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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the year ended December 31, 2004

OR

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

For the transition period from              to             

Commission File Number: 001-16501

GLOBAL POWER EQUIPMENT GROUP INC.

(Exact name of registrant as specified in its charter)

6120 South Yale, Suite 1480, Tulsa, Oklahoma

(Address of principal executive offices)

74136

(Zip Code)

(918) 488-0828

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.  x

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

The aggregate market value of the voting stock held by non-affiliates (affiliates being directors, officers and holders of more than 10% of the Company’s common stock), based on the closing price of the Common Stock on June 26, 2004, the last business day of the registrant’s most recently completed second quarter, as reported by the New York Stock Exchange, was approximately $240.9 million.

The number of shares of the Registrant’s common stock, $.01 par value, outstanding at February 28, 2005 was 46,775,264.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the annual meeting of stockholders for 2005 are incorporated by reference into Part III of this Annual Report on Form 10-K.

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GLOBAL POWER EQUIPMENT GROUP INC.

FORM 10-K

December 31, 2004

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PART I.

ITEM 1. BUSINESS

Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K includes certain “forward-looking statements.” Forward –looking statements represent our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. These forward-looking statements include, in particular, statements about our plans, strategies and prospects. When used in this report, the words “expect,” “may,” “intend,” “plan,” “anticipate,” “believe,” “seek” and similar expressions, as well as statements regarding our focus for the future, are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, these forward-looking statements rely on assumptions and are subject to risks and uncertainties that may cause our actual results to vary from our expected results.

Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Form 10-K are set forth in “Item 1. Business,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K. These forward-looking statements involve risks and uncertainties, including those discussed under “Risk Factors” included in Item 1. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements found in the sections mentioned above. Accordingly, undue reliance should not be placed on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise our forward-looking statements.

Overview

Global Power Equipment Group Inc. (referred to herein as “we,” “us,” “our,” “GPEG” and the “Company”) is a global designer, engineer and fabricator of a comprehensive portfolio of equipment for gas turbine power plants and power-related equipment for industrial operations, with over 30 years of power generation industry experience. We believe that we are a leader in our industry, offering one of the broadest ranges of gas turbine power plant and other power-related equipment in the world. Management believes the Company holds the number one or number two market position by sales in a majority of its product lines. Our equipment is installed in power plants and in industrial operations in more than 40 countries on six continents. We believe that we have one of the largest installed bases of equipment for power generation in the world. In addition, we provide our customers with value-added services including engineering, retrofit and upgrade, and maintenance and repair.

We sell our products to the gas turbine power generation market. Our products are critical to the efficient operation of gas turbine power plants and are highly engineered to meet customer-specific requirements. Our products include:

We market and sell our products globally under the Deltak, Braden and Consolidated Fabricators brand names through our worldwide sales network.

We fabricate our equipment through a combination of in-house manufacturing at our own factories in the United States, Mexico and China and through extensive outsourcing relationships around the world. Our network of high-quality international manufacturing partners, located in nearly 20 countries, allows us to manufacture equipment for power plant projects and power-related equipment worldwide at competitive prices. Our international manufacturing partners enable us to meet increasing demand without being restricted by internal manufacturing capacity limitations, thus minimizing our capital expenditure requirements. Our own facilities coupled with these external manufacturing subcontractors also allow us to meet our customers’ global sourcing initiatives and provide localized supply sources. This structure enables us to maintain relatively low fixed costs, which provides a significant benefit during times of decreased demand and to rapidly increase manufacturing capacity in periods of increasing demand.

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We believe our proprietary design and engineering capabilities differentiate us from our competitors. By providing high-quality products on a timely basis and offering a broad range of equipment for gas turbine power plants from a single company, we have forged longstanding relationships with the leading power industry participants, including General Electric, Mitsubishi Heavy Industries, Siemens-Westinghouse and power generating companies within the United States and abroad.

2004 Developments

During 2004, approximately 82 percent of our revenues were from sales of equipment and services for gas turbine power plants. The remaining 18 percent of our revenues were derived from the sale of industrial boilers in China and specialty boiler systems for co-generation applications and for process industries. Approximately 40 percent of our revenues in 2004 were from sales in North America.

Beginning in late 2001 and continuing through 2004, the health of the U.S. merchant electrical generation industry deteriorated significantly as falling power prices, coupled with sharply higher natural gas costs and reduced access to capital gave rise to postponements and cancellations of planned new power generation capacity inside the United States. The cancellation of new electrical generation projects inside the United States during 2002 and 2003 affected our order bookings during 2003 and into early 2004, which had a negative impact on our revenue and earnings during 2004. At the time we receive an order representing a commitment from a customer (a “booking”), that order is added to our backlog. During the second half of 2004, demand from international markets improved significantly boosting our 2004 bookings to $365.4 million, compared to approximately $167.2 million in 2003 and $305.1 million in 2002. Because of the improved demand from international customers, our firm backlog at the end of December 2004 stood at $308.9 million, compared to $178.5 million at the end of 2003. International orders in our firm backlog at the end of 2004 represented approximately 70 percent of the total compared to 56 percent at the end of 2003 and 25 percent at the end of 2002.

A number of factors contributed to the improved market activity during 2004 including continued strong economic growth across Asia, particularly in China where electricity shortages are prevalent. As a result of the widespread shortage of electricity, the Chinese Government has taken deliberate steps to increase the supply of electricity, much of which is based upon natural gas. The commissioning of a new natural gas pipeline across China during late 2004, the first of its kind in that country, is contributing to a growing demand for natural gas-fired power plants. In addition to China, demand for new power generation produced significant orders for the Company during 2004 from the Middle East, including Iraq, and from regions around the globe including Europe and North America.

In addition to restructuring charges discussed in Item 7 of this Form 10-K, rapidly rising costs for steel during 2004 impacted our gross margin and significantly reduced our profitability. We purchase a significant quantity of steel in varying grades, shapes and form required to manufacture our products. On average, steel is the single largest input cost and as a result, if we are unable to pass through higher than expected costs in the period between developing a proposal and purchasing the steel upon receiving an award, our profitability can be sharply reduced. Such was the case during 2004 when prices for all grades of steel, particularly stainless steel, rose much faster than we or others anticipated. The benchmark price for hot rolled flat plate steel, which we use in a variety of our products, as published by MEPS International, more than doubled from the end of 2003 to the end of 2004, rising from $367 per metric ton in December 2003 to $750 per metric ton in December 2004. During the course of the year, neither we nor our customers, fully contemplated such sharp increases for this vital input. As a consequence, we were not able to fully recoup the increased costs for steel and ultimately, our gross product margins declined sharply.

Since no futures market exists for steel, it is difficult to implement forward hedging programs to purchase steel that we may require on any given project on which we bid. Additionally, given the competitive nature of the bidding process, we have chosen not to speculate on steel prices by placing large quantities of steel into inventory in anticipation that we may win any particular award. During the later part of 2004, we implemented various programs to minimize the impact of rising steel costs, including working more closely with our suppliers, our manufacturing partners and our customers. We are evaluating other steps to minimize the impact of rising steel costs. As an example, we have shortened the time between proposal and order acceptance on projects that we pursue. At the beginning of 2005, we remain vulnerable to rising steel costs and believe our gross margins will remain lower than our average rate for the last several years. If and when steel prices stabilize and then decline, we believe the pressure on our gross margin will subside. However, given the volume of lower margin jobs that were booked into our backlog during late 2004, we believe it could take several quarters for our profitability to improve given the impact of higher than expected steel costs and the related competitive market conditions.

On November 23, 2004, we entered into a Purchase Agreement with Williams Group International LLC, a Georgia limited liability company, to purchase all of the outstanding limited liability company interests of three Georgia limited liability companies, which we refer to collectively as Williams Industrial Services Group, or “WISG.” Founded in 1958, Williams Industrial Services Group provides routine and specialty maintenance services to firms engaged in power generation, pulp and paper manufacturing and to

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government agencies, primarily the Department of Energy. Approximately 80% of WISG’s annual revenue is derived from services provided to firms in power generation and includes work at nuclear power plants, coal-fired power plants and other fossil fuel plants as well as hydro-based generating facilities.

The purchase price will consist of an “Equity Purchase Price” payable at closing and a “Deferred Purchase Price.” The Equity Purchase Price is $65.0 million, subject to certain customary adjustments. The Deferred Purchase Price will range from zero to $0.9 million and will be payable by us in cash in 2006. The Deferred Purchase Price is contingent on the attainment by WISG of certain gross profit targets for 2005.

On November 23, 2004, we completed a private placement of 4.25% convertible senior subordinated notes in the aggregate principal amount of $69.0 million due 2011. We intend to use the net proceeds of the offering, together with borrowings under our credit facility and cash on hand, to fund the purchase of WISG described above. The convertible notes bear interest at a rate of 4.25% per year, payable semi-annually on May 23 and November 23 of each year, beginning on May 23, 2005. The convertible notes are convertible into shares of our common stock at an initial conversion price of $10.61 per share of common stock, which is equal to approximately 122% of the volume weighted average price of our common stock on November 22, 2004. The conversion price is subject to adjustment under certain circumstances.

The WISG Purchase Agreement is subject to customary closing conditions. We expect to close the acquisition in April of 2005. We are required to escrow $7.65 million of the net proceeds from the sale of the convertible notes, for future interest payments for the benefit of the convertible noteholders if the closing does not occur by April 30, 2005. If the acquisition is not consummated by June 30, 2005, we will be required to pay certain outstanding loans under our senior credit agreement with the net proceeds from the sale of the convertible notes.

Upon the occurrence of an “Event of Default,” or a “Change of Control,” the noteholders may require us to redeem all or any portion of the convertible notes. A “Triggering Event” will be deemed to occur if we incur any indebtedness in addition to “Permitted Indebtedness,” and at the time of such incurrence, our trailing 12 months “Consolidated EBITDA” does not equal or exceed $30.0 million or, as a result of the incurrence, our “Consolidated Leverage Ratio” exceeds 4.75 to 1.0. Within 30 days of the occurrence of a Triggering Event, we will be required to offer to redeem all or any portion of the convertible notes then outstanding at a redemption price equal to the principal balance of the notes plus all accrued and unpaid interest. If at any time prior to the incurrence of a Triggering Event, the weighted average price of our common stock equals or exceeds 150% of the conversion price then in effect for a period of 15 out of 30 consecutive trading days, the restrictions on “Permitted Indebtedness” will be removed. We may redeem all or any portion of the convertible notes, at our option, at any time on or after November 23, 2007 if the weighted average price of our common stock exceeds 165% of the conversion price then in effect for a period of 20 out of 30 consecutive trading days. At any time beginning on May 23, 2005 and continuing until August 2, 2005, the noteholders may, at their option, require us to redeem up to $9.0 million of the convertible notes. Beginning on November 23, 2009, the noteholders may, at their option, require us to redeem all or any portion of the convertible notes. In such event, we may elect, at our option and subject to certain conditions, to pay up to 50% of the redemption price in shares of our common stock valued at 94% of the weighted average price of the common stock for the 20-day trading period immediately preceding the redemption date.

Supply and Demand Trends

United States

According to the Energy Information Administration (EIA), an arm of the U.S. Department of Energy, an estimated 41 gigawatts of new generation capacity was added in the United States during 2004, down approximately 9 percent from the 45 gigawatts of new capacity that was added during 2003. The EIA expects new gas turbine combined-cycle generation capacity additions in the United States will average approximately five gigawatts of capacity over the next two years and thereafter grow only marginally in the following decade, at which time the EIA estimates that retirements of older generation capacity will significantly outpace planned additions. Given the extended lead-times required for developing new electrical power generation capacity for a particular market, our bookings and revenues can rise or fall sharply prior to the actual commissioning of new capacity. Limited development, deferral of planned projects and unexpected cancellations may reduce the potential recognition of revenues and profits. In market economies such as the United States, the lags between price signals and the construction of new power plants can cause boom-and-bust cycles for the suppliers of equipment for power generation. Given this situation, our revenues will not necessarily correlate precisely with changes in reported actual or forecasted new capacity. A copy of the EIA’s latest assessment of electrical generation supply and demand trends for the United States can be found on the Department of Energy’s website at http://www.eia.doe.gov/oiaf/aeo/index.html.

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International Markets

According to the International Energy Agency (IEA), in its World Energy Investment Outlook 2003, approximately $10 trillion will be required over the next three decades to expand and upgrade the global electricity sector. This estimated level of spending is approximately three times the level of spending in real terms than was invested in the electricity sector in the prior thirty years. Approximately one-half, or $5 trillion, will be spent in developing countries, two-thirds, or approximately $3 trillion, of which in developing Asia alone. The IEA estimates that the greatest investment in new generating and transmission capacity will be made in China and will approach $2 trillion.

In its World Energy Outlook 2004 study, the IEA estimates nearly 3,600 gigawatts of new generating capacity will be added by 2030, or an average of approximately 128 gigawatts per year. Almost half of the annual addition is expected to be based upon natural gas. The IEA estimates that 4,700 gigawatts of new generation capacity will be required worldwide by 2030 and the importance of natural gas-based generating plants will rise from 24 percent in 2002 to 35 percent by 2030. Most of this new gas turbine capacity will employ combined-cycle technology. The IEA’s latest assessment of worldwide generation supply and demand trends, along with the expected capacity additions through 2030 can be found on the Internet at www.iea.org.

Our Strategy

Given the EIA’s assessment of supply and demand trends, and the existing merchant industry conditions inside the United States, we believe the market opportunities inside the United States for us over the next several years will remain subdued. In view of this outlook, as well as the IEA’s outlook for international supply and demand, we will take a number of initiatives to maximize shareholder value and enhance our market position as a supplier and service provider in the global power generation industry. We will:

Recognizing the market opportunities for gas turbine generating capacity additions globally, we continued to expand our presence in a number of regions outside of the United States during 2004, particularly in China. During the second half of 2004, we booked a significant volume of business in a number of international markets, which resulted in a higher firm backlog at the end of 2004 than a year earlier. In July 2004, we purchased 90 percent of Nanjing Boiler Works, a strategic step to further expand our manufacturing capacity inside China to capitalize on the robust outlook for the construction of new power generating capacity in that country in the years ahead. Starting in January 2006, we may purchase the remaining 10% interest in Nanjing Boiler Works at our sole discretion. In addition to our Nanjing, China manufacturing plant, we continue to maintain strong manufacturing partnerships in nearly 20 countries outside of the United States, including four within China. This global supply capability, in close proximity to key markets, where we can supply our full-range of products and provide customer support, allows us to serve our multinational customers’ needs in a timely and efficient manner and are critical prerequisites for obtaining project awards.

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experience in gas turbine technology, we have developed a number of complementary product lines, including inlet cooling systems, pulse filters, air filter elements and diverter dampers. Throughout our history, we have successfully introduced new end-use applications for our underlying technologies, including products for the process, marine, pulp and paper and pharmaceutical industries. We are actively pursuing potential opportunities in new gas turbine applications, including integrated gasification combined-cycle processes that employ coal as the fuel source into a gas turbine.

Gas Turbine Technology

Gas turbine power plants are well positioned to benefit from the need for new or more efficient power generation infrastructure. The advantages of power generation plants utilizing gas turbine technologies versus other technologies include:

Gas turbine power plants can have either a simple-cycle or combined-cycle configuration, both of which utilize a gas turbine and a generator to produce electricity. A simple-cycle gas turbine plant incorporates many of the products we manufacture, including filter houses, inlet and exhaust systems and turbine enclosures. A simple-cycle plant converts approximately 33% of the fuel’s energy content into electricity. A combined-cycle plant has the same components as a simple-cycle plant, with the addition of a heat recovery steam generator, or HRSG. In a combined-cycle plant, the hot exhaust from the gas turbine is routed through the HRSG where steam is generated which is used to power a steam turbine and produce more electricity. Like the simple-cycle plant, the combined-cycle plant also incorporates many of the products that we manufacture. A combined-cycle power plant converts up to 58% or more of the fuel’s energy content into electricity. As a result of the general availability of natural gas supplies, lower capital costs, environmental factors and increased efficiency, the EIA projects that gas-fired technology will outpace all other competing technologies through 2030. As a leading provider of equipment for simple- and combined-cycle power plants, we are well positioned to benefit from these trends.

Products and Services

We conduct our business through two operating segments: our Heat Recovery Equipment segment and our Auxiliary Power Equipment segment. We offer a broad range of products and services that are integral parts of gas turbine power plants as well as power-related equipment for industrial operations. We also provide advanced engineering, retrofit and upgrade, maintenance and repair services to the power generation industry. For more information regarding our revenues, profitability and total assets by segment, see Note 11 to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Heat Recovery Equipment Segment

Our Heat Recovery Equipment segment is a leader in the production of HRSGs and specialty boilers. Our products in this segment are marketed under the Deltak brand name.

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the type of gas turbine and environmental locale. We design and manufacture HRSGs for all size applications for both new combined-cycle and retrofitted simple-cycle power plants. We believe we are the overall market leader with the largest installed base of gas turbine HRSGs in the world.

Auxiliary Power Equipment Segment

Our Auxiliary Power Equipment segment includes a variety of products and services critical to the operation of gas turbine power plants. These products are marketed under the Braden and Consolidated Fabricators brand names.

Backlog

The time frame between receipt of an order and actual completion or delivery of our products can stretch from a few weeks to a year or more. At the time we receive an order representing a commitment from a customer (a “booking”), that order is added to our backlog. Our backlog consists of firm orders from our customers. Backlog may vary significantly quarter to quarter due to the timing of customer commitments. Our backlog at the end of 2004 totaled $308.9 million as compared to $178.5 million at the end of 2003.

Sales and Marketing

We have an extensive sales network consisting of employees and independent representatives worldwide. We have sales offices in Brazil, China, Egypt, the Netherlands, Singapore, South Korea and the United States. Our international sales force travels extensively and allows us to assess local market conditions, utilize local contacts and respond quickly to our customers’ needs. We focus our sales and marketing efforts on end users of our products, including the developers and operators of gas turbine power plants, and on gas turbine original equipment manufacturers (OEM), which may order our products directly or specify the use of our products.

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Customers

Customers for both our Heat Recovery Equipment segment and our Auxiliary Power Equipment segment include OEMs, engineering and construction firms, operators of power generation facilities and firms engaged across several process related industries. The end users of most of our products are developers and operators of gas turbine power plants. Our top ten customers vary from year to year due to the relative size and duration of our projects. The Company has certain customers that represent more than 10 percent of consolidated revenues. The revenues generated from our three most significant customers as a percentage of the consolidated revenues for 2004, 2003 and 2002 are as follows:

For information with respect to our sales by geographic regions, see Note 11 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Engineering and Design Capabilities

Our business is driven by design and engineering expertise, an area in which we believe we are an industry leader. Our products are custom-designed and engineered to meet the precise specifications of our customers and may require a significant number of engineering hours to design. As of December 31, 2004, we employed 156 degreed engineers specialized in thermal, structural, electrical, mechanical, acoustical, industrial and chemical engineering. Our engineers utilize an extensive PC-based network and engineering programs such as AutoCad^™, ANSYS^™, StruCAD^™ and several internally developed proprietary programs. Our proprietary programs enable us to use design elements from previous projects thereby increasing our engineering efficiency on subsequent projects.

Manufacturing and Outsourcing

Our products are fabricated utilizing a combination of in-house manufacturing and subcontractors. Most of our subcontracting work is performed outside the United States which provides a lower-cost basis for finished goods. Our extensive use of outsourcing relationships provides us the following benefits:

In 2004, subcontractors accounted for approximately 70% of our manufacturing costs. Our subcontractors manufacture products on a fixed-price basis for each project. Typically, our subcontractors agree not to manufacture competing products. We provide on-site technical advisors at our subcontracted facilities to ensure high levels of quality and workmanship. We are constantly pursuing new international subcontractor relationships to enhance our ability to manufacture equipment at the lowest cost while maintaining high-quality standards and on-time delivery.

While a majority of our manufacturing is outsourced, we maintain significant in-house capabilities. Our in-house manufacturing capability allows us to internally develop production methods, train personnel and subcontractors, protect highly sensitive designs and fabricate products whose complexity may preclude their production by subcontractors.

Segment Financial Data and Sales by Geographic Region

See Note 11 to the consolidated financial statements, included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K, for detailed financial information regarding each business segment and our sales by geographic region.

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Raw Materials and Suppliers

The principal raw materials for our products are stainless steel sheet products, carbon steel plate and structural shapes, insulation and finned tubing. We obtain these products from a number of domestic and foreign suppliers. The market for most of the raw materials we use is comprised of numerous participants, and we believe that we can obtain each of the raw materials we require from more than one supplier. While our ability to obtain steel has not diminished, steel prices increased significantly in 2004 causing our gross margins to decrease.

Competition

We compete with a large number of U.S. and international companies along all of our major product lines. We compete based on the price, quality, reliability and reputation of our products. We believe that no single competitor offers our breadth of products to the gas turbine power generation industry.

Employees

As of December 31, 2004, we had 1,805 employees. Other than 4 of our remaining permanent manufacturing employees located in Tulsa, Oklahoma and 149 permanent production employees at our facility in Mexico, none of our employees are represented by unions. However, from time-to-time, we hire union employees on a temporary basis. We believe our employee relations are satisfactory.

Intellectual Property

We depend upon a combination of patents, trademarks and nondisclosure and confidentiality agreements with our employees, subcontractors, customers and others, as well as various security measures to protect our proprietary rights. Designs and processes are developed for specific projects and are charged directly to such projects. Due to the unique nature of each project, we typically create new designs specifically for each project. Also, our customers are contractually obligated to treat these designs as confidential and proprietary. We believe that intellectual property protection is less important than our ability to continue to develop new design applications that meet the demands of our customers. As a result, we do not believe that any single patent or trademark is material to our business.

We typically enter into non-disclosure and confidentiality agreements with our employees and subcontractors with access to sensitive design software and technology. However, this protection does not preclude others from creating programs which perform the same function. In addition, our agreements may be breached and we may not have adequate remedies for any breach.

Environmental Matters

Our operations are subject to laws and regulations governing the discharge of materials into the environment or otherwise relating to the protection of the environment or human health. These laws include U.S. federal statutes such as the Resource Conservation and Recovery Act of 1976, the Comprehensive Environment Response, Compensation, and Liability Act of 1980, or CERCLA, the Clean Water Act and the Clean Air Act, and the regulations implementing them, as well as similar laws and regulations at the state and local levels and in other countries in which we operate.

Any failure to comply with environmental laws or regulations could subject us to significant liabilities for fines, penalties or damages, or result in the denial or loss of significant operating permits. In addition, some environmental laws, including CERCLA, impose liability for the costs of investigating and remediating releases of hazardous substances without regard to fault and on a joint and several basis, so that in some circumstances we may be liable for costs attributable to hazardous substances released into the environment by others.

Our manufacturing facilities use and produce wastes containing various substances classified as hazardous or otherwise regulated under environment laws and regulations, and are subject to ongoing compliance costs and capital expenditure requirements. We believe we are in compliance with applicable environmental laws and regulations and that the costs of compliance are not material to us. However, any newly discovered environmental conditions could result in unanticipated expenses or liabilities that could be material. Moreover, the environmental laws and regulations to which we are subject are constantly changing, and it is impossible to predict the effect of these changes on us. We cannot give any assurances that our operations will comply with future laws and regulations or that these laws and regulations will not significantly adversely affect us.

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Available Information

Our Internet address is www.globalpower.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.

Risk Factors

Our business, financial condition and results of operations may be impacted by a number of factors, including, but not limited to, the following, any of which could cause actual results to vary materially from historical and current results or anticipated future results.

Substantially all of our revenues are from sales of equipment for gas turbine power plants. During periods of declining construction of new gas turbine power plants, the market for our products is significantly diminished.

The demand for our products and services depends on the continued construction of gas turbine power generation plants. In 2004, approximately 82% of our revenues were from sales of equipment and provision of services for gas turbine power plants. The power generation equipment industry has experienced cyclical periods of slow growth or decline. In periods of decreased demand for new gas turbine power plants, our customers may be more likely to decrease expenditures on the types of products and systems that we supply and, as a result, our future revenues may decrease. In addition, the gas turbine power industry depends on natural gas. A rise in the price or a shortage in the supply of natural gas could affect the profitability or operations of gas turbine power plants, which could adversely affect our future revenues.

Environmental laws and regulations have played a part in the increased use of gas turbine technology in various jurisdictions. These laws and regulations may change or other jurisdictions may not adopt similar laws and regulations. Changes in existing laws and regulations could result in a reduction in the building and refurbishment of gas turbine power plants. In addition, stricter environmental regulation could result in our customers seeking new ways of generating electricity that do not require the use of our products. Furthermore, although gas turbine power plants have lower emissions than coal-fired power plants, emissions from gas turbine power plants remain a concern and attempts to reduce or regulate emissions could increase the cost of gas turbine power plants and result in our customers’ switching to alternative sources of power.

Other current power technologies, improvements to these technologies and new alternative power technologies that compete or may compete in the future with gas turbine power plants could affect our sales and profitability. Furthermore, in 2004, approximately 32% of our revenues were from sales of Heat Recovery Equipment used in combined-cycle power plants. Any change in the power generation industry which results in a decline in the construction of new combined-cycle power plants or a decline in the upgrading of existing simple-cycle power plants to combined-cycle power plants could materially adversely affect our sales.

A small number of major customers account for a significant portion of our revenues, and the loss of any of these customers could negatively impact our business.

We depend on a relatively small number of customers for a significant portion of our revenues. In fiscal year 2002, two customers accounted for approximately 49% of our consolidated revenues. In fiscal year 2003, two customers accounted for approximately 42% of our consolidated revenues and approximately 33% of our backlog at the end of the year. In 2004, two customers accounted for approximately 39% of our consolidated revenues and approximately 45% of our backlog at the end of the year. As of December 31, 2004, five customers accounted for approximately 77% of our backlog. Other than their obligations under firm orders placed in our backlog, none of our customers have a long-term contractual obligation to purchase any material amounts of products from us. All of our firm orders contain cancellation provisions, which permit us to recover only our costs and a portion of our anticipated profit in the event a customer cancels its order. If a customer elects to cancel, we may not realize the full amount of future revenues included in our backlog. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our revenues. Because our major customers represent a large part of our business, the loss of any of our major customers could negatively impact our business and results of operations. Several of our customers have the ability to produce some of our products in-house. Any increase in this activity could reduce our sales.

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If our costs exceed the estimates we use to set the fixed prices of our contracts, our earnings will be reduced.

We enter into nearly all of our contracts on a fixed-price basis. As a result, we benefit from cost savings, but have a limited ability to recover any cost overruns. Contract prices are established based in part on our projected costs, which are subject to a number of assumptions. The costs that we incur in connection with each contract can vary, sometimes substantially, from our original projections. Because of the large scale and long duration of our contracts, unanticipated changes may occur, such as customer budget decisions, design changes, delays in receiving permits and cost increases, which may delay delivery of our products. In addition, we often are contractually subject to liquidated damages for late delivery.

Unanticipated cost increases or delays may occur as a result of several factors, including:

Given the rapid economic growth in China and Southeast Asia, steel prices have increased sharply and may continue to increase in the future. For example, carbon steel prices at the end of 2004 were 102% higher than the 2003 average. In 2004, our ability to recover these higher steel prices from our customers was limited, which had a significant, negative impact on our gross margin. While we will continue to work with our suppliers and customers to reduce the impact of higher steel prices on our gross margin, there can be no assurance that our gross margin will not continue to be adversely affected by steel and other material prices. In fact, we believe that our 2005 gross margin will be lower than our average rate for the last several years, and this trend may continue beyond 2005.

Cost increases or overruns that we cannot pass on to our customers or our payment of liquidated damages under our contracts will lower our earnings.

Competition could result in decreased sales or decreased prices for our products and services.

We face and will continue to face significant competition for the sale of our products and services. Competition could result in a reduction in the demand for, or the prices that we can charge for, our products and services. Our success is dependent in large part on our ability to:

Our competitors may:

In recent months, as demand for our products and services has increased from historically low levels, some of our competitors have shown a willingness to accept lower prices or extend progress payments to maintain their market position and absorb their fixed costs. As a result of our competitors’ business practices, we may need to lower our prices, extend progress payments and/or devote significant resources to marketing our products in order to remain competitive. Lower prices and/or higher costs would reduce our revenues and our profitability. If due to competitive market conditions we elect to extend progress payment schedules, our ability to finance work from operating sources may be affected, which would also result in a reduction of operating cash flows.

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If we are unable to control the quality or timely production of products manufactured for us by subcontractors, our reputation could be adversely affected and we could lose customers. If we are unable to recover any advance progress payments made to subcontractors, our profitability would be adversely affected.

We rely on subcontractors to manufacture and assemble a substantial portion of our products. In 2004, subcontractors accounted for approximately 70% of our manufacturing costs. Although we have on-site supervision of our subcontractors to review and monitor their quality control systems, the quality and timing of their production is not totally under our control. Our subcontractors may not always meet the level of quality control and the delivery schedules required by our customers. The failure of our subcontractors to produce quality products in a timely manner could adversely affect our reputation and result in the cancellation of orders for our products and the loss of customers.

In addition, we make advance progress payments to subcontractors in anticipation of their completion of our orders. We may be unable to recover those advances in the event a subcontractor fails to complete an order, which may adversely affect our profitability.

The dollar amount of our backlog, as stated at any time, is not necessarily indicative of our future earnings.

When we receive a firm order for a project from a customer, that order is added to our backlog. However, customers may cancel or delay projects for reasons beyond our control and we may be unable to replace any canceled orders with new orders. To the extent projects are delayed, the timing of our revenues could be affected. If a customer cancels an order, we may be reimbursed for the incurred costs. Typically, however, we have no contractual right to the full amount of the revenues reflected in our backlog that we would have received if the order had not been canceled. In addition, projects may remain in our backlog for extended periods of time. Revenue recognition occurs over extended periods of time and is subject to unanticipated delays. Fluctuations in our quarterly backlog levels also result from the fact that we may receive a small number of relatively large orders in any given quarter that may be included in our backlog. Because of these large orders, our backlog in that quarter may reach levels that may not be sustained in subsequent quarters. Our backlog, therefore, is not necessarily indicative of our future revenues.

Our future revenues and operating results may vary significantly from quarter to quarter.

Our quarterly revenues and earnings have varied in the past and are likely to vary in the future. Our contracts stipulate customer-specific delivery terms which, coupled with other factors beyond our control that may occur at any time over a contract cycle of up to a year or more, may result in uneven realization of revenues and earnings over time. Customer-imposed delays can significantly impact the timing of revenue recognition. Due to our large average contract size, our sales volume during any given period may be concentrated in relatively few orders, intensifying the magnitude of these fluctuations. Consequently, our quarterly performance may not be indicative of our success in achieving year-over-year growth objectives. Furthermore, some of our operating costs are fixed. As a result, we may have limited ability to reduce our operating costs in response to unanticipated decreases in our revenues or the demand for our products in any given quarter. Therefore, our operating results in any quarter may not be indicative of our future performance. In addition, because we must make significant estimates related to potential charges when we recognize revenue on a percentage of completion basis, we may have difficulty accurately estimating revenues and profits from quarter to quarter. In addition, most of our revenues are based on fixed price contracts, and the relative profitability can vary significantly between contracts. As a result, our profitability can vary from quarter to quarter based on the specific contracts being recognized.

Compliance with environmental laws and regulations is costly, and our ongoing operations may expose us to environmental liabilities.

Our operations are subject to laws and regulations governing the discharge of materials into the environment or otherwise relating to the protection of the environment or human health and safety. As discussed on above under the caption, “Environmental Matters,” we are subject to various U.S. federal statutes and the regulations implementing them, as well as similar laws and regulations at the state and local levels and in other countries in which we operate.

If we fail to comply with environmental laws or regulations, we may be subject to significant liabilities for fines, penalties or damages, or lose or be denied significant operating permits. In addition, some environmental laws, including CERCLA, impose liability for the costs of investigating and remediating releases of hazardous substances without regard to fault and on a joint and several basis, so that in some circumstances we may be liable for costs attributable to hazardous substances released into the environment by others. Moreover, the environmental laws and regulations to which we are subject are constantly changing, and we cannot predict the effect of these changes on us.

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A defect in our products could result in unanticipated warranty costs or product liability not covered by our insurance, which could adversely affect our financial condition or results of operations.

We generally provide warranties for terms of three years or less on our products. These warranties require us to repair or replace faulty products. Warranty claims could result in significant unanticipated costs. The need to repair or replace products with design or manufacturing defects could also temporarily delay the sale of new products and adversely affect our reputation.

In addition, we may be subject to product liability claims involving claims of personal injury or property damage. Because our products are used primarily in power plants, claims could arise in different contexts, including the following:

If a very large product liability claim were sustained, our insurance coverage might not be adequate to cover our defense costs and the amount awarded. Additionally, a well-publicized actual or perceived problem could adversely affect our reputation and reduce demand for our products.

The restrictions and covenants contained in our senior credit facility and convertible notes agreement limit our ability to borrow additional money, sell assets and make acquisitions. Compliance with these restrictions and covenants may limit our ability to implement elements of our business strategy.

Our senior credit facility and convertible notes agreement contain a number of significant restrictions and covenants limiting our ability and that of our subsidiaries to:

In addition, our senior credit facility contains other restrictive covenants, including covenants that require us to maintain specified financial ratios, including leverage, asset coverage and fixed charge ratios and mandatory repayment provisions that will require us to repay our indebtedness with proceeds from certain asset sales, certain debt issuances and certain insurance casualty events.

Historically, advance billings from our HRSG equipment sales have been a source of cash to finance our business. Recently, more of our HRSG equipment contracts have payment terms that result in essentially neutral cash flows. Furthermore, our HRSG equipment backlog increased significantly during the fourth quarter of 2004. Most of our larger HRSG projects require us to give our customers a standby letter of credit. As a result, our working capital has increased over the last several months, and our cash flows forecast indicates the need for us to borrow on our line of credit. The need for additional working capital and new standby letters of credit resulting from the growth in our base business as well as the pending WISG acquisition, coupled with our lower than normal level of EBITDA in 2004 caused us to renegotiate our existing fixed charge and leverage ratios and our letter of credit sub-limit. Our lenders approved a second amendment to our senior credit agreement that waived our fixed charge covenant for one quarter, increased our leverage ratios and increased our letter of credit sub-limit on the revolving line of credit.

If we are unable to remain in compliance with our financial covenants currently in effect under our senior credit facility or obtain additional amendments or waivers from our lenders, we may be forced to reduce or delay capital expenditures and business acquisitions, sell assets, restructure or refinance our indebtedness, decline certain business opportunities from customers or seek additional equity capital.

In addition, the convertible notes agreement allows the investors to require us to redeem the notes starting in November 2009, even if our stock price has not attained the conversion price of $10.61. While under certain circumstances, we can pay up to 50% of the principal balance in the form of common stock, we will be required to pay the remaining amount in cash. In addition, we may be required to offer to redeem the notes in cash at a redemption price equal to the unpaid principal balance plus all accrued interest within 30 days of the occurrence of a “Triggering Event.” A “Triggering Event” will be deemed to occur if we incur any indebtedness in addition to “permitted indebtedness,” and at the time of such incurrence, our trailing 12 months “Consolidated EBITDA” does not

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equal or exceed $30.0 million or, as a result of the incurrence, our “Consolidated Leverage Ratio” exceeds 4.75 to 1.0. Finally, the convertible notes agreement stipulates that an event of default under the senior credit facility would result in a default under the convertible notes agreement. There can be no assurance that we will have the cash on hand or the ability to refinance any redemption obligation in the event we are required to redeem the notes.

Our revenues would be adversely affected if we are unable to protect the proprietary design software programs that we use in our business.

We have developed several proprietary software programs to help us design our products. Our ability to protect our proprietary rights to these programs is important to our success. We protect these rights through the use of internal controls and confidentiality and non-disclosure agreements and other legal protections. The legal protections afforded to our proprietary rights and the precautions we have taken may not be adequate to prevent misappropriation of our proprietary rights. We generally enter into non-disclosure and confidentiality agreements with our employees and subcontractors with access to sensitive design software and technology. However, these contractual protections do not prevent independent third-parties from developing functionally equivalent or superior technologies, programs, products or professional services. Third-parties may also infringe upon or misappropriate our proprietary rights and use them to develop competing products. If we were required to commence legal actions to enforce our intellectual property or proprietary rights or to defend ourselves against claims that we are infringing on the intellectual property or proprietary rights of others, we could incur substantial costs and divert management’s attention from operations.

The loss of the services of our key executive officers could have a negative effect on our business.

Our success depends to a significant extent on the continued services of Larry Edwards, our chief executive officer and chairman of the board who will relinquish the CEO position on June 30, 2005, but will remain chairman; Al Brousseau, our president and chief operating officer and CEO effective July 1, 2005; Jim Wilson, our chief financial officer; and Monte Ness, Gene Schockemoehl and John Matheson, three of our senior executives. Our failure to retain the services of Messrs. Edwards, Brousseau, Wilson, Ness, Schockemoehl or Matheson, or attract highly qualified management in the future, could adversely affect our ability to grow and manage our operations. Although we have employment agreements containing non-competition clauses with Messrs. Edwards, Brousseau, Wilson, Ness, Schockemoehl and Matheson, courts are sometimes reluctant to enforce these agreements.

A failure to attract and retain employees who fill key requirements of our business may make it difficult to sustain or expand operations.

We must attract and retain highly qualified, experienced mechanical, design, structural and software engineers, service technicians, marketing and sales personnel and other key personnel to expand our operations. If we are unable to attract and retain necessary personnel, we may not be able to sustain or expand our operations.

We may not be able to maintain or expand our business outside the United States because of numerous risk factors outside our control.

Our international operations are subject to a number of risks inherent in doing business outside the United States including:

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These factors may result in a decline in revenues or profitability and could adversely affect our ability to expand our business outside the United States.

In particular, the Middle East has experienced periods of extreme political instability in recent years. Moreover, political insurgents in Iraq have targeted and may continue to target energy assets, which may in turn disrupt our activities in that country.

Increased operations in China and Southeast Asia could adversely impact our operating margins.

In early 2004, we commenced a strategic initiative to increase the amount of products and services that we sell in China and Southeast Asia. In addition, in July 2004, we purchased a 90% interest in Nanjing Boiler Works which was later renamed Deltak Power Equipment (China) Co. Ltd. While the economic outlook for power generation projects in this region appears more favorable than the current market in the United States, there can be no assurance that our strategy will be successful in obtaining significant increases in revenue and profits. In addition to the risks associated with operations outside the United States noted previously, there are numerous additional challenges to doing business in China, such as strict tax, currency and operating regulations. In addition, the Chinese legal system is relatively new, and the Chinese central and local government authorities retain a greater degree of control over business operations than is customary in more developed countries, making the process of securing bookings and obtaining regulatory approval for business operations inherently unpredictable in some circumstances. We continue to develop strategies for best overcoming the challenges we face for successfully increasing our presence in China. Until those strategies are fully implemented, our gross revenues and profit margin in China may be negatively impacted.

If we were required to write down our goodwill or long-lived assets or place additional valuation allowances against our deferred tax assets, our results of operations and stockholders’ equity could be materially adversely affected.

As a result of our June 1998 acquisition of the power generation division of Jason Incorporated and our October 2000 acquisition of CFI Holdings, Inc. and its subsidiaries, we have approximately $45.0 million of goodwill recorded on our consolidated balance sheet as of December 31, 2004. Due to the implementation of Statement of Financial Accounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets,” goodwill is no longer amortized but must be tested for impairment at least annually based on a fair value concept. Our fair value calculations incorporate several inputs based on estimates and assumptions. These estimates and assumptions include earnings forecasts for the next 10 years, discount rates on future cash flows, income tax rates and EBITDA multiples. Any significant future changes in these estimates and assumptions may require us to write down a portion or the entire balance of our goodwill.

Long-lived assets, such as property and equipment and intangible assets, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets.

Realization of the deferred tax assets at their December 31, 2004 amounts is based on the ability of the Company to generate approximately $158.0 million future taxable income. At some point in the future, the Company may decide that its future taxable income will not be sufficient in order to utilize the deferred tax assets. If this determination were made, the Company would place an additional valuation allowance against its deferred tax assets.

If we were required to write down our goodwill or long-lived assets or place additional valuation allowances against our deferred tax assets, our results of operations and financial position could be materially adversely affected.

We are exposed to market risks from changes in interest rates and foreign currency exchange rates.

We are subject to market risks from changes in interest rates. Our senior credit facility’s variable-rate debt bears interest, at our option, at either the Eurodollar rate or an alternate base rate plus, in each case, an applicable margin. Assuming our level of borrowings at December 31, 2004, a 100 basis point increase in interest rates under these borrowings would increase our interest expense for 2005 by approximately $0.8 million.

We are also subject to market risks from fluctuations in foreign currency exchange rates. Portions of our operations are located in foreign jurisdictions and a portion of our billings is paid in foreign currencies. Changes in foreign currency exchange rates or weak economic conditions in foreign markets could therefore cause fluctuations in those revenues derived from foreign operations. In addition, sales of products and services are affected by the value of the U.S. dollar relative to other currencies. Changes in foreign currency rates can also affect the costs of our products purchased or manufactured outside the United States. At December 31, 2004, we had approximately $29.6 million of forward contracts to sell Euros in the future for a specific number of U.S. dollars. The business purpose of forward

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agreements is to lock in the gross margin in U.S. dollars on a portion of orders pursuant to which we are paid in a currency different from our expenses. A one percent, five percent and ten percent change in the forward rate would result in an additional unrealized gain or loss of $0.3 million, $1.3 million and $2.7 million, respectively, based on the amount hedged at December 31, 2004.

Our pending acquisition of WISG might not be consummated. If the WISG acquisition is completed, there can be no assurance that our combined results will conform to our expectations. There may be additional risks associated with operating the WISG business.

The consummation of the WISG acquisition is subject to the satisfaction of customary conditions, including the accuracy of the various representations and warranties of the parties contained in the purchase and sale agreement on the closing date. In addition, the purchase and sale agreement may be terminated by either party in most circumstances if the closing does not occur by April 30, 2005. Although we believe that the conditions to closing the WISG acquisition will be satisfied and that the closing will occur in April of 2005, there can be no assurance that the transaction will be consummated. If on or prior to April 30, 2005, the contemplated acquisition of WISG has not been consummated, we will be required to escrow $7.65 million of the net proceeds from the sale of the convertible notes for future interest payments for the benefit of the convertible note holders until the WISG acquisition is consummated. If the acquisition is not consummated by June 30, 2005, we will be required to pay certain outstanding loans under our credit agreement with the net proceeds from the sale of the convertible notes.

If the WISG acquisition is consummated, there can be no assurance that our actual results will match our expectations. Successful acquisitions require an assessment of a number of factors, many of which are beyond our control and are inherently uncertain. Factors that may cause our actual results to differ materially from our expected results include the curtailment of major maintenance projects by one or more of WISG’s major customers or unanticipated difficulties or delays in integrating the operations of WISG with our own.

There may be additional risks associated with the operation of the WISG business if the acquisition is consummated, including:

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ITEM 2. PROPERTIES

Our executive offices currently occupy 10,870 square feet in Tulsa, Oklahoma. The lease for this facility expires in October 2007. We have 6 other U.S. facilities, as well as facilities in the Netherlands, Mexico and China. Information about our material facilities at December 31, 2004 is described below:

In addition to the foregoing, the Company leases other facilities in various cities, which are not considered significant. The Company considers each of its facilities to be in good operating condition and sufficient for its current use.

ITEM 3. LEGAL PROCEEDINGS

We are a party to routine litigation arising out of the normal and ordinary operation of our business. We believe that none of these proceedings will result in a material adverse effect on our business, results of operations or financial condition.

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

We did not submit any matters to a vote of security holders during the fourth quarter ended December 31, 2004.

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth as of the date hereof certain information regarding the executive officers of the Company. Officers are elected annually by the Board of Directors and serve at its discretion.

Larry Edwards has served as our chief executive officer and chairman of the Board of Directors since December 2004. Mr. Edwards served as our president, chief executive officer and chairman of the board of directors from October 2003 until December 2004. From May 2001 to October 2003, Mr. Edwards served as president and chief executive officer of the Company. From 1998 to the Company’s public offering in May 2001, Mr. Edwards served as a director of and chief executive officer of Global Energy Equipment Group (GEEG) Holdings, LLC and as president and chief executive officer of GEEG, Inc., the predecessor of Global Power Equipment Group Inc., which was formed following a management-led buy-out from Jason Incorporated in June 1998. From February 1994 until June 1998, Mr. Edwards served as the president of Jason Incorporated’s power generation division, and he played a critical role in that group’s successful acquisition by GEEG. Prior to 1994, Mr. Edwards held a number of critical management positions including vice president of operations, general manager and president of Braden Manufacturing, L.L.C. Mr. Edwards earned a B.S. in Industrial Engineering and Management from Oklahoma State University and an M.B.A. with honors from Oklahoma City University.

Al Brousseau is our president and chief operating officer. Mr. Brousseau joined the Company in mid-December 2004. Prior to his current role, Mr. Brousseau served as vice president and an officer of Lockwood Greene in Atlanta from 1999 to 2004 and was responsible for managing the operations of Lockwood Greene’s Atlanta office. Prior to his service with Lockwood Greene, Mr. Brousseau was employed by ABB Combustion Engineering from 1970 to 1999 in various roles of increasing responsibilities, including engineering, sales, management, sales support and project management, much of which involved power projects in Asia. Mr. Brousseau earned a B.S. in Civil Engineering from the University of Hartford and an A.S. in Civil Engineering from Hartford State Technical College.

Monte Ness is our senior vice president and served as Deltak president since October 2003. Mr. Ness began his employment with Deltak in 1986 as a marketing manager and progressed through the organization in sales, project engineering and project management. Mr. Ness was appointed vice president of the Gas Turbine Heat Recovery product line in 1993. Mr. Ness worked at Brown Boveri Turbomachinery in the Gas Turbine and Steam Turbine groups and at Garrett Turbine Engine Company in the aircraft propulsion group. Mr. Ness is a graduate of North Dakota State University with B.S. degrees in Mechanical Engineering and Business Administration. He also holds an M.B.A. from Arizona State University and completed the Minnesota Management Institute program from the Carlson School of Management at the University of Minnesota. He is a registered Professional Engineer.

Gene Schockemoehl is our senior vice president and president of Braden. Mr. Schockemoehl has served as president of Braden since January 1994 and as a director and vice president of GPEG’s predecessor from June 1998 to May 2001. He began his employment at Braden in 1968, progressing through the plant production area into management positions, and became vice president of operations in 1990. He served as vice president of sales from mid-1991 until his appointment to president in January 1994. Mr. Schockemoehl has a manufacturing and general business educational background, having attended both Tulsa Community College and Rogers State College.

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James Wilson is our chief financial officer and vice president of finance. Previously, Mr. Wilson was the vice president of administration from September 2000 through December 2003. Mr. Wilson also served GPEG and its predecessor as secretary from June 1998 until 2001. He joined Braden in 1986 as controller and became vice president of finance of Braden in 1989 where he served until September 2000. Between 1982 and 1986, Mr. Wilson was employed as a senior auditor with Arthur Andersen LLP. Mr. Wilson has received the C.P.A. designation and has been a member of the American Institute of Certified Public Accountants since 1983. He earned a B.S. in Accounting from Oral Roberts University.

John Matheson is our senior vice president overseeing corporate strategic initiatives and corporate operations in Asia. Prior to his current role, Mr. Matheson served as our general counsel and secretary from November 2001 to May 2004. From 1999 to 2001, Mr. Matheson served as senior attorney for The Williams Companies, an international energy and telecommunications company, where he directed the business development legal group of Williams Communications, which was responsible for mergers, acquisitions and securities law matters. Prior to 1999, he was a shareholder with the law firm of Conner & Winters, P.C., in Tulsa, Oklahoma. From January 1988 to May 1989, he was a tax consultant with Price Waterhouse. Mr. Matheson has received the C.P.A. designation and holds a bachelor of accountancy degree, with highest honors, from the University of Oklahoma, and a juris doctorate from Georgetown University Law Center.

Candice Cheeseman is our general counsel and secretary. Prior to joining our company in May 2004, Ms. Cheeseman was a shareholder with the law firm of Hall, Estill, Hardwick, Gable, Golden & Nelson in Tulsa, Oklahoma. Prior to joining Hall Estill, Ms. Cheeseman was employed by WilTel Communications Group where she served in a variety of capacities including general counsel and secretary, commencing in November 2002. She has been a practicing attorney for two decades serving in various capacities for Williams Communications, Marriott International and law firms in the Washington D.C. area. Ms. Cheeseman received her juris doctorate degree from the University of Tulsa College of Law where she graduated with honors and served on the Tulsa Law Journal. She also holds a Bachelor of Arts degree in History from the University of Delaware, where she graduated with honors and was a member of the Phi Beta Kappa Society.

PART II.

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock began trading on the New York Stock Exchange under the symbol “GEG” on May 18, 2001, following completion of our initial public offering (IPO). The following table sets forth the high and low sale prices per share of our common stock, as reported in the New York Stock Exchange composite transactions, for the periods indicated:

A majority of the Company’s stockholders maintain their shares in “street name” accounts and are not, individually, stockholders of record. As of February 28, 2005, our common stock was held by 55 shareholders of record.

Dividends

We have not paid any cash dividends on our common stock and currently intend to retain all earnings for use in our business. Accordingly, we do not anticipate paying cash dividends in the foreseeable future. The declaration of dividends is at the discretion of our Board of Directors. Our credit agreement currently prohibits us from paying cash dividends to our shareholders. Any future determination as to payment of dividends will depend upon our financial condition and results of operations and such other factors as are deemed relevant by the Board of Directors.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected historical consolidated financial data of Global Power Equipment Group Inc. as of the dates indicated. The financial data for fiscal years 2004, 2003, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements. Such data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

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

The following discussion of our financial condition and results of operations should be read in conjunction with the selected consolidated financial data and consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.

Overview

We design, engineer and fabricate a comprehensive portfolio of Heat Recovery and Auxiliary Power Equipment and provide related services. We conduct our business through two operating segments: our Heat Recovery Equipment segment and our Auxiliary Power Equipment segment.

The demand for our products and services depends, to a significant degree, on the level of construction of gas turbine power generation plants. In 2004, approximately 82% of our revenues were from sales of equipment and provision of services for gas turbine power plants. The power generation equipment industry has experienced cyclical periods of growth or decline. Beginning in 2002 and continuing through 2004, liquidity concerns in the merchant power generation industry coupled with concerns relating to the availability and relative price of natural gas have reduced the availability of financing for power plant development in the United States and have caused the domestic market for our products to significantly decline. While industry forecasts indicate a substantial long-term need for additional gas-fired power plants on a world-wide basis, the significant decline in domestic demand for such plants in 2002 through 2004 negatively impacted our bookings and revenues until the middle of 2004. During the last six months of 2004,

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we experienced a significant increase in our bookings, leaving our year-end backlog in excess of $300 million. 76% of our 2004 bookings came from international customers, and we anticipate that increasing demand for new power plants outside the United States will continue and, accordingly, we have placed additional focus on increasing our business outside the United States, particularly in China and Southeast Asia.

Continuing our efforts to maximize profitability by shifting manufacturing capacity to even lower-cost sources, we announced in the second quarter of 2004 our plans to merge the operations of our subsidiaries, Consolidated Fabricators, Inc. and Braden Manufacturing, L.L.C. The merger occurred in June 2004. During the fourth quarter of 2004, we closed our manufacturing facilities in Toluca, Mexico and Clinton, South Carolina and recorded charges of approximately $0.7 million. The production from these plants was moved to other Company facilities and to subcontractors. The restructuring charges incurred to complete the merger were approximately $1.6 million primarily for the write down of the Clinton facility, severance and lease cancellations, and we estimate annual cost savings of at least $2.0 million. We do not expect to incur any significant restructuring charges in 2005 related to this merger.

On July 30, 2004, we completed the purchase of a 90% interest in Nanjing Boiler Works (NBW). The purchase price was $10.9 million. We may purchase the remaining 10% interest in NBW starting in January 2006. We later changed the name of NBW to Deltak Power Equipment (China) Co., Ltd. This acquisition is important to the Heat Recovery Equipment segment of the business from a strategic perspective. Deltak Power Equipment (China) Co., Ltd. owns licenses necessary to manufacture and sell boilers in China and to export its products to most countries including the United States. Deltak Power Equipment (China) Co., Ltd. owns a fully functioning, state-of-the-art manufacturing plant. In addition, this acquisition is expected to give us a cost advantage and better access to customers within China. However, the fact that Deltak Power Equipment (China) Co., Ltd. is qualified to manufacture and sell boilers in China does not guarantee that it will be successful in obtaining a significant number of new orders.

In November 2004, we signed a definitive agreement with Georgia-based Williams Group International to purchase WISG for approximately $65 million in cash at closing, subject to a working capital adjustment. Of the total purchase price, $59.5 million will be paid in cash to the seller at closing, $5.5 million will be deposited by the Company with an escrow agent and released subject to the terms of the purchase agreement. In addition, zero to $0.9 million of additional consideration will be paid to the seller in 2006 contingent upon WISG meeting certain gross profit targets in 2005. WISG provides routine and specialty maintenance services to companies engaged in power generation, pulp and paper manufacturing and government agencies, primarily the Department of Energy. Approximately 80% of WISG’s annual revenue is derived from services provided to companies in power generation and includes work at nuclear power plants, coal-fired power plants and other fossil fuel plants as well as hydro-based generating facilities. For several years, we have searched for a company such as WISG to strengthen and diversify our company. The WISG business model offers the following advantages: excellent revenue visibility, significant backlog, recurring revenue tied to evergreen contracts, low fixed costs, a variable cost outsourcing component, minimal capital expenditure requirements and strong cash flow. The WISG acquisition will also allow us to expand our reach beyond gas turbine components as it services all segments of the power industry. The WISG transaction is expected to close in April 2005. We expect to finance this transaction with the proceeds from the convertible senior subordinated notes, issued in November 2004, borrowings from our senior credit facility and cash on hand.

In October 2003, we announced a management restructuring plan pursuant to which certain employees were offered either one-time termination or retirement benefits. Certain employees that were offered the retirement incentive packages entered into consulting agreements with us subsequent to their retirement. The expense of the consulting agreements will be recognized as the services are provided over the term of the agreements. In addition, retiring employees were offered the right to amend their stock option agreements to extend the date such options remain exercisable from the original period of 90 days after termination of employment to a new period extending to one year after termination of employment. In some cases, this plan also provided for the acceleration of vesting for certain unvested stock options. Under APB Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” we expensed the fair value of the options at the new measurement date. We recorded charges of approximately $3.9 million during the fourth quarter of fiscal year 2003 and $3.2 million during 2004 related to the restructuring plan for severance payments, consulting fees and stock option expenses. We expect to incur approximately $3.4 million of expenses related to this restructuring plan in 2005.

Under the 2003 management restructuring plan, a retirement benefits agreement was entered into with our Chief Executive Officer (CEO), Larry Edwards, pursuant to which he determines his own future retirement date. In March 2005, Mr. Edwards notified the board of directors that he would retire from his position as CEO effective June 30, 2005. Mr. Edwards will continue as chairman of the board. Upon his retirement as CEO, Mr. Edwards will receive a payment of approximately $1.9 million, which was expensed in 2003 and accrued in other current liabilities as of December 31, 2004. This amount is included in the $3.9 million of 2003 restructuring costs, mentioned above. In addition, we agreed to pay Mr. Edwards approximately $0.8 million within 30 days after signing a consulting service agreement and a release agreement on June 30, 2005. This amount will be expensed in the second quarter of 2005. On June 30, 2005, we will enter into a one-year consulting agreement with Mr. Edwards.

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The consulting fees payable to Mr. Edwards over the term of his consulting service agreement which are currently estimated to total an additional $0.9 million, will be expensed as the services are rendered over the term of the agreement. The actual amount will be based on his actual salary and target bonus at June 30, 2005.

Under our current stock option plans, participants may exercise their vested options up to 90 days after their termination date. As part of his retirement benefits package, Mr. Edwards will execute an extension agreement, on the retirement date, whereby certain of his stock options become immediately fully vested. In addition, instead of the normal 90-day exercise period, Mr. Edwards will have one year from his retirement date to exercise his options. When this extension agreement is executed and these modifications are made to Mr. Edwards’ original stock option agreements, the Company could incur significant compensation expense in accordance with APB 25. The compensation expense will be measured on the retirement date, as the excess of the fair value of the stock over the exercise prices times the number of stock options outstanding. Assuming the expected number of unvested options outstanding at June 30, 2005 ($4.87/share options – 30,000 shares; $6.10/share options – 60,000 shares and $9.76/share options – 75,000 shares) and the closing stock price of $9.81 as of February 28, 2005, we estimate that this pre-tax charge would be approximately $0.5 million. This amount would vary based on the number of unexercised unvested options and the actual stock price as of June 30, 2005.

Historical Overview

The following summary is intended to provide information concerning the historical background of the Company, as certain transactions occurring in fiscal year 2001 had a significant impact on the Company’s results of operations for that year.

The Company’s predecessor, GEEG Holdings, L.L.C., was formed for the purpose of acquiring Jason Incorporated’s power generation products division by the management of the division and other outside investors. This acquisition was consummated on June 5, 1998. Jason Incorporated’s power generation division consisted of Braden Manufacturing L.L.C., Deltak L.L.C. and other subsidiaries.

In July 2000, the owners of GEEG Holdings, L.L.C. sought purchasers for the company, as a result of which, in August 2000, investment entities controlled by Harvest Partners, Inc. acquired control of GEEG Holdings, L.L.C. in a recapitalization transaction. GEEG Holdings, L.L.C. partially financed the recapitalization with $140.0 million of borrowings under a senior credit facility and a $67.5 million senior subordinated loan. In October 2000, GEEG Holdings, L.L.C. acquired CFI Holdings, Inc. and its subsidiary, Consolidated Fabricators, Inc., for $25.2 million.

On May 18, 2001, the Company completed a reorganization, pursuant to which Global Power Equipment Group Inc. became the successor to GEEG Holdings, L.L.C. On May 23, 2001, the Company completed its IPO of 7,350,000 shares of its common stock. As part of the reorganization transaction, the following occurred:

In connection with the reorganization and the IPO, the Company refinanced a portion of its outstanding indebtedness. The Company used a portion of the net proceeds from the IPO to repay $27.5 million of its outstanding senior subordinated loan and $85.4 million of the outstanding balance of its outstanding senior term loans under its senior credit facility. The Company refinanced the remaining balance on its senior term loans under its senior credit facility using the proceeds of a term loan under an amended and restated senior credit facility. For additional information, see “Liquidity and Capital Resources” below. This refinancing of the Company’s outstanding indebtedness in May 2001 resulted in an approximate $13.7 million loss from the write-off of deferred financing costs and debt discount, as well as prepayment premiums relating to the prepayment of long-term debt.

On June 15, 2001, the Company retired the remaining $40.0 million of its senior subordinated loan with the proceeds of a $35.0 million increase to the new term loan facility and $5.0 million on the Company’s revolving credit facility. This debt extinguishment resulted in an approximate $15.9 million loss from the write-off of deferred financing costs and debt discount, as well as prepayment premiums relating to the prepayment of long-term debt. These amounts were charged to earnings in the second quarter of fiscal 2001.

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Critical Accounting Policies

The following discussion of accounting policies is intended to highlight certain portions of the Summary of Significant Accounting Policies presented as Note 2 to the consolidated financial statements, included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. These policies were selected because a fluctuation in actual results versus expected results could materially affect our operating results and because the policies require significant judgments and estimates to be made each quarter. Our accounting related to these policies is initially based on our best estimates at the time of original entry in our accounting records. Adjustments are periodically recorded when our actual experience differs from the expected experience underlying the estimates. These adjustments could be material if our experience were to change significantly in a short period of time. On a monthly basis we compare our actual experience and expected experience in order to further mitigate the likelihood of material adjustments.

Revenue Recognition - GPEG currently has two segments: Heat Recovery Equipment and Auxiliary Power Equipment. Revenues and cost of sales for our Heat Recovery Equipment segment are recognized on the percentage-of-completion method based on the percentage of actual hours incurred to date in relation to total estimated hours for each contract. Our estimate of the total hours to be incurred at any particular time has a significant impact on the revenue recognized for the respective period. The percentage-of-completion method is only allowed under certain circumstances in which the revenue process is long-term in nature (often in excess of one year), the products sold are highly customized and a process is in place whereby revenues, costs and margins can be accurately estimated. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income, and the effects of such revisions are recognized in the period that the revisions are determined. Under percentage-of-completion accounting, management must also make key judgments in areas such as percent complete, estimates of project costs and margin, estimates of total and remaining project hours and liquidated damages and backcharge assessments. Any deviations from estimates could have a significant positive or negative impact on our results of operations. A one percent variation from of our estimate of percent complete on those Heat Recovery Equipment contracts in which we apply the percentage-of-completion method would have increased or decreased our 2004 revenues by approximately $1.2 million.

Revenues for our Auxiliary Power Equipment segment are recognized on the completed-contract method due to the short-term nature of the product production period. Under this method, no revenue is recognized until the contract is complete and the customer takes risk of loss and title. Similar to our Heat Recovery Equipment segment, changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to job costs and income amounts that are different than were originally estimated.

During the course of a project or when a project has been completed, management may become aware of circumstances in which it should make provisions for estimated costs. Costs of this nature are common in our industry and inherent in the nature of our business. The Company records the estimated costs in the period in which they are identified. The costs are typically the result of warranty claims, final contract settlements and liquidated damages due to late delivery. Unanticipated cost increases or delays may occur as a result of several factors, including:

In some cases, cost overruns can be passed on to our customers, which are recognized in the period when agreement is reached with the customers as to the amount of the claims. The agreement may occur after project completion. Cost overruns that we cannot pass on to our customers or the payment of liquidated damages under our contracts will lower our gross profit and resulting operating income.

From time to time, customers have claims against the Company that result in litigation. The Company recognizes these claims as a charge to cost of sales in the period when it is probable they will result in a loss and the amount can be reasonably estimated.

While management has made its best efforts to record known adjustments to revenues and cost of sales for claims, settlements and damages for projects in process, it is possible that there are significant unknown adjustments that will be made in the future for those projects. These adjustments could have a material impact on gross profit percentages and resulting profitability in a given annual or quarterly reporting period.

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Nearly all of our contracts are entered into on a fixed-price basis. As a result, we benefit from cost savings, but have limited ability to recover for any cost overruns, except in those contracts where the scope has changed. Contract prices are established based in part on our projected costs, which are subject to a number of assumptions. The costs that we incur in connection with each contract can vary, sometimes substantially, from our original projections. Because of the large scale and long duration of our contracts, unanticipated changes may occur, such as customer budget decisions, design changes, delays in receiving permits and cost increases, which may delay delivery of our products and, in turn, delay revenue recognition.

Warranty- Estimated costs related to product warranties are accrued as revenue is recognized and included in our cost of sales. Estimated costs are based upon past warranty claims and sales history. Warranty terms vary by contract but generally provide for a term of three years or less. We manage our exposure to warranty claims by having our field service and quality assurance personnel regularly monitor our projects and maintain ongoing and regular communications with the customer. In 2004, a one percent variation from our warranty expense would have increased or decreased our cost of goods sold by approximately $15,000. A reconciliation of the changes to our warranty accrual for 2004 and 2003 is as follows (dollars in thousands):

In 2004, the Company changed its previous estimates due to the lapse of warranty periods and lower than expected settlements under warranty claims. During 2004, the warranty accrual for the Auxilliary Power Equipment segment was reduced by $1.7 million based on a review of historical warranty claims. The Company continues to review its warranty policy in light of its changing business operations and settlement experience.

Income Taxes- Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company classifies deferred tax assets and liabilities into current and non-current amounts based on the classification of the related assets and liabilities. Certain judgments are made relating to recoverability of deferred tax assets, the level of our expected future taxable income and available tax planning strategies. These judgments are routinely reviewed by management.

Stock-based Compensation- Stock-based compensation is accounted for using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. No compensation expense is recorded for stock options when granted as option prices have been set at the market value of the underlying stock at the date of grant.

SFAS 123 “Accounting for Stock-Based Compensation”, requires the measurement of the fair value of options to be included in the statement of operations or disclosed in the notes to financial statements. The Company elected the disclosure-only alternative under SFAS 123.

In December 2004, the FASB issued FASB 123R (revised 2004) “Share-Based Payment.” FASB 123R is a revision of FASB 123 “Accounting for Stock-Based Compensation”, and it supercedes APB Opinion No. 25 “Accounting for Stock Issued to Employees.” FASB 123R provides guidance on transactions whereby companies exchange equity instruments for goods and services. This new rule requires companies to expense the fair market value of stock options issued to employees. The Company will be required to adopt FASB 123R in the third quarter of 2005. The Company is in the process of evaluating its alternatives under FASB 123R and determining the impact on the consolidated financial statements.

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Goodwill and Impairment of Long-Lived Assets- We perform annual impairment analyses on our recorded goodwill and long-lived assets whenever events and circumstances indicate that they may be impaired. The Company prepared the analysis as of December 31, 2004 with the assistance of an independent third party valuation company.

The analysis includes assumptions related to future revenues, cash flows, and net assets. This analysis is based primarily on assumptions about future events such as revenue and cash flow growth rates, discount rates and terminal value of the Company. Actual deviations from the assumptions used in the analysis could have a significant impact on the estimated fair values calculated. Factors that would cause a more frequent test for impairment include, among other things, a significant negative change in the estimated future cash flows of a reporting unit that has goodwill because of an event or a combination of events. We did not record any impairment provisions upon the adoption of SFAS 142 nor have we recorded any in 2004 or 2003 as the future estimated cash flows as well as current market values were in excess of the reporting units’ asset carrying values.

Results of Operations

The table below represents the operating results of the Company for the periods indicated (in thousands except per share amounts):

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A reconciliation of EBITDA to net income (loss) is set forth in the table above.

Prior to 2004, the Company used a 52-/53-week fiscal year ending on the last Saturday in December. As a result, references in this report to fiscal year 2003 refers to the fiscal year ended December 27, 2003, and fiscal year 2002 refers to the fiscal year ended December 28, 2002. The fiscal years 2003 and 2002 included 52 weeks, and 2004 included 53 weeks.

During fourth quarter of 2004, the Company’s Board of Directors approved a change in the fiscal year-end from the last Saturday in December to December 31, which will be effective for the fourth quarter of 2004 and periods beyond. Accordingly, references to 2004 or to fiscal year 2004 refer to the fiscal year ended December 31, 2004.

2004 compared to Fiscal Year 2003

The demand for our products and services depends, to a significant degree, on the continued construction of gas turbine power generation plants. In 2004, approximately 82% of our revenues were from sales of equipment and provision of services for gas turbine power plants. The power generation equipment industry has experienced cyclical periods of growth or decline. In periods of decreased demand for new gas turbine power plants or difficulty in raising capital to finance new power plants, our customers may be more likely to decrease expenditures on the types of products and systems that we supply and, as a result, our revenues may decrease.

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In addition, the gas turbine power industry depends on natural gas. A rise in the price or shortage in the supply of natural gas could affect the profitability or operations of gas turbine power plants, which could adversely affect our future revenues. Liquidity concerns in 2002 and continuing into 2003 in the merchant power production sector have reduced the availability of financing for power plant development in the United States and have caused the market for our products to decline. While it is believed that the long-term need for gas fired power plants on a world-wide basis is substantial, lower demand in the United States during 2003 and 2004 negatively impacted our bookings until the second half of 2004 and revenue for both 2003 and 2004. We anticipate that demand for new power plants outside of the United States will continue to provide a good market for our products.

Revenues

Revenues decreased 11.4% to $233.7 million for 2004 from $263.8 million for the fiscal year 2003. Revenues in both years were negatively impacted by the downturn in the demand for gas turbine power generation equipment in the United States. Demand for our products from international customers was fairly strong for the first six months of 2004 and very strong during the last half of 2004. The significant amount of new orders booked in the last six months of 2004 is expected to result in a significant increase in 2005 revenues.

The following table sets forth our revenues for 2004 and fiscal year 2003 (dollars in thousands) by segment and by major product group:

Heat Recovery Equipment segment revenues decreased 2.1% to $117.3 million for the 2004. Revenues for HRSGs decreased 14.5% to $74.1 million. The number and size of orders booked into backlog decreased dramatically during 2002 and 2003, which resulted in lower revenues for 2003 and 2004 compared to earlier periods. However, we expect our 2005 HRSG revenues to increase significantly as compared to 2004 based on the increased level of bookings at the end of 2004. While there was only a 7.3% increase in revenues from 2003 to 2004 for Specialty boilers, the demand for Specialty boilers in 2004 was much stronger as compared to 2003, but the lag between the time an order is booked and revenue is recognized can be more than one year. The revenues from the sale of Industrial boilers relate exclusively to our acquisition of Deltak Power Equipment (China) Co., Ltd. on July 30, 2004. In light of increased bookings for Specialty boilers and the ownership of Deltak Power Equipment (China) Co., Ltd. for all of 2005, we expect Specialty boiler and Industrial boiler revenues to increase in 2005.

Auxiliary Power Equipment segment revenues decreased 19.1% to $116.4 million for 2004. Revenues for exhaust systems decreased by 18.7% to $39.4 million. This decline is primarily due the downturn of the domestic power market resulting in a significantly lower level of orders. Revenues for inlet systems and other equipment decreased by 27.0% to $43.0 million and 7.0% to $34.0 million, respectively. The significant decrease is also due to a significantly lower level of domestic orders booked during 2003 and 2004.

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The following table presents our revenues by geographic region (dollars in millions):

Revenues in North America comprised 40.0% of our revenues for 2004 and 68.5% of our revenue for fiscal year 2003. Revenues in North America decreased 48.3% to $93.5 million for 2004, primarily as a result of the decrease in the development of gas turbine power plants in the U.S. gas turbine power generation equipment industry beginning in the latter half of 2001 and continuing into 2004. A number of factors have contributed to this situation such as debt and liquidity issues of several merchant power producing companies. While it is believed that the long-term need for power plants on a world-wide basis is substantial, the current demand in the United States has slowed considerably and is expected to remain depressed in 2005. We expect Mexico and Canada to remain good markets for our products in 2005.

Revenues in Asia increased 276.3% for 2004 to $66.6 million, as the Company began to recognize significant revenue from orders we received from Chinese and other Asian customers in the first quarter of 2004. Due to its growing economy and acute shortage of power generating capacity, Asia represents a significant growth opportunity and is expected to account for an increasingly large proportion of the Company’s revenues over the next several years. Revenues in Europe decreased by 37.7% to $24.3 million primarily as a result of a decreased demand for our products in Europe, but we expect this to improve in 2005 based on recent orders received. Middle East revenues were $39.8 million for 2004 as compared to $14.4 million for fiscal year 2003. Most of the revenue relates to several large orders in Saudi Arabia. The Middle East remains one of the most active markets for new power projects.

Gross Profit

Gross Profit decreased 45.1% to $39.3 million for 2004 from $71.5 million for fiscal year 2003. While total revenues decreased approximately 11.4%, the gross profit as a percentage of revenue decreased from 27.1% in 2003 to 16.8% in 2004. The primarily reasons for the decrease in gross margins are as follows:

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Throughout a project’s life cycle, gross profit percentages are continually monitored and, as actual project costs are incurred and other unforeseen events occur, our cost estimates and corresponding margins and revenues will continue to be positively and negatively impacted. We expect gross profit percentage in 2005 to be lower than prior years due to continued high steel prices and intense competition.

Selling and Administrative Expenses

Selling and administrative expenses increased 2.8% to $39.2 million for fiscal year 2004 from $38.1 million for fiscal year 2003. Excluding the effect of restructuring costs of $4.8 million and $3.4 million, respectively, total selling and administrative expenses in 2004 were comparable to 2003.

As a percentage of revenues, selling and administrative expenses increased to 16.8% for 2004 from 14.4% for the comparable period of fiscal year 2003 as a result of our decreasing revenues and higher restructuring costs in 2004 compared to 2003.

Operating Income

Operating income decreased to $0.1 million for 2004 from $33.4 million in fiscal year 2003. The decrease in revenues and gross profit were the main contributors to this decrease. In the fourth quarter of 2004, we experienced an operating loss of approximately $2.4 million. Included in that loss were unrealized losses on several forward foreign currency contracts, management restructuring and operational restructuring costs. Except for the unpredictable impact of future unrealized gain or loss on forward foreign currency contracts, we do not expect to incur these types of charges in 2005 and, therefore, believe that our operating income will be positive in future quarters.

Interest Expense

Interest expense decreased to $1.3 million for 2004 from $1.5 million for fiscal year 2003. For the first nine months of 2004, interest expense was at a much lower run rate than 2003 due to a significant reduction of debt during 2003 and the first half of 2004 resulting from voluntary principal payments. This trend reversed in the fourth quarter of 2004 due to higher total debt as well as higher debt issuance cost amortization from the refinancing of our senior credit facility and the issuance of the convertible notes to finance the acquisition of WISG. In addition, our overall debt level at year-end 2004 was much higher than year-end 2003 with the inclusion of the convertible notes.

Our year-end 2004 borrowing rate increased approximately 197 basis points from year-end 2003 due to general market conditions and the borrowing terms of the new senior credit facility. At December 31, 2004, the average interest rate on our term debt was 4.43%, and our convertible notes bear interest at a fixed rate of 4.25%.

Income Taxes

The Company is currently reflecting a 38% effective tax rate in the 2004 tax provision. Our continued amortization of goodwill, for income tax reporting purposes, will allow us to reduce cash paid for future taxes by approximately $6.4 million annually, but will not reduce future income tax expense. We had approximately $37.3 million of federal net operating loss carrybacks and $0 of federal loss carryforwards at December 31, 2004. The related income tax receivable is reflected in other current assets. The Company also has state net operating loss carryforwards of approximately $35.2 million, which will begin expiring in the years 2008 through 2023 and foreign net operating loss carryforwards of $1.6 million, which will expire in 2014. The related tax benefit is reflected in the deferred tax assets.

Backlog

Backlog increased to approximately $308.9 million at December 31, 2004, compared to $178.5 million at December 27, 2003. Based on current production and delivery schedules, we believe that up to $228.8 million, or 74%, of our backlog at December 31, 2004, will be recognized as a portion of our revenues in 2005. Our backlog consists of firm orders from our customers for projects in progress. Bookings of projects can only be reflected in the backlog when the customers have made a firm commitment. Backlog may vary significantly quarter to quarter due to the timing of customer commitments. During 2004, we removed bookings of approximately $17 million, with zero bookings removed in the fourth quarter. Cancellation fees and revenue recognition have normally exceeded our out-of-pocket costs on projects removed from backlog.

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Fiscal Year 2003 compared to Fiscal Year 2002

Revenues

Revenues decreased 55.0% to $263.8 million for the fiscal year 2003 from $586.8 million for the fiscal year 2002. This decrease was due to a continued decline in new orders for both Heat Recovery and Auxiliary Power equipment, primarily in the United States market. Demand in the gas turbine power generation equipment industry began to decrease during the latter half of 2001, and that trend continued into 2003. Consequently, the development of domestic gas turbine power plants slowed considerably beginning in the latter half of 2001. As a result, our revenues in fiscal 2003 were significantly lower than revenues in 2002 due to the downturn in new power plant construction within the United States.

The following table sets forth our segment revenues for fiscal years 2003 and 2002 (dollars in thousands):

Heat Recovery Equipment segment revenues decreased 61.2% to $119.9 million for the fiscal year 2003. Revenues for HRSGs decreased 62.5% to $86.7 million. The volume and size of orders booked into backlog decreased dramatically during 2002 and 2003, which results in lower revenues in the following periods. Revenues for specialty boilers decreased by 57.2% to $33.2 million. This decrease was due in part to a lower level of revenues for selective catalytic reduction (SCR) units. The large decrease in SCR units was expected, and was due to one-time environmental compliance related investments made in the U.S., which were largely completed in 2001 and 2002.

Auxiliary Power Equipment segment revenues decreased 48.3% to $143.9 million for fiscal year 2003. Revenues for exhaust systems decreased by 28.1% to $48.5 million. This decline was primarily due the downturn of the domestic power market resulting in a significantly lower level of orders. Revenues for inlet systems and other equipment decreased by 56.1% to $58.9 million and 52.3% to $36.5 million, respectively. The significant decrease was also due to a significantly lower level of domestic orders booked during 2002 and 2003.

The demand for our products and services depends, to a significant degree, on the continued construction of gas turbine power generation plants. In fiscal year 2003, approximately 87% of our revenues were from sales of equipment and provision of services for gas turbine power plants. Liquidity concerns in 2002 and continuing into 2003 in the merchant power production sector reduced the availability of financing for power plant development in the United States and caused the market for our products to decline. While it is believed that the long-term need for gas fired power plants on a world-wide basis is substantial, lower demand in the United States during 2002 and 2003 negatively impacted our bookings and revenue.

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The following table presents our revenues by geographic region (dollars in millions):