DRESSER INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

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

For the transition period from _____ to _____

Commission File Number 333-60778

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

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

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

(972) 361-9800
(Registrant's telephone number, including area code)

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

The number of shares outstanding of common stock (par value $0.01 per share) as
of August 8, 2002 was 1,000.

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DRESSER, INC.

INDEX

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DRESSER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

3

DRESSER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE INFORMATION)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

4

DRESSER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

5

DRESSER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Dresser, Inc. was originally incorporated in 1998, under the name of
Dresser Equipment Group, Inc. under the laws of the state of Delaware. The
certificate of incorporation was amended and restated on April 9, 2001 and again
on July 3, 2002. As used in this report, the terms "Dresser," "the Company,",
"we" or "us" refer to Dresser, Inc. and its 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 three business segments known as flow control, measurement
systems and compression and power systems for customers primarily in the energy
industry. Halliburton originally acquired the businesses as part of its
acquisition of Dresser Industries, Inc. ("Dresser Industries") 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 million to redeem common
equity and purchase the stock of foreign subsidiaries. The recapitalization
transactions and related expenses were financed through the issuance of $300
million of senior subordinated debt (the "2001 notes"), $720 million of
borrowings under the credit facility, and approximately $400 million of common
equity contributed by DEG Acquisitions LLC, an entity owned by First Reserve
Corporation and Odyssey Investment Partners Fund, LP.

On July 3, 2002, Dresser modified its corporate structure by forming a
Delaware holding company and two Bermuda holding companies between the existing
shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc.,
a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the
100% holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation,
is the 100% holder of Dresser Holdings, Ltd. The former direct shareholders of
Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to
their prior direct ownership interests in Dresser.

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Generally Accepted Accounting Principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30, 2002,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-K, for the year ended December 31, 2001.

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' deficit.

The consolidated financial information of the Company for periods prior to
March 31, 2001 has been prepared by management on a carve-out basis and reflects
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

6

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

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 prior to March 31, 2001.

NOTE 2. BUSINESS SEGMENT INFORMATION

We operate under three reportable segments: flow control, measurement
systems and compression and power systems. The business segments are organized
around the products and services provided to the customers each serves. During
the second quarter of 2002, we made changes to our internal corporate structure
with the reorganization of certain of our operating units. We believe these
changes will better serve our customers. Although we still report under three
reportable segments, the operating units that comprise each reportable segment
have changed. Flow control consists of all of the previous valve and actuator
product lines with the addition of the instruments, meters, regulators, and
piping specialties product lines. Measurement systems will now only have the
results of the retail fueling product line. Compression and power systems
components have not changed and the segment will continue to report the results
of the natural gas and blowers product lines.

Flow Control. The flow control segment 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. In addition, it is a leading supplier of natural gas meters,
regulators, digital and analog pressure and temperature gauges, transducers, and
piping specialties such as couplings and conductors. These systems and other
products are used to monitor liquids and gases.

Measurement Systems. The measurement systems segment is a leading supplier
of fuel dispensers, pumps, peripherals and point-of-sale systems and software
for the retail fueling industry.

Compression and Power Systems. The compression and 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.

The table below presents revenues and operating income by segment. The
prior period information has been restated to conform to the current year
presentation.

7

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

NOTE 3. RECEIVABLES

Accounts receivable are stated at their estimated net realizable value.
Included in receivables are notes receivable of $7.6 million as of June 30, 2002
and December 31, 2001, respectively. Allowances for doubtful accounts of $6.1
million and $5.4 million as of June 30, 2002 and December 31, 2001,
respectively, are netted in the receivable balance.

NOTE 4. INVENTORIES

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

Inventories on a LIFO method represented $70.1 million and $91.0 million of
our inventories as of June 30, 2002 and December 31, 2001, respectively. The
excess of FIFO over LIFO costs as of June 30, 2002 and December 31, 2001, were
$69.8 million and $72.2 million, respectively. Inventories are summarized as
follows:

NOTE 5. ACQUISITIONS

On April 5, 2002, we acquired the net assets of Modern Supply Company,
Inc., Ponca Fabricators, Inc. and Quality Fabricators, Inc. (the "Modern
Acquisition"). The results of the operations for the Modern Acquisition have
been included in the condensed consolidated financial statements since that
date. The businesses of the Modern Acquisition were principally engaged in the
business of distributing, repairing and servicing our small diameter ball valve,
gate valve, check valve and actuation products in the United States market. With
the Modern Acquisition, we established a more direct control of the distribution
and marketing channel for small valves and spare parts. It is consistent with
our strategy of expanding and developing the service and aftermarket business of
our flow control segment. The purchase price was approximately $28.0 million. We
paid cash of $21.4 million, including $0.5 million of closing costs, and assumed
$7.1 million in debt.

Additionally, we issued 250,000 shares of class B common stock to DEG
Acquisitions, LLC for $10.0 million. The proceeds were used to finance the
purchase of the Modern Acquisition.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.

8

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

The goodwill was assigned to our flow control segment. Of the goodwill
recorded, the total amount is expected to be deductible for tax purposes.

NOTE 6. DEBT

In March 2002, we issued an additional $250.0 million of 9 3/8% senior
subordinated notes due 2011 under the indenture that governs the 2001 notes. The
notes were issued at 102.5% of their principal amounts plus accrued interest
from October 15, 2001. We recorded a $6.3 million premium, which is amortized
over the term of the notes, and recorded as a reduction to interest expense. The
net proceeds were used to repay existing indebtedness under the Tranche A term
loans of the credit facility. As a result of the repayment of debt under the
Tranche A term loans, we recorded a loss of $12.9 million during the first
quarter of 2002, which represented the write-off of an allocable portion of debt
issuance costs associated with the Tranche A term loans.

In March 2002, we also obtained an amendment to the credit facility. The
amendment revised certain financial covenants to provide us with greater
financial flexibility. The amendment also increased from $95 million to $195
million, the amount by which the Tranche B term loan of the credit facility can
be increased.

Fees paid in connection with the issuance of the notes and the amendment
were $5.5 million and $1.0 million, respectively, at the time of closing. The
deferred financing fees are amortized to interest expense on a straight-line
basis (which approximates the effective interest method) over the terms of the
respective debt.

In June 2002, we obtained a second amendment to the credit facility, which
allowed for the modification of our corporate structure. See Note 11.

In June 2002, we also made a voluntary prepayment of $30.0 million on our
credit facility, which extinguished our Tranche A term loans. As a result of the
early extinguishment of debt we recorded a loss of $0.3 million, which
represented the write-off of the remaining unamortized debt issuance costs
associated with the Tranche A term loans. These costs have been reflected as
interest expense in our condensed consolidated statements of operations.

In connection with the acquisition of Modern Supply, we assumed $7.1
million of debt in the form of two notes. The first note has a principal balance
of $4.5 million, bears interest at 9.75% and matures August 31, 2002. The

9

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

second note has a principal balance of $2.6 million, bears interest at the
prime rate plus 2.0% and matures January 2008. The notes are collateralized by
the accounts receivable and inventory of Modern Supply Company, Inc.

NOTE 7. DERIVATIVE INSTRUMENTS

In March 2002, the principal balance of our Euro Tranche A term loan was
significantly reduced with the use of proceeds from the note offering.
Subsequently, the loan was extinguished in June 2002. As a result of the
principal reduction in March 2002, an interest rate swap, which was designated
as a hedge on the Euro Tranche A, was no longer eligible to receive accounting
treatment as a hedge. As a result, changes in the fair market value of the
interest rate swap were recorded through earnings rather than accumulated other
comprehensive income. The unrealized loss was reclassified from accumulated
other comprehensive income and we recorded a charge to earnings of $0.6 million
during the first quarter of 2002, which is reflected in interest expense in our
condensed consolidated statements of operations. This swap was terminated in
April 2002.

In April 2002, we entered into a fair value interest rate swap, which was
not eligible to receive accounting treatment as a hedge. The interest rate swap
has a notional amount of $100.0 million and matures in October 2003. We receive
a fixed rate of 9.375% and pay a variable rate of LIBOR plus 6.20% (8.06% at
June 30, 2002). At June 30, 2002, the interest rate swap had a fair market value
of $0.9 million. This amount has been reflected as a reduction to interest
expense in our condensed consolidated statements of operations.

NOTE 8. COMPREHENSIVE INCOME

The following table sets forth the components of comprehensive income, net
of income tax expense:

NOTE 9. COMMITMENTS 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

10

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

Company notifies Halliburton prior to the third anniversary of the closing date.
The maximum aggregate amount of losses indemnifiable by Halliburton pursuant to
the recapitalization agreement is $950.0 million. Based on these indemnity
rights, only liabilities related to exposures not specifically covered above
have been included in the consolidated financial statements.

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 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 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 the units of Dresser Industries
retained by Halliburton, or as a result of the past use of asbestos in products
manufactured by the businesses currently owned by the Company or any predecessor
entities of those 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 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 that may result in Halliburton denying indemnification
claims for some losses.

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.

11

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangibles".

SFAS No. 141 supercedes Accounting Principles Board Opinion ("APB") No. 16,
"Business Combinations," and eliminates the pooling of interest method of
accounting for business combinations and modifies the application of the
purchase accounting method. SFAS No. 141 requires business combinations
initiated after June 30, 2001, to be accounted for using the purchase accounting
method. SFAS No. 141 also further clarifies the criteria for recognition of
intangible assets separately from goodwill. Our adoption of this standard did
not have any effect on our condensed consolidated financial statements.

SFAS No. 142 supercedes APB No. 17, "Intangible Assets," and eliminates the
requirement to amortize goodwill and intangible assets with indefinite useful
lives, addresses the amortization of intangible assets with defined lives and
requires impairment testing of intangible assets. Accordingly, as of January 1,
2002, we no longer amortize goodwill. In addition, we performed the transitional
impairment test required as of January 1, 2002 and determined there was no
impairment of our goodwill. If goodwill amortization was excluded for the three
and six months ended June 30, 2001, our net income would have increased by
approximately $2.1 million and $4.2 million, respectively. Adjusted net income
for the three and six months ended June 30, 2001, would have been $20.8 million
and $42.4 million, respectively.

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 still evaluating the impact this statement may have on our
results of operations and financial position.

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 were effective for fiscal
years beginning after December 15, 2001. We adopted this statement on January 1,
2002. There was no impact to our operating results or financial position as a
result of adopting this standard.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendments of FASB No. 13 and Technical Corrections." SFAS No.
145 rescinds SFAS No. 4 "Reporting Gains and Losses from Extinguishment of
Debt," which required all gains and losses from the extinguishment of debt to be
classified as an extraordinary item. SFAS No. 64, "Extinguishment of Debts Made
to Satisfy Sinking Fund Requirements," amended SFAS No. 4 and is no longer
necessary as SFAS No. 4 has been rescinded. SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers" established accounting requirements for the
effects of the transition to the provisions of the Motor Carrier Act of 1980. As
the transition is complete, SFAS No. 44 is no longer necessary. This statement
also amends SFAS No. 13, "Accounting for Leases" and requires that certain lease
modifications that have the economic effects similar to the sale-leaseback
transaction be accounted for in the same manner as a sale-leaseback transaction.
This statement also makes technical corrections to existing pronouncements. The
statement is effective for fiscal years beginning after May 15, 2002. We have
elected early application of this statement. During 2002, we extinguished our
Tranche A term loans, and as a result, we recorded a loss of $13.2 million,
which represented the write-off of unamortized debt issuance costs. These costs
have been

12

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

reflected as interest expense in our condensed consolidated statements of
operations, and have not been classified as an extraordinary item.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 supersedes guidance
provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We are still evaluating the impact this
statement may have on our results of operations and financial position.

NOTE 11. SUBSEQUENT EVENT

In July 2002, Dresser modified its corporate structure by forming a
Delaware holding company and two Bermuda holding companies between the existing
shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc.,
a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the
100% holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation,
is the 100% holder of Dresser Holdings, Ltd. The former direct shareholders of
Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to
their prior direct ownership interests in Dresser.

These holding companies have no assets or liabilities, other than common
stock holdings of Dresser, Inc., conduct no operations outside of Dresser, Inc.
and have no transactions to date other than those incidental to their formation.

NOTE 12. SUPPLEMENTAL GUARANTOR INFORMATION

In connection with our senior subordinated notes due 2011 (the "Notes"),
certain of our subsidiaries ("Subsidiary Guarantors") guaranteed, jointly and
severally, our obligation to pay principal and interest on the Notes on a full
and unconditional basis. The guarantors of the Notes will include only our
wholly-owned domestic subsidiaries. The following supplemental consolidating
condensed financial information presents the balance sheet as of June 30, 2002
and the statements of operations and cash flows for the six months ended June
30, 2002 and 2001, respectively. In the consolidating condensed financial
statements, the investments in wholly-owned subsidiaries are accounted for
using the equity method. Certain prior year amounts have been reclassified to
conform to the current presentation.

13

DRESSER, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2002
(IN MILLIONS)
(UNAUDITED)

14

DRESSER, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
(IN MILLIONS)

15

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(IN MILLIONS)
(UNAUDITED)

16

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
(IN MILLIONS)
(UNAUDITED)

17

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN MILLIONS)
(UNAUDITED)

18

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN MILLIONS)
(UNAUDITED)

19

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN MILLIONS)
(UNAUDITED)

20

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN MILLIONS)
(UNAUDITED)

21

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

Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under Section 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. You should not 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 "Certain Risk Factors".

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based on our condensed consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses and related disclosures
of contingent liabilities. In our Annual Report on Form 10-K for the year ended
December 31, 2001, we identified and disclosed critical accounting policies,
which included revenue recognition, inventory obsolescence, product warranties
and income taxes. We reviewed our policies and have determined that those
critical policies remain and have not changed since December 31, 2001.

OVERVIEW

We design, manufacture and market highly engineered equipment and services
sold primarily to customers in the energy industry. Our primary business
segments are flow control, measurement systems and compression and power
systems. We sell our products and services to customers, which include major oil
companies, multinational engineering and construction companies and other
industrial firms. Our total revenues by geographic region for the six months
ended June 30, 2002, consisted of North America (55.6%), Europe/Africa (22.7%),
Latin America (7.1%), Asia (9.8%) and the Middle East (4.8%). 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 six months ended June 30, 2002, we generated revenue of $800.3
million, operating income of $67.3 million and earnings before interest, taxes,
depreciation, and amortization ("EBITDA") of $88.6 million.

MARKET FORCES

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, rate of industrialization 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, gas compression 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

22

significant factor in determining our primary customers' level of cash flow. Our
customer's cash flow and their outlook for future oil and natural gas prices
affects their capital spending which drives demand for our products.

Our customers have reduced their capital spending for 2002, and these
reductions have and will continue to negatively impact our business. We have not
seen signs of increases in capital spending and do not expect significant
changes in these areas in the coming quarter. The significant downturn in the
gas compression market from levels in 2001 greatly impacted our compression and
power systems segment as we saw sharp declines in the demand for new gas
compression engines throughout the first half of 2002 as compared to 2001. We
also saw weakness in global demand for fuel dispenser business and retail point
of sales systems due to reduced capital spending on retail fuel equipment by our
major customers. We expect our principal product lines will continue to be
affected by the same economic conditions seen in the first two quarters of this
year. Accordingly, we expect the third quarter results to be significantly down
from the third quarter 2001. See "Certain Risk Factors" included elsewhere in
the document.

STAND-ALONE COMPANY

The condensed consolidated financial information prior to March 31, 2001
has been derived from the consolidated financial statements of the DEG 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. The condensed consolidated financial statements may
not, however, necessarily reflect the results of operations, financial positions
and cash flows that would have occurred if our company had been a separate,
stand-alone entity during the periods prior to March 31, 2001.

RESULTS OF OPERATIONS

The following table presents selected financial information regarding each
of our segments for the three and six months ended June 30, 2002 and 2001,
respectively. During 2002, we made changes to our internal corporate structure
with the reorganization of certain of our operating units. We believe these
changes will better serve our customers. Although we still report under three
reportable segments, the operating units that comprise each reportable segment
have changed. The prior year information has been restated to conform to the
current year presentation.

23

24

THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001

CONSOLIDATED

Revenues. Revenues increased by $46.7 million, or 12.5%, to $420.1 million
in 2002 from $373.4 million in 2001. The increase in revenues was primarily
attributable to increases in our flow control segment, which offset decreases in
our compression and power system segment. Our flow control segment benefited
from acquisitions in 2001 and 2002 as well as increased sales volume in our
valve product lines. Our compression and power systems segment was negatively
impacted by declines in demand for natural gas compression, as compared to the
second quarter of 2001.

Cost of revenues. Cost of revenues as a percentage of revenues increased to
72.1% in 2002 from 69.0% in 2001. An unfavorable product mix affected our flow
control segment. In addition, our compression and power system segment was
negatively impacted by reduced manufacturing volume and resulting inefficiencies
and lower manufacturing absorption as compared to the second quarter of 2001.

Gross Profit. Gross profit increased by $1.5 million, or 1.3% to $117.4
million in 2002 from $115.9 million in 2001. As a percentage of revenues, gross
profit decreased to 27.9% in 2002 from 31.0% in 2001, primarily as a result of
the factors discussed above.

Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses increased by $9.7 million to
$82.8 million in 2002 from $73.1 million in 2001. Selling, engineering,
administrative and general expenses increased as a percentage of revenues, to
19.7% of revenues in 2002 from 19.6% of revenues in 2001. Increases in selling,
engineering, administrative and general expenses primarily related to higher
volume and acquisitions were in part offset by the suspension of goodwill
amortization in 2002. For the three months ended June 30, 2001, selling,
engineering, administrative and general expenses included $2.1 million of
amortization of goodwill.

Operating Income. Operating income decreased by $8.2 million, or 19.2%, to
$34.6 million in 2002 from $42.8 million in 2001. Operating income was impacted
primarily by declines in our compression and power systems segment. This segment
was impacted by the depressed demand for new gas compression engines. Declines
in our compression and power system segment were somewhat offset by increases in
our flow control segment and measurement systems segment.

Bookings and Backlog. Bookings for the three months ended June 30, 2002
were $396.0 million as compared to $392.0 million during the same period in
2001. Backlog at June 30, 2002 period was $406.4 million compared to $401.9
million at June 30, 2001, a 1.1% increase. Increased bookings and backlog in our
flow control segment were offset by declines in our measurement and compression
and power systems segments.

SEGMENT ANALYSIS

Flow Control. Revenues increased by $67.2 million, or 32.1%, to $276.3
million in 2002 from $209.1 million in 2001. Increases in our flow control
segment in part were attributable to acquisitions made in 2001 and 2002.
Revenues attributable to these acquisitions were approximately $33.3 million
with the remainder of the increase attributable to increased volume in our
on/off valve and our control valve product lines, which offset declines in our
instrument product lines.

Gross profit increased by $13.1 million, or 19.0%, to $81.9 million in 2002
from $68.8 million in 2001. However, as a percentage of revenue, gross margins
decreased to 29.6% in 2002 from 32.9% in 2001. In our on/off valve product line,
we had a substantial volume of low margin third-party buyouts associated with
large international projects. In the control valve and pressure relief valve
product lines, growth in lower margin original equipment sales for new
construction business combined with relatively flat higher margin part sales
resulted in overall lower margins.

25

Selling, engineering, administrative, and general expenses increased by
$8.5 million or 19.1%, to $53.1 million in 2002 from $44.6 million in 2001.
Increases in selling, engineering, administrative and general expenses primarily
related to higher volume and acquisitions. This was partially offset by the
suspension of goodwill amortization in 2002. As a percentage of revenue, these
costs decreased to 19.2% in 2002 from 21.3% in 2001.

Operating income increased by $4.6 million, or 19.0%, to $28.8 million in
2002 from $24.2 million in 2001. Increases in operating income were due in part
to the acquisitions, which represented $3.4 million in the second quarter of
2002, and increased sales volume in our valve product lines offsetting declines
in our instrument product lines.

Bookings and Backlog. Bookings during the 2002 period of $252.3 million
were 17.9% above bookings during the 2001 period and 0.3% above the previous
quarter. Backlog at June 30, 2002 was $313.8 million, or 26.5% above June 30,
2001 and 7.5% below the previous quarter. Significant increases in demand in our
on/off product lines for 2002, particularly associated with large international
projects, are primarily responsible for increased bookings and backlog on a year
over year comparison. The decrease in backlog as compared to the first quarter
of 2002 can be attributed to the fulfillment of orders for a large offshore
project in Brazil, and improved throughput of a manufacturing facility in Italy.
Backlog attributable to the three acquisitions made in 2001 and 2002 was $39.1
million at June 30, 2002.

Measurement Systems. Revenues increased by $0.8 million, or 1.0%, to $78.9
million in 2002 from $78.1 million in 2001. Although revenues remained flat
during the quarter, declines in our U.S. markets due to weakness in the fuel
dispenser market were offset by stronger sales in certain international
locations.

Gross profit increased by $0.9 million, or 4.7%, to $20.0 million in 2002
from $19.1 million in 2001. As a percentage of revenue, gross margins increased
to 25.3% in 2002 from 24.5% in 2001. This increase is primarily attributable to
manufacturing cost savings resulting from certain cost reduction initiatives
implemented in U.S. plants earlier in the year.

Selling, engineering, administrative, and general expenses decreased $0.8
million, or 5.7%, to $13.3 million in 2002 from $14.1 million in 2001. Increases
in legal expenses and other reserves in 2002 were offset by the reduction in
amortization related to goodwill. As a percentage of revenue, these costs
decreased to 16.9% in 2002 from 18.1% in 2001.

Operating income increased by $1.7 million or 34.0%, to $6.7 million in
2002 from $5.0 million in 2001, primarily a result of the factors discussed
above.

Bookings and Backlog. Bookings during the 2002 period of $69.8 million were
15.8% below bookings during the 2001 period and 9.1% above the previous quarter.
Backlog at June 30, 2002 was $42.1 million, or 26.9% below June 30, 2001 and
14.8% below the previous quarter. The weak market conditions in 2002 and the
overall decline in the U.S. dispenser market led to lower bookings and backlog
in the 2002 period as compared to the prior year. The increase in bookings in
the second quarter of 2002 as compared to the first quarter of 2002 was impacted
by seasonality, with bookings in the first quarter typically impacted by the
delay in the release of capital funds of major oil companies.

Compression and Power Systems. Revenues decreased by $22.2 million, or
25.2%, to $65.9 million in 2002 from $88.1 million in 2001. Original equipment
sales for the second quarter decreased approximately $16.0 million from the
prior year due to sharply lower gas compression engine demand. Aftermarket part
sales decreased by approximately $4.9 million primarily attributable to
diminished gas compression fleet utilization.

Gross profit decreased by $12.5 million, or 44.6%, to $15.5 million in 2002
from $28.0 million in 2001. As a percentage of revenues, gross margins decreased
to 23.5% in 2002 from 31.8% in 2001. Margins were impacted by manufacturing
efficiency and rate variances associated with declining production volume, as
well as significant price competition on certain of our products.

26

Selling, engineering, administrative, and general expenses remained
relatively flat, decreasing by $0.6, or 4.7%, to $12.2 million in 2002 from
$12.8 million in 2001. Decreases in selling, engineering, administrative, and
general expenses in our natural gas engines business were offset by increases in
our blowers business. As a percentage of revenue, these costs increased to 18.5%
in 2002 from 14.5% in 2001. This percentage was impacted by the sharp decrease
in revenues, as a result of the factors discussed above, as costs stayed
relatively stable between the periods.

Operating income decreased by $11.9 million, or 78.3%, to $3.3 million in
2002 from $15.2 million in 2001, primarily as a result of the factors discussed
above.

Bookings and Backlog. Bookings during the 2002 period of $73.9 million were
22.3% below bookings during the 2001 period and 6.8% above the previous quarter.
Backlog at June 30, 2002 was $55.1 million, or 45.3% below June 30, 2001 and
15.0% above the previous quarter. The decline in the gas compression demand led
to a significant reduction in bookings and backlog on a year over year
comparison. In the second quarter of 2002, bookings and backlog benefited from
increased orders in the distributed power generation market and aftermarket
parts. These gains were somewhat offset by decreases in bookings and backlog in
the gas compression market.

SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001

CONSOLIDATED

Revenues. Revenues increased by $65.4 million, or 8.9%, to $800.3 million
in 2002 from $734.9 million in 2001. The increase in revenues was attributable
to increases in our flow control segment, which offset decreases in both our
measurement and compression and power system segments. Our flow control segment
benefited from acquisitions in 2001 and 2002 as well as increased sales volume
in our valve product lines. Our compression and power systems segment was
negatively impacted by declines in demand for natural gas compression, as
compared to 2001. Our measurement systems segment was negatively impacted by
reduced capital spending on retail fuel equipment.

Cost of revenues. Cost of revenues as a percentage of revenues increased to
72.0% in 2002 from 69.1% in 2001. Higher manufacturing costs and an unfavorable
product mix affected our flow control segment. In addition, our compression and
power system segment was negatively impacted by reduced manufacturing volume and
resulting inefficiencies and lower manufacturing absorption as compared to 2001.

Gross Profit. Gross profit decreased by $3.1 million, or 1.4% to $224.2
million in 2002 from $227.3 million in 2001. As a percentage of revenues, gross
profit also decreased to 28.0% in 2002 from 30.9% in 2001, primarily as a result
of the factors discussed above.

Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses increased by $9.8 million to
$156.9 million in 2002 from $147.1 million in 2001. Selling, engineering,
administrative and general expenses decreased as a percentage of revenues, to
19.6% of revenues in 2002 from 20.0% of revenues in 2001. Increases in selling,
engineering, administrative and general expenses primarily related to higher
volume and acquisitions were generally offset by the suspension of goodwill
amortization in 2002. For the six months ended June 30, 2001, selling,
engineering, administrative and general expenses included $4.2 million of
amortization of goodwill. In addition, selling, engineering, administrative and
general expenses in 2001 included $4.0 million of expenses related to the
closure of a manufacturing facility.

Operating Income. Operating income decreased by $12.9 million or 16.1%, to
$67.3 million in 2002 from $80.2 million in 2001. The decline was primarily a
result of declines in our compression and power systems segment. This segment
was impacted by the depressed demand for new gas compression engines. Declines
in our compression and power system segment were somewhat offset by increases in
our flow control segment and measurement systems segment.

Bookings and Backlog. Bookings during the 2002 period of $780.7 million
were 0.4% below bookings during the same period in 2001. Increased bookings in
our flow control segment were offset by declines in our

27

measurement and compression and power systems segments. Backlog at June 30, 2002
period was $406.4 million compared to $401.9 million at June 30, 2001, a 1.1%
increase. Increased bookings and backlog in our flow control segment were offset
by declines in our measurement and compression and power systems segments.

SEGMENT ANALYSIS

Flow Control. Revenues increased by $109.9 million, or 26.9%, to $519.1
million in 2002 from $409.2 million in 2001. Increases in our flow control
segment in part were attributable to the acquisitions made. Revenues
attributable to these acquisitions were approximately $52.8 million, with the
remainder of the increase attributable to increased volume in our on/off valve
and our control valve product lines.

Gross profit increased by $18.6 million or 13.6%, to $155.1 million in 2002
from $136.5 million in 2001. However, as a percentage of revenue, gross margins
decreased to 29.9% in 2002 from 33.4% in 2001. The earnings associated with
favorable volume for certain of our products were negatively impacted by the
margin deterioration with higher manufacturing costs and unfavorable product
mix. In our on/off valve product line, we had a substantial volume of low margin
third-party buyouts associated with large international projects. Higher
manufacturing costs were impacted by throughput issues in a plant in Italy. In
the control valve and pressure relief valve product lines, growth in lower
margin original equipment sales for new construction business combined with
relatively flat higher margin part sales resulted in overall lower margins.

Selling, engineering, administrative, and general expenses increased by
$14.1 million or 16.6%, to $98.9 million in 2002 from $84.8 million in 2001.
Increases in selling, engineering, administrative and general expenses primarily
related to higher volume and acquisitions. This increase was offset somewhat by
the suspension of the amortization of goodwill. As a percentage of revenue,
these costs decreased to 19.1% in 2002 from 20.7% in 2001.

Operating income increased by $6.0 million, or 11.6%, to $56.2 million in
2002 from $51.7 million in 2001. Increases in operating income were due in part
to the acquisitions, as discussed above, which contributed approximately $4.8
million to the increase, with the remaining increase resulting from increased
volume.

Bookings and Backlog. Bookings during the 2002 period of $503.8 million
were 13.9% above bookings during the 2001 period. Backlog at June 30, 2002 was
$313.8 million, or 26.5% above backlog at June 30, 2001. Significant increases
in demand in our on/off product lines for 2002 particularly associated with
large international projects are primarily responsible for increased bookings
and backlog on a year over year comparison. Backlog attributable to the three
acquisitions made in 2001 and 2002 was $39.1 million at June 30, 2002.
Measurement Systems. Revenues decreased by $9.1 million, or 6.0%, to $143.2
million in 2002 from $152.3 million in 2001. The decrease in revenues was in
large part due to reduced capital spending on retail fuel equipment.

Gross profit decreased by $1.9 million, or 5.2%, to $34.8 million in 2002
from $36.7 million in 2001. This decrease primarily resulted from lower sales
volume. As a percentage of revenue, gross margins were 24.3% in 2002 as compared
to 24.1% in 2001.

Selling, engineering, administrative, and general expenses decreased by
$5.8 million or 18.5% to $25.6 million from $31.4 million in 2001. In the first
quarter of 2001, we recorded $4.0 million in expenses related to the closure and
relocation of a retail fuel dispenser facility. In addition, we realized savings
from cost reduction measures implemented earlier in the year. As a percentage of
revenue, these costs decreased to 17.9% in 2002 from 20.6% in 2001.

Operating income increased by $3.9 million, or 73.6%, to $9.2 million in
2002 from $5.3 million in 2001. This was primarily impacted by the $4.0 million
in expenses incurred in 2001 related to a plant closure discussed above. In
addition, the segment was impacted by lower sales volume, which was mitigated in
part by certain cost reduction measures implemented earlier in the year.

28

Bookings and Backlog. Bookings during the 2002 period of $133.8 million
were 15.8% below bookings during the 2001 period. Backlog at June 30, 2002 was
$42.1 million, or 26.9% below backlog at June 30, 2001. The weak market
conditions in 2002 and the overall decline in the U.S. dispenser market led to
lower bookings and backlog in the 2002 period as compared to the prior year.

Compression and Power Systems. Revenues decreased by $36.9 million, or
20.9%, to $139.9 million in 2002 from $176.8 million in 2001. Sales for our
products in our natural gas engine business for the second quarter decreased
approximately $24.1 million from the prior year due to sharply lower gas
compression engine demand and aftermarket part sales decreased by approximately
$9.3 million.

Gross profit decreased by $19.6 million or 36.3%, to $34.4 million in 2002
from $54.0 million in 2001. As a percentage of revenues, the gross margin
percentages decreased to 24.6% in 2002 from 30.5% in 2001. This decrease was
primarily a result of reduced manufacturing efficiency and rate variances
associated with declining production volume.

Selling, engineering, administrative, and general expenses remained
relatively flat decreasing by $0.1 million or 0.4% to $25.0 million in 2002 from
$25.1 million in 2001. Decreases in selling, engineering, administrative, and
general expenses in our natural gas engines business were offset by increases in
our blowers business. As a percentage of revenue, these costs increased to 17.9%
in 2002 from 14.2% in 2001. This percentage was impacted by the sharp decrease
in revenues, as a result of the factors discussed above, as costs stayed
relatively stable between the periods.

Operating income decreased by $19.5 million, or 67.5%, to $9.4 million in
2002 from $28.9 million in 2001. Our operating income was primarily impacted by
declines in orders for engines used in gas compression, as discussed above.

Bookings and Backlog. Bookings during the 2002 period of $143.1 million
were 21.7% below bookings during the 2001 period. Backlog at June 30, 2002 was
$55.1 million, or 45.3% below backlog at June 30, 2001. The decline in the gas
compression demand led to a significant reduction in booking and backlog on a
year over year comparison.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash and equivalents were $84.1 million and $101.3 million as of June 30,
2002 and 2001 respectively. A significant portion of our cash and equivalents
balances is utilized in our international operations and may not be immediately
available to service debt in the United States.

Net cash flow provided by operating activities was $42.3 million and $98.0
million for the six months ended June 30, 2002 and 2001, respectively.

Net cash flow used in investing activities was $29.9 million for the six
months ended June 30, 2002. The cash flow used in investing activities resulted
from the Modern Acquisition and capital expenditures. Net cash flow used in
investing activities was $1,304.6 million for the six months ended June 30, 2001
resulting from cash used to complete the recapitalization transaction of
$1,291.8 million and capital expenditures of $12.8 million.

Net cash flow used in financing activities was $23.3 million for the six
months ended June 30, 2002, resulting primarily from the repayment of debt with
the use of the proceeds from the issuance of additional senior subordinated
notes and the payment of deferred financing fees. In addition, we issued an
additional 250,000 shares of class B common stock for proceeds of $10.0 million.
Net cash flow provided by financing activities was $1,289.4

29

million for the six months ended June 30, 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.

In March 2002, we issued an additional $250 million of 9-3/8% senior
subordinated notes due 2011 under the indenture that governs the 2001 notes. The
notes were issued at 102.5% of their principal amounts plus accrued interest
from October 15, 2001. We recorded a $6.3 million premium that is amortized over
the term of the notes, and recorded as a reduction to interest expense. The net
proceeds were used to repay existing indebtedness under the Tranche A term loans
of the credit facility. As a result of the repayment of debt under the Tranche A
term loans, we recorded a loss of $12.9 million, which represented the write-off
of an allocable portion of debt issuance costs associated with the Tranche A
term loans. Fees paid at closing in connection with the issuance were
approximately $5.5 million

In March 2002, we also obtained an amendment to our credit facility. The
amendment revised certain financial covenants to provide us with greater
financial flexibility. The amendment also increased from $95 million to $195
million, the amount by which the Tranche B term loan of the credit facility can
be increased. Fees paid in connection with the amendment were approximately $1.0
million. As discussed under "Market Forces," we have experienced weakness in
demand for some of our products as a result of general economic conditions. If
economic conditions do not improve in the second half of 2002, we may need to
seek approval from the lenders under our credit facility to modify the financial
ratios applicable to future periods.

In June 2002, we made a voluntary prepayment on our credit facility of $30
million, which extinguished our Tranche A term loans. As a result of the early
extinguishment of debt we recorded a loss of $0.3 million, which represented the
write-off of the remaining unamortized debt issuance costs associated with the
Tranche A term loans. These costs have been reflected as interest expense in our
condensed consolidated statements of operations.

As of June 30, 2002, we had $556.1 of senior subordinated notes, including
a $6.1 million premium, $427.1 million of debt consisting of the Tranche B term
loan under the credit facility, and $12.0 million of other long-term debt. In
addition, we have a $100.0 million revolving credit facility, subject to certain
conditions, of which $59.3 million was available and $40.7 million was reserved
for letters of credit as of June 30, 2002.

The following tables set forth the contractual cash commitments for debt
and lease obligations as well as commitments for the next several years:

(1) Excludes a $6.1 premium which is being amortized over the term of the notes

Our ability to make payments on and to refinance our indebtedness,
including the notes, 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

30

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, working capital reductions and operating improvements will be realized
on schedule or that future borrowings will be available to us under the
revolving credit portion of our credit facility in an amount sufficient to
enable us to pay our indebtedness, including the notes, 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,
including the notes on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness, including the credit facility and the
notes, on commercially reasonable terms or at all.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangibles".

SFAS No. 141 supercedes Accounting Principles Board Opinion ("APB") No. 16,
"Business Combinations," and eliminates the pooling of interest method of
accounting for business combinations and modifies the application of the
purchase accounting method. SFAS No. 141 requires business combinations
initiated after June 30, 2001, to be accounted for using the purchase accounting
method. SFAS No. 141 also further clarifies the criteria for recognition of
intangible assets separately from goodwill. Our adoption of this standard did
not have any effect on our consolidated financial statements.

SFAS No. 142 supercedes APB No. 17, "Intangible Assets," and eliminates the
requirement to amortize goodwill and intangible assets with indefinite lives,
addresses the amortization of intangible assets with defined lives and requires
impairment testing of intangible assets. Accordingly, as of January 1, 2002, we
no longer amortize goodwill. In addition, we performed the transitional
impairment test required as of January 1, 2002 and determined there was no
impairment of our goodwill. If goodwill amortization was excluded for the three
and six months ended June 30, 2001, our net income would have increased by
approximately $2.1 million and $4.2 million, respectively. Adjusted net income
for the three and six months ended June 30, 2001, would have been $20.8 million
and $42.4 million, respectively.

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 still evaluating the impact this statement may have on our
results of operations and financial position.

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 were effective for fiscal
years beginning after December 15, 2001. We adopted this statement on January 1,
2002. There was no impact to our operating results and financial position as a
result of adopting this standard.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendments of FASB No. 13 and Technical Corrections." SFAS No.
145 rescinds SFAS No. 4 "Reporting Gains and Losses from Extinguishment of
Debt," which required all gains and losses from the extinguishment of debt to be
classified as an extraordinary item. SFAS No. 64, "Extinguishment of Debts Made
to Satisfy Sinking Fund Requirements," amended SFAS No. 4 and is no longer
necessary as SFAS No. 4 has been rescinded. SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers" established accounting requirements for the
effects of the transition to the provisions of the Motor Carrier Act of 1980. As
the transition is complete, SFAS No. 44 is no longer necessary. This statement
also amends SFAS No. 13, "Accounting for Leases" and requires that certain lease
modifications that have the economic effects similar to the sale-leaseback
transaction be accounted for in the same

31

manner as a sale-leaseback transaction. This statement also makes technical
corrections to existing pronouncements. The statement is effective for fiscal
years beginning after May 15, 2002. We have elected early application of this
statement. During 2002, we extinguished our Tranche A term loans, and as a
result, we recorded a loss of $13.2 million, which represented the write-off of
unamortized debt issuance costs. These costs have been reflected as interest
expense in our condensed consolidated statements of operations, and have not
been classified as an extraordinary item.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 supersedes guidance
provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We are still evaluating the impact this
statement may have on our results of operations and financial position.

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 has resulted 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.
See "Management's Discussion of Financial Condition and Results of Operations -
Market Forces."

THE LOSS OF ONE 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 six months ended June 30, 2002, our largest customer represented
approximately 3.5% of total revenues, and our top ten customers collectively
represented approximately 16.5% 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.

32

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 44.4% for the six
months ended June 30, 2002. Accordingly, our future results could be harmed by a
variety of factors, including:

o changes in foreign currency exchange rates;

o exchange controls;

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

o hyperinflation;

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

o potentially negative consequences from changes in tax laws;

o difficulty in staffing and managing widespread operations;

o differing labor regulations;

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

o different regimes controlling the protection of our intellectual property;

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

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

o 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

33

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

34

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 Note 9 to
Condensed Consolidated Financial Statements as of June 30, 2002 (unaudited).

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

As of the sixth months ended June 30, 2002, we had approximately 8,300
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, one will expire in 2002, six will expire in 2003, one
will expire in 2004 and two 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 INTEREST MAY NOT BE
ALIGNED WITH INVESTORS' INTEREST.

A holding company controlled by First Reserve, Odyssey and their affiliates
owns approximately 92.5% the outstanding common shares of our parent company
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

35

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-Q 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 the six months ended June 30,
2002, we had $995.2 million of outstanding long-term indebtedness, $41.6 million
of short-term notes and $3.5 million of capital lease obligations and a
stockholders' deficit of $16.9 million. This level of indebtedness could have
important consequences, including the following:

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

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

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

36

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

o 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

o 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.

DESPITE OUR SUBSTANTIAL INDEBTEDNESS, WE MAY STILL INCUR SIGNIFICANTLY MORE
DEBT. THIS COULD INTENSIFY THE RISKS DESCRIBED ABOVE.

The terms of the indenture governing the notes do not prohibit us from
incurring significant additional indebtedness in the future. As of the six
months ended June 30, 2002, we had $59.3 million available for additional
borrowing under the revolving credit facility, subject to certain conditions.
All borrowings under the credit facility will be senior to the notes.

YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES WILL BE JUNIOR TO THE BORROWINGS
UNDER THE CREDIT FACILITY AND POSSIBLY ALL FUTURE BORROWINGS.

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

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

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

As of June 30, 2002, the notes and the subsidiary guarantees would have
been subordinated to $439.1 million of long-term indebtedness, $41.6 million of
short-term notes and $3.5 million of capital lease obligations and approximately
$59.3 million would have been available for borrowing as additional senior
indebtedness under the credit facility, subject to certain conditions. We will
be permitted to borrow substantial additional indebtedness, including senior
indebtedness, in the future under the terms of the indenture.

RESTRICTIVE COVENANTS IN 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:

o incur additional indebtedness or contingent obligations;

37

o pay dividends or make distributions to our stockholders;

o repurchase or redeem our stock;

o make investments;

o grant liens;

o make capital expenditures;

o enter into transactions with our stockholders and affiliates;

o sell assets; and

o 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."

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.

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 up to $950.0
million of 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.

CERTAIN SUBSIDIARIES ARE NOT INCLUDED AS SUBSIDIARY GUARANTORS.

The guarantors of the notes include our wholly owned domestic subsidiaries.
However, the condensed consolidated financial statements include both our wholly
owned and non-wholly owned domestic subsidiaries and

38

our foreign subsidiaries. The aggregate revenues for the six months ended June
30, 2002 of our subsidiaries that are not guarantors were $354.8 million. As of
the six months ended June 30, 2002, those subsidiaries held 50.1% of our total
assets. Each of the subsidiary guarantors would be released from its guarantee
of the notes if we transfer 5% or more of its voting stock to a third party so
that it is no longer "wholly owned." The indenture does not restrict our ability
to do so.

Because a substantial portion of our operations are conducted by foreign
and non-wholly owned subsidiaries, our cash flow and our ability to service
debt, including our and the subsidiary guarantors' ability to pay the interest
on and principal of the notes when due, are dependent to a significant extent on
interest payments, cash dividends and distributions and other transfers of cash
from our foreign and non-wholly owned subsidiaries. In addition, any payment of
interest, dividends, distributions, loans or advances by our foreign and
non-wholly owned subsidiaries to us and the subsidiary guarantors, as
applicable, could be subject to taxation or other restrictions on dividends or
repatriation of earnings under applicable local law, monetary transfer
restrictions and foreign currency exchange regulations in the jurisdiction in
which our foreign subsidiaries operate. Moreover, payments to us and the
subsidiary guarantors by the foreign and non-wholly owned subsidiaries will be
contingent upon these subsidiaries' earnings.

Our foreign and non-wholly owned subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the notes, or to make any funds available therefore,
whether by dividends, loans, distributions or other payments. Any right that we
or the subsidiary guarantors have to receive any assets of any of the foreign
subsidiaries upon the liquidation or reorganization of those subsidiaries, and
the consequent rights of holders of notes to realize proceeds from the sale of
any of those subsidiaries' assets, will be effectively subordinated to the
claims of that subsidiary's creditors, including trade creditors and holders of
debt of that subsidiary.

FEDERAL AND STATE LAWS PERMIT A COURT TO VOID THE SUBSIDIARY GUARANTEES UNDER
CERTAIN CIRCUMSTANCES.

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

o any of the subsidiary guarantors were insolvent, or became
insolvent, when they issued the guarantee;

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

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

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

Generally, an entity will be considered insolvent if:

o the sum of its debts is greater than the fair value of its
property;

o the present fair value of its assets is less than the amount that
it will be required to pay on its existing debts as they become
due; or

39

o it cannot pay its debts as they become due.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, we 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 manage such exposures. The use of these financial instruments
modifies the exposure of these risks with the intent to reduce the risk and
variability to the Company. We do not enter into these transactions for
speculative purposes.

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

Our financial performance is also exposed to movements in short-term
floating market interest rates. Our objective in managing this interest rate
exposure is to comply with terms of the credit agreement and 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
agreements, the table presents the notional amounts and weighted-average
exchange rates by expected (contractual) maturity dates. For debt obligations,
the table presents principal cash flows and related weighted average interest
rates by expected maturity dates. Weighted average variable rates are based on
the implied forward rate in the yield curve. 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.

40

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDING

The Company is involved in various legal proceedings, none of which is
deemed material for reporting purposes. Information relating to various
commitments and contingencies is described in Note 8 of the financial statements
in this Form 10-Q.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

On April 3, 2002, we issued 250,000 shares of class B common stock, par
value $0.001, to DEG Acquisitions LLC, for proceeds of $10 million.

41

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.) Exhibits

* Filed herewith

b.) Reports on Form 8-K

Current Report on Form 8-K of Dresser dated May 15, 2002 reporting under
Item 9. Regulation FD Disclosure announcing its financial results for the
quarter ended March 31, 2002.

Current Report on Form 8-K of Dresser dated June 10, 2002 reporting under
Item 4. Changes in Registrant's Certifying Accountant regarding the dismissal of
Arthur Andersen LLP and the appointment of PricewaterhouseCoopers LLP.

Current Report on Form 8-K of Dresser dated July 3, 2002 reporting under
Item 5. Other Events and FD Disclosure announcing a modification of its
corporate structure.

42

SIGNATURES

AS REQUIRED BY THE SECURITIES AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS
AUTHORIZED THIS REPORT TO BE SIGNED ON BEHALF OF THE REGISTRANT BY THE
UNDERSIGNED AUTHORIZED INDIVIDUALS.

DRESSER, INC.

Date: August 14, 2002 By: /s/ Patrick M. Murray
--------------------------------------
Patrick M. Murray
President, Chief Executive Officer

/s/ James A. Nattier
--------------------------------------
James A. Nattier
Executive Vice President
Chief Financial Officer

/s/ Dale B. Mikus
--------------------------------------
Dale B. Mikus
Vice President - Finance and
Chief Accounting Officer

43

INDEX TO EXHIBITS