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, 2003

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COMMISSION FILE NUMBER: 000-31346

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:

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

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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. [X]

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

As of June 30, 2003, approximately 27,159,064 shares of common stock, par
value $0.0001 per share, of the registrant were outstanding, and the aggregate
market value of the outstanding shares of common stock of the registrant held by
non-affiliates (based on the closing price of such shares on the NASDAQ National
Market on such date) was approximately $440.1 million. The determination of
stock ownership by non-affiliates was made solely for the purpose of providing
the foregoing market capitalization information, and the registrant is not bound
by such determination for any other purpose.

As of March 5, 2004, approximately 27,418,191 shares of common stock, par
value $0.0001 per share, of the registrant were outstanding and the aggregate
market value of the outstanding shares of common stock of the registrant held by
non-affiliates (based on the closing price of such shares on the New York Stock
Exchange on such date) was approximately $382.1 million. The determination of
stock ownership by non-affiliates was made solely for the purpose of providing
the foregoing market capitalization information, and the registrant is not bound
by such determination for any other purpose.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for its 2004 Annual Meeting of
Shareholders, which the Registrant intends to file within 120 days of December
31, 2003, are incorporated by reference into Part III of this Form 10-K.

W-H ENERGY SERVICES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

OVERVIEW

W-H Energy Services, Inc. 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. In this report, unless otherwise
specified, "W-H" and "we," "our," "us" and "our company" refer to W-H Energy
Services, Inc., a Texas corporation, and/or one or more of its subsidiaries. We
have onshore operations in the United States, Canada, Brazil, Europe, North
Africa and the Middle East and offshore operations in the Gulf of Mexico, North
Sea, Persian Gulf, Gulf of Suez and Mediterranean Sea and off the coast of
Brazil. Since our formation in 1989, we have entered the following three primary
lines of business through acquisitions, and we 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, down-hole drilling motors, rental tools (including
drill pipe) and drilling fluids;

- completion and workover related products and services, which include
cased-hole wireline logging, perforating, tubing conveyed 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 plus services.

As discussed below under "-- Businesses -- Maintenance and Safety Related
Products and Services," we recently announced that we are evaluating the
possible divestiture of our maintenance and safety related products and services
segment.

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 and cost effective products and
services;

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

- 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 reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and other reports and forms that we file with the
U.S. Securities and Exchange Commission (the "SEC") or that are filed with the
SEC in respect of our company, such as Forms 3, 4 and 5, as well as any
amendments and exhibits to the foregoing reports and forms, are available free
of charge through our website as soon as reasonably practicable after we file
them with, or furnish them to, the SEC.

Information regarding our corporate governance policies and guidelines,
including our Corporate Governance Guidelines, Corporate Code of Business
Conduct and Ethics, Financial Code of Ethics for Senior Officers, as well as the
charters for the Audit, Compensation and Corporate Governance and Nominating
Committees of our Board of Directors are also available on our internet website
or in print to any shareholder who requests them.

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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 in the Gulf of Mexico, North Sea,
Persian Gulf, Gulf of Suez and Mediterranean Sea and off the coast of Brazil.
Our drilling related products and services consist of the following business
lines:

- LWD, MWD and directional drilling;

- down-hole drilling motors;

- rental tools (including drill pipe); and

- drilling fluids.

LWD, MWD and Directional Drilling. We are one of a few 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 while drilling is in progress, thereby improving
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
typically 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 $240,000 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 offer MWD products and services, which use down-hole electronic
instruments to help locate and direct the drill bit to the intended target. This
capability is particularly advantageous 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.

In October 2002, we made a strategic decision to begin providing
directional drilling services in North America. Prior to October 2002, we
provided directional drilling services in select areas of the Eastern
Hemisphere. Directional drilling services include the directing and steering of
the path of the well-bore by an on-site operator. Providing this service in
North America has increased the utilization of our MWD and down-hole drilling
motor fleet. During the fourth quarter of 2003, we completed the acquisition of
Continental Directional Corporation ("Continental"). Headquartered in Nisku,
Alberta, Continental provides directional drilling services in Western Canada, a
directional drilling market that we did not previously serve.

Our LWD, MWD and directional drilling services are provided by our wholly
owned subsidiary, PathFinder Energy Services, Inc. We market these services
through an internal sales force. Our customers typically utilize these services
on a per well or per project basis. We charge our customers for these services
primarily on a per day rental basis.

Down-hole Drilling Motors. We are a manufacturer and supplier of down-hole
drilling motors and their replaceable parts, such as power sections and
bearings. We provide down-hole drilling motors internally to

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PathFinder's directional drilling business and other oilfield service companies.
Our drilling motors business is conducted by our two wholly owned subsidiaries,
Drill Motor Services, Inc. and Dyna-Drill Technologies, Inc.

Drill Motor Services' rental product line consists of a wide range of sizes
of down-hole 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.

Our Dyna-Drill down-hole drilling motors are manufactured and repaired by
our subsidiary, Dyna-Drill Technologies. In addition to complementing our Drill
Motor Services line of down-hole drilling motors, our manufacturing capability
enables us to support both of our 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 manufactures the power
section of down-hole drilling motors.

We typically charge our customers for the use of our rental fleet of
drilling motors on the basis of hours of usage. We charge our customers for our
manufactured motor components and repair services when products are shipped and
services are completed. We market our down-hole drilling motors and services
directly through our internal sales force.

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;

- down-hole tools, such as milling tools and casing scrapers;

- pipe handling equipment; and

- side entry subs and our patented lockdown lubricator system (described
below under "Strategy").

Our rental tool operations are focused onshore in Texas, Oklahoma,
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 conducted by our subsidiaries: Thomas Tools (a
division of Thomas Energy Services, Inc.) and Dutch, Inc, which we acquired
during the fourth quarter of 2003 . These rental tools and related services are
marketed through our internal sales force. 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.

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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 reduce torque and drag, primarily are
used to drill water-sensitive shale 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.

Our drilling fluids business is conducted through our wholly owned
subsidiaries, Integrity Industries, Inc., Grinding and Sizing Company, Inc. and
Agri-Empresa, Inc. We market and sell these products through our internal sales
force.

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 in and along the
Gulf of Mexico. These products and services include:

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

- polymers and specialty chemicals;

- rental tools (including tubing); and

- coiled tubing.

Cased-hole wireline logging, perforating, tubing conveyed perforating and
associated rental equipment. We provide cased-hole wireline logging,
perforating, tubing conveyed perforating and associated rental equipment
services to oil and natural gas companies onshore in Alabama, Louisiana,
Mississippi, New Mexico 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 down-hole
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 skid unit offshore. These units contain considerable
instrumentation and computer equipment used to chart and record down-hole
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.

- Tubing Conveyed Perforating ("TCP")/Drill Stem Testing Services
("DST"). TCP involves the use of drill pipe, tubing or coil tubing, to
convey the perforating assembly to the required depth. DST is a method of
determining the producing potential of a formation by allowing the
formation fluids to flow into the work string. The use of these tools
together allow our customers to evaluate and complete oil and gas wells
in a more efficient and safe manner relative to conventional techniques.

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- 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, Inc., E.M. Hobbs, L.P. and HydraCoil,
Inc., which we acquired in the fourth quarter of 2003. Our wireline rental
equipment is offered through our wholly owned subsidiary, Boyd's Bit Service,
Inc. dba Boyd's Rental Tools. A wireline job typically involves the use by a
skilled operator of a logging and perforating unit and certain specialized
rental equipment at a customer's well site. 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.

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;

- lubricants;

- well treating chemicals; and

- liquefied polymers;

- industrial products, which include:

- cleaners;

- lubricants; and

- environmentally sensitive solvents; and

- environmental remediation products.

We conduct our completion and workover related 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.

Rental Tools (including tubing). We provide rental of premium tubing work
strings, 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.

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 per day rental
basis.

Coiled Tubing. We provide coiled tubing conveyed well intervention
services to oil and natural gas companies, primarily in Louisiana, Mississippi,
Texas and in the Gulf of Mexico. We own and operate 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, where a large percentage of domestic
natural gas reserves are located, the economics of coiled tubing

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operations are often far superior to the use of conventional workover rigs. The
growth in deep well and horizontal drilling has increased the market for coiled
tubing. Routine logging and down-hole tool manipulation in highly deviated and
horizontal wells previously performed primarily with wireline can now be
accomplished more efficiently utilizing coiled tubing services.

Our coiled tubing business is conducted by our wholly owned subsidiary,
Coil Tubing Services, L.L.C. A typical coiled tubing job involves the use of a
coiled tubing unit by one or more skilled operators at a customer well site to
perform any of the services described above. These services 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, Inc. These services are marketed directly through
our internal sales force.

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, Inc. We market and sell our safety services and
products directly through an internal sales force.

In January 2004, we announced that we were evaluating the possible
divestiture of our maintenance and safety related products and services segment.
The net book value of this segment was approximately $27.6 million at December
31, 2003. We anticipate that our future operating performance will be enhanced
by this divestiture as we will be able to concentrate our focus on our core
business segments

For a summary of our reportable segments and operations by geographical
region as of and for the years ended December 31, 2003, 2002 and 2001, see Note
12 to our Consolidated Financial Statements, which information is incorporated
herein by reference.

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 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 are committed to investing substantial time and
resources in building our technology based products and services. We believe our
new products and services are among the

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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:

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

- patent-pending Gravity MWD(TM) service, which eliminates the adverse
impact of magnetic interference while conducting directional surveying,
thereby reducing reliance on and the cost of conventional gyroscopic
wireline surveys;

- patent-pending Well Twinning(TM) service, in which we are able to
facilitate the drilling of a second well that follows the path of an
existing well with high precision at a close but controlled distance, to
assist in, for example, relief well drilling; and

- Matrix-3(TM) metal coating system, developed independently in-house,
combining proven tungsten carbide-based metallurgy and brazing
technologies in a trade secret formulation. The coating delivers superior
resistance to wear, corrosion and impact to metal components used in
drilling and other down-hole applications , such as motor bearings used
in down-hole drilling motors.

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

- PathMaker(TM) 3D Rotary Steerable ("3DRS") technology, which facilitates
full steering and propulsion of a drill string with or 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 improves the precision
and reliability of formation data obtained through the analysis of
electromagnetic wave transmissions through the formation surrounding a
well-bore;

- Slim Density Neutron Standoff Caliper technology, which allows us to
measure formation porosity in smaller borehole diameters;

- E-sonic(TM) technology, which enhances the precision and predictability
of our proven sonic formation evaluation technology;

- Rig Site Computer Surface System, which enhances our ability to receive
and interpret data received from down-hole sensors to provide timely
useful information to our customers about subsurface conditions; and

- PayZone Inclination Gamma (PZIG(TM)) technology, in which we run
independent drilling subs near or at the drill bit with the drilling
assembly, in order to provide real-time directional survey information at
the drill bit and subsurface formation information immediately
surrounding the drill bit.

We are developing a line of LWD and MWD tools (our Survivor(TM) tools)
including our AWR technology designed to operate in high temperature (350(LOGO)
F) and/or high pressure (25,000 psi) conditions. The Survivor(TM) line of tools
are either patented or are in a patent-pending state and will be fully
compatible with our existing LWD and MWD products and services.

Both the 3DRS and the AWR are expected to be available for commercial
service before the end of the second quarter of 2004.

We also have several innovative products and services available, or under
development through our mud motor, wireline, wireline rental and drilling fluids
businesses. Some of these products and services include our:

- patent-allowed Sensor Spool(TM), which detects 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;

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

- patented wireline side entry sub and patented wireline wear sleeve, which
may be used in pipe recovery applications;

- patented lockdown lubricator system, which, when installed on a well-head
above the blowout preventers, allows wireline operations to be conducted
more safely and more cost effectively;

- submersible down-hole pump technology, in which we are applying our
expertise and technology in power sections, currently deployed in our
down-hole motors, in the development of submersible pumps suitable for a
wide range of applications;

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

- patented seepage control product (involving the use of grape pumice)
which when added to the drilling fluids system, does not affect the
electrical stability of the drilling fluid system and in some cases,
enhances it for a more homogenous fluid; and

- pelletizing process, whereby bulky drilling fluid additives are condensed
into pellet form which reduces dust and transportation costs and enables
more rapid deployment of the material into the drilling fluid system.

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 most 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;

- directional drilling services, which enable an on-site operator to steer
a well-bore to its intended target;

- down-hole 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 down-hole
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 and directional drilling services in Canada. We expect to continue to
expand our international operations on a selective basis.

Selectively Acquire Complementary Businesses and Technologies. We expect
to 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.

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POTENTIAL LIABILITIES AND INSURANCE

Our industry involves a high degree of operational risk. Failure of
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 coverages that are 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. In addition, 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 embodied in our portfolio of products and services. 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. We have the right to use a small number of these acquired technologies
under licenses from other third party licensors. The terms of certain of these
licenses may be subject to change if there is a change in control of our
company.

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 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

9

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. While our management believes that we are in compliance in all material
respects with applicable environmental laws and regulations, there can be no
assurance that future compliance with environmental laws and regulations will
not have a material effect on us.

We generate wastes, including hazardous wastes, which are subject to the
federal Resource Conservation and Recovery Act ("RCRA") and comparable state
statutes. The U.S. Environmental Protection Agency and state agencies have
limited the approved methods of disposal for some types of hazardous and
non-hazardous 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 strict 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 and prior to our occupation of the subject
property. 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 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

10

"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. We are currently updating our existing or developing new
spill prevention, control and countermeasure ("SPCC") plans required under the
FWPCA. Our management believes that we are in compliance with applicable
permitting, planning and discharge requirements under the FWPCA and OPA and that
the SPCC plans will be completed prior to applicable deadlines in 2004.

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." The "source material" used in the
conduct of our business includes cesium, americium(241), iridium, iodine, radium
and cobalt. 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 E.M.
Hobbs, in connection with logging exploratory and producing 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, as
well as reciprocity license from the NRC, that allow us to store and use these
source materials in connection with our well logging activities in these three
states and offshore in federal waters. We believe that we are in compliance with
the terms and conditions of our source material licenses.

As part of the oilfield products and services provided by our Charles
Holston, Inc. subsidiary 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. While 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 , there can be
no assurance that future handling of regulated NORM in accordance with
applicable state NORM requirements will not have a material effect on us.

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 the
Gulf of Mexico, North Sea, Persian Gulf, Gulf of Suez and Mediterranean Sea and
off the coast of Brazil. Our customers also include refinery and petrochemical
companies located on the United States Gulf Coast. Additionally, we provide
drilling fluids to other oilfield service 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 years ended December 31, 2003, 2002 and 2001, 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 LWD, MWD 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, down-hole 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 waste management business ranging from large public companies to small
independent, single-location operators.

EMPLOYEES

As of December 31, 2003, we had 2,081 employees. None of our employees are
represented by a union or covered by a collective bargaining agreement. We
believe that our relations with our employees are satisfactory.

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 (the "Securities Act") and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act") 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. Actual results may 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 segment. 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 changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of other factors

12

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 that could have a material
adverse effect on our financial condition or results of operations.

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

13

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, 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 financial condition or
results of operations 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 volatility of oil and natural gas prices and the
consequent decline in the oil and natural gas industry in the last 5 years led
to a consolidation of a 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 or production
platform 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 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.

14

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.

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 the exploration and
development of 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 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 businesses 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;

- issuance of corrective action orders;

- assessment of administrative, civil or criminal penalties; and

- issuance of injunctions restricting or prohibiting our operations.

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.

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

15

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 in March
1999. We have the right to use these technologies through non-exclusive,
worldwide licenses granted to us by 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 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.

16

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, 2003, 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. 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.

17

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.

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 certain of our Lafayette and Houma, Louisiana and our
Alice, Bridgeport, 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

One of our subsidiaries, Charles Holston, Inc., has been named as a
defendant in a case styled Bryson Adams, et al v. Environmental Purification
Advancement Corporation, No. 99-1998, which was filed in Federal District Court
for the Middle District of Louisiana. This lawsuit involves several hundred
plaintiffs alleging personal injury and property damage associated with oilfield
waste disposal practices over a 30-year period at a waste disposal facility
located near Bayou Sorrel, west of Plaquemine Louisiana. The plaintiffs in these
cases are seeking unspecified amounts of general, special and exemplary damages.
Subsequent to year end, a joint settlement agreement among the defendants in the
case was tentatively approved by the plaintiffs and the court, pursuant to which
Charles Holston, Inc. would be dismissed from the case. This settlement is
pending final approval, which is expected to occur during the second quarter of
2004.

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. This matter is
still pending.

19

We do not expect these lawsuits to have a material adverse effect on our
financial condition, results of operations or cash flows.

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 financial condition, results of operations or cash flows.

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

No matters were submitted to a vote of our securityholders during the
fourth quarter of 2003.

PART II

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

Our common stock is traded on the New York Stock Exchange under the symbol
"WHQ" where it began trading on August 6, 2003. Prior to that time, our common
stock 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 through August 5, 2003 and as
reported by the New York Stock Exchange since that date.

As of March 5, 2004, there were 27,418,191 shares of our common stock
outstanding, which were held by approximately 162 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 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.

20

EQUITY COMPENSATION PLANS

The table below provides information relating to our equity compensation
plans as of December 31, 2003:

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 shareholders 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 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 three (3) months
following any such event.

SALES OF UNREGISTERED SECURITIES

Set forth below are the securities we issued during 2003 which have not
been registered under 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 SEC, 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 April 24, 2003, we issued 3,400 shares of common stock to John
Samuell, a former employee, in consideration for Mr. Samuell's execution of
a separation agreement with us.

(ii) On November 17, 2003, we issued 51,016 shares of our common stock
valued at $17.97 per share as partial consideration for the acquisition of
100% of the outstanding capital stock of Continental Directional Corp. 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 and Regulation S under the Securities Act.

(iii) On November 24, 2003, we issued 58,823 shares of our common
stock valued at $13.61 per share as partial consideration for the
acquisition of 100% of the outstanding capital stock of HydraCoil, 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.

21

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
issuance of our common stock was made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.

22

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 years ended December 31, 2003
and 2002 have been audited by PricewaterhouseCoopers LLP. The Consolidated
Financial Statements for fiscal years 1999 through 2001 were audited by Arthur
Andersen LLP ("Andersen") which has ceased operations. A copy of the report
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 Form 10-K. Such report has not been reissued
by Andersen.

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

(1) Includes 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, reclassified in conjunction with the adoption of FAS 145 in
January 2003.

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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 (1) drilling
related products and services, (2) completion and workover related products and
services and (3) 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 61% of our total 2003 consolidated revenue. Approximately 25% of
our 2003 drilling segment revenue was generated in various international
locations which include Canada, Brazil, Europe, North Africa and the Middle
East. 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, which was comprised of 110 offshore rigs and
628 land rigs. As natural gas prices climbed and remained relatively strong, rig
count levels began to recover in 2003. This increase, however, resulted entirely
from an increase in land-based rigs. According to statistics published by Baker
Hughes, the average number of rotary rigs operating in the United States was
1,156, 830 and 1,032 for 2001, 2002 and 2003, respectively. Of these figures,
land rigs comprised 1,003, 717 and 924, respectively, and offshore rigs
comprised 153, 113 and 108, respectively, for the same periods.

The modest recovery in exploration and development activity levels in the
United States has impacted our revenue and earnings generated in this market.
Although the overall rig count in the United States has increased, the offshore
rig count, where we experience our highest operating margins, has yet to respond
to the higher levels of natural gas prices and declined slightly from 2002. We
believe that the overall outlook for natural gas exploration and development
activity remains positive as natural gas production continues to decline. On a
longer-term basis, this shortfall will tend to reduce the industry's ability to
maintain adequate supplies of natural gas in storage and should keep upward
pressure on natural gas prices. However, the extent and timing of a recovery in
offshore drilling activity remains difficult to predict.

Outside of the United States, the North Sea remains our largest drilling
segment market. However, due to the United Kingdom tax law imposing a 10%
supplementary tax on oil and natural gas profits derived from certain North Sea
properties, many of our customers reduced drilling activity in this region. In
July 2002, the North Sea rotary rig count reached a low of 42. 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

24

of 46 in December 2003, after having reached a low of 42 in July 2002. We do not
expect any marked increase in activity levels in the North Sea in the near term.

As offshore drilling has stagnated over the last 18 months, the importance
of maintaining market share has become critical. In response to this market
condition, in October 2002, we made a strategic decision to enter the
directional drilling business in North America. As a result of this decision and
the growth of the United States land rig count, we have successfully increased
the utilization of our MWD and down-hole drilling motor fleet. The increased
utilization of our MWD and down-hole drilling motor fleet during 2003 helped to
offset decreases in utilization of our LWD fleet, which is primarily driven by
the United States offshore rig count.

Additionally, we have been working to commercialize our 3DRS technology and
our AWR technology, the first new technologies to have been developed
independently by PathFinder since it was acquired in March 1999. Both
technologies are currently being tested in live-well environments.
Commercialization of the 3DRS technology has been prioritized to improve the
utilization of our LWD, MWD and directional drilling services as our customers
often require that this type of technology be offered by a service company as a
prerequisite to submitting a bid for a drilling project or contract.
Introduction of our AWR technology heralds our next generation of resistivity
tools, which allows for advanced resistivity measurements in both high pressure
and high temperature well conditions. Both the 3DRS and the AWR are expected to
be available for commercial service before the end of the second quarter of
2004. We see a waiting market for these tools in the Gulf of Mexico, Brazil and
North Sea. We believe that the commercialization of these tools will have a
meaningful impact on our future results of operations.

COMPLETION AND WORKOVER RELATED PRODUCTS AND SERVICES

This sector is our second largest business segment and provided
approximately 31% of our total 2003 consolidated revenue. Revenues provided by
the completion and workover segment are almost entirely 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,
2002 and 2003, which, when combined with our acquisitions, has strengthened and
further diversified the operations of this segment.

MAINTENANCE AND SAFETY RELATED PRODUCTS AND SERVICES

Our maintenance and safety segment provided approximately 8% of our total
2003 consolidated revenue and is focused in and along the Gulf Coast region of
the United States. Although somewhat seasonal in nature, with higher activity
levels in the early and latter portion 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 oil and natural gas exploration,
development and production activity.

In January 2004, we announced that we were evaluating the possible
divestiture of this segment. The net book value of this segment was
approximately $27.6 million at December 31, 2003. We anticipate that our future
operating performance will be enhanced by this divestiture, as we will be able
to concentrate our focus on our core business segments.

ADVERSE WEATHER CONDITIONS

In the third quarter of 2003, we experienced delay in completion and
workover jobs due to wet weather in South Texas. However, the impact was minor
in comparison to the previous year. In 2002, our results of operations were
negatively impacted by the effects of adverse weather conditions associated with
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.

25

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002

Revenues. Revenues increased by $84.9 million, or approximately 27%, to
$398.3 million for the year ended December 31, 2003 from $313.4 million for the
year ended December 31, 2002. This increase was attributable to higher demand
for products and services in each of our operating segments, as well as the full
year effect of revenue contributions of Boyd's Bit Service, Inc. ("Boyd's"),
which was acquired in August 2002 and E. M. Hobbs, L.P. ("Hobbs"), which was
acquired in November 2002.

Drilling related products and services revenues increased by $36.9 million,
or approximately 18%, to $242.1 million for the year ended December 31, 2003
from $205.2 million for the year ended December 31, 2002. This increase was
primarily attributable to the increase in land drilling activity levels in the
United States of $19.0 million due to our entrance into the directional drilling
business in North America in October 2002.

Completion and workover related products and services revenues increased by
$44.5 million, or approximately 55%, to $125.1 million for the year ended
December 31, 2003 from $80.6 million for the year ended December 31, 2002. This
increase was the result of increases in capacity driven by capital expenditures
of $23.5 million, increases in activity levels, higher utilization of our coiled
tubing and cased-hole wireline fleet and increased demand for our completion
fluids, as well as the full year's impact of the Boyd's and Hobbs acquisitions
of $11.1 million.

Maintenance and safety related products and services revenues increased by
$3.6 million, or approximately 13%, to $31.2 million for the year ended December
31, 2003 from $27.6 million for the year ended December 31, 2002. This increase
was due primarily to increased sales of our safety products and turnaround
related services.

Cost of Revenues. Cost of revenues increased by $55.2 million, or
approximately 32%, to $228.1 million for the year ended December 31, 2003 from
$172.9 million for the year ended December 31, 2002. As a percentage of
revenues, cost of revenues increased to 57% for the year ended December 31, 2003
from 55% for the year ended December 31, 2002. The increase in cost of revenues,
as a percentage of revenues, was due to the continued effects of softness in
pricing, increased insurance costs and the greater contribution to our
consolidated revenues from lower margin products and services, primarily from
our drilling fluids businesses.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $15.1 million, or approximately 23%, to
$79.5 million for the year ended December 31, 2003 from $64.4 million for the
year ended December 31, 2002. The increase was primarily attributable to
additional expenses of $3.7 million related to the operations of Boyd's and
Hobbs, which were acquired during the second half of 2002 and increased
personnel costs of $8.3 million related to expansion efforts within our coiled
tubing and directional drilling business lines. We also experienced increased
corporate costs to comply with the Sarbanes-Oxley Act of 2002 and incurred
expenses associated with the our move from the NASDAQ National Market to the New
York Stock Exchange. As a percentage of revenues, selling, general and
administrative expenses decreased to 20% for the year ended December 31, 2003
from 21% for the year ended December 31, 2002.

Research and Development Expense. Research and development expenses
increased by $1.2 million, or approximately 12%, to $11.2 million for the year
ended December 31, 2003 from $10.0 million for the year ended December 31, 2002.
This increase was the result of continued research and development spending on
our PathFinder technologies, including 3DRS and AWR and other research and
development initiatives.

Depreciation and Amortization. Depreciation and amortization increased by
$7.5 million, or approximately 23%, to $40.1 million for the year ended December
31, 2003 from $32.6 million for the year ended December 31, 2002. This increase
was the result of depreciation associated with our continued capital
expenditures, as well as additional depreciation and amortization due to our
acquisitions.

26

Interest and Other Expense. Interest and other expense for the year ended
December 31, 2003 was $8.1 million, an increase of $1.1 million, or
approximately 16%, from $7.0 million for the year December 31, 2002. This
increase was primarily due to the increase in the amounts outstanding under our
credit facility.

Net Income. Net income for the year ended December 31, 2003 was $19.3
million, an increase of $3.0 million, or approximately 18% from $16.3 million
reported for the year ended December 31, 2002.

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 largely attributable to reduced
activity levels within the oil and natural gas industry, including the effects
of softness in pricing. This decrease was partially offset by the $4.0 million
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 $11.7 million
from Coil Tubing Services, L.L.C. ("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 $4.0 million revenue contributions of
Boyd's and Hobbs, which were acquired in August 2002 and November 2002,
respectively, and the full year effect of CTS of $11.7 million, which was
acquired in May 2001, but was offset by the effects of lower activity levels,
softness in 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, increases in insurance costs and 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. This increase was 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.

27

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 LWD, MWD and related technologies.

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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our consolidated 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. The most significant areas involving
management judgment and estimates are described below. Actual results may differ
from these estimates under different assumptions or conditions.

REVENUE RECOGNITION

We provide rental equipment and services to our customers on a day rate
basis and recognize the related revenue on a per-day basis as the work
progresses. We also provide products to customers and recognize the related
revenue as items are shipped from our facilities. See Note 2 to the Consolidated
Financial Statements for further discussion.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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. In the event we were to determine that a customer may
not be able to make required payments, we would increase the allowance through a
charge to income in the period in which that determination is made. See Note 2
to the Consolidated Financial Statements for further discussion.

INCOME TAXES

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. We believe that our earnings
during the periods when the temporary differences become deductible will be
sufficient to realize the related future income tax benefits. In certain cases
where projected results indicate that realization is not likely, we have
established a valuation allowance to reduce deferred tax assets to estimated
realizable value.

In assessing the need for a valuation allowance, we estimate future taxable
income, considering the feasibility of ongoing tax planning strategies and the
realizability of tax loss carry-forwards. Valuation allowances related to
deferred tax assets can be impacted by changes to tax laws, changes to statutory
tax rates

28

and future taxable income levels. In the event we were to determine that we
would not be able to realize all or a portion of our deferred tax assets in the
future, we would reduce such amounts through a charge to income in the period in
which that determination is made. Conversely, if we were to determine that we
would be able to realize our deferred tax assets in the future in excess of the
net carrying amounts, we would decrease the recorded valuation allowance through
an increase to income in the period in which that determination is made. See
Note 8 to the Consolidated Financial Statements for further discussion.

INSURANCE RESERVES

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.

IMPAIRMENT OF LONG-LIVED ASSETS

We assess our long-term assets for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset 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 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.

Our determination of impairment of long-lived assets, if any, requires
estimates of undiscounted future cash flows. Actual impairment charges, if any,
are recorded using an estimate of discounted future cash flows. The
determination of future cash flows requires estimates based upon the most recent
market and operating data for the applicable asset at the time the estimate is
made, and such estimates can change based on market conditions, technological
advances in the industry or changes in regulations governing the industry.

GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment testing. The identification and
measurement of goodwill impairment involves the estimation of the fair value of
reporting units. The estimates of fair value of reporting units are based on the
best information available as of the date of the assessment, which primarily
incorporate management assumptions about expected future cash flows and
contemplate other valuation techniques. Future cash flows can be affected by
changes in industry or market conditions or the rate and extent to which
anticipated synergies or cost savings are realized with newly acquired entities.
Although no goodwill impairment has been recorded to date, there can be no
assurances that future goodwill impairments will not occur. See Note 5 to the
Consolidated Financial Statements for further discussion.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of APB No. 51" ("FIN 46"). This
interpretation provides guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights, or variable-interest entities ("VIEs"). FIN 46 originally became
effective for public entities with VIEs created before February 1, 2003, at the
beginning of the first interim or annual reporting period starting after June
15, 2003. In December 2003, the FASB issued FIN 46-R, which amended FIN 46 to
extend its effective date until the first quarter of 2004 for all types of
entities except special purpose entities. In addition, FIN 46-R also limited the
scope of FIN 46 to exclude certain joint ventures or other entities that meet
the characteristics

29

of businesses. Upon the applicable effective date, FIN 46 will become the
guidance that determines whether consolidation is required and whether the
variable-interest accounting model must be used to account for existing and new
entities. As we do not maintain any VIEs, we do not believe that the adoption of
FIN 46 will have an impact on our consolidated financial position, results of
operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures, in
its statement of financial position, certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS 150 is effective for such financial instruments,
except for those that apply to mandatorily redeemable non-controlling interests,
entered into or modified after May 31, 2003, and otherwise was effective for
such financial instruments, except for those that apply to mandatorily
redeemable non-controlling interests, at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS 150 did not have a
material effect on our financial position, results of operations or cash flows
for the year ended December 31, 2003.

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 our cash flow from
operations, we must fund our cash requirements primarily through debt and equity
financing activities.

CASH FLOW

Working capital was $96.7 million as of December 31, 2003 and $73.9 million
as of December 31, 2002. Net cash provided by operating activities was $41.1
million for the year ended December 31, 2003 and $29.3 million for the year
ended December 31, 2002. The increase in working capital was due to increases in
activity levels and acquisitions of three companies that were consummated in the
fourth quarter of 2003. The increase in cash flow from operating activities was
principally attributable to higher operating levels across all business
segments.

Net cash used in investing activities was $68.2 million for the year ended
December 31, 2003 and $67.5 million for the year ended December 31, 2002. Net
cash used in investing activities was principally the result of capital
expenditures and acquisitions, offset by lost-in-hole proceeds.

Net cash provided by financing activities was $27.2 million for the year
ended December 31, 2003 and $25.4 million for the year ended December 31, 2002.
Changes in net cash provided by financing activities were primarily the result
of borrowings and repayments under our credit facility, including those
associated with the August 2003 amendment to our credit facility in which we
added a $70 million Term C loan facility as discussed more fully below.

For the year ended December 31, 2003, we made capital expenditures,
primarily for rental tool inventory, LWD and MWD tools, wireline equipment and
coil tubing units, of $68.8 million, including expenditures for the replacement
of equipment lost-in-hole. In addition, we incurred $11.2 million in research
and development expenses for the year ended December 31, 2003.

ACQUISITIONS

During the fourth quarter of 2003, we completed the acquisition of three
companies -- Continental Directional Corp., Dutch, Inc. and HydraCoil, Inc.
Headquartered in Nisku, Alberta, Continental provides directional drilling
services in Western Canada, a market that our directional drilling business did
not previously serve. Dutch provides rental tools to drilling, completion and
production businesses through its sole location in Broussard, Louisiana. The
acquisition of HydraCoil extends the geographic reach of our cased-hole logging
and perforating services into the North Texas market. These three companies were
acquired for total

30

cash consideration of approximately $15.9 million and approximately 110,000
shares of our common stock, valued at approximately $1.5 million.

CAPITAL RESOURCES

With the exception of operating leases on real property and automobile
leases discussed in Note 7 of our consolidated financial statements, we have no
off-balance sheet debt or other off-balance sheet financing arrangements. We
have not entered into any 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, 2003:

In the first quarter of 2003, we obtained an additional revolving loan
commitment of $10.0 million and a supplemental Term B loan of $5.0 million under
our credit facility. During the third quarter of 2003, we amended our credit
facility to, among other things, include a $70.0 million Term C loan facility.
As so amended, our credit facility includes the following features:

- a $40.0 million Term A loan facility, of which $17.0 million was
outstanding as of December 31, 2003, that amortizes over five years,
matures on October 16, 2005 and requires that we make annual principal
repayments ranging from zero in the first year to $12.3 million in the
fifth year;

- an $85.0 million Term B loan facility, of which $82.6 million was
outstanding as of December 31, 2003, that amortizes over six and one-half
years, matures on April 16, 2007 and requires that we make annual
principal repayments of $0.85 million in each of the first six years with
the outstanding balance due on the maturity date;

- a $70.0 million Term C loan facility, of which $69.7 million was
outstanding as of December 31, 2003, that amortizes over three and
one-half years, matures on April 16, 2007 and requires that we make
annual principal repayments of $0.7 million in each of the first three
years with the outstanding balance due on the maturity date; and

- a $55.0 million revolving credit facility, of which $4.0 million was
outstanding as of December 31, 2003, that may be borrowed, repaid and
reborrowed from time to time and matures on October 16, 2005. Our credit
facility provides that we may request the issuance of letters of credit.
Outstanding letters of credit reduce the available amount that we may
borrow under our revolving credit facility. As of December 31, 2003,
approximately $4.7 million in letters of credit had been issued under our
credit facility to guarantee payment of claims for commercial insurance
purposes. These letters of credit are issued for a period of one year,
with automatic one year extensions. Partial drawings against each letter
of credit are permitted.

At our option, amounts borrowed under the credit facility 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 (1) ranges
from 1.75% to 3.00% in the case of a LIBOR based loan under the revolving loan
facility or the Term A loan facility, (2) is equal to 3.25% in the case of a
LIBOR based loan under the Term B loan facility and (3) is equal to 3.00% in the
case of a LIBOR based loan under the Term C loan facility. For alternate base
rate loans, the applicable margin (1) ranges from 0.75% to 2.00% under the
revolving loan facility and the Term A loan facility, (2) is equal to 2.25%
under the Term B loan facility and (3) is equal to 2.00% under the Term C loan
facility. The foregoing margins are subject to adjustment based on a debt
service coverage ratio and a leverage ratio.

31

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 material
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 material 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, the amount of future investments and our
ability to pay dividends. As of December 31, 2003, we were in compliance with
these restrictive covenants. As of December 31, 2003 and 2002, respectively, we
had outstanding borrowings under our credit facility of $173.2 million and
$142.8 million, respectively, of which $4.0 million and $32.4 million,
respectively, were outstanding under the revolving credit facility.

In connection with the CTS acquisition in May 2001, we issued $4.5 million
in 9% convertible subordinated notes to eight individuals as partial
consideration for the acquisition of CTS. The notes were paid in full in January
2004.

Future capital requirements

We anticipate that acquisitions of complementary companies, assets and
product lines will continue to play an important role in our business strategy.
While there are currently no unannounced agreements or ongoing negotiations for
the acquisition of any material businesses or assets, such transactions can be
effected quickly and may occur at any time. Likewise, we will continue to need
to make capital expenditures for tools and equipment and to make research and
development expenditures to maintain and improve the quality of our products and
services. We currently estimate that we will make capital expenditures of
approximately $50 to $55 million in 2004 and will make research and development
expenditures of approximately $12 to $14 million in 2004.

We believe that our internally generated cash flow, combined with access to
our credit facility will be sufficient to meet the liquidity requirements
necessary to fund our operations, capital expenditure requirements, research and
development and debt service requirements for at least the next 12 months.
However, our ability to maintain our credit facility and the sufficiency of our
internally generated cash flow can be impacted by economic conditions outside of
our control.

The continuation of our acquisition strategy will require substantial
capital. We currently intend to finance future acquisitions through issuances of
our equity or debt securities and through borrowings under our credit facility.
Using debt to complete acquisitions could substantially limit our operational
and financial flexibility and using stock could dilute the ownership interests
of our existing shareholders. The extent to which we will be able or are willing
to use our common stock to make acquisitions will depend on its market value
from time to time and the willingness of potential sellers to accept it as full
or partial payment. If we are unable to obtain additional capital on acceptable
terms, we may be unable to grow through acquisitions.

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 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 interest rates under these borrowings would have increased our
interest expense by approximately $1.8 million for the year ended December 31,
2003 and $1.5 million for the year ended December 31, 2002.

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 unlikely to be significant to our operations.

Stock Price Volatility. Our ability to raise capital at a reasonable cost
of capital is, in part, affected by the market price of our stock. The market
price of our stock may be influenced by many factors including variations in our
earnings, variations in oil and natural gas prices, the level of exploration,
development and

32

production activity of, and the corresponding capital spending by, our
customers, investor perceptions of us and other oilfield service companies and
the liquidity of the market for our common stock.

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-26 of
this Annual Report on Form 10-K 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.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. We maintain controls and
procedures designed to ensure that we are able to collect the information we are
required to disclose in the reports we file with the SEC, and to process,
summarize and disclose this information within the time periods specified in the
rules of the SEC. Based on an evaluation of our disclosure controls and
procedures as of the end of the period covered by this report conducted by our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, our Chief Executive Officer and Chief Financial Officer
believe that these controls and procedures are effective to ensure that we are
able to collect, process and disclose the information we are required to
disclose in the reports we file with the SEC within the required time periods.

(b) Internal Control over Financial Reporting. During the period covered
by this report, there have been no changes in our internal control over
financial reporting that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICER OF THE REGISTRANT

Information required by this item is hereby incorporated by reference to
the section entitled "Directors and Executive Officers" in our definitive proxy
statement to be filed with the SEC pursuant to the Exchange Act within 120 days
of the end of our fiscal year on December 31, 2003.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is hereby incorporated by reference to
the sections entitled "Director Compensation" and "Executive Compensation" of
our definitive proxy statement to be filed with the SEC pursuant to the Exchange
Act within 120 days of the end of our fiscal year on December 31, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information required by this item is hereby incorporated by reference to
the section entitled "Principal Shareholders" of our definitive proxy statement
to be filed with the SEC pursuant to the Exchange Act within 120 days of the end
of our fiscal year on December 31, 2003 and under the heading "Equity
Compensation Plans" in Item 5 of this Annual Report on Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is hereby incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" of our
definitive proxy statement to be filed with the SEC pursuant to the Exchange Act
within 120 days of the end of our fiscal year on December 31, 2003.

33

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is hereby incorporated by reference to
the section entitled "Audit Committee Report" of our definitive proxy statement
to be filed with the SEC pursuant to the Exchange Act within 120 days of the end
of our fiscal year on December 31, 2003.

PART IV

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

(a)(1 and 2) Financial Statements and Financial Statement Schedules. Our
consolidated financial statements, together with the notes thereto and our
independent accountants' reports thereon appear on pages F-1 through F-27 of
this Annual Report on Form 10-K. An index to such financial statements appears
on page F-1, and such index is incorporated herein by reference. All schedules
not filed herewith for which provision is made under SEC Regulation S-X have
been omitted as not applicable or not required or the information required has
been included in the notes to our consolidated financial statements.

(3) Index of Exhibits

See Index of Exhibits, which index is incorporated herein by reference, 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.

On October 28, 2003, we filed a Current Report on Form 8-K pursuant to
which we updated our earnings estimate for the quarter ended September 30, 2003.

On October 30, 2003, we filed a Current Report on Form 8-K pursuant to
which we furnished our earnings information for the quarter ended September 30,
2003.

34

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 15th day of March, 2004.

W-H ENERGY SERVICES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors.............................. F-1
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 2003 and
2002...................................................... F-3
Consolidated Statements of Operations and Comprehensive
Income for the Years Ended December 31, 2003, 2002 and
2001...................................................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7

F-1

REPORT OF INDEPENDENT AUDITORS

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

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income, of
shareholders' equity (deficit) 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, 2003 and 2002 and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2003 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 audits. We conducted our
audits 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 audits provide a reasonable basis for our opinion. The
Company's consolidated financial statements for the year 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 for the
year 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 included in Note 5. In our
opinion, the transitional disclosures for 2001 in Note 5 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 financial statements 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 financial statements taken as a whole.

PricewaterhouseCoopers LLP

Houston, Texas
March 10, 2004

F-2

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 YEAR ENDED DECEMBER 31, 2001 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 sheets as of December 31, 2001 and December
31, 2000 and the consolidated statements of operations and comprehensive
income (loss), shareholders' equity (deficit) and cash flows for the years
ended December 31, 2000 and December 31, 1999 are not included in this Form
10-K.

F-3

W-H ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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

F-4

W-H ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

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

F-5

W-H ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

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

F-6

W-H ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

F-7

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), down-hole drilling motors and drilling fluids;
(ii) completion and workover related products and services, which include
cased-hole wireline logging, perforating, tubing conveyed 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.

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. 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. Changes in prices
could have a material effect on W-H's results of operations and financial
condition, particularly with respect to its drilling related products and
services segment. Demand for W-H's 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 W-H's 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 W-H's
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 gas exploration, development and production activity. 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. However, since W-H's completion and workover related products and
services are less commodity price sensitive than its drilling related products
and services, they continue to provide stability during prolonged downturns in
drilling activity. 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. Certain prior period amounts have been reclassified to
conform to the current presentation.

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.

F-8

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. W-H regularly reviews
outstanding receivables and provides for estimated losses through an allowance
for doubtful accounts.

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 and comprehensive income.
Proceeds from customers for the cost of oilfield rental equipment that is
involuntarily damaged or lost down-hole are reflected as revenues, with the
resulting carrying value of the related equipment charged to cost of 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 2003, 2002 or 2001.

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 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

F-9

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

W-H provides rental equipment and services to its customers on a day rate
basis and recognizes the related revenue on a per-day basis as the work
progresses. W-H also provides products to customers and recognizes the related
revenue as items are shipped from its facilities. Proceeds from customers for
the cost of oilfield rental equipment that is involuntarily damaged or lost
down-hole are reflected as revenues.

COST OF REVENUES

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.

RESEARCH AND DEVELOPMENT

Research and development costs primarily represent salaries of research
personnel and their related expenditures. Such activities are expensed when
incurred. For the years ended December 31, 2003, 2002 and 2001, research and
development costs were $11.2 million, $10.0 million and $7.9 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 automobile
leases discussed in Note 7 of the consolidated financial statements, W-H has no
off-balance sheet debt or other off-balance sheet financing arrangements. W-H
has 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

F-10

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 and earnings 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:

The fair value of each option was estimated on the date of grant using the
Black-Scholes option valuation model. The following assumptions were used for
the historical option grants in the years ended December 31, 2003, 2002 and
2001: risk-free interest rates of between 3.8%-5.0%; dividend rates of zero;
expected lives of between 6.6 and 8.6 years and expected volatilities of
54.5%-65.9%. The 3,633,458 options outstanding as of December 31, 2003 have a
remaining weighted average contractual life of 7.3 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 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. The translation adjustments were a gain of $3.2 million,
$4.2 million and $0.3 million for the years ended December 31, 2003, 2002 and
2001, respectively, and are reflected as foreign currency translation
adjustments in the consolidated statements of operations and comprehensive
income for the years ended December 31, 2003, 2002 and 2001.

EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing net
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 the assumed exercise of stock options,
warrants and other convertible instruments. For the years ended December 31,
2003, 2002 and 2001, additional shares resulting from the assumed exercise of
outstanding options and warrants of 752,672, 1,010,919 and 1,715,935,
respectively, were added to the denominator because the inclusion of such shares
would be dilutive. For the

F-11

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

years ended December 31, 2003, 2002 and 2001, additional shares resulting from
the assumed exercise of outstanding options and warrants of 1,495,925, 912,337
and 787,400, respectively, were excluded from the computation of diluted
earnings per share, because the inclusion of such shares would be antidilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
interpretation provides guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights, or variable-interest entities ("VIEs"). FIN 46 originally became
effective for public entities with VIEs created before February 1, 2003, at the
beginning of the first interim or annual reporting period starting after June
15, 2003. In December 2003, the FASB issued FIN 46-R, which amended FIN 46 to
extend its effective date until the first quarter of 2004 for all types of
entities except special purpose entities. In addition, FIN 46-R also limited the
scope of FIN 46 to exclude certain joint ventures or other entities that meet
the characteristics of businesses. Upon the applicable effective date, FIN 46
will become the guidance that determines whether consolidation is required and
whether the variable-interest accounting model must be used to account for
existing and new entities. As W-H does not maintain any VIEs, it does not
believe that the adoption of FIN 46 will have an impact on its consolidated
financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures, in
its statement of financial position, certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS 150 is effective for such financial instruments,
except for those that apply to mandatorily redeemable non-controlling interests,
entered into or modified after May 31, 2003, and otherwise was effective for
such financial instruments, except for those that apply to mandatorily
redeemable non-controlling interests, at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS 150 did not have a
material effect on W-H's financial position, results of operations or cash flows
for the year ended December 31, 2003.

3. ACQUISITIONS

During the fourth quarter of 2003, W-H made the following acquisitions:

DUTCH, INC.

In December 2003, W-H acquired Dutch, Inc. ("Dutch"). Dutch provides rental
tools to drilling, completion and production businesses through its sole
location in Broussard, Louisiana. W-H acquired Dutch for consideration
consisting of $9.2 million in cash, of which $1.85 million will be held in
escrow for a period of two years to satisfy any indemnification claims of W-H.

CONTINENTAL DIRECTIONAL CORPORATION

In November 2003, W-H acquired Continental Directional Corporation
("Continental"). Continental, headquartered in Nisku, Alberta, provides
directional drilling services in Western Canada, a market that W-H's directional
drilling business did not previously serve. Consideration for this acquisition
was approximately $3.1 million in cash and a short-term payable and 51,016
shares of W-H common stock, of which 25,513 shares will be held in escrow for a
period of eighteen months to satisfy any indemnification claims of W-H.

F-12

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

HYDRACOIL, INC.

In November 2003, W-H acquired HydraCoil, Inc. ("HydraCoil"). The
acquisition of HydraCoil extends the geographic reach of W-H's cased-hole
logging and perforating services into the North Texas market. Consideration for
this acquisition was approximately $3.0 million in cash and 58,823 shares of W-H
common stock, of which 44,118 shares will be held in escrow for a period of
between two and three years to satisfy any indemnification claims of W-H.

The aggregate purchase price and estimated aggregate fair market value of
the net assets acquired with the businesses acquired in 2003 are as follows (in
thousands):

Purchase price:
Cash paid to former owners................................ $13,108
Common stock.............................................. 1,518
Payable to former owners.................................. 2,711
Acquisition costs......................................... 583
-------
Total purchase price................................... $17,920
=======
Net assets acquired:
Current assets............................................ $ 2,996
Property and equipment.................................... 3,101
Goodwill.................................................. 13,441
Other intangibles......................................... 961
Current liabilities....................................... (2,579)
-------
Net assets acquired.................................... $17,920
=======

Unaudited proforma consolidated financial information for these
acquisitions has not been included as the results were not material to current
operations.

During 2002, W-H made the following acquisitions:

E. M. HOBBS, L.P.

In November 2002, W-H acquired E. M. Hobbs, L.P. ("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

F-13

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

3D STABILISERS LTD.

In January 2002, W-H acquired 3D Stabilisers Ltd. ("3D Stabilisers"). 3D
Stabilisers developed a patented 3D rotary steerable system for use in
directional drilling. The technology developed by 3D Stabilisers was not fully
commercialized and has served as a complement to the technology base at
PathFinder Energy Services. 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 net assets acquired with the businesses acquired in 2002 are as follows (in
thousands):

Purchase price:
Cash paid to former owners................................ $22,361
Common stock.............................................. 6,790
Payable to former owners.................................. 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
=======

Unaudited proforma consolidated financial information for these
acquisitions has not been included as the results were not material to current
operations.

During 2001, W-H made the following acquisition:

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-14

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The purchase price and estimated fair market value of the net assets
acquired in connection with the CTS acquisition are as follows (in thousands):

Purchase price:
Cash paid................................................. $26,596
Convertible subordinated notes............................ 4,500
Common stock.............................................. 10,053
Payable to former owners.................................. 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, 2001 (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, 2003, 2002 and 2001, consists of the following (in thousands):

F-15

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of inventories as of December 31, 2003 and 2002 are as
follows (in thousands):

Net property and equipment as of December 31, 2003 and 2002, consists of
the following (in thousands):

Depreciation expense charged to operations totaled approximately $39.2
million, $32.0 million and $23.3 million for the years ended December 31, 2003,
2002 and 2001, respectively.

Goodwill and other intangibles as of December 31, 2003 and 2002, consist of
the following (in thousands):

Amortization expense charged to operations totaled approximately $0.9
million, $0.7 million and $3.4 million for the years ended December 31, 2003,
2002 and 2001, respectively.

Estimated aggregate amortization of intangible assets (in thousands) for
the next 5 years is as follows:

F-16

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accrued liabilities as of December 31, 2003 and 2002, 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 assessments in accordance with SFAS No. 142 for the year
ended December 31, 2003, 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 years ended December 31, 2002 and 2003 were as follows
(in thousands):

F-17

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table shows what W-H's net income and earnings per share
("EPS") would have been in 2001, if goodwill had not been amortized during that
period, compared to the net income and EPS W-H recorded for 2003 and 2002 (in
thousands, except per share data):

F-18

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. DEBT:

Long-term debt as of December 31, 2003 and 2002 consists of the following
(in thousands):

CREDIT FACILITY

In the first quarter of 2003, W-H obtained an additional revolving loan
commitment of $10.0 million and a supplemental Term B loan of $5.0 million under
its credit facility. During the third quarter of 2003, W-H amended its credit
facility to, among other things, include a $70.0 million Term C loan facility.
The amended and restated credit facility includes the following features:

- a $40.0 million Term A loan facility, of which $17.0 million was
outstanding as of December 31, 2003, that amortizes over five years,
matures on October 16, 2005 and requires that W-H makes annual principal
repayments ranging from zero in the first year to $12.3 million in the
fifth year;

- an $85.0 million Term B loan facility, of which $82.6 million was
outstanding as of December 31, 2003, that amortizes over six and one-half
years, matures on April 16, 2007 and requires that W-H makes annual
principal repayments of $0.85 million in each of the first six years with
the outstanding balance due on the maturity date;

- a $70.0 million Term C loan facility, of which $69.7 million was
outstanding as of December 31, 2003, that amortizes over three and
one-half years, matures on April 16, 2007 and requires that W-H makes
annual principal repayments of $0.7 million in each of the first three
years with the outstanding balance due on the maturity date; and

F-19

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- a $55.0 million revolving credit facility, of which $4.0 million was
outstanding as of December 31, 2003, that may be borrowed, repaid and
reborrowed from time to time and will mature on October 16, 2005. Letters
of credit also reduce the available amount of our revolving credit
facility. These letters of credit have been established to guarantee
payment of claims for commercial insurance purposes. They are issued for
a period of one year, with automatic one year extensions. Partial
drawings against each letter of credit are permitted. As of December 31,
2003, we had approximately $4.7 million set aside for this purpose.

At W-H's 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 (i) 1.75% to 3.00% in the case of a LIBOR based loan under
the revolving credit facility or the Term A loan facility, (ii) 3.25% in the
case of a LIBOR based loan under the Term B loan facility and (iii) 3.00% in the
case of a LIBOR based loan under the Term C loan facility. For alternate base
rate loans, the applicable margin ranges from (i) 0.75% to 2.00% under the
revolving credit facility and the Term A loan facility, (ii) 2.25% under the
Term B loan facility and (iii) 2.00% under the Term C loan facility. The
foregoing margins are subject to adjustment based on a debt service coverage
ratio and a leverage ratio.

The credit facility is secured by a lien on substantially all of W-H's
property and assets, a pledge of all of the capital stock of W-H's material
domestic subsidiaries and a pledge of not greater than 65% of the capital stock
of each of W-H's foreign subsidiaries. In addition, the credit facility is
guaranteed by all of W-H's material domestic subsidiaries. The credit facility
requires, among other things, that certain financial ratios are maintained and
limits the amount of capital expenditures that may be made, the amount of debt
incurred outside of the credit facility, the ability to pay dividends and future
investments. As of December 31, 2003, W-H had outstanding borrowings under its
credit facility of $173.2 million, of which $4.0 million was outstanding under
the revolving credit facility.

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

For the year ended December 31 --
2004...................................................... $ 10,763
2005...................................................... 17,838
2006...................................................... 1,550
2007...................................................... 147,574
2008...................................................... --
Thereafter................................................ --
--------
Total.................................................. $177,725
========

CONVERTIBLE SUBORDINATED NOTES

In connection with the CTS acquisition (Note 3), W-H issued $4.5 million in
9% convertible subordinated notes to eight of the individuals (the Sellers) from
whom CTS was acquired as partial consideration for the acquisition. The notes
were paid in full in January 2004.

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 $8.8 million, $7.4 million and

F-20

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$8.9 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):

EMPLOYMENT AGREEMENTS

W-H has entered into employment agreements with its corporate officers.
Under these 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 or automobile allowance
and certain fringe benefits as may be available to such executive officers. The
agreements are for terms of two to six 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 or certain change of control.

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

LITIGATION

One of W-H's subsidiaries, Charles Holston, Inc. has been named as a
defendant in a case styled Bryson Adams, et al v. Environmental Purification
Advancement Corporation, No. 99-1998, which was filed in Federal District Court
for the Middle District of Louisiana. This lawsuit involves several hundred
plaintiffs alleging personal injury and property damage associated with oilfield
waste disposal practices over a 30-year period at a waste disposal facility
located near Bayou Sorrel, west of Plaquemine Louisiana. The plaintiffs in these
cases are seeking unspecified amounts of general, special and exemplary damages.
Subsequent to year-end, a joint settlement agreement amongst the defendants in
the case was tentatively approved by the plaintiffs and the court, pursuant to
which Charles Holston, Inc. would be dismissed from the case. This settlement is
pending final approval, which is expected to occur during the second quarter of
2004.

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 unspecified times over the years. This matter is
still pending.

W-H does not expect these lawsuits to have a material adverse effect on
W-H's financial condition, results of operations or cash flows.

F-21

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

W-H is a party to various routine legal proceedings that primarily involve
intellectual property, commercial 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 financial condition, results of operations or cash flows.

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):

The total provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):

F-22

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The significant components of the deferred tax assets and liabilities as of
December 31, 2003 and 2002, are as follows (in thousands):

At December 31, 2003, W-H has approximately $9.5 million of federal net
operating loss ("NOL") carry-forwards, $29.5 million of state NOL carry-forwards
and $5.9 million of foreign NOL carry-forwards. Usage of the federal
carry-forwards is subject to limitations provided under Section 382 of the
Internal Revenue 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 carry-forward 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, 2003, approximately $1.2 million of the
valuation allowance relates to the possible expiration of federal carry-forwards
due to the limitations imposed under Section 382 and separate return limitation
year rules. $0.6 million of the valuation allowance relates to credit
carry-forwards that are expected to expire prior to utilization, $1.0 million of
the valuation allowance relates to state net operating loss carry-forwards and
$1.5 million relates to foreign net operating loss carry-forwards. The valuation
allowance increased approximately $1.2 million in 2003, decreased approximately
$0.9 million in 2002 and increased approximately $0.8 million in 2001. The $1.2
million increase in 2003 was primarily due to the increase in state and foreign
NOLs that are not expected to be utilized in the future.

F-23

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. RELATED-PARTY TRANSACTIONS

CONSULTING AND ADVISORY AGREEMENTS

On August 11, 1997, W-H entered into a transaction advisory agreement with
an affiliate of The Jordan Company ("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 $500,000 for the year ended December 31, 2001. No
such expenses were incurred in either 2002 or 2003.

LEASE AGREEMENT

One of W-H's subsidiaries leases its facilities from a W-H officer. For
each of the years ended December 31, 2003, 2002 and 2001, W-H paid the officer
$108,000 for such annual lease costs.

TRANSACTIONS WITH PENNY-FARTHING PRESS, INC.

W-H's Chairman, President 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 2003, 2002 and
2001, W-H made payments to PFP for graphic design and other services of
approximately $0, $28,000 and $64,000, respectively. During the same periods,
PFP made payments to W-H of approximately $38,000, $30,000 and $26,000,
respectively, primarily for rental of office space.

10. SHAREHOLDERS' EQUITY

SECONDARY OFFERING

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.

STOCK OPTIONS

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 compensation committee (the "Committee"). The options currently outstanding
under the 1997 Option Plan 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. The terms of such options also provide
that 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, 2003,
2,732,558 options were outstanding under this plan.

Additionally, on March 29, 1999, W-H issued 900,900 options to its chief
executive officer under a separate non-statutory option plan. These options have
a 10-year term and an exercise price of $4.55 per share. At December 31, 2003,
all of these options were vested.

W-H has historically issued warrants in association with acquisitions or as
compensation for debt arrangements. No warrants have been granted since 1999. As
of December 31, 2003, there are no warrants outstanding and exercisable.

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W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of W-H's stock options as of December 31, 2001, 2002 and 2003 is
as follows:

The following table summarizes information about stock options outstanding
at December 31, 2003:

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, 2003, 2002 and 2001, W-H recognized
$387,000, $404,000 and $404,000, respectively, 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.

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W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

W-H matching contributions were approximately $1.4 million, $0.9 million and
$0.9 million for the years ended December 31, 2003, 2002 and 2001, respectively.

12. SEGMENTS

Management has elected to aggregate its business unit segments based on the
differences in each segment's customers, the products and services offered and
other economic characteristics. Based on these requirements, management has
identified three reportable segments: (i) drilling related products and
services, (ii) completion and workover related products and services and (iii)
maintenance and safety related products and services. The accounting policies of
the operating segments are the same as 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
selected areas of the Eastern Hemisphere. This segment includes the following
business lines: (i) LWD; (ii) MWD; (iii) directional drilling; (iv) down-hole
drilling motors; (v) rental tools (including drill pipe) 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 and services include: (i)
cased-hole wireline logging, perforating, tubing conveyed 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 in the Gulf
Coast region. These products and services include: (i) waste management; and
(ii) safety equipment and services.

W-H is currently evaluating the possible sale of this segment. This
segment, which is comprised of two businesses, had a net book value of
approximately $27.6 million at December 31, 2003.

SUMMARY INFORMATION

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

F-26

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003:

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

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

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-27

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, 2003 and 2002 (amounts in thousands, except per share
data):

14. SUBSEQUENT EVENT (UNAUDITED)

On February 5, 2004, the W-H compensation committee awarded 75,000
restricted share units to W-H's Chairman and Chief Executive Officer, pursuant
to the W-H incentive program, subject to shareholder approval. The units vest
ratably over a 3-year period from the date of the grant.

F-28

EXHIBIT INDEX

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* filed herewith