts have not been provided as this amount
would not be indicative of the Company's taxable position. Tax strategy
decisions were made during those periods that may not have been made had the
Company operated on a stand-alone basis.

F-18

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

The income tax provision for December 31, 2000 and 1999 is based upon the
Company's estimate of the effective tax rate of 38.5%. The Company believes that
this income tax charge was calculated in a manner consistent with a reasonable
estimate of future tax expense.

13. COMMITMENT AND CONTINGENCIES:

HALLIBURTON INDEMNIFICATIONS

In accordance with the Agreement, Halliburton has agreed to indemnify the
Company for certain items. The indemnification items generally include any
product liability claim or product warranty claim arising out of any products
relating to any discontinued product or service line of the Company. In
addition, Halliburton has generally agreed to indemnify the Company for any
product liability claim made prior to closing the Agreement, any environmental
liability claim against the Company, any loss, liability, damage or expense from
any legal proceeding initiated prior to closing of the Agreement, any loss,
liability, damage or expense relating to worker's compensation, general
liability, and automobile liability arising out of events or occurrences prior
to the closing as to which the Company notifies Halliburton prior to the third
anniversary of the closing date. Based on these indemnity rights, only
liabilities related to exposures not specifically covered above have been
included in the consolidated financial statements.

LEASES

At December 31, 2001, the Company was obligated under noncancelable
operating leases, principally for the use of land, offices, equipment, field
facilities, and warehouses. Total rental expense charged to operations for such
leases totaled $14.4, $13.6, and $9.9, for the years ended December 31, 2001,
2000 and 1999, respectively.

Additionally, the Company has entered into several capital leases. Future
minimum lease payments under capital and operating leases that had initial or
remaining noncancelable lease terms at December 31, 2001, were:

PRODUCT WARRANTIES

The Company offers warranties on the sale of certain of its products and
records an accrual for estimated future claims. Such accruals are based upon
historical experience and management's estimate of the level of future claims.

ENVIRONMENTAL

The Company's businesses and some of the Company's products are subject to
regulation under various and changing federal, state, local and foreign laws and
regulations relating to the environment and to employee

F-19

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

safety and health. These environmental laws and regulations govern the
generation, storage, transportation, handling, disposal and emission of various
substances.

These environmental laws also impose liability for personal injury or
property damage related to releases of hazardous substances. Permits are
required for operation of the Company's businesses, and these permits are
subject to renewal, modification and, in certain circumstances, revocation. The
Company believes it is substantially in compliance with these laws and
permitting requirements. The Company's businesses also are subject to regulation
under substantial various and changing federal, state, local and foreign laws
and regulations which allow regulatory authorities and private parties to compel
(or seek reimbursement for) cleanup of environmental contamination at sites now
or formerly owned or operated by the Company's businesses and at facilities
where their waste is or has been disposed. Going forward, the Company expects to
incur ongoing capital and operating costs for investigation and remediation and
to maintain compliance with currently applicable environmental laws and
regulations; however, the Company does not expect those costs, in the aggregate,
to be material.

In April 2001, the Company completed the recapitalization transaction.
Halliburton originally acquired the Company's businesses as part of its
acquisition of Dresser Industries, Inc. ("Dresser Industries") in 1998. Dresser
Industries' operations consisted of the Company's businesses, as well as other
operating units. As Halliburton has publicly disclosed, it has been subject to
numerous lawsuits involving asbestos claims associated with, among other things,
the operating units of Dresser Industries that were retained by Halliburton or
disposed of by Dresser Industries or Halliburton prior to the recapitalization
transaction. These lawsuits have resulted in significant expense for
Halliburton. The Company has not historically incurred, and in the future the
Company does not believe that it will incur, any material liability as a result
of the past use of asbestos in products manufactured by these other units of
Dresser Industries, or as a result of the past use of asbestos in products
manufactured by the Company's businesses or any predecessor entities of the
Company's businesses.

Pursuant to the recapitalization agreement, all liabilities related to
asbestos claims arising out of events occurring prior to the consummation of the
recapitalization transaction, are defined to be "excluded liabilities," whether
they resulted from activities of Halliburton, Dresser Industries or any
predecessor entities of any of the Company's businesses. The recapitalization
agreement further provides, subject to certain limitations and exceptions, that
Halliburton will indemnify the Company and hold it harmless against losses and
liabilities that the Company actually incurs which arise out of or result from
"excluded liabilities," as well certain other liabilities in existence as of the
closing of the recapitalization transaction. The maximum aggregate amount of
losses indemnifiable by Halliburton pursuant to the recapitalization agreement
is $950.0 million. All indemnification claims are subject to notice and
procedural requirements which may result in Halliburton denying indemnification
claims for some losses. See "Part I--Certain Risk Factors--Environmental
Compliance Costs And Liabilities Could Adversely Affect Our Financial Condition"
and "--We May Be Faced With Unexpected Product Claims or Regulations."

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

EMPLOYMENT AGREEMENTS

The Company has employment agreements with its executive officers and
certain management personnel. The agreements generally continue until terminated
by the executive or the Company and provide for severance payments under certain
circumstances. The agreements include a covenant against competition with the
Company, which extends for a period of time after termination for any reason.
F-20

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

14. SHAREHOLDERS' EQUITY:

CAPITAL STOCK

The Company has authorized the issuance of up to 15 million shares of stock
which consists of 13 million shares of class A common stock, par value $0.001
per share and 2 million shares of class B common stock, par value $0.001 per
share. The holder of each share of class A common stock shall have the right to
one vote and shall be entitled to notice of any shareholders' meeting in
accordance with the bylaws of the Company and shall be entitled to vote upon
such matters and in such manner provided by law. The holders of class B common
stock shall have no voting rights. As of December 31, 2001, the Company had
10,488,222 shares of class A common stock outstanding and 909,486 shares of
class B common stock outstanding.

In accordance with the Agreement, Halliburton retained an approximate 5.1%
interest in the Company, for which Halliburton received 537,408 shares of class
A common stock. The Company issued DEG Acquisition, LLC 9.7 million shares of
class A common stock and 300,000 shares of class B common stock valued at $400
on the date of closing. As of December 31, 2001, DEG Acquisition, LLC owned
approximately 92.5% of the Company with the remaining 2.4% being held by various
parties.

In connection with the acquisition of Entech, the Company issued 171,756
shares of class A common stock and 490,744 shares of class B common stock valued
at approximately $26.5, net of 52,857 shares reacquired for $2.1.

In addition, during 2001, the Company issued 925 shares of class A common
stock to non employee, non affiliate board members as compensation for
participation in board and committee meetings.

STOCK INCENTIVE PLANS

The Company has adopted certain employee incentive programs for the purpose
of (i) attracting and retaining employees, directors and consultants (ii)
providing incentives to those deemed important to the success of the Company and
(iii) associating the interests of these individuals with the interest of the
Company and their shareholders through opportunities for increased stock
ownership.

DRESSER, INC. 2001 STOCK INCENTIVE PLAN

The Dresser incentive plan provides for the award of a variety of equity
based compensation awards, including non-qualified stock options, incentive
stock options, restricted stock awards, phantom stock, stock appreciation rights
and other rights with respect to the Company's common stock. Under the plan, the
Company can issue 710,101 shares of common stock, which can be issued in either
class A or class B common stock. However, the aggregate number of shares of
common stock that may be issued pursuant to the exercise of incentive stock
options under this incentive plan shall not exceed 672,601 shares.

During 2001, the Company issued to certain employees, 214,000 options with
an exercise price of $40.00 per share. These options will vest 20% on the first
anniversary of the date of grant and 1/48 of the remaining 80% per month for
each month thereafter until the option is fully vested. The Company has also
issued 321,000 options with an exercise price of $40.00; shares will vest if the
employee is still employed after nine and one-half years, but vesting will
accelerate if the Company achieves predetermined financial performance
milestones. In addition, the Company has issued 107,000 options at an exercise
price of $40.00, which will vest if the Company's majority shareholder realizes
a 35% annualized internal rate of return on its initial investment and is able
to liquidate its initial investment at a price equal to at least 450% of the
price paid for its initial investment. As of December 31, 2001, 618,000 options
remained outstanding; no options had been exercised.

F-21

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

Certain members of management are party to an Investor Rights Agreement,
whereby if the employee leaves for good reason, is terminated by the Company
without cause, dies or suffers a permanent disability, then such employee will,
pursuant to a right granted in the employee's employment agreement be permitted
to cause the Company to repurchase shares at fair market value that they have
held for at least six months. If an employee retires, is terminated for cause,
or resigns (without good reason), or leaves for the reasons enumerated in the
prior sentence but fails to "put" their shares to the Company for repurchase,
then the Company will have the right to repurchase their shares at fair value.
Due to this redemption feature, options owned by management will be recorded in
temporary equity upon vesting and exercise. As of December 31, 2001, no options
had vested.

SFAS NO. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION

SFAS No. 123 defines a fair value method of accounting for employee stock
compensation and encourages, but does not require all entities to adopt that
method of accounting. Entities electing not to adopt the fair value method of
accounting must make pro forma disclosures of net income as if the fair value
based method of accounting as defined in the statement had been applied. The
Company accounts for the stock option plans in accordance with APB Opinion No.
25, under which no compensation cost has been recognized for stock option
awards. The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 2001:
risk-free rate 5.09%, a dividend yield of 0.0%, a volatility factor of the
expected market price of 0.01, and an expected life of the options of 10 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

During 2001, the Company issued 642,000 options to certain employees with a
weighted average exercise price of $40.00. In addition, 24,000 options with a
weighted average exercise price of $40.00 were forfeited. As of December 31,
2001, 618,000 options remained outstanding with a weighted average exercise
price of $40.00 and a weighted average contractual remaining life of 9.3 years.

2001 MANAGEMENT EMPLOYEE EQUITY PURCHASE PLAN

The 2001 Management Employee Equity Purchase Plan provides for certain of
the Company's employees, directors and consultants, as authorized by the board
of directors, to purchase common stock of the Company. The plan provides for the
purchase of up to 87,500 shares of class A common stock and up to 762,523 shares
of class B common stock. The per share price for such shares will be $40.00
which equaled the fair market value on the date of the recapitalization
transactions. The number of shares that each employee will be eligible to
purchase will be between 625 and 25,000 shares subject to the overall limitation
on the number of shares that may be purchased under the plan. As of December 31,
2001, 87,500 shares of class A common stock and 146,875 shares of class B common
stock had been purchased under the plan. The company received proceeds of $9.4.
In connection with the resignation of one employee, the Company repurchased
9,367 shares of class A common stock and 28,133 shares of class B common stock.

DEFERRED COMPENSATION

The Company offers a non-qualified deferred compensation program to certain
key employees whereby they may defer a portion of annual compensation.
Participants will generally be able to elect to have such accounts deemed to be
invested in either units which are valued based upon the value of the Company's

F-22

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

common stock or an interest bearing account. Distributions shall generally be
made from the deferred compensation plan over time following the participant's
retirement or other termination of employment. The liability for the deferred
compensation program included in the financial statements at December 31, 2001
and 2000, was $8.8 and $10.0, respectively. Certain liabilities under the
Halliburton deferred compensation plans and supplemental retirement plans have
been transferred to the Company's plan and are general liabilities of the
Company.

15. RETIREMENT AND OTHER POSTRETIREMENT PLANS:

DEFINED CONTRIBUTION PLANS

These plans provide retirement contributions in return for services
rendered, provide an individual account for each participant and have terms that
specify how contributions to the participant's account are to be determined
rather than the amount of pension benefits the participant is to receive.
Contributions to these plans are based on pretax income and/or discretionary
amounts determined on an annual basis. The expense associated with the
contribution and administration of these plans was $5.5 and $6.4, for the years
ended December 31, 2001 and 2000, respectively.

DOMESTIC AND FOREIGN BENEFITS

The Company sponsors several qualified and non-qualified pension plans and
other postretirement benefit plans that cover a significant number of its
employees. These plans include both defined contribution plans and defined
benefit plans. The plans are funded to operate on an actuarially sound basis.
Plan assets are primarily invested in cash, short-term investments, real estate,
equity and fixed income securities of entities domiciled in the country of the
plan's operation. The plans that have been included in these financial
statements are as follows:

F-23

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

In the table above, the valuation date used for the obligation, fair value
of plan assets and funded status for 2001 is for the period ended April 10, 2001
when Dresser, Inc. was formed. In 2000, the valuation date was December 31,
2000. For the nine months ended December 31, 2001 the funded status of both the
domestic and foreign pension benefit plans was as follows:

Weighted average assumptions at valuation date:

The aggregate benefits obligation for those plans where the accumulated
benefits obligation exceeded the fair value of plan assets represents the net
liability. The net liability recognized was $31.8 and $32.8 for the years ended
December 31, 2001 and 2000, respectively.

F-24

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

Components of the net periodic benefit cost for the plans are as follows:

There were no prior service costs, gains or losses reported in 2001 for the
domestic plans. The prior service costs reported in 2000 were amortized on the
straight-line basis over the average remaining service period of active
participants. In 2000, gains and losses in excess of 10% of the greater of the
benefit obligation and the market-related value of assets were amortized over
the average remaining service period of active participants.

NON-QUALIFIED PENSION PLANS

The Company provides certain key employees with additional pension benefits
through several unfunded non-qualified pension plans. These plans, the Dresser,
Inc. Supplemental Executive Retirement Plan (SERP), the Dresser, Inc. Excess
Compensation Limit Plan and the ERISA Excess Benefits Plan for Dresser, Inc.,
work in tandem with the Company's qualified retirement plans and are designed to
restore the benefits that are otherwise limited due to Internal Revenue Service
limitations. The estimated liability for the non-qualified pension plans at
December 31, 2001 and 2000, was $4.7 and $4.3, respectively.

OTHER POSTRETIREMENT PLANS

The Company offers postretirement medical plans to specific eligible
employees. Plans are contributory with the Company absorbing remaining costs.
The Company may elect to adjust the amount of its contributions for these plans.
As a result, for these plans, the expected future health care cost inflation
rate affects the accumulated postretirement benefit obligation amount.

The accumulated projected benefit obligation for the postretirement medical
and life plans at December 31, 2001 and 2000, was $163.2 and $155.4,
respectively. In 2001 service costs, interest costs and benefits paid represent
expenses for the nine month period when the Company was formed. An additional
$1.8 was incurred and paid to Halliburton Company for the first three months of
2001 that is excluded from the table below.

F-25

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one-percent change in assumed
healthcare cost trend rates would have the following effect:

F-26

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

16. SEGMENT INFORMATION:

The Company operates under three reportable segments: flow control,
measurement systems and power systems. The business segments are organized
around the products and services provided to the customers each serves.

Flow Control. The flow control segments designs, manufactures and markets
valves and actuators. These products are used to start, stop and monitor the
flow of liquids and gases and to protect process equipment from excessive
pressure. The flow control segment markets its products under well recognized
brand names, including Masoneilan(R), Grove(R), Consolidated(R) and Ledeen(TM).

Measurement Systems. The measurement systems segment consists of two
primary product groups. The first, retail fueling, is a leading supplier of fuel
dispensers, pumps, peripheral, point-of-sale and site monitoring systems and
software for the retail fueling industry. The second, measurement, is a leading
supplier of natural gas meters, regulators, digital and analog pressure and
temperature gauges and transducers and specialty couplings and connectors. These
systems and other products are used to measure and monitor liquids and gases.
Our measurement systems group markets its products and services under well
recognized brand names including Wayne(R), Ashcroft(R), Mooney(TM), Roots(TM)
and Dresser(R).

Power Systems. The power systems segment designs, manufactures and markets
natural gas fueled engines used primarily in natural gas compression and power
generation applications and rotary blowers and vacuum pumps. Our power systems
group markets its products under well-recognized brand names, including
Waukesha(R) and Roots(TM).

The following tables present information on the segments:

F-27

DRESSER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)

The Company has two reportable geographic segments: Americas and Europe.
The following tables present information by geographic area for the years ended
December 31, 2000, 1999 and 1998:

17. QUARTERLY INFORMATION (UNAUDITED):

18. SUPPLEMENTAL GUARANTOR INFORMATION:

In connection with the Company's offer to sell $300 million of Senior
Subordinated Notes due 2011 (the "Notes"), certain of the Company's subsidiaries
("Subsidiary Guarantors") guaranteed, jointly and severally, the Company's
obligation to pay principal and interest on the Notes on a full and
unconditional basis. The guarantors of the Notes will include only the Company's
wholly-owned domestic subsidiaries. The following supplemental consolidating
condensed financial information presents the balance sheets as of December 31,
2001 and 2000 and the statements of operations and cash flows for the years
ended December 31, 2001, 2000 and 1999. In the consolidating condensed financial
statements, the Subsidiary Guarantors account for their investment in the
wholly-owned subsidiaries using the equity method.

F-28

DRESSER, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(IN MILLIONS)

F-29

DRESSER, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
(IN MILLIONS)

F-30

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS)

F-31

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS)

F-32

DRESSER, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)

F-33

DRESSER , INC.

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS)

F-34

DRESSER , INC.

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS)

F-35

DRESSER , INC.

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)

F-36

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of Dresser, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
February 28, 2002. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule listed in the
index to financial statement schedules is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Dallas, Texas,
February 28, 2002

F-37

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)

II-1

EXHIBIT INDEX