2008 // 2007

OVERVIEW

Sales for 2008 were up a total of 24 percent from 2007. About 15 percent is attributable to sales from the Company's acquisitions and about 9 percent from organic growth. Fueling Systems product sales increased to 25 percent of the Company's total 2008 sales from about 22 percent in 2007. Earnings increased in 2008 primarily due to the higher sales volume and product mix changes. Fueling Systems product sales increased about 40 percent from 2007 resulting in significant earnings improvement as the Segment leveraged its fixed costs. Sales growth of the Company slowed significantly in the fourth quarter of 2008 primarily as a result of broad economic deterioration in our end markets.

RESULTS OF OPERATIONS

Net Sales
                     2008        2007       2008 v 2007
                                Net Sales
Water Systems     $ 557.0     $ 466.8     $        90.2
Fueling Systems   $ 188.6     $ 135.2     $        53.4
Other             $     -     $     -     $           -
Consolidated      $ 745.6     $ 602.0     $       143.6

Net sales for 2008 were $745.6 million, an increase of $143.6 million or about 24 percent compared to 2007 sales of $602.0 million. The full year incremental impact of sales from businesses acquired during 2007 and acquisitions in 2008 was $87.7 million. Sales revenue increased by $6.3 million or about 1 percent in 2008 due to foreign exchange rate changes. However the U.S. dollar strengthened against most foreign currencies late in 2008, negatively impacting fourth quarter sales. Overall organic growth for 2008, including foreign exchange rate changes, was $55.9 million or about 9 percent.

Net Sales-Water Systems
Globally, Water Systems sales increased in 2008 by about 19 percent from 2007. The increase in Water Systems sales was due primarily to sales attributable to acquisitions. Excluding acquisitions, Water Systems sales increased by about 1 percent versus 2007. Sales growth was impacted by the reduction in the number of new housing starts in the United States and portions of Western Europe and a reduction in inventory held by distributors and contractors. Management expects the reduction in new housing starts and inventory to continue into 2009.

Net Sales-Fueling Systems
Globally, Fueling Systems sales for 2008 were $188.6 million, an increase of $53.4 million or about 40 percent compared to 2007. All of the sales increase was organic. Fueling revenue growth was led by vapor recovery system sales in California. Management estimates that as of year end 2008, 45 to 50 percent of the 11,200 filling stations in California have installed vapor control systems and that Franklin Fueling Systems has supplied over 90 percent of these installations. In late 2008, the rate of vapor recovery system installations in California slowed. The Company believes that some of this slowing is due to the general economic environment and the difficulty station owners are having in obtaining debt financing for new equipment. Additionally, a competitive vapor management control system was introduced by Veeder Root. The Company filed a lawsuit (i) alleging that Veeder Root, in an effort to gain market share, has engaged in unfair competition and (ii) seeking to prevent any further adverse effect on the Company's business in California. The Company expects that it will continue to win a majority share of the remaining California installations.

Fueling Systems sales also increased in key international markets including China, other areas of Asia, and Latin America during the year.

Selling, General and Administrative ("SG&A") Selling and administrative ("SG&A") expense as a percent of net sales for 2008 and 2007 was 19.8 percent and 19.9 percent, respectively. SG&A expense spending increased by $28.2 million in 2008 compared to last year. The acquisitions of Pump Brands (South Africa), the pump division of Monarch Industries (Canada), Industrias Schneider SA (Brazil), Western Pumps and Cal Pump (United States) added approximately $18.0 million of selling, general and administrative expenses to the Water Systems segment during 2008. Excluding acquisitions, the Company's overall marketing and selling expenses in 2008 increased by $3.7 million to prior year. Additionally, expenses related to variable performance based compensation increased by approximately $3.9 million in 2008 versus 2007.

Restructuring Expenses
There were $2.2 million of nonrecurring restructuring expenses in 2008 compared to $3.9 million in 2007. In December 2008, the Company announced Phase 3 of its Global Manufacturing Realignment Program for its manufacturing facilities in North America and Brazil. In North America the Company is continuing the rationalization of manufacturing capacity between the manufacturing complex in Linares, Mexico and its other North American plants. Initially, Phase 3 of the realignment plan includes the phased move of approximately 500,000 man hours of manufacturing activity to Linares, approximately 80 percent of which is from Siloam Springs, Arkansas. The transfer is expected to be largely complete by June, 2009 and is anticipated to reduce manufacturing labor and overhead costs. The Company has estimated the pretax charge at $6.0 million to $8.0 million over three to four quarters beginning with the fourth quarter of 2008 and includes severance expenses, pension charges, asset write-offs, and equipment relocation costs. Approximately two thirds of these charges will be non-cash. After this transfer is complete, the Linares facility will have sufficient capacity to absorb additional manufacturing activity and plans are being made to further rationalize capacity in late 2009 and 2010.

In Brazil, in order to support sales growth, the Company will transfer its manufacturing operations in Joinville to a new facility and will sell the existing facility. The Company believes this transfer will begin in late 2009 or early 2010. It is anticipated that relocation costs for this move will be approximately $0.3 million. When more definitive estimates of the timing and costs of the transfer are known, the Company will announce them.

During the first quarter of 2007, the Company initiated Phase 2 of its Global Manufacturing Realignment Program. Phase 2 of the realignment plan included expanding facilities in low-cost regions and shifting production out of higher cost manufacturing facilities. During the first quarter 2008, having finished construction of the new pump plant in Linares, Mexico and the consolidation of other manufacturing facilities, the Company completed Phase 2 of the Global Manufacturing Realignment Program. In total, this phase included severance and equipment relocation costs of $4.0 million pre-tax, with $3.9 million in 2007 and $0.1 million in the first quarter 2008. As previously disclosed, Phase 1 of the realignment plan, which was completed in December 2005, resulted in $7.5 million of pre-tax restructuring expenses

Operating Income
Operating income was $76.7 million in 2008, up $27.5 million from 2007 operating
income of $49.2 million.

                     2008        2007       2008 v 2007
                        Operating income/ (loss)
Water Systems     $  67.6     $  56.7     $        10.9
Fueling Systems   $  49.4     $  24.6     $        24.8
Other             $ (40.3 )   $ (32.1 )   $        (8.2 )
Consolidated      $  76.7     $  49.2     $        27.5

Operating Income-Water Systems
Water Systems operating income was $67.6 million for 2008, up $10.9 million or about 19 percent versus the same period a year ago. Operating margins were basically unchanged at 12.1 percent to sales in 2008 versus in the prior year of 12.2 percent.

Operating Income-Fueling Systems
Fueling Systems operating income was $49.4 million, an increase of $24.8 million or about 100 percent versus 2007. Operating margins improved to 26.2 percent of sales versus 18.2 percent in the prior year percent. Fueling Systems operating income improved primarily as a result of sales volume increases.

Operating Income-Other
Operating income other is composed primarily of unallocated general and administrative expenses. General and administrative expense increases were primarily due to higher compensation expenses. Other SG&A increases were related to the realignment of general and administrative expenses of acquired companies within the Water Systems segment into the corporate structure.

Interest Expense
Interest expense for 2008 and 2007 was $11.0 million and $8.1 million, respectively. Interest expense increased in 2008 due primarily to debt increases associated with the acquisitions, as well as increased working capital.

Other Income or Expense
Other Income or Expense for 2008 and 2007 was $1.3 million income and $3.0 million income, respectively. Included in "Other income" for both 2008 and 2007 was interest income of $2.1 and $2.2 million, primarily derived from the investment of cash balances in short-term U.S. treasury and agency securities. Also, included in other income in 2008 and 2007 was income from equity investments of $0.7 million and $0.9 million. In 2008, the Company reached an agreement in principle to settle a trademark licensing dispute and recorded a pre-tax expense of $0.9 million to reflect the settlement payment.

Foreign Exchange
For 2008 foreign currency-based transactions were not significant and were a gain of about $0.1 million for 2007.

Income Taxes
The provision for income taxes in 2008 and 2007 was $22.9 million and $15.4 million, respectively. The effective tax rates for 2008 and 2007 were 34.2 and 35.0 percent, respectively. The effective tax rate differs from the United States statutory rate of 35 percent, generally due to foreign income exclusion and due to the effects of state and foreign income taxes, net of federal tax benefits.

Net Income
Net income for 2008 was $44.1 million, or $1.90 per diluted share, compared to the same period of 2007 net income of $28.7 million or $1.22 per diluted share.

2007 // 2006

OVERVIEW

Sales for 2007 were up from 2006. The increase in sales was primarily related to sales from acquisitions. Sales growth was further benefited by significant organic growth in Water Systems pump unit shipments and international sales of Water Systems products, as well as organic growth in Fueling Systems product shipments, primarily vapor recovery systems. Earnings declined in 2007 primarily due to the decreased sales of submersible motor units in the United States and Canada. The Company's margins were also impacted by higher commodity costs, increased fixed costs incurred in connection with manufacturing, engineering, selling, general and administrative spending resulting from the Company's strategy of selling to a more diversified customer base by marketing its Water Systems products direct to distributors as well as price discounting in the submersible motor and pump industry within the United States and Canada. The Company also incurred significant restructuring costs related to the 2007 phase of its Global Manufacturing Realignment program, which also decreased operating income.

RESULTS OF OPERATIONS

Net Sales
(In millions)       2007          2006         2007 v 2006
                      Net sales to external customers
Water Systems     $   466.8      $ 465.6     $         1.2
Fueling Systems   $   135.2      $  92.3     $        42.9
Other                     -            -                 -
Consolidated      $   602.0      $ 557.9     $        44.1

Net sales for fiscal year 2007 were $602.0 million, an increase of $44.1 million or 8 percent compared to 2006 sales of $557.9 million. Excluding acquisition related sales and changes in foreign exchange rates; net sales decreased about 8 percent. Incremental sales related to acquisitions for fiscal year 2007 were about $79 million or 14 percent of prior year sales. Acquisition sales growth was attributable to the full year impact on 2007 of the Little Giant Pump Company and Healy Systems acquisitions from 2006, as well as the 2007 acquisitions of Pump Brands and the pump division of Monarch. The Company also realized organic growth in Fueling Systems sales and in all submersible Water Systems sales in regions outside the United States and Canada.

Net Sales-Water Systems
Water Systems sales worldwide were $466.8 million, up $1.2 million for fiscal year 2007 compared to 2006. Excluding acquisition related sales and changes in foreign exchange rates; net sales decreased about 15 percent. The decrease was primarily attributable to a significant decline in unit sales of 4 inch submersible motors in the United States and Canada. Partially offsetting the decline was a significant increase in pump product unit sales in the United States and Canada, as well as increases across all submersible product sales outside of the region.

Net Sales-Fueling Systems
Fueling Systems sales worldwide were $135.2 million an increase of approximately 47 percent in 2007 from fiscal year 2006. Fueling Systems sales growth benefited from both organic sales growth, primarily related to vapor recovery systems and electronic fuel management systems, as well as acquisition related sales. Excluding acquisition related sales and changes in foreign exchange rates; net sales increased about 29 percent.

Cost of Sales
Cost of sales as a percent of net sales for 2007 and 2006 was 71.3 percent and 65.7 percent, respectively. Cost of sales as a percent of net sales increased in 2007 from 2006 primarily as a result of product mix changes as Fueling Systems products and complete Water Systems pumps (including Little Giant product lines) represented a higher percentage of overall sales and these product lines carry a higher cost of sales than submersible motor products. Fixed costs increased as a percentage of sales for Water Systems sales in the United States as shipments declined faster than related costs. Other less significant increases in cost of sales during 2007 were freight, warranty and obsolescence expenses.

Selling, General and Administrative ("SG&A") SG&A expense as a percent of net sales for 2007 and 2006 was 19.9 percent and 18.4 percent, respectively. The increase in SG&A was about $17.3 million in 2007 over 2006, $13.2 million of which was due to acquisitions. Other increases in SG&A costs were incurred in connection with selling, general and administrative spending resulting from the Company's strategy of selling to a more diversified customer base by marketing its Water Systems products directly to distributors and increased variable commissions on stronger Fueling Systems sales.

Operating Income
(In millions)      2007        2006         2007 v 2006
                        Operating income/ (loss)
Water Systems     $  56.7     $ 104.4     $       (47.7 )
Fueling Systems   $  24.6     $  15.0     $         9.6
Other             $ (32.1 )   $ (30.3 )   $        (1.8 )
Consolidated      $  49.2     $  89.1     $       (39.9 )

Operating Income-Water Systems
Water Systems operating income decreased primarily as a result of lower unit sales of 4" submersible motors to major OEMs in the US and Canada. In addition, other factors affecting the decrease in operating income for the Water Systems segments were product mix changes, about $5.5 million primarily from declining motor shipments as a percentage of Water Systems sales, higher freight costs of $4.5 million, slow moving and obsolescence expense of $1.4 million related to change over and implementing new product designs, and warranty costs of $0.8 million. Partially offsetting the decline in operating income were earnings from acquisitions and increased Water Systems product sales and related earnings from regions outside of the US and Canada.

Operating Income-Fueling Systems
Fueling Systems operating income improved primarily as a result of sales volume increases. Fueling Systems margins improved by 90 basis points due to the product mix benefit of the sales growth and as sales increased at a greater rate than fixed manufacturing costs.

Operating Income-Other
Other operating income is composed primarily of unallocated general and administrative expenses. General and administrative expense increases were primarily due to increased expenses associated with acquisitions.

Interest expense
Interest expense for 2007 and 2006 was $8.1 million and $3.4 million, respectively. Interest expense increased in 2007 due to the debt incurred for acquisitions and increased working capital requirements.

Other income or expense
Included in other income for 2007 and 2006 was interest income of $2.2 million and $1.9 million, respectively, primarily derived from the investment of cash balances in short-term U.S. treasury and agency securities. Also,

included in other income for 2007 and 2006 was income from equity investments of $0.9 million and $0.7 million, respectively.

Foreign exchange
Foreign currency-based transactions produced a gain for 2007 of about $0.1 million primarily due to rate changes of the euro, the Canadian dollar and the South African Rand relative to the U.S. dollar. Foreign currency-based transactions produced a loss for 2006 of $0.1 million primarily due to euro rate changes relative to other currencies in Europe and the U.S. dollar.

Income taxes
The provision for income taxes from continuing operations in 2007 and 2006 was $15.4 million and $30.7 million, respectively. The effective tax rates were 35.0 and 35.1 percent for 2007 and 2006, respectively. The effective tax rate differs from the United States statutory rate of 35 percent, generally due to foreign income exclusion and R&D credits and due to the effects of state and foreign income taxes, net of federal tax benefits.

Income from continuing operations
Income from continuing operations for 2007 was $28.7 million, or $1.22 per diluted share, compared to 2006 income from continuing operations of $56.8 million or $2.43 per diluted share.

CAPITAL RESOURCES AND LIQUIDITY

The Company's primary sources of liquidity are cash flows from operations and funds available under its committed, unsecured, revolving credit agreement maturing 2011 (the "Agreement") in the amount of $120.0 million and its amended and restated uncommitted note purchase and private shelf agreement (the "Prudential Agreement") in the amount of $175.0 million. The Company has no scheduled principal payments on the Prudential Agreement until 2015. As of January 3, 2009 the Company had $85.0 million and $25.0 million of borrowing capacity under the respective agreements. The uncertainty in the financial and credit markets has not impacted the liquidity of the Company and the Company expects that ongoing requirements for operations, capital expenditures, dividends, and debt service will be adequately funded from its existing credit agreements. The Agreement and the Prudential Agreement do not contain any material adverse changes or similar provisions that would accelerate the maturity of amounts drawn under either agreement. The Agreement and Prudential Agreement do contain various customary conditions and covenants, which limit, among other things, borrowings, interest coverage, loans or advances and investments. As of January 3, 2009, the Company was in compliance with all covenants.

Net cash flows from operating activities were $44.4 million in 2008 compared to $4.2 million in 2007 and $55.4 million in 2006. The operating cash flow improvement was largely a result of greater Fueling Systems income from continuing operations and normal fluctuations in operating assets and liabilities related to overall results of operations. Fueling revenue growth was led by strong vapor recovery system sales in California.

Net cash used in investing activities was $65.0 million in 2008 compared to $63.2 million in 2007 and $131.6 million in 2006. The 2008 activities were primarily related to $38.4 million, net of cash acquired, used to acquire Industrias Schneider on January 9, 2008. The acquisition was funded with cash and long term borrowings under the Agreement. Additionally, $25.6 million was used for property, plant and equipment additions in 2008. During 2007 the Company acquired Pump Brands in the second quarter and the pump division of Monarch Industries Limited in the third quarter at an aggregate purchase price of $37.0 million, net of cash acquired, and utilized $28.3 million to fund property, plant and equipment additions. In 2006, the Company completed its acquisition of Little Giant Pump Company for a cash purchase price of $120.8 million and Healy Systems, Inc. in a stock purchase transaction for a cash purchase price of $35.1 million. Additionally, $23.1 million was used to fund property, plant and equipment additions in 2006.

Net cash provided by financing activities of $8.9 million in 2008 was primarily related to proceeds from new debt incurred, net of repayments to date. Also included was the repurchase of approximately 235,000 shares of its common stock for $7.8 million and the payment of $11.4 million in dividends to its shareholders. Net cash provided by financing activities of $87.0 million in 2007 was primarily related to proceeds from new debt incurred, net of repayments to date, the repurchase of approximately 187,600 shares of its common stock for $8.1 million, and the payment of $10.8 million in dividends to its shareholders. In 2006, net cash provided by financing activities of

$54.8 million was primarily related to proceeds from new debt incurred, net of repayments to date, as well as the payment of $9.8 million in dividends to its shareholders.

2008 AGGREGATE CONTRACTUAL OBLIGATIONS
Most of the Company's contractual obligations to third parties are debt
obligations. In addition, the Company has certain contractual obligations for
future lease payments, contingency payments, as well as, purchase obligations.
The payment schedule for these contractual obligations is as follows:

 (In millions)                                   Less than                                       More than
                                    Total         1 Year         1-3 Years       3-5 Years        5 Years
Debt                              $   185.0     $       0.0     $      35.0     $       0.0     $     150.0
Debt interest                          76.1             9.5            18.5            17.7            30.4
Capital leases                          1.2             0.7             0.4             0.1             0.0
Operating leases                       20.4             5.6             7.2             2.4             5.2
Contingencies from acquisitions
(Healy Systems and Western
Pump)                                   0.6             0.6             0.0             0.0             0.0
Purchase obligations                    2.1             2.1             0.0             0.0             0.0
                                  $   285.4     $      18.5     $      61.1     $      20.2     $     185.6

Debt interest includes interest under the Company's current credit agreement. The average interest rate for 2008 was 3.2 percent based on the LIBOR plus an interest spread. The remaining interest calculated was based on the fixed rate of 6.31 percent for the Company's short-term insurance company debt and 5.79 percent for the Company's long-term insurance company debt.

The Healy Systems stock purchase agreement provided for additional contingent payments of 5 percent of certain Healy Systems product sales over the next five years from the year of acquisition. The Western Pump stock purchase agreement provided for additional contingent payments of 7.5 percent of business net sales for the two year period commencing April 1, 2008; however the aggregate amount shall not exceed $0.8 million.

The Company has pension and other post-retirement benefit obligations not included in the table above which will result in future payments of $15.7 million. The Company also has unrecognized tax benefits related to FASB Interpretation 48 obligations, none of which are included in the table above. The unrecognized tax benefits of approximately $6.8 million have been recorded as liabilities in accordance with FASB Interpretation No. 48 Uncertainty in Income Taxes, and we are uncertain as to if or when such amounts may be settled. Related to the unrecognized tax benefits, the Company has also recorded a liability for potential penalties and interest of $0.4 million.

ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements. This statement defines fair value in generally accepted accounting principles and expands disclosures about fair value measurements that are required or permitted under other accounting pronouncements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company's adoption of this statement in first quarter 2008 had no impact on its consolidated financial position, results of operations and cash flows. The Company also adopted the deferral provisions of SFAS No. 157-2, which delayed . . .