W-H ENERGY SERVICES INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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COMMISSION FILE NUMBER: 000-31721

W-H ENERGY SERVICES, INC.
(Exact name of Registrant as specified in its charter)

TEXAS 76-0281502
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10370 RICHMOND AVENUE, SUITE 990
HOUSTON, TEXAS 77042
(713) 974-9071
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS
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Common Stock, $0.0001 par value per share
Rights to Purchase Series A Junior Participating Preferred Stock, $0.01 par
value per share
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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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

As of June 28, 2002, approximately 26,143,847 shares of common stock, par
value $0.0001 per share, of Registrant were outstanding and the aggregate market
value of the outstanding shares of common stock of Registrant held by
non-affiliates (based on the average bid and asked price of such shares on such
date) was approximately $477,705,181.

As of March 25, 2003, approximately 27,044,538 shares of common stock, par
value $0.0001 per share, of Registrant were outstanding and the aggregate market
value of the outstanding shares of common stock of Registrant held by
non-affiliates (based on the average bid and asked price of such shares on such
date) was approximately $393,684,954.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 2003 Annual Meeting of
Shareholders, which the Registrant intends to file within 120 days of December
31, 2002, are incorporated by reference into Part III of this Form 10-K.
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W-H ENERGY SERVICES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

OVERVIEW

W-H Energy Services, Inc. and its subsidiaries (collectively, "W-H") is a
diversified oilfield service company that provides products and services used
primarily for the drilling, completion and production of oil and natural gas
wells. We have onshore operations in the United States, Canada, Brazil, Europe,
North Africa and the Middle East and offshore operations off the coast of Brazil
and in the Gulf of Mexico, the North Sea, the Persian Gulf, the Gulf of Suez and
the Mediterranean Sea. Since our formation in 1989, we have entered the
following three primary lines of business through acquisitions and have expanded
our product and service offerings through a combination of acquisitions,
internal growth and research and development:

- drilling related products and services, which include
logging-while-drilling ("LWD"), measurement-while-drilling ("MWD"),
directional drilling, downhole drilling motors, rental tools (including
drill pipe) and drilling fluids;

- completion and workover related products and services, which include
cased-hole wireline logging, perforating and associated rental equipment,
polymers and specialty chemicals, rental tools (including tubing) and
coiled tubing; and

- maintenance and safety related products and services, which include waste
management and safety equipment and services.

We focus on discrete products and services that provide our customers with
alternatives to the integrated services typically marketed by the major
integrated oilfield service companies. We believe our business approach enables
us to compete successfully against these larger oilfield service companies by:

- offering technologically advanced products and services;

- focusing on niche markets in which leading market positions can be
maintained;

- operating our business lines autonomously and marketing our product
offerings independently;

- emphasizing customer service, responsiveness and reliability; and

- providing equity incentives to key management and operating personnel.

Our customers include major and independent oil and natural gas companies,
refining and petrochemical companies and other oilfield service companies.

General information about us can be found at our internet website
(www.whes.com). Our annual report on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, as well as any amendments and exhibits to those
reports, are available free of charge through our website as soon as reasonably
practicable after we file them with, or furnish them to, the United States
Securities and Exchange Commission ("SEC").

STRATEGY

Our strategy is to grow revenues and earnings by providing our customers
with an alternative to the major integrated oilfield service companies while
preserving our entrepreneurial culture. Our strategy consists of the following
key components:

Provide Leading Technology Solutions to Our Customers. We believe
technology is an increasingly important aspect of our business. Improving
technology helps us provide our customers with more efficient and cost-effective
tools to find and produce oil and natural gas. We have invested a substantial
amount of our time and resources in building our technology-based offerings. We
believe our new products and services are among

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the best in the industry and will provide us with the opportunity to grow our
business and service the needs of our customers. Some of our recent
commercialized technological developments include:

- Our Retrievable MWD system, including our patented
wireline-retrievable MWD tool, which can be retrieved from the
surface, thus reducing lost-in-hole costs if the drill string gets
stuck;

- Our Drilling Formation Tester (DFT) tool, an LWD tool that obtains
wireline-equivalent data regarding formation pressure while drilling,
offering time and cost savings as compared to open-hole wireline
measurement of such data;

- Our Gravity MWD service, which minimizes the adverse impact of
magnetic interference while conducting directional surveying, thereby
reducing reliance on conventional gyroscopic wireline surveys; and

- Our Sensor Spool tool, a tool used to detect the precise location of
pipe tool joints and connections during tripping, snubbing or removal
of pipe through the well bore, thereby allowing for increased safety,
fewer equipment failures and cost savings.

We plan to use research and development expenditures to continue to develop
our MWD and LWD technologies, including the following new technologies currently
under development:

- 3D Rotary Steerable (3DRS) technology, which is being developed to
permit full steering and propulsion of a drill string without the use
of a down-hole drilling motor, thereby improving drilling speed and
the quality of the hole drilled;

- Array Wave Resistivity (AWR) technology, which is being developed to
improve the precision and predictability of formation data obtained
through the analysis of electromagnetic wave transmissions through the
formation surrounding a well bore; and

- Slim Density Neutron Standoff Caliper (DNSC) technology, which is
being developed to allow the measurement of formation porosity
information in a wider range of borehole diameters than we currently
offer.

We have also introduced several innovative products and services to the
market through our wireline, wireline rental and drilling fluids businesses.
Some of these products and services include:

- Our patented gravel pack service, which provides operators of oil and
natural gas wells with a more precise method of installing gravel
packs;

- Our patented wireline side entry sub, which is used in pipe recovery
applications; and

- Our high performance lubricant, which allows the use of
environmentally friendly water-based drilling fluids in deep, severe
drilling environments.

Capitalize on the Growth of Offshore and Directional Drilling. A
substantial portion of our drilling related products and services are designed
for use in directional drilling onshore and directional and vertical drilling
offshore. While the overall level of drilling activity fluctuates based on the
industry environment, we believe the trends in both directional drilling and
offshore drilling are positive. We intend to capitalize on these trends by
aggressively marketing the following products and services:

- LWD products, which are economically attractive in many offshore wells,
whether directional or vertical;

- MWD products, which are necessary when LWD products are used and when
drilling directionally, whether onshore or offshore;

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- directional drilling services;

- downhole drilling motors, which are used in most wells drilled
directionally;

- high torque drill pipe, which is utilized in wells drilled directionally;
and

- specialized drilling fluids, which improve drilling performance.

Expand the Breadth and Scope of Our International Operations. We offer LWD
and MWD products and services, directional drilling services and downhole
drilling motors internationally in select areas of the Eastern Hemisphere. In
addition, we provide LWD and MWD products and services in Brazil and MWD
products in Canada. We expect to continue expanding our international operations
on a selective basis.

Selectively Acquire Complementary Businesses and Technologies. We will
continue to pursue acquisitions of complementary businesses which increase the
technological base and expand the market reach of our product and service
offerings. We intend to focus on acquisitions that expand our operations with
new products and services, broaden our geographic scope, increase our market
share and improve our ability to compete with the major integrated oilfield
service companies. We also intend to provide management and key personnel of
acquired businesses with stock-based incentives in our company and to continue
to market these companies and technologies under their established names.

HISTORY

The following table lists the operating subsidiaries that we have formed or
acquired, either through stock or asset acquisitions, since 1989 and the
business segments in which each of these subsidiaries operates. Three of these
subsidiaries, Thomas Energy Services, Inc., Integrity Industries, Inc. and
Agri-Empresa, Inc., operate in more than one segment.

Since their acquisition by us, most of these companies have continued to be
operated by their former owners and key managers.

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BUSINESSES

DRILLING RELATED PRODUCTS AND SERVICES

Our drilling related products and services segment provides a broad range
of products and services used by oil and natural gas companies, drilling
contractors and other oilfield service companies for the drilling of oil and
natural gas wells. Currently, our drilling related products and services are
used primarily onshore in the United States, Canada, Brazil, Europe, North
Africa and the Middle East and offshore off the coast of Brazil and in the Gulf
of Mexico, the North Sea, the Persian Gulf, the Gulf of Suez and the
Mediterranean Sea. Our drilling related products and services consist of the
following business lines:

- LWD, MWD and directional drilling;
- downhole drilling motors;
- rental tools (including drill pipe); and
- drilling fluids.

LWD, MWD and Directional Drilling. Upon the acquisition of our PathFinder
subsidiary in March 1999 from Halliburton Company, we became one of four
companies worldwide that currently has the technological capability to offer a
full complement of LWD products and services. In addition to indicating the
possible presence of oil and natural gas, LWD tools provide real-time data about
formation pressure, porosity and permeability which improves drilling
performance. Also, data can be provided during the drilling process which can be
correlated with previously obtained seismic information.

Before the introduction of LWD technology, well formation data was
traditionally obtained by lowering evaluation tools into the well with armored
electro-mechanical cable, or wireline, from a truck on land or a skid unit
offshore. Traditional open-hole wireline information can only be obtained after
the well has been drilled or during the drilling process if drilling is halted
and the drill string is removed from the well. An advantage that LWD has over
traditional open-hole wireline logging is that costs are reduced as drilling rig
downtime is minimized -- these savings can be substantial for offshore jobs
where day rates for drilling currently range from $15,000 per day in shallow
waters to $210,000 per day in deep waters. In addition, the real-time
information transmitted during the drilling process can assist in making
drilling decisions such as altering the path of the well bore to a point in the
formation which, when compared with previously obtained seismic data, provides
for enhanced recovery of oil and natural gas.

We also provide MWD products and services, which involve the use of a
downhole electronic instrument to locate and direct the drill bit to the
intended target. This capability is primarily utilized when drilling directional
(non-vertical) wells which represent an increasing percentage of overall
drilling activity, particularly offshore. In order to drill a directional well,
the driller must be able to determine the precise direction the drill bit is
moving during the drilling operation. MWD tools enable the driller to make this
determination by transmitting the angle and direction of the well bore. This
data is received at the surface enabling the driller to adjust the drilling path
as necessary.

We entered the MWD business in 1998 with the commercialization of an MWD
system after three years of internal research and development. Additionally, in
connection with our acquisition of Pathfinder from Halliburton Company, we
acquired the Pathfinder MWD kits, which may also be used in conjunction with our
LWD tools.

In October 2002, we made a strategic decision to provide directional
drilling services in North America. Directional drilling services include the
directing and steering of the path of the well bore by an on-site operator to
specific targets in the formation. We believe that providing this service in
North America will increase the utilization of our LWD, MWD and downhole
drilling motor fleet. Prior to October 2002, we only provided directional
drilling services in select areas of the Eastern Hemisphere.

Our LWD, MWD and directional drilling services are provided by our
wholly-owned subsidiary, PathFinder Energy Services. A typical LWD job involves
deployment of LWD tools and one to three skilled LWD field engineers to a
customer's drill site and generally lasts five days for onshore jobs and 20 days
for offshore jobs. A typical MWD job involves deployment of MWD tools and a
skilled MWD field engineer to a

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customer's drill site and generally lasts 15 days for onshore jobs and 20 days
for offshore jobs. A typical directional drilling job involves deployment of job
specific tools and two drillers and generally lasts from 10 to 60 days.

We market these services through an internal sales force. Our customers
typically utilize these services on a per well basis. We charge our customers
for these services primarily on a per day rental basis. Our LWD, MWD and
directional drilling businesses are currently operated from service facilities
in Midland and Victoria, Texas; Lafayette, Louisiana; Casper, Wyoming; Edmonton,
Canada; Macae, Brazil; Cairo, Egypt; Dubai, United Arab Emirates; Aberdeen,
Scotland and Stavanger, Norway.

Downhole Drilling Motors. We are a manufacturer and supplier of downhole
drilling motors. We provide downhole drilling motors internally to PathFinder's
directional drilling business, exploration and production companies and other
oilfield service companies. Our drilling motors business is conducted by our two
wholly owned subsidiaries, Drill Motor Services and Dyna-Drill Technologies.

Drill Motor Services' rental product line consists of a wide range of sizes
of downhole drilling motors ranging from 1 11/16 inches to 11 1/2 inches in
outside diameter for use at various drilling depths. The components of the drill
motor are designed to operate at various speeds and torque levels and to
withstand severe environmental conditions such as high temperatures, hard rock
and abrasive muds.

In connection with the PathFinder acquisition, we acquired a second line of
rental downhole drilling motors and the related manufacturing equipment which
had been operated and marketed by Halliburton under the brand Dyna-Drill. The
Dyna-Drill downhole drilling motors are manufactured and repaired by our
subsidiary, Dyna-Drill Technologies. In addition to complementing our Drill
Motor Services line of downhole drilling motors, the manufacturing equipment
enables us to support both motor lines and to provide manufacturing and repair
services for other oilfield service companies. Dyna-Drill Technologies is one of
only a limited number of companies worldwide that manufacture the power section
of downhole drilling motors.

We typically charge our customers for the use of our drilling motors on the
basis of hours of usage. We market our downhole drilling motors and services
directly through our internal sales force and operating managers at locations in
Lafayette, Louisiana; Houston, Texas; Elk City, Oklahoma; Aberdeen, Scotland;
and Stavanger, Norway.

Rental Tools (including drill pipe). We provide a broad range of rental
equipment and tools for the drilling of oil and natural gas wells. Our rental
equipment allows our customers, primarily oil and natural gas companies, the
ability to have access to inventories of tools and other equipment without the
cost of maintaining or storing that equipment in their own inventory. Our rental
tool inventory includes:

- drilling equipment, such as large diameter drill pipe, heavy weight drill
pipe, high torque drill pipe, drill collars and other required
accessories;

- pressure control equipment, such as blowout preventers, high pressure
valves, choke and kill manifolds and test pumps;

- downhole tools, such as milling tools and casing scrapers; and

- pipe handling equipment.

Our rental tool operations are focused onshore in Texas and Louisiana and
offshore in the Gulf of Mexico.

We have various sizes of drill pipe and related handling tools, providing
our customers with a wide range of drill pipe for drilling at a variety of well
depths and conditions. In response to the growth in directional drilling, we
have expanded our inventory of premium, high torque drill pipe, which also
provides operators with the technical characteristics demanded by deeper wells
and wells expected to encounter adverse conditions. We also offer all
corresponding handling and sub-surface tools and pressure control equipment that
support high torque drill pipe.

Our rental tool business is operated by Thomas Tools, a division of our
wholly owned subsidiary Thomas Energy Services. Equipment and tools typically
are rented to customers for seven to 45 days.

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These rental tools and related services are marketed through our internal
sales force and provided from service facilities in Victoria and Corpus Christi,
Texas and New Iberia, Louisiana. The majority of our equipment and tools are
rented to our customers on a daily rental basis.

Drilling Fluids. We manufacture, package, transport, warehouse and
wholesale drilling fluids and drilling fluid chemicals and additives. We also
provide size reduction services of environmentally approved solids used in loss
circulation and seepage control, both of which are problems regularly
encountered in drilling oil and natural gas wells. Drilling fluid products are
used to cool and lubricate the drill bit during drilling operations, to contain
formation pressures and to suspend and remove rock cuttings from the hole while
maintaining the stability of the well bore. Our customers, which include retail
drilling fluid companies, specialty fluid companies and other oilfield service
companies, use our drilling fluid products throughout the world.

Our drilling fluid chemicals and additives are used in the production and
maintenance of:

- water-based drilling fluids, which are the most widely used drilling
fluids, having application in both land and offshore environments;

- oil-based drilling fluids, which primarily are used to drill
water-sensitive shale, reduce torque and drag and are widely used in
drilling conditions where stuck pipe is likely to occur; and

- synthetic-based drilling fluids, which are used where oil-based fluids
are prohibited for environmental reasons or where high performance and
safety are an issue.

We manufacture a large portion of the drilling fluid products we wholesale,
which enables us to manage the cost and maintain the proprietary nature of these
products. Our research and development initiatives are designed to develop new
products specifically for our customer base. One of our recent product
innovations is a high performance lubricant that allows the use of
environmentally friendly water-based drilling fluids in the deep, severe
drilling environments of the North Sea.

Our drilling fluids business is conducted through our wholly owned
subsidiaries, Integrity Industries, Grinding and Sizing Company and
Agri-Empresa. We market and sell these products through our internal sales
force. Our drilling fluids business provides and sells products and services
through sales and services facilities in Alabama, Texas, Louisiana, Oklahoma and
Eastern New Mexico.

COMPLETION AND WORKOVER RELATED PRODUCTS AND SERVICES

Our completion and workover related products and services segment provides
a broad range of products and services primarily to customers onshore in the
Gulf Coast region and offshore in the Gulf of Mexico. These products and
services include:

- cased-hole wireline logging, perforating and associated rental equipment;

- polymers and specialty chemicals;

- rental tools (including tubing); and

- coiled tubing.

Cased-hole wireline logging, perforating and associated rental
equipment. We provide cased-hole wireline logging, perforating and associated
rental equipment services to oil and natural gas companies onshore in Alabama,
Louisiana, Mississippi and Texas and offshore in the Gulf of Mexico. Cased-holes
are wells that have been drilled and in which casing has been installed to
stabilize the hole. They typically are either ready to produce or are already
producing. As a result, the majority of our revenues from this business are
generated by repeat business on existing wells. Consequently, this business
provides revenue stability during periods of reduced drilling activity. Our
services include:

- Logging Services. Logging involves the gathering of downhole information
to identify various characteristics about the formation or zone to be
produced. Logging services are performed via armored electro-mechanical
cable, or wireline, which is lowered into a well from a truck on land or
a

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skid unit offshore. These units contain considerable instrumentation and
computer equipment used to chart and record downhole information.

- Perforating Services. A path for oil and natural gas to flow from the
reservoir through the casing and cement to the production tubing is
created through the use of a shaped explosive charge from a perforating
gun which penetrates the producing zone. Wireline is used to position and
discharge the perforating gun. We also perform services aimed at
improving the production rate of existing oil and natural gas wells,
perforating new zones in a well once a deeper zone or formation has been
depleted and restoring or improving production in wells that have become
congested by sand.

- Rental Equipment. Wireline rental equipment includes grease injector
units, pipe recovery lubricators, air compressors, high pressure rises,
wireline blow-out preventers and flanges.

We conduct our cased-hole wireline logging and perforating business through
our wholly owned subsidiaries Perf-O-Log, Diamond Wireline Services and E. M.
Hobbs. Our wireline rental equipment is offered through our wholly owned
subsidiary Boyd's Rental Tools. A wireline job typically involves the use of a
logging and perforating unit and certain specialized rental equipment at a
customer's well site. These services require skilled operators and typically
last several days for onshore jobs and a week or more for offshore jobs. We
market these services through an internal sales force and our customers
typically utilize these services on a per well basis. We charge our customers on
a per day or per job basis. Our cased-hole wireline logging, perforating and
associated rental equipment business is currently operated out of facilities
located in Lafayette, New Iberia, Lake Charles and Houma, Louisiana; Laurel,
Mississippi; and Alice, Corpus Christi, Pearland, Sonora, Victoria and Tyler,
Texas.

Polymers and Specialty Chemicals. We produce polymers and specialty
chemicals for niche applications related to completion and workover activities.
Our polymers and specialty chemical products are sold to customers for use
around the world.

Completion fluids are generally solids-free solutions with high specific
gravities and are non-damaging to the producing formation. Oil and natural gas
operators use completion fluids in combination with specialty chemical products
to control bottom-hole pressures during the completion and workover phase of a
well.

Our three classes of completion and workover related polymer and specialty
chemical products are:

- oilfield products, which include:

- enhanced recovery chemicals;

- spotting fluids;

- well treating chemicals; and

- liquefied polymers;

- industrial products, which include:

- cleaners;

- lubricants; and

- environmentally sensitive solvents; and

- environmental remediation products.

We conduct our polymers and specialty chemicals business through our wholly
owned subsidiaries Integrity Industries and Agri-Empresa. We market and sell our
polymers and specialty chemical products through an internal sales force. Our
polymers and specialty chemical products are distributed from facilities
throughout Alabama, Texas, Louisiana, Oklahoma and Eastern New Mexico.

Rental Tools (including tubing). We provide rental of premium tubing
workstrings, high pressure blowout preventers, flow iron packages, high pressure
manifolds, tanks and tubing handling tools for conventional well remediation, as
well as specialized equipment for snubbing and coiled tubing applications.
Snubbing involves pushing pipe into the well against high well bore pressures.

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We conduct our rental tool business through Thomas Tubing Specialists, a
division of Thomas Energy Services. We market our rental tools through an
internal sales force. Our customers typically utilize tools on a per well basis
and we charge our customers for rental tools primarily on a day rental basis.
Our rental tool business is currently operated out of our facilities located in
New Iberia, Louisiana, Corpus Christi and Victoria, Texas.

Coiled Tubing. We provide coiled tubing and related services to oil and
natural gas companies, primarily in the southeastern United States and the Gulf
of Mexico. We own a fleet of coiled tubing units that are used in a variety of
well bore applications, including foam washing, acidizing, displacing,
cementing, gravel packing and jetting. In addition to these services, we use
modeling software for coiled tubing applications to provide optimal job design
and cost saving solutions for our customers.

Coiled tubing is one of the fastest growing segments of the well service
industry today. In the Gulf of Mexico offshore environment, where a large
percentage of domestic natural gas reserves are located, the economics of coiled
tubing operations are often far superior to the use of conventional workover
rigs. The growth in horizontal drilling has also increased the market for coiled
tubing. Routine logging and downhole tool manipulation previously performed
primarily with wireline can now be accomplished utilizing coiled tubing
services.

Our coiled tubing business is conducted by our wholly owned subsidiary,
Coil Tubing Services, and is operated out of facilities located in Broussard,
Louisiana and Pearland and Alice, Texas. We provide services for oil and natural
gas wells located on land, in the inland waterways and offshore. A typical
coiled tubing job involves the use of a coiled tubing unit at a customer well
site to perform any of the services described above. These services require one
or more skilled operators and typically last several days on land and up to
several weeks or more offshore.

MAINTENANCE AND SAFETY RELATED PRODUCTS AND SERVICES

We provide maintenance and safety related products and services primarily
for refinery and petrochemical plant applications and for major and independent
oil and natural gas companies. The primary two business lines of this segment
are:

- waste management; and

- safety equipment and services.

Waste Management. This segment provides waste management, waste
transportation, wastewater services, container cleaning and repair, emergency
spill response services and other general plant support services. We provide
these services primarily to major and independent oil and natural gas well
operators and to various refining and petrochemical companies through our fleet
of high velocity vacuum trucks, storage tanks and boxes and a broad selection of
specialty equipment.

We conduct our waste management business through our wholly owned
subsidiary, Charles Holston. These services are marketed directly through our
internal sales force and operating managers at locations in Jennings and Eunice,
Louisiana.

Safety Equipment and Services. Our safety equipment and services business
provides equipment used in the detection of and protection from toxic gases
encountered by refining and petrochemical companies and major and independent
oil and natural gas companies primarily onshore in the Gulf Coast region and
offshore in the Gulf of Mexico. We rent electronic detection and monitoring
equipment, breathing units and other personal safety equipment, primarily on a
day rate basis. In addition, we provide comprehensive safety planning, training
and supervision.

We conduct our safety equipment and services business through our wholly
owned subsidiary, Well Safe. We market and sell our safety services and products
directly through an internal sales force and operating managers at locations in
Mobile and Decatur, Alabama; Gonzales, Lafayette and Sulphur, Louisiana; and
Corpus Christi, Beaumont and Houston, Texas.

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For a summary of our reportable segments and operations by geographical
region as of and for the years ended December 31, 2002, December 31, 2001 and
December 31, 2000, see Note 12 to the Consolidated Financial Statements, which
information is incorporated herein by reference.

POTENTIAL LIABILITIES AND INSURANCE

Our operations involve a high degree of operational risk. Failure of our
equipment could result in property damage, personal injury, loss of life,
environmental pollution and other damages for which we could be liable.
Litigation arising from a catastrophic occurrence at a location where our
equipment or services are used may result in our being named as a defendant in
lawsuits asserting potentially large claims. We maintain insurance against risks
that are consistent with industry standards and required by our customers.
Although we believe that we maintain insurance coverage that is adequate in
amount and type for the risks associated with our businesses, there is always a
risk that our insurance may not be sufficient to cover any particular loss. In
addition, our insurance does not provide coverage for all liabilities, including
liability for some events involving pollution. We may not be able to maintain
adequate insurance at rates we consider commercially reasonable.

LICENSES, PATENTS AND TRADEMARKS

We own or have licenses to use various patents covering a variety of
technologies that form components of our products and tools. Although in the
aggregate these patents are of importance to us, we do not consider any single
patent to be of a critical or essential nature. We also enjoy product name brand
recognition, principally through trademarks and trade names that we own or have
the right to use and consider such trademarks and trade names to be important to
our business.

While we are developing and deploying our own new LWD technologies, our LWD
business is still substantially dependent upon technologies that we acquired in
the PathFinder acquisition. We have the right to use substantially all of these
acquired technologies pursuant to worldwide, royalty-free, irrevocable license
rights from Halliburton. We have the right to use a small number of these
acquired technologies under licenses from other third party licensors including
Schlumberger. The terms of certain of these licenses may be subject to change if
there is a change in control of our Company. The Schlumberger license is
worldwide and royalty bearing.

We have employment or product revenue sharing agreements with a limited
number of our employees who have been involved in the development of
technologies that are important to our business. In general, these agreements
provide that we must make payments to these employees based upon the amount of
revenues generated by the products to which these employees contributed. In some
cases, these agreements provide for acceleration of these payments upon the
occurrence of specified events, such as a change in control of our company.

GOVERNMENT REGULATION

Our business is significantly affected by foreign, federal, state and local
laws and regulations relating to the oil and natural gas industry, the refining
and petrochemical industry, worker safety and environmental protection. Changes
in these laws, including more stringent administrative regulations and increased
levels of enforcement of these laws and regulations, could affect our business.
We cannot predict the level of enforcement of existing laws and regulations or
how these laws and regulations may be interpreted by enforcement agencies or
court rulings or the effect changes in these laws and regulations may have on us
or our businesses, our results of operations, our cash flows or our financial
condition. We also are not able to predict whether additional laws and
regulations will be adopted.

We depend on the demand for our products and services from oil and natural
gas companies, oilfield service companies and refining and petrochemical
companies. This demand is affected by changing taxes, price controls and other
laws and regulations relating to the oil and natural gas industry and the
refining and petrochemical industry. The adoption of laws and regulations
curtailing exploration and development drilling for oil and natural gas in our
areas of operation for economic, environmental or other policy reasons could
also adversely affect our operations by limiting demand for our products and
services. In addition, our maintenance
9

and safety related services are substantially dependent on the cleaning and
maintenance operations of our customers. Numerous local, state and federal laws
and regulations affect the necessity, timing and frequency of the cleaning and
maintenance operations of refining and petrochemical companies and, consequently
affect the demand for our products and services. We cannot determine the extent
to which our future operations and earnings may be affected by new laws or
legislation, new regulations or changes in existing laws, regulations or
enforcement.

Some of our employees who perform services on offshore platforms and
vessels are covered by the provisions of the Jones Act, the Death on the High
Seas Act and general maritime law. These laws have the effect of making the
liability limits established under state workers' compensation laws inapplicable
to these employees and, instead, permit them or their representatives to pursue
actions against us for damages from job-related injuries, with generally no
limitations on our potential liability.

Our operations are subject to numerous foreign, federal, state and local
laws and regulations governing the manufacture, management and/or disposal of
materials and wastes in the environment and otherwise relating to environmental
protection. Numerous governmental agencies issue regulations to implement and
enforce these laws which are often difficult and costly to comply with and the
violation of which may result in the revocation of permits, issuance of
corrective action orders and assessment of administrative, civil and even
criminal penalties. For example, state and federal agencies have issued
regulations implementing environmental laws that regulate environmental and
safety matters, such as restrictions on the types, quantities and concentration
of various substances that can be released into the environment in connection
with specialty chemical manufacturing and vacuum tank or other field service
operations, remedial measures to prevent pollution arising from current and
former operations and requirements for worker safety training and equipment
usage. Our management believes that we are in compliance in all material
respects with applicable environmental laws and regulations and, further, does
not anticipate that compliance with existing laws and regulations will have a
material effect on us.

We generate wastes, including hazardous wastes that are subject to the
federal Resource Conservation and Recovery Act (RCRA) and comparable state
statutes. The U.S. Environmental Protection Agency (EPA) and state agencies have
limited the approved methods of disposal for some types of hazardous and
nonhazardous wastes. Furthermore, it is possible that certain wastes handled by
us in connection with our vacuum tank or other field service activities that
currently are exempt from treatment as "hazardous wastes" may in the future be
designated as "hazardous wastes" under RCRA or other applicable statutes and
therefore be subject to more rigorous and costly operating and disposal
requirements.

The federal Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), also known as the "Superfund" law and comparable state
statutes impose liability, without regard to fault or legality of the original
conduct, on classes of persons that are considered to have contributed to the
release of a "hazardous substance" into the environment. These persons include
the owner or operator of the disposal site or sites where the release occurred
and companies that disposed of or arranged for the disposal of the hazardous
substances at the site where the release occurred. Under CERCLA, these persons
may be subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources and it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. We
currently lease a number of properties upon which activities involving the
handling of hazardous substances or wastes may have been conducted by third
parties not under our control. These properties may be subject to CERCLA, RCRA
and analogous state laws in the future. Under these laws and implementing
regulations, we could be required to remove or remediate previously discarded
hazardous substances and wastes or property contamination that was caused by
these third parties. These laws and regulations may also expose us to liability
for our acts that were in compliance with applicable laws at the time the acts
were performed.

We are subject to regulation under both the Federal Water Pollution Control
Act (FWPCA) and the Oil Pollution Act of 1990 (OPA). The FWPCA and analogous
state laws impose restrictions and strict controls regarding the discharge of
pollutants into state waters and waters of the United States. The FWPCA
prohibits

10

any discharge into waters of the United States except in strict conformance with
permits issued by federal and state agencies. The OPA imposes a variety of
regulations on "responsible parties" related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States.
A "responsible party" includes the owner or operator of a facility or vessel, or
the lessee or permittee of the area in which an offshore facility is located.
The OPA imposes strict, joint and several liability on responsible parties for
oil removal costs and a variety of public and private damages, including natural
resource damages. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill was caused by gross
negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. If the party fails to report a spill or to
cooperate fully in the cleanup, liability limits likewise do not apply. Both
FWPCA and OPA regulations require the development and implementation of oil
spill response plans. Our management believes that we are in compliance with
applicable permitting, planning and discharge requirements under the FWPCA and
OPA.

The Atomic Energy Act, which provides for the development and regulation of
commercial nuclear power, authorizes the Nuclear Regulatory Commission (NRC) to
regulate radioactive "source material." A "source material" is uranium and
thorium that can be used to produce nuclear fuels, but that has not yet been
"enriched" to be fissionable. Under the Atomic Energy Act, the NRC has entered
into cooperative agreements with the states of Texas, Louisiana and Mississippi
that authorize those states to regulate and license the use of source material.
Source material is used by several of our companies, including PathFinder,
Perf-O-Log and Diamond Wireline, in connection with logging exploratory wells in
Louisiana, Mississippi and Texas. We have obtained licenses from the Louisiana
Department of Environmental Quality, the Texas Department of Health and
Radiological Control and the Mississippi Department of Health and Radiological
Control that allow us to store and use these source materials in connection with
our well logging activities in these three states. We believe that we are in
compliance with the terms and conditions of our source material state licenses.

As part of the oilfield products and services provided by our Charles
Holston company in Louisiana, we have in the past been involved in treating,
removing and disposing of naturally occurring radioactive material (NORM) which
is generated in connection with oil and gas exploration and production
activities. The Atomic Energy Act does not regulate NORM; rather, NORM is
regulated by the states. Under authority granted by Louisiana law, the Louisiana
Department of Environmental Quality has adopted regulations establishing
radiation, health and safety requirements for the possession, use, transfer,
treatment, storage and disposal of NORM and the recycling of NORM-contaminated
equipment. These regulations authorize the issuance of "specific licenses" to
qualified companies to remove and dispose of regulated NORM that has
contaminated oilfield equipment such as tanks and pipes as well as surficial
soils, including soils comprising oilfield pits. We have in the past held, and
currently hold, a specific license for treating, removing and disposing of NORM
in Louisiana. We believe that our past NORM activities under our previous
specific license were performed in compliance with applicable Louisiana
Department of Environmental Quality NORM requirements and expect our future
handling of regulated NORM to be in accordance with applicable state NORM
requirements.

CUSTOMERS

Our customers include major and independent oil and natural gas companies
and other oilfield service companies operating onshore in the United States,
Canada, Brazil, Europe, North Africa and the Middle East and offshore in Brazil,
the Gulf of Mexico, the North Sea, the Persian Gulf, the Gulf of Suez and the
Mediterranean Sea. Our customers also include refinery and petrochemical
companies located on the United States Gulf Coast. Additionally, we provide
drilling fluids to other oilfield services companies on a wholesale basis. We
provide services and equipment to a broad range of customers and, therefore, we
believe that we are not dependent on any single customer or group of customers.
For the year ended December 31, 2002, no single customer or group of affiliated
customers accounted for 10% or more of our revenues. We generally enter into
informal, nonbinding commitments with our customers, which are customary within
our business lines.

11

SUPPLIERS

We obtain our coiled tubing units, wireline equipment and rental tools,
certain parts and components of our drilling motors and LWD and MWD tools and
certain chemicals and additives used in producing our drilling fluids from
various third-party suppliers. We do not believe that any one supplier of these
products is material to us. We have not experienced and do not foresee
experiencing a shortage of any of these products.

COMPETITION

Drilling Related Products and Services. In this segment, we principally
compete on the basis of reputation, technology, quality, price, reliability,
experience and availability. Competitors in our MWD, LWD and directional
drilling businesses include divisions of Baker Hughes, Halliburton and
Schlumberger. In our rental tool business, our competitors range from small,
independent oilfield service companies to much larger oilfield service companies
such as Weatherford International. In addition, many of our customers own and
operate large inventories of equipment they might otherwise rent and have the
ability to purchase additional equipment, as opposed to renting. Competitors in
our MWD, directional drilling, downhole drilling motors, drilling fluids and
specialty chemicals businesses include both small and large independent oilfield
service companies.

Completion and Workover Related Products and Services. In this segment, we
principally compete on the basis of reputation, quality, price, reliability,
experience, availability and range of services offered. Our competitors in this
segment include the major integrated oilfield service companies and both small
and large independent oilfield service companies.

Maintenance and Safety Related Products and Services. In this segment, we
compete principally on the basis of reputation, quality, price, reliability and
experience. Competition in our safety equipment and services business is
fragmented and our competitors vary widely. We have a variety of competitors in
our cleaning and waste management business ranging from large public companies
to small independent, single-location operators.

EMPLOYEES

As of December 31, 2002, we had 1,618 employees. None of our employees is
represented by a union or covered by a collective bargaining agreement. We
believe that our relations with our employees are generally good.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND ACCURACY OF FORWARD LOOKING
STATEMENTS

This Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks, uncertainties
and assumptions. The words "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may," and similar expressions are intended to
identify forward-looking statements. No assurance can be given that actual
results may not differ materially from the results discussed in the
forward-looking statements as a result of important risk factors including, but
not limited to, the risk factors discussed below.

RISKS RELATED TO OUR BUSINESS

Demand for our products and services depends on oil and natural gas
industry activity and expenditure levels that are directly affected by
trends in oil and natural gas prices.

The markets for oil and natural gas historically have been volatile and are
likely to continue to be so in the future. A prolonged downturn in oil and
natural gas prices could have a material adverse effect on our results of
operations and financial condition, particularly with respect to our drilling
related products and services. Demand for our drilling related products and
services is particularly sensitive to the level of exploration, development and
production activity of, and the corresponding capital spending by, oil and
natural gas companies. Prices for oil and natural gas are subject to large
fluctuations in response to relatively minor
12

changes in the supply of and demand for oil and natural gas, market uncertainty
and a variety of other factors that are beyond our control. Any prolonged
reduction in oil and natural gas prices will depress the level of exploration,
development and production activity. Lower levels of activity result in a
corresponding decline in the demand for our drilling related products and
services which could have a material adverse effect on our revenues and
profitability.

Factors affecting the prices of oil and natural gas include:

- the level of demand for oil and natural gas;

- worldwide political, military and economic conditions, including the
ability of the Organization of Petroleum Exporting Countries (OPEC) to
set and maintain production levels and prices for oil;

- oil and natural gas production/inventory levels;

- the policies of governments regarding the exploration for and production
and development of their oil and natural gas reserves; and

- global weather conditions.

The production sector of the oil and natural gas industry, which utilizes
our completion and workover related products and services, is less immediately
affected by changing oil and natural gas prices and, thus, is less volatile than
the exploration sector, which utilizes our drilling related products and
services. However, producers likely would react to declining oil and natural gas
prices by reducing expenditures, which could also adversely affect our business
in this segment.

Because many of our products and services are used in potentially hazardous
applications and operations, our business is subject to risks associated with
the occurrence of personal injuries, loss of life, damage to or destruction of
property, equipment or the environment and suspension of operations. The
occurrence of any of these events could adversely affect our financial
condition or results of operations.

Many of our products and services are used in potentially hazardous
drilling, completion and production applications, as well as cleaning,
maintenance and safety operations. These activities can result in:

- personal injury;

- loss of life;

- damage to or destruction of property, equipment and the environment; and

- suspension of operations.

Litigation arising from a catastrophic occurrence at a location where our
equipment or services are used may result, in the future, in our being named as
a defendant in lawsuits asserting potentially large claims.

In addition, many of our employees who perform services on offshore
platforms and vessels are covered by provisions of the Jones Act, the Death on
the High Seas Act and general maritime law. These laws have the effect of making
the liability limits established by state workers' compensation laws
inapplicable to these employees and, instead, permit them or their
representatives to pursue actions against us for damages from job-related
injuries, with generally no limitations on our potential liability.

The frequency and severity of these incidents affect our operating costs,
insurability and relationships with customers, employees and regulators. Any
increase in the frequency or severity of these incidents, or the general level
of compensation awards resulting from these incidents, could affect our ability
to obtain projects from oil and natural gas companies or insurance covering
these incidents.

There is always a risk that our insurance may not be sufficient to cover
any particular loss. In addition, our insurance does not provide coverage for
all liabilities, including liability for some events involving pollution. We may
not be able to maintain adequate insurance at rates we consider commercially
reasonable. The

13

occurrence of an event not fully covered by insurance could have a material
adverse effect on our financial condition.

The volatility of the oil and natural gas industry and the demanding nature of
our work may affect our ability to attract and retain the skilled workers on
which our operations depend.

We may not be able to find enough skilled workers to meet our needs, which
could limit our growth. Business activity in the oil and natural gas industry
historically decreases or increases with the price of oil and natural gas. Even
though the prices of oil and natural gas have recovered over the past year,
industry-wide downsizing, resulting from low oil and natural gas prices in the
late 1990s and industry consolidation, caused oilfield workers to look for and
secure work in other industries and locations. The oil and natural gas industry
has not fully recovered from the earlier employment migration away from the oil
and natural gas industry. As a result, we may have problems finding enough
skilled workers in the future.

In addition, we require skilled workers who can perform physically
demanding work. As a result of the volatility of the oil and natural gas
industry and the demanding nature of the work, workers may choose to pursue
employment in fields that offer a more desirable and stable work environment at
wage rates that are competitive with ours.

With a reduced pool of workers, it is possible that we will have to raise
wage rates to attract workers from other fields and to retain or expand our
current work force. If we are not able to increase our service rates to our
customers to compensate for wage rate increases, our operating results may be
adversely affected.

Our success depends on key members of our management, the loss of whom could
disrupt our business operations.

We depend to a large extent on the services of some of our key employees,
including executive officers and directors. The loss of services of any of these
key personnel could disrupt our operations. We have employment agreements with
certain key employees that contain non-compete provisions. Despite these
agreements, we may not be able to retain these key employees and may not be able
to enforce the non-compete provisions in their employment agreements.

Intense competition in our industry could adversely affect our results of
operations.

We may not be able to continue operating at current volumes or prices if
our current competitors or new market entrants introduce new products or
services with better features, performance, prices or other characteristics than
our products and services. Competitive pressures or other factors also may
result in significant price competition that could have a material adverse
effect on our results of operations and financial condition. Furthermore,
competition among oilfield service and equipment providers is also based on the
provider's reputation for safety and quality. Although we believe that our
reputation for safety and quality service is good, there can be no assurance
that we will be able to maintain this reputation and, thus, our competitive
position.

We operate in highly competitive areas of the oilfield products and
services markets. The depressed oil and natural gas prices and the consequent
decline in the oil and natural gas industry in the 1980s, 1998, early 1999, late
2001 and 2002 led to a consolidation of the number of companies providing
products and services similar to those we provide. As a result of these
consolidations, many of our competitors are much larger and have greater
marketing, distribution, financial and other resources than we do.

Adverse weather conditions could result in fluctuations in our operating
results.

Demand for our products and services in the Gulf of Mexico may be adversely
affected by the hurricanes and other storms prevalent in the Gulf of Mexico and
along the Gulf Coast during the summer and fall months. The threat of a
hurricane or tropical storm in the vicinity of a drilling rig where we have
personnel and equipment deployed often requires us to evacuate our personnel and
equipment. An evacuation and the amount of time required to redeploy personnel
and equipment after the threat of a storm has passed may result

14

in significant downtime and lost revenues, especially in the case of a large
storm. In addition, equipment that we are unable to remove from the path of a
storm may be damaged, lost or destroyed.

In the North Sea, demand for our products and services is also affected by
periods of adverse weather, although the storms experienced in the North Sea
typically do not require the evacuation of personnel and equipment.

As a result, our operating results may vary from quarter to quarter,
depending upon factors outside of our control. Thus, full year results are not
likely to be a direct multiple of any particular quarter or combination of
quarters. See Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations for details on weather conditions in 2002.

Compliance with environmental and other government regulations could adversely
affect our business.

Our business is significantly affected by foreign, federal, state and local
laws and regulations relating to:

- the oil and natural gas industry;

- the refining and petrochemical industry; and

- worker safety and environmental protection.

We depend on the demand for our products and services from oil and natural
gas companies, oilfield service companies and refining and petrochemical
companies. This demand is affected by a variety of factors, including taxes,
price controls and the adoption or amendment of laws and regulations. For
example, the adoption of laws and regulations curtailing exploration and
development drilling for oil and natural gas in our areas of operation for
economic, environmental or other policy reasons could adversely affect our
operations by limiting demand for our products and services.

In addition, our maintenance and safety related products and services are
substantially dependent on the cleaning and maintenance operations of our
customers. Numerous foreign, federal, state and local laws and regulations
affect the necessity, timing and frequency of the cleaning and maintenance
operations of refining and petrochemical companies and thus affect the demand
for our products and services. We cannot determine the extent to which our
future operations and earnings may be affected by new legislation, new
regulations or changes in existing laws and regulations or enforcement.

The technical requirements of the foreign, federal, state and local laws
and regulations affecting our business are becoming increasingly complex and
stringent. For instance, some environmental laws may provide for "strict
liability" for damages to natural resources or threats to public health and
safety, rendering a party liable for environmental damage without regard to
negligence or fault on the part of the party. Sanctions for noncompliance with
these laws and regulations may include:

- revocation of permits;

- corrective action orders;

- administrative or civil penalties; and

- criminal prosecution.

Some environmental laws provide for joint and several strict liability for
remediation of spills and releases of hazardous substances. In addition, we may
be subject to claims alleging personal injury or property damage as a result of
alleged exposure to hazardous substances, as well as damage to natural
resources. These laws and regulations also may expose us to liability for the
conduct of, or conditions caused by, others, or for our acts that were in
compliance with applicable laws at the time the acts were performed.

15

Our business could be adversely affected by new technologies and by disputes
regarding intellectual property.

Many of our operations, especially those dependent on LWD and MWD products
and services and specialty chemical sales, are based substantially on
technologies for which we hold licenses or patents. Our success in these areas
depends to a significant extent on the development and implementation of new
product designs and formulations. Whether we can continue to develop products
and technologies to meet evolving industry requirements and at prices acceptable
to our customers will be a significant factor in determining our ability to
compete in these areas. Many of our competitors have greater resources devoted
to research and development of new products and technologies than we do.

We are pursuing patent and trademark protection for our newly developed
technologies and brands, especially at PathFinder. The market success of these
new technologies will depend, in part, on our ability to obtain and enforce
exclusive rights in the technologies, to preserve rights in our trade secret and
non-public information and to operate without infringing the proprietary rights
of others.

The degree of protection that we can obtain for our technologies and brands
is uncertain. There can be no assurance that particular patents or trademark
registrations for which we apply will actually be issued. Further, there can be
no assurance that third parties will not independently develop similar or
alternative technologies, duplicate any of our technologies or design around or
invalidate any patents we obtain.

Numerous patents have been issued to oilfield service companies covering a
wide variety of products and services. Although we endeavor to avoid infringing
the proprietary rights of others in bringing new technologies and brands to
market, there can be no assurance that third parties will not make claims of
infringement.

Intellectual property litigation is inherently expensive, whether enforcing
our own proprietary rights or defending against the infringement claims of
others. If a commercially significant intellectual property dispute arises, we
could incur substantial litigation costs or be subject to claims for damages or
injunctive relief.

Our LWD business is substantially dependent upon technologies that we
acquired when we acquired the Pathfinder LWD and related MWD business of
Halliburton Company in March 1999. We have the right to use these technologies
through non-exclusive, worldwide licenses granted to us by Halliburton and other
third-party licensors.

The concentration of our customers in the energy industry could materially and
adversely affect our earnings.

Substantially all of our customers are in the energy industry. This
concentration of customers may impact our overall exposure to credit risk,
either positively or negatively, in that customers may be similarly affected by
changes in economic and industry conditions. Many of our customers slow the
payment of their accounts when industry conditions decline. We perform ongoing
credit evaluations of our customers, but do not generally require collateral in
support of our trade receivables.

A significant amount of our growth has occurred through the acquisition of
existing businesses; however, future acquisitions may be difficult to
integrate, may disrupt our existing businesses and may adversely affect our
operating results.

We may acquire other companies, assets and product lines that complement or
expand our existing business. Each acquisition, however, involves a number of
risks. These risks include:

- the diversion of our management's attention from our existing businesses
to integrate the operations and personnel of the acquired business;

- possible adverse effects on our operating results during the integration
process; and

- our possible inability to achieve the intended objectives of the
combination.

We may seek to finance an acquisition through borrowings under our credit
facility or through the issuance of new debt or equity securities. If we should
proceed with a relatively large cash acquisition, we

16

could deplete a substantial portion of our financial resources to the possible
detriment of our other operations. Any future acquisitions could also dilute the
equity interests of our shareholders, require us to write off assets for
accounting purposes or create other undesirable accounting issues.

Our international operations may experience interruptions due to political and
economic risks.

We operate our business and market our products and services in oil and
natural gas producing areas outside the United States. We are, therefore,
subject to the risks common in international operations and investments in
foreign countries. These risks include:

- nationalization and expropriation;

- war and civil disturbances;

- restrictive actions by local governments;

- limitations on repatriation of earnings;

- changes in foreign tax laws; and

- changes in currency exchange rates.

The occurrence of any of these events could have an adverse effect on
regional demand for our products and services or our ability to provide our
products and services in a particular region. An interruption of our
international operations could have a material adverse effect on our results of
operations and financial condition.

An impairment of goodwill could reduce our earnings.

Our balance sheet as of December 31, 2002, included net goodwill which
represented approximately 22% of our total assets. Goodwill is recorded when we
pay more for a business than the fair market value of the tangible and
separately measurable intangible net assets. Generally accepted accounting
principles require us to test goodwill for impairment. We evaluate goodwill for
impairment on an annual basis or when events or circumstances occur indicating
that goodwill might be impaired. If we were to determine that any of the
remaining balance of goodwill was impaired, we would be required to take an
immediate charge to earnings with a correlative effect on shareholders' equity.

As a holding company, we are totally dependent on dividends from our operating
subsidiaries to pay our obligations.

We are a holding company with no business operations. Our only significant
asset is the outstanding capital stock of our subsidiaries. As a result, we must
rely on dividends from our subsidiaries to meet our obligations. We currently
expect that the majority of earnings and cash flow of our subsidiaries will be
retained and used by them in their operations, including servicing any debt
obligations they may now or in the future have. Even if we decided to pay a
dividend on or make a distribution in respect of our common stock, our
subsidiaries may not be able to generate sufficient cash flow to pay a dividend
or distribute funds to us. At present, we are restricted from paying dividends
under our credit facility. Future credit facilities and other future debt
obligations, as well as statutory provisions, may also limit our ability to pay
dividends.

Our credit facility contains restrictive covenants that limit our financial
and operational flexibility and our ability to pay dividends.

Our credit facility contains restrictive covenants that limit the
incurrence of debt by our company or our subsidiaries, require us to maintain
financial ratios, such as a debt service coverage ratio and leverage ratio,
limit the amount of capital expenditures we may make and effectively restrict
our ability to pay dividends. These restrictions may adversely affect our
ability to conduct and expand our operations. For example, our business is
capital intensive, requiring specialized equipment and trained personnel to
provide our products and services. We may need to raise additional funds through
public or private debt or equity financing.

17

Adequate funds may not be available when needed or may not be available on
favorable terms. Even if adequate funds are available, our credit facility may
restrict our ability to raise additional funds. If we are unable to raise
capital, our finances and operations may be adversely affected.

RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK

The availability of shares of our common stock for future sale could depress
our stock price.

Sales of a substantial number of shares of our common stock in the public
market, or the perception that such sales might occur, could have a material
adverse effect on the price of our common stock. We registered the sale of
4,650,075 shares of our common stock which have been and may in the future be
issued upon the exercise of options granted under our option plans. All of the
shares issued upon exercise of these options will be freely tradable without
restrictions or registration under the Securities Act of 1933, by persons other
than our affiliates. Our affiliates would be able to sell these shares under
Rule 144 after compliance with any lock-up agreement to which they are subject.

Our stock price could be extremely volatile as a result of the effect that
variations in oil and natural gas prices and other factors beyond our control
could have on the market price of our stock.

The market price of our common stock may be influenced by many factors,
including:

- variations in our quarterly or annual results of operations;

- variations in oil and natural gas prices and production/ inventory
levels;

- investor perceptions of us and other oilfield service companies, in
general;

- general economic conditions; and

- the liquidity of the market for our common stock.

These factors may cause the price of our common stock to fluctuate
significantly or decline.

In particular, the market price of our common stock may be influenced by
variations in oil and natural gas prices, because demand for our products and
services is closely related to the prices of these commodities. This may cause
our stock price to fluctuate with these underlying commodity prices, which are
highly volatile.

ITEM 2. PROPERTIES

Our principal executive offices are located at 10370 Richmond Avenue, Suite
990, Houston, Texas 77042 and our telephone number is (713) 974-9071. Our
businesses are conducted out of sales offices and facilities located throughout
North America, Brazil and in select areas of the Eastern Hemisphere. Set forth
below is a chart describing the locations of these sales offices and facilities:

With the exception of our Lafayette and Houma, Louisiana and our Tyler and
Corpus Christi, Texas facilities, which are owned, all of these sales offices
and facilities are leased pursuant to operating leases for various terms. Some
of these sales offices and facilities are leased from employees who were the
former owners of our subsidiaries. We believe that all of our leases are at
competitive or market rates and do not anticipate any difficulty in leasing
suitable additional space upon expiration of our current lease terms.

ITEM 3. LEGAL PROCEEDINGS

Two separate lawsuits, Keith Vienne, et al v. Conoco, Inc., et al., No.
74,427 and Larry Mouton, et al v. Conoco, Inc., et al., No. 75,038, were filed
in 1999 in Louisiana state court against six defendants, including Conoco, Inc.,
the primary operator of the field beginning in the 1950s and Guillory Tank Truck
Service, Inc., an oilfield waste disposal company. One of our subsidiaries,
Charles Holston, Inc., purchased the assets of Guillory Tank Truck Service, Inc.
in 1989. These cases have several hundred plaintiffs who allege that they and
their property have been exposed to improperly handled oil, gas and oilfield
waste over a 40-year period in connection with the operation of an oilfield
approximately four miles north of Rayne, Louisiana. The plaintiffs allege that
Guillory Tank Truck Service, Inc. improperly disposed of oilfield waste from the
field at various unspecified times over the years. The plaintiffs are seeking an
unspecified amount of general, special and exemplary damages. These cases, which
are being consolidated for trial purposes, are in the initial phase of discovery
and it is too early for us to predict a range of exposure or a likely outcome.
However, we believe that under the terms of the asset purchase agreement entered
into in 1989 to acquire these assets, Charles Holston, Inc. is not contractually
liable for any acts which may result in liability prior to the acquisition of
these assets. We do not expect these two lawsuits to have a material adverse
effect on our financial condition or results of operations.

19

We are a party to various routine legal proceedings that primarily involve
intellectual property, commercial and workers' compensation claims. We cannot
predict the outcome of these lawsuits, legal proceedings and claims with
certainty. Nevertheless, we believe that the outcome of all of these
proceedings, even if determined adversely, would not have a material adverse
effect on our business or financial condition.

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

None

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY

The names, ages and titles of our officers are listed below, along with a
description of their business experience during the last five years.

Mr. White, our founder, has served as a director and as our President,
Chairman and Chief Executive Officer since our inception in April 1989. Prior to
founding our company, Mr. White participated in the acquisition, development and
eventual sale of a number of businesses, including an oil and natural gas
products and services business and a manufacturing and distributing company. Mr.
White has over 25 years of experience in the oil and natural gas industry.

Mr. Tepera, a certified public accountant, serves as our Vice President,
Secretary and Chief Financial Officer. From December 1997 until March 2000, when
Mr. Tepera was appointed to his current positions with us, Mr. Tepera served as
our Vice President and Treasurer. From 1989 to December 1997, Mr. Tepera was
employed by Arthur Andersen LLP serving in various positions, most recently as a
Manager in the enterprise group, which specialized in emerging, high growth
companies.

Mr. Thomas has served as our Vice President since May 2000, the Chief
Executive Officer of PathFinder Energy Services, Inc. since June 1999 and the
President and Chief Executive Officer of Thomas Energy Services, Inc. since June
1994. Mr. Thomas has over 25 years of experience in the oil and natural gas
industry and has been employed by Thomas Energy Services since 1974.

Mr. Bautista, a certified public accountant, has served as Vice President
and Corporate Controller since June 2000. From September 1994 to May 2000, Mr.
Bautista was employed by Arthur Andersen LLP serving in various capacities, most
recently as a Manager in the assurance practice, primarily focusing on emerging,
high growth companies.

Mr. Ford, a registered patent attorney, has served as Vice President and
Intellectual Property Counsel since February 2002. Mr. Ford was formerly a
partner at the Houston law firm of Vinson & Elkins L.L.P., where he practiced
from August 1998 to February 2002 specializing in patent and other intellectual
property matters.

20

PART II

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

Our common stock is traded on the NASDAQ National Market under the symbol
"WHES". The following table sets forth the high and low bid prices per share of
our common stock as reported by the NASDAQ National Market for each fiscal
quarter during 2001 and 2002.

As of March 25, 2003, there were 27,044,538 shares of our common stock
outstanding, which were held by approximately 159 record holders.

We have not declared or paid any cash dividends on our common stock since
our initial public offering and do not intend to declare or pay any cash
dividends on our common stock in the foreseeable future. Instead, we currently
intend to retain our earnings, if any, to finance our business and for general
corporate purposes. Furthermore, our existing credit facility restricts our
ability to pay dividends. Please read "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in Item 7 for a discussion of restrictions on our ability to pay
dividends. Any future determination as to the declaration and payment of
dividends will be at the discretion of our Board of Directors and will depend on
then existing conditions, including our financial condition, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors that our Board of Directors considers relevant.

EQUITY COMPENSATION PLANS

The table below provides information relating to our equity compensation
plans as of December 31, 2002:

On March 29, 1999, prior to our initial public offering, we granted to
Kenneth T. White, Jr., our Chairman, President and Chief Executive Officer an
option to purchase 900,900 shares of our common stock at a purchase price of
$4.55 per share. The issuance of this option was approved by the Board of
Directors but was not submitted to our stockholders for their approval. As of
the date hereof, the right to purchase all 900,900 shares of common stock under
the option had vested. This option is exercisable by Mr. White at any time until
March 29, 2009 and is not transferable. Upon Mr. White's death or disability, or
the termination of

21

his employment for any reason, this option will terminate and expire; although,
Mr. White (or his estate or the person who acquires this option by will or the
laws of descent or distribution or otherwise by the reason of Mr. White's death)
may exercise this option for a period of thirty (30) days following any such
event.

SALES OF UNREGISTERED SECURITIES

Set forth below are the securities we issued during 2002 which have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"). Further included is the consideration, if any, we received for such
securities and information relating to the section of the Securities Act, or
rule of the Securities and Exchange Commission, under which exemption from
registration was claimed. No underwriters were engaged in connection with the
issuance of the securities in any of these transactions.

(i) On November 1, 2002, we issued 112,126 shares of our common stock
valued at $15.97 per share as partial consideration for the
acquisition of 100% of the outstanding capital stock of E. M. Hobbs,
Inc. This issuance of securities was made in reliance upon the
exemptions from registration set forth in Section 4(2) of the
Securities Act and Regulation D under the Securities Act.

(ii) On August 9, 2002, we issued 279,287 shares of our common stock
valued at $16.11 per share as partial consideration for the
acquisition of 100% of the outstanding capital stock of Boyd's Bit
Service, Inc. This issuance of securities was made in reliance upon
the exemptions from registration set forth in Section 4(2) of the
Securities Act and Regulation D under the Securities Act.

(iii) On January 15, 2002, we issued 28,798 shares of our common stock
valued at $17.36 per share as partial consideration for the
acquisition of 100% of the outstanding capital stock of 3D
Stabilisers. This issuance of securities was made in reliance upon
the exemptions from registration set forth in Section 4(2) of the
Securities Act and Regulation S under the Securities Act.

In addition, the following persons were issued shares of our common stock
upon the exercise of warrants issued prior to our initial public offering. The
exercise price of such warrants was $2.21 per share and the issuance of our
common stock was made in reliance upon the exemption from registration set forth
in Section 4(2) of the Securities Act.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

Our selected consolidated financial information contained below is derived
from our Consolidated Financial Statements and should be read in conjunction
with our Consolidated Financial Statements and the accompanying notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K.

The Consolidated Financial Statements for the year ended December 31, 2002
have been audited by PricewaterhouseCoopers LLP. The Consolidated Financial
Statements for fiscal years 1998 through 2001 were audited by Arthur Andersen
LLP ("Andersen") which has ceased operations. A copy of the report

22

previously issued by Andersen on our financial statements as of December 31,
2001 and 2000 and for each of the three years in the period ended December 31,
2001 is included elsewhere in this Report. Such report has not been reissued by
Andersen.

- ---------------

(1) Write-off of $13.2 million for deferred financing costs and unamortized
discount associated with debt that was repaid in 2000 with the net proceeds
from our initial public offering and borrowings under our credit facility.

23

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

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our Consolidated
Financial Statements and related notes appearing elsewhere in this Form 10-K.

OVERVIEW OF THE MARKETS FOR OUR PRODUCTS AND SERVICES

We are a diversified oilfield service company that provides drilling
related products and services, completion and workover related products and
services and maintenance and safety related products and services. Our customers
include major and independent oil and natural gas companies, other oilfield
service companies and refining and petrochemical companies.

Prices for oil and natural gas are subject to large fluctuations in
response to relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and a variety of other factors. Any prolonged
increase or decrease in oil and natural gas prices affects the levels of
exploration, development and production activity as well as the entire health of
the oil and natural gas industry. Demand for our drilling related products and
services is directly affected by the level of exploration, development and
production activity of, and the corresponding capital spending by, oil and
natural gas companies. Demand for our completion and workover related products
and services depends more on oil and natural gas production activity, which is
less immediately affected by changes in oil and natural gas prices. Demand for
our maintenance and safety related products and services is affected by the rate
of plant overhauls and maintenance turnarounds as well as the overall health of
the refining and petrochemical industries and, to a lesser extent, by the level
of oil and natural gas exploration, development and production activity.

DRILLING RELATED PRODUCTS AND SERVICES

Revenue from our drilling related products and services segment constituted
approximately 65% of our total 2002 consolidated revenue. Approximately 27% of
our 2002 drilling segment revenue was generated in various international
locations which include Canada, Brazil, Europe, North Africa, the Middle East,
the Persian Gulf, the Gulf of Suez, the Mediterranean Sea and the North Sea.
However, the most significant portion of our drilling segment revenues is
generated in the United States, including the Gulf of Mexico. In July 2001,
exploration and development activity levels in the United States peaked and
began to decline primarily as a result of lower natural gas prices. This decline
continued through April 2002, at which point the United States drilling rig
count levels reached a low of 738. Rig count levels modestly recovered during
the remainder of 2002, but remained well below the average activity level of
2001. According to statistics published by Baker Hughes, the average number of
rotary rigs operating in the United States was 1,156 and 830 for 2001 and 2002,
respectively. The decline in exploration and development activity levels in the
United States has significantly impacted our revenue and earnings generated in
this key market.

Natural gas prices increased during 2002 and this increase became more
pronounced during early 2003 due to the colder winter when compared to last
year. However, the increased price level of natural gas has yet to result in a
meaningful increase in drilling activity. We believe that concerns about the
United States economy and the war in the Middle East are among the factors that
have delayed the recovery. We believe that the overall outlook for natural gas
exploration and development activity remains positive as natural gas production
continues to decline and natural gas storage levels are now near record low
levels which should continue to keep natural gas prices at relatively high
levels. However, the extent and timing of a recovery in drilling activity
remains difficult to predict as it may depend on how the factors mentioned above
are resolved.

Outside of the United States, the North Sea remains our largest drilling
segment market, particularly for LWD and MWD services. However, due to the
unexpected enactment of a UK tax law imposing a 10% supplementary tax on oil and
natural gas profits derived from the North Sea, many of our customers have
reduced drilling activity in this region. According to statistics published by
Baker Hughes, the number of rotary rigs operating in the North Sea declined from
an average of 67 in January 2002 to an average of 45 in December 2002. We do not
expect any marked increase in activity levels in the North Sea in the near term.

24

In October 2002, we made a strategic decision to provide directional
drilling services in North America. Directional drilling services include the
directing and steering of the path of the well bore by an onsite operator to
specific targets in the formation. We believe that providing this service in the
United States will increase the utilization of our LWD, MWD and downhole
drilling motor fleet. Prior to October 2002, we only provided directional
drilling services in select areas of the Eastern Hemisphere.

COMPLETION AND WORKOVER RELATED PRODUCTS AND SERVICES

This sector is our second largest business segment and provided
approximately 26% of our total 2002 consolidated revenue. Revenues provided by
the completion and workover segment are almost exclusively derived from the
United States and the Gulf of Mexico. Although activity levels in the completion
and workover of existing oil and natural gas wells are linked to commodity
prices, our completion segment is less commodity price sensitive than our
drilling segment. As a result, our completion and workover segment has and
continues to provide stability during prolonged downturns in drilling activity.
We have increased our revenue capacity in this segment through capital spending
in 2001 and 2002 which, when combined with our acquisitions of CTS in May 2001,
Boyd's in August 2002 and E. M. Hobbs in November 2002, has strengthened and
further diversified our completion and workover segment.

MAINTENANCE AND SAFETY RELATED PRODUCTS AND SERVICES

Our maintenance and safety segment provided approximately 9% of our total
2002 consolidated revenue and is focused entirely in and along the Gulf Coast
region of the United States. Although somewhat seasonal in nature, with higher
activity levels in the early and late portions of the year, this segment is
primarily dependent upon the maintenance activity levels of refineries and
petrochemical plants and to a lesser extent on the level of exploration,
development and production activity. During 2002, we experienced a decrease in
turnaround activity in the petrochemical industry.

ADVERSE WEATHER CONDITIONS

Our results of operations were negatively impacted by the effects of
adverse weather conditions brought on by Tropical Storm Isidore, Hurricane Lili
and the related wet weather conditions along the Gulf Coast. The impact of these
adverse weather conditions began near the end of the third quarter of 2002 and
continued through the early part of the fourth quarter.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001

Revenues. Revenues decreased by $45.7 million, or approximately 13%, to
$313.4 million for the year ended December 31, 2002 from $359.1 million for the
year ended December 31, 2001. This decrease was attributable to reduced activity
levels within the oil and natural gas industry, including the effects of
softness in pricing, partially offset by the revenue contribution of Boyd's,
which was acquired in August 2002 and Hobbs, which was acquired in November 2002
and the full year effect of CTS, which was acquired in May 2001. Additionally,
our results of operations in 2002 were negatively impacted by the effects of the
adverse weather conditions previously discussed.

Revenues from our drilling related products and services decreased by $47.9
million, or approximately 19%, to $205.2 million for the year ended December 31,
2002 from $253.1 million for the year ended December 31, 2001. This decrease was
primarily attributable to a reduction in drilling activity, including the
effects of softness in pricing and the adverse weather conditions previously
discussed.

Revenues from our completion and workover related products and services
increased by $2.5 million, or approximately 3%, to $80.6 million for the year
ended December 31, 2002 from $78.1 million for the year ended December 31, 2001.
Revenue increased as a result of the revenue contributions of Boyd's and Hobbs,
which were acquired in August 2002 and November 2002, respectively, and the full
year effect of CTS, which

25

was acquired in May 2001, but was offset by the effects of lower activity
levels, pricing and the adverse weather conditions previously discussed.

Revenues from our maintenance and safety related products and services
decreased by $0.4 million, or approximately 1%, to $27.6 million for the year
ended December 31, 2002 from $28.0 million for the year ended December 31, 2001.
This decrease was primarily attributable to a reduction in the amount of
turnaround activity in the petrochemical industry.

Cost of Revenues. Cost of revenues decreased by $13.6 million, or
approximately 7%, to $172.9 million for the year ended December 31, 2002 from
$186.5 million for the year ended December 31, 2001. As a percentage of
revenues, cost of revenues increased to 55% for the year ended December 31, 2002
from 52% for the year ended December 31, 2001. The increase in cost of revenues
as a percentage of revenues was due to the effects of softness in pricing and
lower utilization of our equipment and services during a period of reduced
drilling and workover activity levels, as well as increased insurance costs. In
addition, our cost of revenues as a percentage of revenues was negatively
impacted by our strategy of maintaining an optimal level of staffing and
infrastructure to ensure that we are capable of benefiting fully from future
increases in industry activity levels, as well as the adverse weather conditions
previously discussed.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.5 million, or approximately 4%, to $64.4
million for the year ended December 31, 2002 from $61.9 million for the year
ended December 31, 2001. The increase was attributable to additional expenses
related to the operations of Boyd's and Hobbs, which were acquired in August
2002 and November 2002, respectively, the full year effect of CTS, which was
acquired in May 2001 and increases in insurance costs, partially offset by a
reduction in sales incentives, bonuses and marketing expenses resulting from the
decreased activity levels within the oil and natural gas industry. As a
percentage of revenues, selling, general and administrative expenses increased
to 21% for the year ended December 31, 2002 from 17% for the year ended December
31, 2001, partially due to our strategy of maintaining an optimal level of
staffing and infrastructure to ensure that we are capable of benefiting fully
from future increases in industry activity levels.

Research and Development Expense. Research and development expenses
increased by $2.1 million, or approximately 27%, to $10.0 million for the year
ended December 31, 2002 from $7.9 million for the year ended December 31, 2001.
This increase was the result of increased research and development spending on
our MWD/LWD and related technologies. We believe it is necessary to maintain our
investment in developing new technologies during the current downturn in
drilling to ensure that we are capable of benefiting fully from future increases
in industry activity levels.

Depreciation and Amortization. Depreciation and amortization increased by
$5.9 million, or approximately 22%, to $32.6 million for the year ended December
31, 2002 from $26.7 million for the year ended December 31, 2001. This increase
was the result of depreciation associated with our continued capital
expenditures, as well as additional depreciation and amortization due to our
acquisitions of Boyd's and Hobbs and the full year effect of CTS, which was
acquired in May 2001.

Interest and Other Expense. Interest and other expense for the year ended
December 31, 2002 was $7.0 million, a decrease of $0.7 million, or approximately
9%, from $7.7 million for the year December 31, 2001. The decrease was primarily
due to an overall reduction of interest rates.

Net Income. Net income for the year ended December 31, 2002 was $16.3
million, a decrease of $25.1 million, or approximately 61%, from $41.4 million
reported for the year ended December 31, 2001.

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

Revenues. Revenues increased by $129.2 million, or approximately 56%, to
$359.1 million for the year ended December 31, 2001 from $230.0 million for the
year ended December 31, 2000. This increase was attributable to increased
activity levels within the oil and natural gas industry, higher asset
utilization, our international expansion effort and the benefit of additional
equipment, as well as the effects from our acquisition of CTS in May 2001.

26

Revenues from our drilling related products and services increased by $90.1
million, or approximately 55%, to $253.1 million for the year ended December 31,
2001 from $162.9 million for the year ended December 31, 2000. This increase was
primarily attributable to an increase in drilling activity, higher asset
utilization rates, our international expansion effort and the benefit of
additional equipment.

Revenues from our completion and workover related products and services
increased by $34.9 million, or approximately 81%, to $78.1 million for the year
ended December 31, 2001 from $43.2 million for the year ended December 31, 2000.
Revenue increased as a result of an increase in workover rig activity, the
benefit of additional equipment, as well as the effects from our acquisition of
CTS in May 2001.

Revenues from our maintenance and safety related products and services
increased by $4.1 million, or approximately 17%, to $28.0 million for the year
ended December 31, 2001 from $23.8 million for the year ended December 31, 2000.
This increase was primarily the result of an increase in the number of plant
overhauls and turnarounds and the benefit of additional equipment.

Cost of Revenues. Cost of revenues increased by $62.6 million, or
approximately 51%, to $186.5 million for the year ended December 31, 2001 from
$123.9 million for the year ended December 31, 2000. As a percentage of
revenues, cost of revenues decreased to 52% for the year ended December 31, 2001
from 54% for the year ended December 31, 2000, due to a significant portion of
our costs being fixed.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $17.5 million, or approximately 39%, to
$61.9 million for the year ended December 31, 2001 from $44.4 million for the
year ended December 31, 2000. The increase was attributable to our expansion of
sales, administration and marketing personnel in 2000 and 2001, as well as the
effects from our acquisition of CTS in May 2001. As a percentage of revenues,
selling, general and administrative expenses decreased to 17% for the year ended
December 31, 2001 from 19% for the year ended December 31, 2000, due to a
significant portion of our costs being fixed.

Research and Development Expense. Research and development expenses
increased by $1.9 million, or approximately 32%, to $7.9 million for the year
ended December 31, 2001 from $6.0 million for the year ended December 31, 2000.
This increase was the result of increased research and development spending on
our MWD/LWD and related technologies.

Depreciation and Amortization. Depreciation and amortization increased by
$7.4 million, or approximately 38%, to $26.7 million for the year ended December
31, 2001 from $19.3 million for the year ended December 31, 2000. This increase
was the result of depreciation associated with our increased capital
expenditures, as well as the effects from our acquisition of CTS in May 2001.

Interest and Other Expense. Interest and other expense for the year ended
December 31, 2001 was $7.7 million, a decrease of $16.4 million, or
approximately 68%, from $24.1 million for the year December 31, 2000. The
decrease was primarily due to our significant debt reduction in October 2000
funded by our IPO.

Net Income (Loss). Net income for the year ended December 31, 2001 was
$41.4 million, an improvement of $42.1 million, from the $0.7 million loss
reported for the year ended December 31, 2000.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires that we
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. We evaluate our estimates on an on-going basis, based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

27

We extend credit to customers and other parties in the normal course of
business. Further, we regularly review outstanding receivables and provide for
estimated losses through an allowance for doubtful accounts. In evaluating the
level of established reserves, we make judgments regarding our customers'
ability to make required payments, economic events and other factors. As the
financial condition of these parties change, circumstances develop or additional
information becomes available, adjustments to the allowance for doubtful
accounts may be required.

We have made significant investments in inventory and rental equipment to
service our customers around the world. On a routine basis, we use judgments in
determining the level of reserves required to state inventory and rental
equipment at the lower of cost or market. Our estimates are primarily influenced
by technological innovations, market activity levels and the physical condition
of products. Changes in these or other factors may result in adjustments to the
carrying value of inventory and rental equipment.

Deferred tax assets and liabilities are recognized for the difference
between the book basis and tax basis of our net assets. In providing for
deferred taxes, we consider current tax regulations, estimates of future taxable
income and available tax planning strategies. In certain cases, we have
established reserves to reduce deferred tax assets to estimated realizable
value. If tax regulations, operating results or the ability to implement tax
planning strategies vary, adjustments to the carrying value of deferred tax
assets and liabilities may be required.

We maintain insurance coverage for various aspects of our business and
operations. We retain a portion of losses that occur through the use of
deductibles and retentions under self-insurance programs. We regularly review
estimates of reported and unreported claims and provide for losses through
insurance reserves. As claims develop and additional information becomes
available, adjustments to loss reserves may be required.

We assess the impairment of identifiable intangibles, long-lived assets and
related goodwill at least annually, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
considered important, which could trigger an impairment review, include the
following:

- Significant underperformance relative to expected historical or projected
future operating results;

- Significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;

- Significant negative industry or economic trends;

- Significant decline in our stock price for a sustained period; and

- Market capitalization relative to net book value.

When we determine that the carrying value of intangibles, long-lived assets
and related goodwill may not be recoverable based upon the existence of one or
more of the above indicators of impairment, any impairment is measured based on
projected net cash flows expected to result from that asset, including eventual
disposition.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
was issued. This statement requires that legal obligations associated with the
retirement of long-lived assets be recorded at fair value when incurred and
became effective for us on January 1, 2003. The adoption of this statement is
not expected to have a material impact on our consolidated financial position,
results of operations or cash flows.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections" was issued.
This statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified lease
transactions. The adoption of this statement is not expected to have a material
impact on our consolidated financial position, results of operations or cash
flows.

28

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and became effective for us on January 1, 2003. The adoption of this statement
is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others," which clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to a
guarantor's accounting for and disclosures of certain guarantees issued. FIN 45
requires enhanced disclosures for certain guarantees. It also will require us to
record certain guarantees that we issue after December 31, 2002, including
certain third-party guarantees, on the balance sheet initially at fair value. We
will record liabilities for guarantees we issued on or before December 31, 2002,
when and if payments become probable and estimable. We do not expect the
adoption of FIN 45 will have a material impact on our consolidated financial
position, results of operations or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Our primary uses for cash are working capital, capital expenditures,
acquisitions and principal and interest payments on indebtedness. To the extent
our cash requirements for working capital, capital expenditures, acquisitions
and principal and interest payments on indebtedness exceed cash flow from
operations, we must finance our cash requirements primarily through debt and
equity financing activities.

Working capital was $73.9 million as of December 31, 2002 and $86.9 million
as of December 31, 2001. Net cash provided by operating activities was $29.3
million for the year ended December 31, 2002 and $51.3 million for the year
ended December 31, 2001. Decreases in working capital and cash flow from
operating activities are principally the result of decreased operating activity.

Net cash used in investing activities was $67.5 million for the year ended
December 31, 2002 and $95.9 million for the year ended December 31, 2001. Net
cash used in investing activities was principally the result of our capital
expenditures program and the acquisitions of Hobbs, Boyd's, U.S. Clay and CTS,
which were acquired in November 2002, August 2002, April 2002 and May 2001,
respectively.

Net cash provided by financing activities was $25.4 million for the year
ended December 31, 2002 and $60.9 million for the year ended December 31, 2001.
Net cash provided by financing activities in 2002 was primarily due to proceeds
obtained through our revolving credit facility that was utilized to finance the
Boyd's and E.M. Hobbs acquisitions. Net cash provided by financing activities in
2001 was primarily from the increase in our credit facility to finance the CTS
acquisition and a total of $19.9 million in proceeds obtained from our June 2001
public offering of 5.5 million shares of our common stock and $4.3 from the
proceeds of the exercise of warrants by the holders thereof.

With the exception of the operating leases on real property and automobiles
discussed in Note 7 of our consolidated financial statements, we have no
off-balance sheet debt or other off-balance sheet financing arrangements. We
currently have not entered into derivative or other financial instruments for
trading or speculative purposes. The following table aggregates information
about our contractual cash obligations (in thousands) as of December 31, 2002:

29

On May 31, 2001, in connection with our acquisition of CTS, we amended and
restated our $115.0 million credit facility to increase our available borrowing
capacity to $165.0 million. Our amended and restated credit facility includes
the following features:

- a $40.0 million Term A loan facility that will amortize over five years,
will mature on October 16, 2005 and will require that we make annual
principal repayments ranging from 0% of the original loan amount in the
first year of the credit facility to 35% of the original loan amount on
October 16, 2005;

- a $80.0 million Term B original loan facility that will amortize over six
and one-half years, will mature on April 16, 2007 and will require that
we make annual principal repayments of 1% of the original loan amount in
each of the first six years of the credit facility with the outstanding
balance due on April 16, 2007; and

- a $45.0 million revolving credit facility that may be borrowed, repaid
and reborrowed from time to time and will mature on October 16, 2005.

In accordance with our credit agreement, we exercised our option and
obtained an additional revolving loan commitment of $10.0 million on January 17,
2003 and an additional supplemental Term B loan of $5.0 million on March 7,
2003. The quarterly payment of the supplemental Term B loan has been increased
by $12,500 corresponding to this increase in the amount outstanding.

At our option, amounts borrowed under the credit facility will bear
interest at either a variable rate equal to the reserve-adjusted LIBOR or an
alternate base rate, plus, in each case, an applicable margin. The applicable
margin ranges from 1.75% to 3.00% in the case of a LIBOR based loan under the
revolving credit facility or the Term A loan facility and is 3.25% in the case
of a LIBOR based loan under the Term B loan facility. For alternate base rate
loans, the applicable margin ranges from 0.75% to 2.00% under the revolving
credit facility and the Term A loan facility and is 2.25% under the Term B loan
facility. The foregoing margins are subject to adjustment based on a debt
service coverage ratio and a leverage ratio.

Our credit facility is secured by a lien on substantially all of our
property and assets, a pledge of all of the capital stock of our domestic
subsidiaries and a pledge of not greater than 65% of the capital stock of each
of our foreign subsidiaries. In addition, our credit facility is guaranteed by
all of our domestic subsidiaries. The credit facility requires, among other
things, that we maintain certain financial ratios and limits the amount of
capital expenditures we may make, the amount of debt we may incur outside of the
credit facility, our ability to pay dividends and future investments. As of
December 31, 2002, we had outstanding borrowings under our credit facility of
$142.8 million, of which $32.4 million was outstanding under the revolving
credit facility.

In connection with the CTS acquisition in May 2001, we issued $4.5 million
in convertible subordinated notes to eight of the individuals from whom we
acquired CTS as partial consideration for the acquisition. These notes bear
interest at 9% per annum, payment of which is due quarterly. These notes mature
on December 31, 2003. The holders of these notes may convert the notes into
shares of common stock within 30 days of maturity at a rate of 0.0331 shares of
common stock for each $1.00 of principal, subject to adjustment based upon
various factors. We may redeem the notes at any time prior to their maturity
with no prepayment penalty. However, the holders of these notes would have the
option to exercise the conversion feature prior to redemption by us.

For the year ended December 31, 2002, we made capital expenditures,
primarily for additional rental tool inventory, additional LWD and MWD tools,
wireline equipment and coiled tubing units, of $69.4 million, including
expenditures for the replacement of equipment lost in hole. In addition, we
incurred $10.0 million in research and development expenses for the year ended
December 31, 2002. We believe that cash generated from operations and amounts
available under our revolving credit facility will provide sufficient funds for
our identified capital projects, debt service and working capital requirements.
However, part of our strategy involves the acquisition of companies that have
products and services complementary to our existing strategic base of
operations. Depending on the size of any future acquisitions, we may require
additional debt financing, possibly in excess of the limits of our credit
facility, or additional equity financing.

30

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risks. Market risk is the potential loss arising
from adverse changes in market prices and rates. We currently have not entered
into derivative or other financial instruments for trading or speculative
purposes. Our market risk could arise from changes in interest rates and foreign
currency exchange rates.

Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates. Assuming our current level of borrowings, a 100 basis
point increase in the interest rate applicable to these borrowings would have
increased our interest expense by approximately $1.5 million for the year ended
December 31, 2002 and $1.2 million for the year ended December 31, 2001.

Foreign Currency Exchange Risk. Our earnings and financial position are
affected by foreign exchange rate fluctuations. We currently do not hedge
against foreign currency translation risks and we believe that foreign currency
exchange risk is not significant to our operations.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, together with the notes thereto and
our independent accountants' reports thereon appear on pages F-1 through F-22 of
this Annual Report and are incorporated herein by reference.

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

As previously reported on Form 8-K, filed with the Commission on April 17,
2002, on April 12, 2002 we terminated Arthur Andersen LLP as our independent
public accountants and engaged PricewaterhouseCoopers LLP as our independent
public accountants for 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICER OF THE REGISTRANT

Information required by this item is hereby incorporated by reference to
such information included in our definitive proxy statement in connection with
our 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant
to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal
year on December 31, 2002.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is hereby incorporated by reference to
such information included in our definitive proxy statement in connection with
our 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant
to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal
year on December 31, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is hereby incorporated by reference to
such information included in our definitive proxy statement in connection with
our 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant
to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal
year on December 31, 2002 and under the heading "Equity Compensation Plans" in
Item 5 of this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND RELATED STOCKHOLDER
MATTERS

Information required by this item is hereby incorporated by reference to
such information included in our definitive proxy statement in connection with
our 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant
to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal
year on December 31, 2002.

31

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Within 90 days
before the filing of this annual report on Form 10-K, our principal executive
officer and principal financial officer evaluated the effectiveness of our
disclosure controls and procedures. Based on the evaluation, our principal
executive officer and principal financial officer believe that:

- our disclosure controls and procedures are designed to ensure that
information we are required to disclose in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms; and

- our disclosure controls and procedures were effective to ensure that
material information was accumulated and communicated to our management,
including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.

(b) Changes in Internal Controls. There have been no significant changes
in our internal controls or in other factors that could significantly affect our
internal controls subsequent to their evaluation, nor have there been any
corrective actions with regard to significant deficiencies or material
weaknesses.

The certifications of our chief executive and chief financial officers
required under 18 U.S.C. 1350 are included as Exhibit 99.1 to this Annual
Report.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements

The following financial statements are included on pages F-1 through F-26
of this Report:

Report of Independent Accountants

Report of Independent Public Accountants

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years Ended December 31, 2002, 2001 and 2000

Consolidated Statements of Shareholders' Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

All schedules not filed herein for which provision is made under the rules
of Regulation S-X have been omitted as not applicable or not required or the
information required has been included in the notes to the consolidated
financial statements.

(3) Index of Exhibits

See Index of Exhibits for a list of those exhibits filed herewith, which
index also includes and identifies management contracts or compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(b)(10)(iii) of Regulation S-K.

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.

32

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

W-H ENERGY SERVICES, INC.

By: /s/ KENNETH T. WHITE, JR.
------------------------------------
Kenneth T. White, Jr.
Chairman, President and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of March, 2003.

33

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kenneth T. White, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of W-H Energy
Services, Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements and other
financial information included in this annual report, fairly present in all
material respects, the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons performing
the equivalent function:

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 28, 2003

/s/ KENNETH T. WHITE, JR.
--------------------------------------
Name: Kenneth T. White, Jr.
Title: Chairman, President and Chief
Executive Officer

34

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey L. Tepera, certify that:

1. I have reviewed this annual report on Form 10-K of W-H Energy
Services, Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements and other
financial information included in this annual report, fairly present in all
material respects, the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons performing
the equivalent function:

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 28, 2003

/s/ JEFFREY L. TEPERA
--------------------------------------
Name: Jeffrey L. Tepera
Title: Vice President, Secretary and
Chief Financial Officer

35

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
W-H Energy Services, Inc.:

In our opinion, the accompanying consolidated balance sheet as of December
31, 2002 and the related consolidated statements of operations and comprehensive
income (loss), of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of W-H Energy Services, Inc. and its
subsidiaries (the Company) at December 31, 2002 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The Company's consolidated financial
statements as of December 31, 2001 and for each of the two years in the period
ended December 31, 2001, prior to the revision described in Note 5 of the
consolidated financial statements, were audited by other independent accountants
who have ceased operations. Those independent accountants expressed an
unqualified opinion on those financial statements in their report dated February
1, 2002.

In accordance with the Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") and as discussed in
Notes 2 and 5 of the consolidated financial statements, the Company changed its
method of accounting for goodwill effective January 1, 2002.

As discussed above, the Company's consolidated financial statements as of
December 31, 2001 and for each of the two years in the period ended December 31,
2001, were audited by other independent accountants who have ceased operations.
As described in Note 5, those financial statements have been revised to include
the transitional disclosures required by SFAS No. 142. We audited the
transitional disclosures for 2001 and 2000 included in Note 5. In our opinion,
the transitional disclosures for 2001 and 2000 in Note 5 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 or 2000 financial statement of the Company other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 or 2000 financial statements taken as a whole.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
January 31, 2003

F-1

THE FOLLOWING IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP
(ANDERSEN). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN AND ANDERSEN DID NOT
CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT (AS INCLUDED IN THIS
FORM 10-K) INTO ANY OF THE COMPANY'S REGISTRATION STATEMENTS.

THE COMPANY HAS REVISED NOTE 5 TO ITS FINANCIAL STATEMENTS (AS DISCUSSED
THEREIN) FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 TO INCLUDE THE
TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 142, GOODWILL AND INTANGIBLE ASSETS. THE ANDERSEN REPORT DOES NOT EXTEND TO
ANY OF THESE CHANGES. THE REVISIONS TO THE 2001 FINANCIAL STATEMENTS RELATED TO
THESE TRANSITIONAL DISCLOSURES WERE REPORTED ON BY PRICEWATERHOUSECOOPERS LLP,
AS STATED IN THEIR REPORT APPEARING HEREIN.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
W-H Energy Services, Inc.:

We have audited the accompanying consolidated balance sheets of W-H Energy
Services, Inc. (a Texas corporation) and subsidiaries as of December 31, 2001
and 2000* and the related consolidated statements of operations and
comprehensive income (loss), shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 2001*. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
W-H Energy Services, Inc. and subsidiaries as of December 31, 2001 and 2000* and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001*, in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
February 1, 2002

- ---------------

* The Company's consolidated balance sheet as of December 31, 2000 and the
consolidated statements of operations and comprehensive income (loss),
shareholders' equity (deficit) and cash flows for the year ended December 31,
1999 are not included in this Form 10-K.
F-2

W-H ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

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

W-H ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)

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

W-H ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

W-H ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS ORGANIZATION

DESCRIPTION OF COMPANY

W-H Energy Services, Inc., a Texas corporation, and its subsidiaries
(collectively, W-H) is a diversified oilfield service company that provides
products and services used primarily for the drilling, completion and production
of oil and natural gas wells. W-H has the following three primary lines of
business: (i) drilling related products and services, which include
logging-while-drilling, measurement-while-drilling, directional drilling, rental
tools (including drill pipe), downhole drilling motors and drilling fluids; (ii)
completion and workover related products and services, which include cased-hole
wireline logging, perforating and associated rental equipment, polymers and
specialty chemicals, rental tools (including tubing) and coiled tubing; and
(iii) maintenance and safety related products and services, which include waste
management and safety equipment and services.

On October 16, 2000, W-H closed its initial public offering of 10,000,000
shares of its common stock at an offering price of $16.50 per share. Concurrent
with the closing of the offering, W-H executed a $115.0 million credit facility
(see Note 6). The net proceeds of the offering along with borrowings under this
credit facility were utilized to repay in full the outstanding balances,
including accrued and unpaid interest, under its then existing senior secured
credit facility, senior subordinated notes and other long term debt obligations,
reducing its outstanding debt at October 16, 2000 from approximately $226.0
million to approximately $80.0 million. As a result of the early extinguishments
of debt, W-H recognized an extraordinary loss of $8.3 million, net of taxes,
resulting from the write-off of deferred financing costs and unamortized
discount associated with the debt that was repaid.

On June 27, 2001, W-H closed on an equity offering comprised of 900,000
shares of common stock offered by W-H and 4,600,000 shares of common stock
offered by selling shareholders at a price to the public of $24 per share. W-H
received approximately $19.9 million from the sale of the 900,000 shares of
common stock, after deducting underwriting fees and offering expenses. W-H also
received approximately $4.3 million in connection with the exercise of the
warrants that were sold by the selling shareholders to, and exercised by, the
underwriters.

W-H's business depends in large part on the conditions of the oil and
natural gas industry and specifically on the capital investment of W-H's
customers. A prolonged downturn in oil and natural gas prices could have a
material adverse effect on W-H's results of operations and financial condition,
particularly with respect to its drilling related products and services. Demand
for W-H's drilling related products and services is particularly sensitive to
the level of exploration, development and production activity of, and the
corresponding capital spending by, oil and natural gas companies. Prices for oil
and natural gas are subject to large fluctuations in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of other factors that are beyond W-H's control. Any
prolonged reduction in oil and natural gas prices may depress the level of
exploration, development and production activity. Lower levels of activity
result in a corresponding decline in the demand for W-H's drilling related
products and services which could have a material adverse effect on its revenues
and profitability. Other risk factors include, but are not limited to,
competition, risks relating to W-H's acquisition strategy, risks relating to
acquisition financing and reliance on key personnel.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION AND PRESENTATION

The accompanying consolidated financial statements include the accounts of
W-H and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.

F-7

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

W-H considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.

ACCOUNTS RECEIVABLE

Accounts receivable have a concentration of credit risk in the oil and
natural gas industry. W-H performs continuing credit evaluations of its
customers and generally does not require collateral.

INVENTORIES

Inventories are stated at the lower of cost or market, determined on a
first-in, first-out basis. Inventories consist primarily of equipment, parts,
raw materials and supplies.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized while minor replacements, maintenance
and repairs, which do not improve or extend the life of such assets, are charged
to operations as the services are provided. Disposals are removed at cost, less
accumulated depreciation, and any resulting gain or loss is reflected in the
accompanying consolidated statements of operations. Proceeds from customers for
the cost of oilfield rental equipment that is involuntarily damaged or lost
downhole are reflected as revenues.

Depreciation is calculated using the straight-line method over the
estimated useful lives of the depreciable assets. Leasehold improvements are
amortized over the shorter of their useful lives or the term of the lease. The
useful lives of the major classes of property and equipment are as follows:

REALIZATION OF LONG-LIVED ASSETS

Effective January 1, 2002, W-H adopted Statement of Financial Accounting
Standards (SFAS) No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" which supersedes SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and APB
Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Under SFAS No. 144, W-H evaluates the
recoverability of assets not held for sale by measuring the carrying amount of
the assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. Based on
these evaluations, there were no adjustments to the carrying value of long-lived
assets in 2002, 2001 or 2000.

GOODWILL AND OTHER INTANGIBLES

Goodwill represents the excess of the aggregate price paid by W-H in
acquisitions accounted for as purchases over the fair market value of the
tangible and identifiable intangible net assets acquired. Prior to

F-8

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

January 1, 2002, goodwill and other intangible assets were amortized on a
straight-line basis over their estimated useful lives of 2 to 25 years.
Effective January 1, 2002, W-H adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" and accordingly, discontinued amortizing goodwill (Note 5).
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives.

REVENUE RECOGNITION AND COST OF REVENUES

W-H recognizes revenue for services as services are provided. Revenue from
products is recognized upon shipment of the product. Revenue from the rental of
equipment is recognized as earned over the life of the contract. The primary
components of cost of revenues are those salaries, expendable supplies, repairs
and maintenance, costs of products sold and general operational costs that are
directly associated with the services W-H performed for or products sold by W-H
to its customers. Proceeds from customers for the cost of oilfield rental
equipment that is involuntarily damaged or lost downhole are reflected as
revenues.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred. For the years
ended December 31, 2002, 2001 and 2000, research and development costs were
$10.0 million, $7.9 million and $6.0 million, respectively.

INCOME TAXES

W-H utilizes the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying values of existing assets and liabilities and their
respective tax bases based on enacted tax rates.

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

FINANCIAL INSTRUMENTS

W-H considers the fair value of all financial instruments (primarily
long-term debt) not to be materially different from their carrying values at the
end of each fiscal year based on management's estimate of W-H's ability to
borrow funds under terms and conditions similar to those of W-H's existing debt.

With the exception of the operating leases on real property and automobiles
discussed in Note 7 of the consolidated financial statements, we have no
off-balance sheet debt or other off-balance sheet financing arrangements. We
currently have not entered into derivative or other financial instruments for
trading or speculative purposes.

ACCOUNTING FOR STOCK-BASED COMPENSATION

W-H accounts for all stock-based employee compensation plans under the
recognition and measurement provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB No. 25) and related interpretations. Under APB
No. 25, no stock-based employee costs are reflected in net income, as all
options granted under those plans had an exercise price equal to or in excess of
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income (loss) and earnings

F-9

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(loss) per share as if W-H had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation:

Under SFAS No. 123, the fair value of each option was estimated on the date
of grant using the Black-Scholes option pricing model. The following assumptions
were used for the grants in the years ended December 31, 2002, 2001 and 2000:
risk-free interest rates of between 3.8%-7.0%; dividend rates of zero; expected
lives of between eight and ten years and expected volatilities of 60.2%-65.9%.
The 3,256,824 options outstanding as of December 31, 2002 have a remaining
contractual life of between 4.4 and 8.6 years.

The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. W-H's stock options have
characteristics significantly different from those of traded options and changes
in the subjective input assumptions can materially affect the fair value
estimate.

FOREIGN CURRENCY TRANSLATIONS

The operations of foreign locations were translated into U.S. dollars based
on the current exchange rates at the respective balance sheet dates and the
weighted-average rates during each year for the statements of operations and
comprehensive income (loss). The translation adjustments were a gain of $4.2
million, $0.3 million and a loss of $1.0 million for the years ended December
31, 2002, 2001 and 2000, respectively, and are reflected as foreign currency
translation adjustments in the consolidated statements of operations and
comprehensive income (loss) for the years ended December 31, 2002, 2001 and
2000.

EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed
considering the dilutive effect of stock options and warrants. For the years
ended December 31, 2002, 2001 and 2000, shares issuable under outstanding
options of 912,337, 787,400 and 2,375,175, respectively, and warrants of zero,
zero and 2,894,694, respectively, were excluded from the computation of earnings
(loss) per common share, because the inclusion of such shares would be
antidilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
was issued. This statement requires that legal obligations associated with the
retirement of long-lived assets be recorded at fair value when

F-10

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

incurred and will be effective for W-H on January 1, 2003. The adoption of this
statement is not expected to have a material impact on W-H's consolidated
financial position, results of operations or cash flows.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections" was issued.
This statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified lease
transactions. The adoption of this statement is not expected to have a material
impact on W-H's consolidated financial position, results of operations or cash
flows.

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for W-H on January 1, 2003. The adoption of this statement is
not expected to have a material impact on W-H's consolidated financial position,
results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others," which clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to a
guarantor's accounting for and disclosures of certain guarantees issued. FIN 45
requires enhanced disclosures for certain guarantees. It also will require W-H
to record certain guarantees that W-H issues after December 31, 2002, including
certain third-party guarantees, on the balance sheet initially at fair value.
W-H will record liabilities for guarantees it issued on or before December 31,
2002, when and if payments become probable and estimable. W-H does not expect
the adoption of FIN 45 will have a material impact on its consolidated financial
position, results of operations or cash flows.

3. ACQUISITIONS

During 2002, W-H made the following acquisitions:

E. M. HOBBS, INC.

In November 2002, W-H acquired E. M. Hobbs, Inc. (Hobbs). Hobbs provides
cased-hole wireline services in the southwest region of Texas. W-H acquired
Hobbs for consideration consisting of $5.0 million in cash and 112,126 shares of
W-H common stock, of which 39,461 shares will be held in escrow for a period of
two years to satisfy any indemnification claims of W-H.

BOYD'S BIT SERVICE, INC.

In August 2002, W-H completed the acquisition of Boyd's Bit Service, Inc.
(Boyd's). Boyd's provides wireline rental equipment through its four facilities
in Lake Charles and New Iberia, Louisiana and Pearland and Alice, Texas.
Consideration for this acquisition was approximately $14.6 million in cash and
279,287 shares of W-H common stock, of which 122,887 shares will be held in
escrow for a period of two years to satisfy any indemnification claims of W-H.

U. S. CLAY, L.P.

In April 2002, W-H completed the acquisition of U.S. Clay, L.P. (U.S.
Clay). U.S. Clay was formed to mine and market a sodium bentonite discovery in
West Texas. Sodium bentonite is a basic component of drilling fluids used in the
drilling of oil and natural gas wells. Consideration for this acquisition was
approximately $5.0 million in cash, of which $600,000 is held in escrow for a
period of two years to satisfy any indemnification claims of W-H and $1.7
million in the form of promissory notes payable.

F-11

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3D STABILISERS LTD.

In January 2002, W-H acquired 3D Stabilisers Ltd. (3D Stabilisers). 3D
Stabilisers has developed a patented 3D rotary steerable system for use in
directional drilling. The technology developed by 3D Stabilisers is not fully
commercialized and is anticipated to serve as a complement to the technology
base at PathFinder Energy Services, Inc. Consideration for this acquisition was
approximately $0.5 million in cash and 28,798 shares of W-H common stock.

The aggregate purchase price and estimated aggregate fair market value of
the assets acquired and liabilities assumed with the businesses acquired in 2002
are as follows (in thousands):

Purchase price:
Cash paid to former owners................................ $22,361
Common stock.............................................. 6,790
Liabilities assumed....................................... 4,465
Acquisition costs......................................... 1,395
-------
Total purchase price.............................. $35,011
=======
Net assets acquired:
Current assets............................................ $ 1,460
Property and equipment.................................... 6,717
Goodwill.................................................. 20,584
Mineral leases............................................ 5,943
Other intangibles......................................... 2,255
Current liabilities....................................... (1,948)
-------
Net assets acquired............................... $35,011
=======

COIL TUBING SERVICES, L.L.C.

On May 31, 2001, W-H acquired Louisiana-based Coil Tubing Services, L.L.C.
(CTS). CTS provides coiled tubing services for oil and natural gas wells located
on land, in the inland waterways and offshore through its facilities in
Broussard, Louisiana and Pearland and Alice, Texas. W-H acquired CTS for $41.8
million in cash, common stock and convertible subordinated notes and assumed
approximately $5.9 million in liabilities.

The acquisition of CTS has been accounted for using the purchase method of
accounting for business combinations. Accordingly, the results of operations of
CTS have been included in the W-H financial statements since the date of
acquisition. The purchase price has been allocated to the assets acquired based
upon their estimated fair market values at the date of acquisition. The excess
of the purchase price over the estimated fair value of the assets acquired of
approximately $40.0 million has been recorded as goodwill and was being
amortized over 20 years on a straight-line basis (see Note 5).

F-12

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The purchase price and estimated fair market value of the assets acquired
and liabilities assumed with the business acquired are as follows (in
thousands):

Purchase price:
Cash paid................................................. $26,596
Convertible subordinated notes............................ 4,500
Common stock.............................................. 10,053
Liabilities assumed and paid.............................. 5,897
Acquisition costs......................................... 600
-------
Total purchase price.............................. $47,646
=======
Net assets acquired:
Current assets............................................ $ 750
Property and equipment.................................... 7,509
Goodwill and other intangibles............................ 40,340
Current liabilities....................................... (953)
-------
Net assets acquired............................... $47,646
=======

The following unaudited pro forma consolidated financial information
presents consolidated results of operations as if W-H had acquired CTS on
January 1, 2000 (in thousands, except per share amounts):

The unaudited pro forma consolidated financial information does not purport
to represent what W-H's results of operations actually would have been had the
acquisition of CTS occurred on the date indicated nor are they intended to
project W-H's results of operations for any future period or date.

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Activity in W-H's allowance for doubtful accounts for the years ended
December 31, 2002, 2001 and 2000, consists of the following (in thousands):

F-13

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of inventories as of December 31, 2002 and 2001 are as
follows (in thousands):

Net property and equipment as of December 31, 2002 and 2001, consists of
the following (in thousands):

Depreciation expense charged to operations totaled approximately $32.0
million, $23.3 million and $17.3 million for the years ended December 31, 2002,
2001 and 2000, respectively.

Goodwill and other intangibles as of December 31, 2002 and 2001, consist of
the following (in thousands):

Amortization expense charged to operations totaled approximately $0.7
million, $3.4 million and $2.0 million for the years ended December 31, 2002,
2001 and 2000, respectively.

F-14

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accrued liabilities as of December 31, 2002 and 2001, consist of the
following (in thousands):

5. GOODWILL:

Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed annually (or more frequently if
indicators arise) for impairment. According to SFAS No. 142, companies are
required to identify their reporting units and determine the aggregate carrying
values and fair values of all such reporting units. To the extent the carrying
value of a reporting unit exceeds its relative fair value, a second step of the
SFAS No. 142 impairment test is required. This second step requires the
comparison of the implied fair value of the reporting unit goodwill to its
related carrying value, both of which must be measured by the company at the
same point in time each year. Any initial loss resulting from a goodwill
impairment test must be recorded as a change in accounting principle. W-H
performed the required transitional and annual assessments in accordance with
SFAS No. 142 for the year ended December 31, 2002, which resulted in W-H
recording no goodwill impairment expense.

The changes in the carrying amount of goodwill for each of W-H's reportable
business segments for the year ended December 31, 2002 were as follows (in
thousands):

F-15

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table shows what W-H's net income (loss) and earnings (loss)
per share ("EPS") would have been in 2001 and 2000, if goodwill had not been
amortized during those periods, compared to the net income and EPS W-H recorded
for 2002 (in thousands, except per share data):

6. DEBT:

Long-term debt as of December 31, 2002 and 2001 consists of the following
(in thousands):

F-16

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CREDIT FACILITY

On May 31, 2001, in connection with its acquisition of CTS, W-H amended and
restated its $115.0 million credit facility increasing borrowing availability to
$165.0 million. W-H's amended and restated credit facility includes the
following features:

- a $40.0 million Term A loan facility that amortizes over five years,
matures on October 16, 2005 and requires that W-H make annual principal
repayments ranging from 0% of the original loan amount in the first year
of the credit facility to 35% of the original loan amount on October 16,
2005;

- a $80.0 million Term B loan facility that amortizes over six and one-half
years, matures on April 16, 2007 and requires that W-H make annual
principal repayments of 1% of the original loan amount in each of the
first six years of the credit facility with the outstanding balance due
on April 16, 2007; and

- a $45.0 million revolving credit facility that may be borrowed, repaid
and reborrowed from time to time and matures on October 16, 2005.

At W-H's option, amounts borrowed under the credit facility bear interest
at either a variable rate equal to reserve-adjusted LIBOR or an alternate base
rate, plus, in each case, an applicable margin. The applicable margin ranges
from 1.75% to 3.00% in the case of a LIBOR based loan under the revolving credit
facility or the Term A loan facility and is 3.25% in the case of a LIBOR based
loan under the Term B loan facility. For alternate base rate loans, the
applicable margin ranges from 0.75% to 2.00% under the revolving credit facility
and the Term A loan facility and is 2.25% under the Term B loan facility. The
foregoing margins are subject to adjustment based on a debt service coverage
ratio and a leverage ratio.

W-H's credit facility is secured by a lien on substantially all of its
property and assets, a pledge of all of the capital stock of its domestic
subsidiaries and a pledge of not greater than 65% of the capital stock of each
of its foreign subsidiaries. In addition, W-H's credit facility is guaranteed by
all of its domestic subsidiaries. The credit facility requires, among other
things, that we maintain certain financial ratios and limits the amount of
capital expenditures we may make, the amount of debt we may incur outside of the
credit facility, W-H's ability to pay dividends and future investments. As of
December 31, 2002 and December 31, 2001, W-H had outstanding borrowings under
our credit facility of $142.8 million and $117.7 million, respectively.

Scheduled maturities of long-term debt are as follows (in thousands):

For the year ended December 31 --
2003...................................................... $ 14,300
2004...................................................... 13,300
2005...................................................... 43,680
2006...................................................... 800
2007...................................................... 75,225
Thereafter................................................ --
--------
Total.................................................. $147,305
========

CONVERTIBLE SUBORDINATED NOTES

In connection with the CTS acquisition (Note 3), W-H issued $4.5 million in
convertible subordinated notes (the Notes) to eight of the individuals (the
Sellers) from whom CTS was acquired as partial consideration for the
acquisition. The Notes bear interest at 9% per annum, payment of which is due
quarterly. The Notes mature on December 31, 2003. The Sellers may convert the
Notes into shares of common stock within 30 days of maturity at a rate of 0.0331
shares of common stock for each $1.00 of principal, subject to adjustment based
upon various factors. W-H may redeem the Notes at any time prior to their
maturity with no

F-17

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

prepayment penalty. However, the Sellers have the option to exercise the
conversion feature prior to redemption by W-H.

EXTRAORDINARY LOSS

On October 16, 2000 W-H recorded an after tax extraordinary loss of $8.3
million, net of tax benefit of $4.9 million as a result of the write-off of
deferred financing costs and unamortized discount associated with the debt that
was repaid with the net proceeds from the offering and borrowings under its
credit facility entered into at the IPO date.

7. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

W-H leases certain real property and automobiles under operating leases
that expire at various dates through 2009. Rental expense under operating leases
was approximately $7.4 million, $8.9 million and $4.6 million for the years
ended December 31, 2002, 2001 and 2000, respectively. Future minimum lease
payments under non-cancelable operating leases are as follows (in thousands):

For the year ended December 31 --
2003...................................................... $ 4,163
2004...................................................... 3,425
2005...................................................... 2,824
2006...................................................... 2,433
2007...................................................... 3,057
Thereafter................................................ 739
-------
Total.................................................. $16,641
=======

EMPLOYMENT AGREEMENTS

W-H has entered into employment agreements with its corporate officers.
Under the agreements, each officer receives a set base salary, subject to
adjustment, an annual discretionary bonus based on specific objectives to be
determined by the compensation committee, an automobile allowance and certain
fringe benefits as may be available to such executive officers. The agreements
are for terms of two to four years, with certain automatic renewal provisions
and contain non-competition agreements. The agreements also contain a
termination clause, which requires a two-year payment based on the officer's
salary, in the event of termination without cause.

W-H also has employment agreements with certain non-corporate officers. The
agreements are for terms of three to five years and provide for severance pay in
the event of involuntary termination.

LITIGATION

Two separate lawsuits, Keith Vienne, et al v. Conoco, Inc., et al., No.
74,427 and Larry Mouton, et al v. Conoco, Inc., et al., No. 75,038, were filed
in 1999 in Louisiana state court against six defendants, including Conoco, Inc.,
the primary operator of the field beginning in the 1950s, and Guillory Tank
Truck Service, Inc., an oilfield waste disposal company. One of W-H's
subsidiaries, Charles Holston, Inc., purchased the assets of Guillory Tank Truck
Service, Inc. in 1989. These cases have several hundred plaintiffs who allege
that they and their property have been exposed to improperly handled oil, gas
and oilfield waste over a 40-year period in connection with the operation of an
oilfield approximately four miles north of Rayne, Louisiana. The plaintiffs
allege that Guillory Tank Truck Service, Inc. improperly disposed of oilfield
waste from the field at various

F-18

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unspecified times over the years. The plaintiffs are seeking an unspecified
amount of general, special and exemplary damages. These cases, which are being
consolidated for trial purposes, are in the initial phase of discovery and it is
too early for us to predict a range of exposure or a likely outcome. However,
W-H believes that under the terms of the asset purchase agreement entered into
in 1989 to acquire these assets, Charles Holston, Inc. is not contractually
liable for any acts which may result in liability prior to the acquisition of
these assets. W-H does not expect these two lawsuits to have a material adverse
effect on W-H's financial condition, results of operations or cash flows.

W-H is a party to various routine legal proceedings that primarily involve
intellectual property claims, commercial claims and workers' compensation
claims. W-H cannot predict the outcome of these lawsuits, legal proceedings and
claims with certainty. Nevertheless, W-H believes that the outcome of all of
these proceedings, even if determined adversely, would not have a material
adverse effect on W-H's business or financial condition.

8. INCOME TAXES

The components of W-H's income tax provision are as follows (in thousands):

The United States and foreign components of income before income taxes are
as follows (in thousands):

F-19

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The 2000 benefit differs from the provision in the statement of operations
due to the $4.9 million benefit arising from the extraordinary loss (Note 6).
The total provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):

The significant components of the deferred tax assets and liabilities as of
December 31, 2002 and 2001, are as follows (in thousands):

At December 31, 2002, W-H has approximately $21.4 million of federal net
operating loss ("NOL") carry forwards, $7.5 million of state NOL carry forwards
and $3.7 million of foreign NOL carry forwards. Usage of the federal carryovers
is subject to limitations provided under Section 382 of the Internal Revenue

F-20

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Code as well as the separate return limitation year rules of the IRS
regulations. The table below presents the details of our net operating loss
carryover periods (in thousands).

Valuation allowances have been established for uncertainties in realizing
the benefit of tax loss and credit carry forwards. As a result of the material
changes in ownership of W-H, the utilization of certain NOL carry forwards is
subject to certain annual limitations and has not been fully tax benefited for
financial statement purposes. While W-H expects to realize the net deferred tax
assets, changes in future taxable income or in tax laws may alter this
expectation. As of December 31, 2002, approximately $1.76 million of the
valuation allowance relates to the possible expiration of federal carryovers due
to the limitations imposed under Section 382. $0.25 million of the valuation
allowance relates to state net operating loss carryovers and $1.01 million
relates to foreign net operating loss carryovers. The valuation allowance
decreased approximately $908,000 in 2002, increased approximately $817,000 in
2001 and decreased approximately $3.4 million in 2000. The $908,000 decrease in
2002 was primarily due to the realization of state NOLs and foreign tax credits.

9. RELATED-PARTY TRANSACTIONS

CONSULTING AND ADVISORY AGREEMENTS

On August 11, 1997, W-H entered into a consulting agreement with an
affiliate of The Jordan Company (Jordan), a private merchant banking firm that
is affiliated with persons who are W-H shareholders and a member of W-H's board
of directors. W-H paid approximately $925,000 under this agreement, for the year
ended December 31, 2000. Concurrent with the closing of the IPO offering, W-H
paid Jordan $250,000 to terminate the consulting agreement, which is recorded in
selling, general and administrative expenses in the accompanying financial
statements for the year ended December 31, 2000.

On August 11, 1997, W-H entered into a transaction advisory agreement with
an affiliate of Jordan, which expires on December 31, 2007. The advisory
agreement provides for an investment banking and financial consulting fee
ranging up to 1% to 2% of the aggregate transaction size for equity, debt,
acquisitions, divestitures and other transactions. Under this agreement, W-H
paid Jordan $-0-, $500,000 and $1,777,000 for the years ended December 31, 2002,
2001 and 2000, respectively.

LEASE AGREEMENT

One of W-H's subsidiaries leases its facilities from an officer of the
Company. For each of the years ended December 31, 2002, 2001 and 2000, W-H paid
the officer $108,000.

TRANSACTIONS WITH PENNY-FARTHING PRESS, INC.

W-H's Chairman and Chief Executive Officer is the owner of Penny-Farthing
Press Inc. (PFP), a publishing company, which occasionally performs services for
W-H and several of its subsidiaries. In 2002, 2001 and 2000, W-H made payments
to PFP for graphic design and other services of approximately $28,000, $64,000
and $60,000, respectively. During the same periods, PFP made payments to W-H of
approximately $30,000, $26,000 and $33,000, respectively, primarily for rental
of office space.

F-21

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SHAREHOLDERS' EQUITY

STOCK DIVIDEND

In May 2000, W-H's Board of Directors declared a stock dividend to effect a
stock split of 33 shares for every one share of common stock then outstanding.
The accompanying consolidated financial statements and footnotes have been
restated to reflect the stock split, including an assumed increase in the
authorized shares of common stock. The par value of the shares of common stock
to be issued in connection with the stock dividend was credited to common stock
and a like amount charged to additional paid-in capital.

CAPITAL STOCK

In May 2000, W-H amended its articles of incorporation to reclassify its
Class A common stock to common stock and eliminate its Class B common stock,
with the par value of common stock reduced from $0.01 per share to $0.0001 per
share. The change in par value did not affect any of the existing rights of
shareholders and was recorded as an adjustment to additional paid-in capital in
2000. In addition, W-H's Board of Directors may authorize the issuance of up to
10,000,000 shares of preferred stock, par value $0.01, in one or more series.

STOCK OPTIONS AND STOCK PURCHASE WARRANTS

In June 2001, W-H's shareholders approved an amendment to W-H's stock
option plan (the 1997 Option Plan) to increase the number of authorized shares
to 3,750,000 to be issued under the 1997 Option Plan. Each option granted under
the 1997 Option Plan contains such terms and conditions as may be approved by
the Board of Directors or compensation committee (the Committee). These options
vest ratably over a four-year period, after the first full year of service
following the date of the grant and will expire ten years from the date the
options were granted. If an optionee's employment terminates for any reason, the
option may be exercised during the three month period following such
termination, but only to the extent vested at the time of such termination. At
December 31, 2002, 2,355,924 options were outstanding under this plan.

Additionally, on March 29, 1999, W-H issued 900,900 options to its chief
executive officer (CEO) under a separate non-statutory option plan. The options
issued to its CEO have a 10-year term and an exercise price of $4.55 per share.
At December 31, 2002, all of these options were vested.

Warrants are normally issued in association with acquisitions or as
compensation for debt arrangements. No warrants have been granted since 1999. As
of December 31, 2002, there are 233,887 warrants outstanding and exercisable.

F-22

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of W-H's stock options and warrants as of December 31, 2000, 2001
and 2002 is as follows:

The following table summarizes information about stock options outstanding
at December 31, 2002:

In January 2000, W-H issued options to purchase 190,575 shares of common
stock to employees. W-H recorded additional deferred compensation totaling
approximately $1.5 million for options granted in the first quarter of 2000. The
additional deferred compensation is being amortized over the four-year vesting
period of the individual stock options issued. The fair value of the common
stock on the date of grant was determined based on a third-party valuation and
taking into consideration certain industry and company-specific factors. During
each of the years ended December 31, 2002, 2001 and 2000, W-H recognized
$404,000 in compensation expense relating to these options.

11. 401(k) PLAN

W-H maintains a 401(k) plan that enables employees to contribute up to
specified percentages of their annual compensation. W-H may contribute a
matching amount for each participant equal to a discretionary percentage
determined annually by W-H. W-H may also contribute additional amounts at its
sole discretion. W-H matching contributions were approximately $870,000,
$855,000 and $695,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.

F-23

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. SEGMENTS

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires that companies report separately information about each
significant operating segment reviewed by the chief operating decision maker.
Management has organized segments based on differences in each segment's
customers and the products and services offered without aggregating operating
segments. All segments that meet a threshold of 10% of revenues, reported profit
or loss, or combined assets are defined as significant segments. Based on these
requirements, management has identified three reportable segments, drilling
related products and services, completion and workover related products and
services and maintenance and safety related products and services. The
accounting policies of the operating segments are the same at those described in
the summary of significant accounting policies.

DRILLING RELATED PRODUCTS AND SERVICES:

The drilling related products and services segment provides products and
services used by oil and natural gas companies, drilling contractors and other
oilfield service companies for the drilling of oil and natural gas wells. These
products and services are used primarily throughout North America, Brazil and in
select areas of the Eastern Hemisphere. This segment consists of six primary
business lines: (i) LWD; (ii) MWD; (iii) directional drilling; (iv) downhole
drilling motors; (v) rental tools and (vi) drilling fluids.

COMPLETION AND WORKOVER RELATED PRODUCTS AND SERVICES

The completion and workover related products and services segment provides
products and services primarily to customers onshore in the Gulf Coast region
and offshore in the Gulf of Mexico. These products include: (i) cased-hole
wireline logging, perforating and associated rental equipment; (ii) polymers and
specialty chemicals; (iii) rental tools (including tubing) and (iv) coiled
tubing.

MAINTENANCE AND SAFETY RELATED PRODUCTS AND SERVICES

The maintenance and safety related products and services segment provides
products and services primarily for refinery and petrochemical plant
applications and major and independent oil and natural gas companies, including:
(i) waste management; and (ii) safety equipment and services.

W-H recognizes revenues, cost of revenues, selling, general and
administrative expense, research and development expense and depreciation and
amortization expense by segment. Interest expense and other income (expense) are
not monitored by segment. Summarized information for W-H's reportable segments
is contained in the following tables (in thousands):

As of and for the year ended December 31, 2002:

F-24

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of and for the year ended December 31, 2001:

As of and for the year ended December 31, 2000:

W-H operates in the United States, the North Sea and other geographic
regions. The following is summary information by geographic region (in
thousands):

F-25

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. INTERIM FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of consolidated interim information for the
years ended December 31, 2002 and 2001 (amounts in thousands, except per share
data):

14. SUBSEQUENT EVENT (UNAUDITED)

In accordance with W-H's credit agreement, W-H exercised its option and
obtained an additional revolving loan commitment of $10.0 million on January 17,
2003 and an additional supplemental Term B loan of $5.0 million on March 7,
2003. The quarterly payment of the supplemental Term B loan has been increased
by $12,500 corresponding to this increase in the amount outstanding.

F-26

EXHIBIT INDEX

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* filed herewith