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, 2004
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COMMISSION FILE NUMBER: 001-31346

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, 2004, approximately 27,474,972 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 $448.2 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 February 11, 2005, approximately 27,884,153 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 $593.3 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 2005 Annual Meeting of
Shareholders, which the Registrant intends to file within 120 days of December
31, 2004, are incorporated by reference into Part III of this Form 10-K.
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W-H ENERGY SERVICES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

OVERVIEW

We are a diversified oilfield service company that provides products and
services used primarily for the drilling, completion and production of oil and
natural gas wells. We have operations in North America and select areas
internationally. Since our formation in 1989, we have entered the following
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, or LWD, measurement-while-drilling, or MWD,
directional drilling, rental tools (including drill pipe), down-hole
drilling motors and drilling fluids; and

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

We focus on 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,
drilling contractors and other oilfield service companies.

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. 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, or 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.

Following is a discussion of our business lines, our strategy, our research
and development initiatives and certain risks we face.

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

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and natural gas wells. Our drilling related products and services are used
primarily in North America and select areas internationally. We currently are
conducting operations onshore in Canada, Brazil, Europe, North Africa and the
Middle East and offshore in the North Sea, the Persian Gulf, the Gulf of the
Suez, the Mediterranean Sea and off the coast of Brazil. Our drilling related
products and services segment includes 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. LWD tools provide real-time data about the physical
properties of downhole formations such as pressure, porosity and permeability.
In addition to indicating the possible presence of oil and natural gas, this
data also assists in improving drilling performance.

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 because
drilling rig downtime is minimized. These savings can be substantial for
offshore jobs where day rates for drilling currently range from an average of
about $25,000 per day in shallow waters to an average of about $160,000 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 assist the driller in making this determination by
transmitting data to the surface enabling the driller to adjust the drilling
path as necessary during the drilling process.

We provide directional drilling services in North America and in select
areas internationally. Directional drilling involves directing the well-bore
along a predetermined path to optimally recover oil and natural gas from a
reservoir. These services are used to more accurately drill vertical wells and
to drill deviated or directional wells (which deviate from vertical by a planned
angle and direction), horizontal wells (which are sections of wells drilled
perpendicular or nearly perpendicular to vertical) and extended reach wells
(which are deviated over extended distances). We entered the directional
drilling market in North America in October 2002 and believe that doing so has
increased the domestic utilization of our MWD, LWD and down-hole drilling motor
fleet. Prior to that time, we provided directional drilling services only in
select areas of the Eastern Hemisphere.

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 supplier of down-hole drilling motors
and a manufacturer of their replaceable parts. We provide down-hole drilling
motors internally to PathFinder's directional drilling business

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and to 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 drilling fluids.

Power sections and bearing packs for Dyna-Drill(R) down-hole drilling
motors are manufactured 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 our own 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 sections and bearing packs for 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 "Research and Development: Patents and Technologies").

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 wholly-owned subsidiaries
Thomas Energy Services, Inc., through its Thomas Tools division, and Dutch, Inc.
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
per day rental basis.

Drilling Fluids. 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 borehole while maintaining the
stability of the well-bore. 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
control of loss circulation and seepage. 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 are used primarily to drill
water-sensitive shale and in drilling conditions where stuck pipe is more
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 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 and services;

- polymers and specialty chemicals;

- rental tools (including tubing); and

- coiled tubing.

Cased-hole wireline logging, perforating, tubing conveyed perforating and
associated rental equipment and services. We provide cased-hole wireline
logging, perforating, tubing conveyed perforating and associated rental
equipment services to oil and natural gas companies. Cased-holes are wells that
have been drilled and in which casing has been installed to stabilize the hole.
Cased-holes typically are either ready to produce or are already producing oil
and natural gas. The majority of our revenues from this business are generated
by repeat business on existing wells. Consequently, this business typically
provides more stable revenue 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 by lowering armored
electro-mechanical cable, or wireline, into a well from a truck on land
or a skid unit offshore. These units contain instrumentation and computer
equipment used to chart and record down-hole information.

- Perforating Services. Perforating involves creating a pathway for oil
and natural gas to flow into a completed and cased well from a reservoir.
Once a well has been drilled and cased and is ready for production, a
perforating gun is lowered into the well using wireline and a shaped
explosive charge is detonated in the zone from which production is
desired. The resulting perforations in the casing allow oil and natural
gas to flow into the casing where they are carried to the surface.
Perforating is also used in wells that are already producing to improve
the production rate of oil and natural gas. For example, perforating
might be used to restore or improve production in a producing well that
has become congested by sand or might be used to create production from a
new zone once a deeper zone or formation has been depleted.

- Tubing Conveyed Perforating/Drill Stem Testing. Tubing conveyed
perforating, or TCP, involves the use of drill pipe, tubing or coil
tubing, to convey the perforating assembly to the required depth. Drill
stem testing, or DST, is a method of determining the producing potential
of a formation by allowing the formation fluids to flow into the
borehole. The use of these tools together allows our customers to

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evaluate and complete oil and gas wells in a more efficient and safer
manner relative to conventional techniques.

- Rental Equipment and Services. Wireline rental equipment includes grease
injector units, pipe recovery lubricators, air compressors, high pressure
risers, 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. and E.M. Hobbs, L.P. Our
wireline rental equipment is offered through our wholly owned subsidiary, Boyd's
Bit Service, Inc. which conducts business as 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.

Our rental tool business is conducted by our wholly-owned subsidiary Thomas
Energy Services, Inc., through its Thomas Tubing Specialists division. 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. A typical coiled tubing job involves
the use of a coiled tubing unit by one or more skilled operators at a customer
well site. 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

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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 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.

DISCONTINUED OPERATIONS

In March 2004, we committed to the divestiture of our maintenance and
safety related products and services segment. Accordingly, this segment has been
included in the Consolidated Statements of Operations and Comprehensive Income
as discontinued operations and in the Consolidated Balance Sheets as assets and
liabilities held for sale. In April 2004, we completed the sale of Well Safe,
Inc., one of the two companies that formerly comprised the maintenance and
safety related products and services segment, for cash consideration of $28.0
million. Additionally, in December 2004, we sold the remaining entity that
formerly comprised this segment, Charles Holston, Inc., for consideration of
$2.0 million, consisting of $1.0 million in cash and a $1.0 million subordinated
promissory note due December 31, 2009. We sold Well Safe and Charles Holston
pursuant to customary stock purchase agreements in which we made customary
representations and warranties, agreed to customary covenants and agreed to
indemnify the buyers of these businesses for certain matters, subject to certain
caps, limitations and deductibles. These sales resulted in a loss of $5.1
million for the year ended December 31, 2004.

For a summary of our reportable segments and operations by geographical
region as of and for the years ended December 31, 2004, 2003 and 2002, 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. In fiscal year 2004, we spent approximately $15.5
million on research and development initiatives, and we plan to spend
approximately $18 million on these initiatives in 2005. 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
best in the industry and will provide us with the opportunity to grow our
business and service the needs of our customers.

Maintain a Diverse Source of Revenues within the Oilfield Services
Industry. We believe that the value and stability of our company will be
enhanced if we continue to broaden and diversify our revenue base, both
operationally and geographically. We believe that the products and services
provided by our completion and workover segment provide a measure of revenue
stability during periods of low drilling activity when demand for our drilling
related products and services is reduced. We have devoted substantial time and
capital to accomplish this diversification of our business lines, both through
organic growth and through acquisitions, and we expect to continue to do so in
the future.

Capitalize on Trends in the Gulf of Mexico. We believe that many of the
larger integrated oil and natural gas companies are increasingly focused on
projects in the deeper waters of the Gulf of Mexico and in international
locations. As a consequence, we believe that independent oil and natural gas
companies are becoming more prominent players in exploration, development and
production activity in the Gulf of Mexico,

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especially in this areas' shallow waters. We believe that we have good working
relationships with many of these independent oil and natural gas companies, and
we plan to capitalize on these relationships to increase the utilization of our
tools and personnel.

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 that the long-term trends in directional
drilling are positive. We provide directional drilling services in North America
and in select areas internationally. We believe that providing directional
drilling services will continue to increase the utilization of some of our other
products and services, such as MWD, LWD, down-hole drilling motors and rental
tools.

Expand the Breadth and Scope of Our International Operations. Although our
operations are focused primarily in the United States, we believe that larger
oil and natural gas exploration and development projects are increasingly
located in international locations. We will continue to seek to selectively
capitalize on this trend in international locations where we offer LWD and MWD
products and services, directional drilling services and down-hole drilling
motors.

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.

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 policies providing coverage for risks that we believe
are consistent with industry standards and that meet the requirements of our
customers. We have deductibles under these policies in amounts we believe to be
customary and reasonable. 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.
Finally, insurance rates have recently been subject to increases and wide
fluctuations, and, during the last five fiscal years our cost of insurance and
deductibles have increased substantially. Changes in coverage, insurance markets
and our industry, and events affecting our company, may result in future
increases in our insurance costs and in higher deductibles and retentions.

RESEARCH AND DEVELOPMENT: TECHNOLOGY INITIATIVES

Several of our subsidiaries conduct research and development initiatives at
their facilities. Our subsidiary Pathfinder Energy Services, Inc. maintains a
research and development facility in Houston, Texas, at which most of our LWD,
MWD and directional drilling technology is developed. We invest heavily in
research and development in an effort to improve our existing product and
service offerings and to satisfy customer demand for tools, products and
services that will increase the efficiency of their operations. Our expenditures
for research and development were $15.5 million, $11.2 million and $10.0 million
for the years ended December 31, 2004, 2003 and 2002, respectively.

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Recently Commercialized Technologies. Some of our recently commercialized
technologies include:

- PathMaker(R) 3-Dimensional Rotary Steerable, or 3DRS, technology for
12 1/4-inch borehole size. This technology facilitates full steering and
propulsion of a drill string in any direction, with or without the use of
a down-hole drilling motor, with real-time at-surface feedback as to the
tool's performance and well placement. Aspects of this technology are
patented or patent-pending.

- Array Wave Resistivity (AWR(TM)) technology. Tools and data analysis in
this technology improve the precision and reliability of formation data
obtained through the analysis of electromagnetic wave transmissions
through the formation surrounding a well-bore. Aspects of this technology
are patented or patent-pending.

- E-sonic(TM) acoustic tool technology. This technology enhances the
precision and measurement quality of our proven and patented sonic
formation evaluation technology.

- Matrix-3(TM) tungsten carbide-based metal coating technology. These
coatings deliver improved 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. The coating process
is a confidential process, developed independently in-house, based on
proven tungsten carbide metallurgy and brazing technologies.

- Guardian(TM) sensor spool technology. This patented tool 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 and fewer equipment failures, while greatly enhancing
operating efficiency.

- Pay Zone Inclination Gamma (PZIG(TM)) directional survey
technology. This technology includes deployment of independent drilling
subs at or near the drill bit, from which real-time directional survey
and drill bit/subsurface formation information can be obtained.

- TWINNING(TM) passive ranging and well twinning technology. These are
advanced MWD techniques that 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,
or drilling of a "twin" well to complete as a producing well. Aspects of
this technology are patented or patent-pending.

- Gyro MWD(TM) directional survey technology. This technology allows us to
provide directional surveys while drilling in subterranean zones of high
magnetic interference, such as below a multi-well platform.

- RX5(TM) rig site computer technology. This surface system enhances our
ability to receive and interpret data received from down-hole sensors to
provide timely and useful information to our customers about current
subsurface conditions.

- GSX600(TM) polymeric loss circulation technology. This product, in
development, when added to the drilling fluid system, seals porous
formation zones and helps build a thin but tight filter caulk, thereby
improving drilling performance.

- Tiger Paw(TM) isolation tool technology. This tool protects pressure
control equipment above ground while high pressures are temporarily
introduced into the well bore during, for example, fracturing operations.

Technologies in Development. Some of our technologies in development
include:

- PathMaker(R) 3DRS technology for 8 1/2-inch borehole size. This
technology will be functionally substantially similar to the 12 1/4-inch
3DRS technology described above that is now commercially available,
except that the 8 1/2-inch tool will be able to accommodate a smaller
borehole diameter. Aspects of this technology are patent-pending. This
technology is targeted to be commercially available during the second
half of 2005.

- Slim Density Neutron Standoff Caliper technology. This technology will
allow our proven density neutron technology to be used to evaluate
formation characteristics in smaller borehole diameters.

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Aspects of this technology are patent-pending. This technology is
targeted to be commercially available during the second half of 2005.

- Survivor(TM) high-temperature/high pressure technology. This technology
will include a survey package and a data transmission system that are
designed for especially demanding down-hole conditions (up to 3507 F and
25,000 psi). The Survivor(TM) tools will be configured to be compatible
with other LWD technologies, such as the AWR(TM) and slim density neutron
technologies described above.

- Slim Array Wave Resistivity technology. This technology will allow our
new AWR(TM) technology described above to be used to evaluate formation
characteristics in smaller borehole diameters.

- Azimuthally-enriched data technology. This technology will associate
relative rotational position with other sensor data regarding the
formation or subsurface conditions. The resulting data will enable us to
provide increasingly sophisticated and useful information to our
customers about the formation and/or current subsurface conditions.
Aspects of this technology are patent-pending.

- Enhanced power section technology for down-hole drilling motors. This
technology involves incorporating elastomer and non-elastomer materials
into the manufacture of certain components of the power sections of our
drilling motors. This technology also involves the introduction of new
manufacturing techniques associated with use of these new materials. The
resulting components will be more reliable, and will enhance the power
capability, fluid compatibility, and resistance to high temperatures of
power sections in drilling motors. Aspects of this technology are
patent-pending.

Established Commercial Technologies. Some of our other established
commercial technologies include:

- Drilling Formation Tester tool. This LWD tool obtains
wireline-equivalent formation pressure data while drilling, offering time
and cost savings over conventional formation pressure measurement by
open-hole wireline equipment.

- Gravity MWD(R) directional survey technology. This patented technology
eliminates the adverse impact of magnetic interference while conducting
directional surveying, thereby reducing reliance on and the cost of
conventional gyroscopic wireline surveys.

- Patented gravel pack service. This service provides operators of oil and
natural gas wells with a more precise method of installing gravel packs
with cased-hole wireline.

- Patented wireline side entry sub, patent-pending locking swivel, and
patented wireline wear sleeve. All of these tools may be used, for
example, in pipe recovery applications.

- Patented LLS(TM) lockdown lubricator system. This system, installed on a
well-head above the blowout preventers, allows wireline operations to be
conducted more safely and more cost effectively.

- Patented drilling fluid seepage control technology. This product,
containing grape pumice, controls seepage when added to the drilling
fluids system, but does not affect the electrical stability of the
drilling fluid system. In some cases, the product actually enhances the
drilling fluid system for a more homogenous fluid.

- Patented pelletizing technology. This process condenses bulky drilling
fluid additives into pellet form. The pellet form reduces dust in
handling, reduces transportation costs, and enables more rapid deployment
of the material into the drilling fluid system.

- Ultralube II(TM) high performance lubricant technology. This lubricant
allows the use of environmentally friendly water-based drilling fluid
systems in deep or severe drilling environments where the drill string
may encounter high torque resistance or drag. The lubricant also enhances
the lubricity of oil-based and synthetic-based drilling fluids.

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. Some of our products and
services enjoy brand

9

name recognition. We own trademarks in respect of these brands. Some of these
trademarks are registered or are pending registration.

While we are developing and deploying many of our own technologies, our LWD
business is still dependent upon technologies that we acquired when we acquired
PathFinder. 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, 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, drilling contractors and other oilfield service companies. This
demand is affected by changing taxes, price controls and other laws and
regulations relating to the oil and natural gas 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. We cannot determine the extent to which our future
operations and earnings may be affected by new laws or legislation, new
regulations or changes in existing laws, regulations or enforcement.

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

Our operations are subject to numerous foreign, federal, state and local
laws and regulations governing the manufacture, management and/or disposal of
materials and wastes in the environment and otherwise relating to environmental
protection. Numerous governmental agencies issue regulations to implement and
enforce these laws which are often difficult and costly to comply with and the
violation of which may result in the revocation of permits, issuance of
corrective action orders and assessment of administrative, civil and even
criminal penalties. For example, state and federal agencies have issued
regulations implementing environmental laws that regulate environmental and
safety matters, such as restrictions on the types, quantities and concentration
of various substances that can be released into the environment in connection
with specialty chemical manufacturing 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.

10

We generate wastes, including hazardous wastes, which are subject to the
federal Resource Conservation and Recovery Act, or 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 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, or 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, or FWPCA, and the Oil Pollution Act of 1990, or 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 "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. Our management believes that we
possess and are in material compliance with applicable permits required under
the FWPCA. We are currently updating our existing or developing new spill
prevention, control and countermeasure, or SPCC, plans which are required under
the FWPCA for certain facilities that store oils. The SPCC regulations have been
amended in recent years and their applicability is under consideration as each
subsidiary evaluates its obligations under the regulations in light of the
changing dynamics of the operations.

The Atomic Energy Act, which provides for the development and regulation of
commercial nuclear power, authorizes the Nuclear Regulatory Commission, or 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, Mississippi and New Mexico 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 those states. 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.

11

CUSTOMERS

Our customers include major and independent oil and natural gas companies,
drilling contractors and other oilfield service companies operating in North
America and select areas internationally. 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,
2004, 2003 and 2002, no single customer or group of affiliated customers
accounted for 10% or more of our revenues. We typically enter into master
service agreements with our customers. These agreements govern the terms of our
relationship with our customers, but they generally do not create binding
commitments on the part of our customers to use our services or on us to provide
services.

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 product capability, reputation, quality, price,
reliability, experience, availability and range of services offered. 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.

EMPLOYEES

As of December 31, 2004, 2003 and 2002 we had 2,079, 1,795 and 1,383
employees, respectively. 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

In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, or 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.
You should not place undue reliance on these forward-looking statements, which
speak only of the date of this report. We undertake no obligation to publicly
update such forward-looking statements to reflect events or circumstances after
the date of this report.

12

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.

Demand for our drilling related products and services is substantially
dependent on the level of exploration, development and production activity of,
and the corresponding capital spending by, oil and natural gas companies. Oil
and natural gas companies typically reduce exploration and development activity
during periods of low or volatile 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. 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 our control. Any prolonged reduction in oil and natural gas prices
will depress the level of exploration, development and production activity by
our customers which will result in a decrease in the demand for our drilling
related products and services and 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 to set and
maintain production levels and prices for oil and potential political or
economic uncertainties resulting from the threat or occurrence of
terrorist attacks;

- 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;

- global weather conditions;

- interest rates and cost of capital; and

- tax policies.

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
completion and workover products and services segment.

Because many of our products and services are used in potentially hazardous
applications and operations, our business is subject to risks associated with
events that result in personal injuries, loss of life, damage to or
destruction of property, equipment or the environment and suspension of
operations.

Many of our products and services are used in potentially hazardous
drilling, completion and production applications. These activities are dangerous
and accidents 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

13

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.

Unavailability of or costs associated with insurance could affect us
adversely.

We maintain insurance policies providing coverage for risks that we believe
are consistent with industry standards and that meet the requirements of our
customers. However, our insurance may not be sufficient to cover any particular
loss, and it does not provide coverage for all liabilities, including liability
for some events involving pollution. In addition, many of our insurance policies
contain deductibles for which we are responsible.

Insurance premiums for our industry have been subject to increases and
large fluctuations during the last five years. As a result, the amount we are
required to spend each year on insurance has increased, in some cases,
substantially, and we expect that these increases will continue. We have sought
to minimize these premium increases through increasing the size of our
deductibles. Continuing increases in the costs of insurance could adversely
affect our financial condition and results of operations. 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.

We may encounter difficulty in continuing to develop, produce and
commercialize technologically advanced products and services.

Our customers continually demand new and improved products and services
that increase the precision of and reduce the uncertainty associated with the
exploration for and development of oil and natural gas. Many of our competitors
are much larger and have greater research and development, financial and other
resources than we do. If we are not able to develop commercially competitive
products and services that we can offer at competitive prices in a timely
manner, our financial condition and results of operations may be adversely
affected. New product development is a lengthy and costly process and depends
upon our ability to:

- foresee the needs of our customers and the new technologies likely to be
introduced by our competitors;

- successfully design, test, manufacture, market and commercialize our own
competing technologies; and

- obtain and maintain exclusive technology positions through patent and
trade secret protection.

We may encounter resource constraints or technical or other difficulties
that could delay the introduction of new products and services in the future. In
addition, our competitors may introduce new products before we are able to,
thereby possibly achieving a commercial advantage over us.

If we are unable to develop, produce and commercialize new products and
services that we can offer to our customers at a competitive price, our
financial position and results of operations could be adversely affected.

Our business could be adversely affected by disputes regarding intellectual
property or our inability to obtain protection for technologies we develop.

Many of our operations, especially those dependent on our LWD and MWD
products and services and specialty chemical sales, rely substantially on
proprietary rights in technologies for which we hold licenses or patents. In
addition, we are pursuing patent and trademark protection for our newly
developed technologies and brands. The market success of our technologies will
depend, in part, on our ability to obtain and enforce our proprietary rights in
these technologies, to preserve rights in our trade secret and non-public
information,

14

and to operate without infringing the proprietary rights of others. We rely on a
combination of patent, trademark and trade secret laws and restrictions on
disclosure of our proprietary information to protect our intellectual property
rights. We also seek to obtain confidentiality agreements from our employees,
consultants and business partners and control access to and distribution of our
documentation and other forms of our proprietary information. It is possible
that these measures may not:

- Prevent the challenge, invalidation, narrowing or circumvention of our
existing patents;

- Prevent our competitors from independently developing similar products or
services, duplicating our products or services, or designing around the
patents owned by us;

- Prevent third-parties from enforcing patents against us that eventually
limit our ability to do business in some areas of the market;

- Provide adequate protection for our intellectual property rights and
technologies;

- Prevent disclosure of our trade secrets and know-how to third parties or
the public; or

- Result in intellectual property rights adequate to protect our business
from competition from foreign sources.

If any of our patents or other intellectual property rights are determined
to be invalid or unenforceable, or if a court limits the scope of claims in a
patent or fails to recognize our trade secret rights, our competitive advantages
could be significantly reduced in the relevant technology, allowing competition
for our customer base to increase. The resulting loss in revenues could
adversely affect our operational results. In addition, unauthorized parties may
attempt to obtain or use our proprietary technologies. Monitoring unauthorized
use of our technology may be difficult and we cannot be certain that the steps
that we have taken will prevent unauthorized use of our technology particularly
in foreign countries or markets where the laws may not protect our proprietary
rights as fully as in the United States.

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, the impact of which upon our business could be
substantial.

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

We operate in highly competitive areas of the oilfield products and
services markets. The volatility of oil and natural gas prices has 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 research and development,
marketing, distribution, financial and other resources than we do. If these or
other of our competitors or new market entrants introduce new products or
services with better features, performance, prices or other characteristics than
our products and services, our financial condition or results of operations may
be adversely affected. In addition, the intense competition in our industry
could result in significant price competition that could have a material adverse
effect on our results of operations and financial condition. Finally,
competition among oilfield service and equipment providers is partly 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.

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

15

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 on the services of certain key employees, including executive
officers and directors. The loss of the services of any of these key employees
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.

Increases in the prices of raw materials could affect our results of
operations.

Large amounts of steel are used in the manufacture of many of the products
we use. Steel prices have increased significantly since the end of 2003, which
has resulted in increased costs of these products for us and, in some cases,
delays in our ability to obtain these products. In addition, we use raw
materials in the production of our drilling fluid products. If we encounter
difficulty in procuring or arranging for the transportation of these raw
materials, and we are unable to pass corresponding cost increases on to our
customers, our financial position and results of operations could be adversely
affected.

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. For example, during the
third quarter of 2004, two major hurricanes affected the Gulf of Mexico, causing
a suspension of oil and natural gas operations for several days, which had a
negative impact on our results of operations during that period.

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 and full year results are not
likely to be a direct multiple of any particular quarter or combination of
quarters.

16

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; and

- worker safety and environmental protection.

We depend on the demand for our products and services from oil and natural
gas companies, drilling contractors and other oilfield service 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.

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.

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.

17

Any future acquisitions could also dilute the equity interests of our
shareholders, require us to write off assets for accounting purposes or create
other undesirable accounting issues.

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

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

- nationalization and expropriation;

- acts of terrorism, 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 and currency devaluations.

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.

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
certain financial ratios, including a leverage ratio and a debt service coverage
ratio, and a specified net worth. Our credit facility further limits the amount
of capital expenditures we may make, limits the amount of debt we can incur
outside the credit facility, limits the amount of future investments we may
make, restricts our ability to pay dividends and restricts our ability to engage
in certain business combination transactions. These restrictions may adversely
affect our ability to conduct and expand our operations. For example, our
business is capital intensive and requires specialized equipment. We may need to
raise additional funds through public or private debt or equity financing to
acquire new or additional equipment or for other purposes. 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 financial
condition and results of operations may be adversely affected.

As a holding company, we are 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 provide funding to meet our debt
obligations and operating expenses. Before they can dividend funds to us, our
subsidiaries must meet their own debt obligations, including payment of their
trade payables. We currently intend to retain our earnings and cash flow for
growth and general corporate expenditures and not to pay any dividends. 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.

18

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 have registered the sale of
5,800,075 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;

- level of drilling activity worldwide;

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

- general economic conditions and industry competition; 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.

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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 and in select areas internationally. 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, Snyder, 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 renewing these leases or in leasing suitable
alternative space upon expiration of our current lease terms.

20

ITEM 3. LEGAL PROCEEDINGS

We are from time to time a party or otherwise subject to legal proceedings,
claims, investigations and other proceedings in the ordinary course of our
business. These matters typically involve tort, workers compensation, commercial
and infringement and other intellectual property claims. Where appropriate, we
make provision for a liability with respect to these claims in our financial
statements in accordance with generally accepted accounting principles. These
provisions are reviewed periodically and adjusted to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, we believe that we have valid defenses with respect to the legal
matters pending against us. It is possible, nevertheless, that our results of
operations or financial position could be adversely affected by the resolution
of one or more of these matters.

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

No matters were submitted to a vote of our security holders during the
fourth quarter of 2004.

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 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 February 11, 2005, there were 27,884,153 shares of our common stock
outstanding, which were held by approximately 137 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.

21

EQUITY COMPENSATION PLANS

The table below provides information relating to our equity compensation
plans as of December 31, 2004:

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. This
option, which is fully vested, 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.

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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. In particular, Note 3 to our
Consolidated Financial Statements describes acquisitions consummated since
January 1, 2003, which acquisitions could affect the year to year comparability
of the information presented below.

The Consolidated Financial Statements for the years ended December 31,
2004, 2003 and 2002 have been audited by PricewaterhouseCoopers LLP. The
Consolidated Financial Statements for the years 2000 and 2001 were audited by
Arthur Andersen LLP which has ceased operations.

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

(1) Includes the write-off of approximately $3.1 million ($1.9 million, after
tax) of non-cash financing costs associated with our previous credit
facility.

(2) Includes the write-off of approximately $13.2 million of 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
a prior 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

Set forth below is a description of the matters that we consider to be
important to understanding the results of our operations for each of the three
years in the period ended December 31, 2004, and our capital resources and
liquidity as of December 31, 2004 and 2003. Our discussion begins with an
overview of the significant factors that have recently affected our company,
including a discussion of industry market trends and management's perspectives
regarding the opportunities and challenges we face during 2005 and beyond. Next,
we analyze the results of our operations for the last three years. A summary
follows of the critical accounting judgments and estimates that we have made
which we believe are most important to an understanding of our MD&A and our
consolidated financial statements, as well as a discussion of recently issued
accounting pronouncements. Finally, we review our cash flows and liquidity,
capital resources and contractual commitments.

The following discussion includes various forward-looking statements about
the markets in which we operate, the demand for our products and services and
our future results. These statements are based on certain assumptions that we
believe are reasonable. For information about some of the risks that could cause
actual results to differ from these forward looking statements, please refer to
the section entitled "Item 1. Business -- Factors That May Affect Future Results
and Accuracy of Forward-Looking Statements."

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 OUR PRODUCTS AND SERVICES

We provide drilling related products and services and completion and
workover related products and services to major and independent oil and natural
gas companies, drilling contractors and other oilfield service companies. The
majority of our revenues are generated from charging our customers day rates,
based on the number of days our products and services are used, for the use of
our equipment or for the provision of services by our personnel. We also sell
certain products used in the exploration for and production of oil and natural
gas and receive revenues from our customers in connection with these sales. Our
primary expenses are salaries for our personnel and the costs associated with
expendable parts and supplies, research and development, repair and maintenance
of equipment and costs of products sold as well as general operational costs. A
detailed description of the products and services that we provide, the manner in
which we market these products and services and the way in which we charge our
customers for these products and services is contained under "Item 1.
Business -- Businesses."

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.

DRILLING RELATED PRODUCTS AND SERVICES

Revenue from our drilling related products and services segment constituted
approximately 65% of our total 2004 consolidated revenue. Approximately 83% of
our drilling segment revenue for 2004 was generated in the United States,
including the Gulf of Mexico. The remaining 17% was generated in various
international locations. 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 and continued throughout 2004. This increase, however, resulted entirely
from an increase in

24

land-based rigs. According to statistics published by Baker Hughes, the average
number of rotary rigs operating in the United States was 830, 1,032 and 1,192
for 2002, 2003 and 2004, respectively. Of these figures, land rigs comprised
717, 924 and 1,095, respectively, and offshore rigs comprised 113, 108 and 97,
respectively, for the same periods.

The 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, declined approximately
11% from the 2003 average. However, the offshore rig count did improve modestly
during the fourth quarter of 2004, increasing about 6% as compared to the prior
quarter. This slight increase in offshore activity has carried into early 2005.
Whether this improvement will continue throughout 2005 is unclear at this time.
We do believe that the overall outlook for domestic natural gas exploration and
development activity remains positive as natural gas production continues to
decline. This factor should keep upward pressure on natural gas prices.

Outside of the United States, the North Sea remains our largest drilling
segment market. According to statistics published by Baker Hughes, the number of
rotary rigs operating in the North Sea declined from an average of 67 in January
2002 to an average of 35 in December 2004, after having reached a low of 31 in
July 2004. We expect only a marginal increase in activity levels in the North
Sea in the near term.

As the primary area of improvement in drilling activity has been onshore,
the importance of improving our market share for land-based services became
critical. As we started to see this trend developing, 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 leveraged our new directional drilling business to affect
an increase in the utilization of our MWD and down-hole drilling motor fleet.
The increased utilization of our MWD and down-hole drilling motor fleet has
helped to offset decreases in utilization of our higher margin LWD fleet, which
is primarily driven by the United States offshore rig count.

Another key challenge that our drilling related products and services
segment faces is the demand by our customers for more efficient and
technologically advanced services and tools. We have invested a substantial
amount of our time and capital into developing and commercializing technologies
that are of value to our customers and that enable us to compete effectively
with the major integrated oilfield service companies. During the third quarter
of 2004, we began to market our 12 1/4" 3-Dimensional Rotary Steerable (3DRS)
technology. We expect commercialization of the 3DRS technology to improve the
utilization of our LWD, MWD and directional drilling services, as our customers
are increasingly requiring this type of technology as a prerequisite for a
drilling project or contract. We are currently developing an 8 1/2" 3DRS tool
and we expect to be able to offer this tool on a commercial basis during the
second half of 2005.

Introduction of our Array Wave Resistivity (AWR) technology is the first of
our next generation of LWD tools that are designed to withstand high pressure
and high temperature well conditions. We believe that our AWR tools provide a
more robust and accurate resistivity measurement. Tools and data analysis in
this technology improve the precision and reliability of formation data obtained
through the analysis of electromagnetic wave transmissions through the formation
surrounding a well-bore.

These technologies were the first to be developed since we acquired
PathFinder in March 1999. For a discussion of other technologies we have under
development, please read "Item 1. Business-Research and Development and Patents
and Technologies."

COMPLETION AND WORKOVER RELATED PRODUCTS AND SERVICES

Our completion and workover related products and services segment provided
approximately 35% of our total consolidated revenue for 2004. Revenues provided
by this segment are almost entirely derived from the United States and the Gulf
of Mexico. While revenues from this segment are affected by the level of oil and
natural gas prices, activity in this segment is only modestly affected by
drilling activity (see the discussion under Drilling Related Products and
Services above). As a result, our completion and workover segment has provided
stability during prolonged downturns in drilling activity.

25

We have increased our revenue capacity in this segment through capital
spending in 2002, 2003 and 2004, which, when combined with our acquisitions, has
strengthened and further diversified the operations of the Company. Continued
growth in this segment will be dependent upon, among other factors, industry
activity levels, prices of oil and natural gas, our capital expenditure program
and our ability to attract and retain qualified service personnel and field
engineers required to operate the specialized equipment used in this business.

DISCONTINUED OPERATIONS

In March 2004, we committed to the divestiture of our maintenance and
safety related products and services segment. Accordingly, this segment has been
included in the Consolidated Statements of Operations and Comprehensive Income
as discontinued operations and in the Consolidated Balance Sheets as assets and
liabilities held for sale. In April 2004, we completed the sale of Well Safe,
Inc., one of the two companies that formerly comprised the maintenance and
safety related products and services segment, for cash consideration of $28.0
million. Additionally, in December 2004, we sold the remaining entity that
formerly comprised this segment, Charles Holston, Inc., for consideration of
$2.0 million, consisting of $1.0 million in cash and a $1.0 million subordinated
promissory note due December 31, 2009. We sold Well Safe and Charles Holston
pursuant to customary stock purchase agreements in which we made customary
representations and warranties, agreed to customary covenants and agreed to
indemnify the buyers of these businesses for certain matters, subject to certain
caps, limitations and deductibles. These sales resulted in a loss of $5.1
million for the year ended December 31, 2004.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003

Revenues. Revenues increased by $95.2 million, or approximately 26%, to
$462.4 million for the year ended December 31, 2004 from $367.2 million for the
year ended December 31, 2003. This increase was attributable to increases in
capacity driven by capital expenditures, higher demand for certain of our
products and services, particularly drilling/completion fluids, land-based MWD
and directional drilling services, cased-hole wireline and coiled tubing, as
well as the revenue contributions of Hydracoil, Inc., Dutch, Inc. and
Continental Directional Corp., which were acquired in the fourth quarter 2003.

Revenues from our drilling related products and services increased by $60.7
million, or approximately 25%, to $302.8 million for the year ended December 31,
2004 from $242.1 million for the year ended December 31, 2003. This increase was
primarily attributable to increases in capacity driven by capital expenditures,
the growth of our North American directional drilling business, enhanced by the
increase in land-based drilling activity levels in the United States, increased
demand for our drilling fluids and rental tool products and the impact of the
acquisitions that we consummated during the fourth quarter of 2003.

Revenues from our completion and workover related products and services
increased by $34.5 million, or approximately 28%, to $159.6 million for the year
ended December 31, 2004 from $125.1 million for the year ended December 31,
2003. This increase was the result of increases in capacity driven by capital
expenditures, higher utilization of our coiled tubing and cased-hole wireline
fleet, demand for our completion fluids and the impact of the acquisitions that
we consummated during the fourth quarter of 2003.

Cost of Revenues. Cost of revenues increased by $60.8 million, or
approximately 29%, to $269.9 million for the year ended December 31, 2004 from
$209.1 million for the year ended December 31, 2003. As a percentage of
revenues, cost of revenues increased to 58% for the year ended December 31, 2004
from 57% for the year ended December 31, 2003. The increase in cost of revenues
as a percentage of revenues was due to increased insurance costs and our revenue
mix. In particular, our revenue mix was affected by sales increases in our lower
margin fluids products and land-based directional drilling services.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $16.7 million, or approximately 23%, to
$87.8 million for the year ended December 31, 2004 from $71.1 million for the
year ended December 31, 2003. The increase was primarily attributable to the
operating

26

expenses associated with the businesses we acquired in the fourth quarter of
2003 and during 2004, as well as increased personnel costs related to expansion
efforts within our directional drilling business and corporate compliance
initiatives as mandated by law. As a percentage of revenues, selling, general
and administrative expenses remained flat at 19% for the year ended December 31,
2004 relative to the year ended December 31, 2003.

Research and Development Expense. Research and development expenses
increased by $4.3 million, or approximately 38%, to $15.5 million for the year
ended December 31, 2004 from $11.2 million for the year ended December 31, 2003.
This increase was the result of increased research and development spending on
our PathFinder technologies, including our 3DRS and AWR tools and other research
and development initiatives.

Depreciation and Amortization. Depreciation and amortization increased by
$9.7 million, or approximately 27%, to $45.7 million for the year ended December
31, 2004 from $36.0 million for the year ended December 31, 2003. This increase
was the result of depreciation associated with our continued capital
expenditures, as well as additional depreciation and amortization due to our
acquisitions.

Interest and Other Expense. Interest and other expense for the year ended
December 31, 2004 was $11.0 million, an increase of $2.8 million, or
approximately 34%, from $8.2 million for the year December 31, 2003. This
increase was primarily due to the $3.1 million write-off of non-cash financing
costs related to our previous credit facility, offset by a reduction in our
effective interest rate during the second half of 2004.

Net Income. Net income for the year ended December 31, 2004 was $17.9
million, a decrease of $1.4 million, or approximately 7% from $19.3 million
reported for the year ended December 31, 2003.

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

Revenues. Revenues increased by $81.4 million, or approximately 28%, to
$367.2 million for the year ended December 31, 2003 from $285.8 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., which was
acquired in August 2002 and E. M. Hobbs, L.P., which was acquired in November
2002.

Revenues from our drilling related products and services 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 our entry into the directional drilling business in
North America in October 2002, enhanced by the increase in land-based drilling
activity levels in the United States.

Revenues from our completion and workover related products and services
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, 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.

Cost of Revenues. Cost of revenues increased by $51.9 million, or
approximately 33%, to $209.1 million for the year ended December 31, 2003 from
$157.2 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 $14.4 million, or approximately 25%, to
$71.1 million for the year ended December 31, 2003 from $56.7 million for the
year ended December 31, 2002. The increase was primarily attributable to
additional expenses related to the operations of Boyd's and Hobbs, which were
acquired during the second half of 2002 and increased personnel costs related to
expansion efforts within our coiled tubing and directional drilling

27

business lines. We also experienced increased corporate costs to comply with the
Sarbanes-Oxley Act of 2002 and incurred expenses associated with 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 19% for the
year ended December 31, 2003 from 20% 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
$6.9 million, or approximately 24%, to $36.0 million for the year ended December
31, 2003 from $29.1 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.

Interest and Other Expense. Interest and other expense for the year ended
December 31, 2003 was $8.2 million, an increase of $1.5 million, or
approximately 22%, from $6.7 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.

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 we believe are
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.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We extend credit to customers and other parties in the normal course of
business. 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 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

28

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.

In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If we ultimately determine that payment of these
amounts is unnecessary, we reverse the liability and recognize a tax benefit
during the period in which we determine that the liability is no longer
necessary. We record an additional charge in our provision for taxes in the
period in which we determine that the recorded tax liability is less than we
expect the ultimate assessment to be.

INSURANCE RESERVES

We maintain insurance coverage for various aspects of our business and
operations and retain a portion of losses that occur through the use of
deductibles. We are subject to legal proceedings and claims from time to time,
the outcomes of which are subject to significant uncertainty. Although we
maintain policies of insurance that cover claims asserted against our company,
many of our policies provide for deductibles. In addition, our insurance
policies may not cover certain types of claims, such as those involving
pollution. We determine whether to disclose and accrue for loss contingencies
based on the coverages we maintain and on an assessment of whether the risk of
loss is remote, reasonably possible, or probable. While we make these judgments
with the advice of legal counsel and our insurers, these judgments are
inherently subjective. 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 but are also
based on 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.

29

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123R "Share-Based Payment" (SFAS
123R). This statement revises SFAS No. 123, supercedes APB No. 25, and requires
companies to recognize the cost of employee stock options and other awards of
stock-based compensation based on the fair value of the award as of the grant
date. Currently this type of compensation expense is not reflected in our
Consolidated Statements of Operations and Comprehensive Income. The effective
date of this pronouncement is as of the beginning of the first interim or annual
period that begins after June 15, 2005. We have adopted the requirements of SFAS
123R effective January 1, 2005. As a result of the implementation of SFAS 123R,
we expect to incur stock-based compensation expense totaling approximately $0.6
million in the first quarter of 2005.

In December 2004, the FASB published the following two final FASB Staff
Positions, effective immediately. FAS 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004," giving guidance
on applying FASB Statement No. 109, Accounting for Income Taxes, to the tax
deduction on qualified production activities provided by the American Jobs
Creation Act of 2004. FAS 109-2 "Accounting and Disclosure Guidance for that
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004" provides guidance on the Act's repatriation provision. We are in the
process of reviewing the FAS 109-1 and FAS 109-2; however, at this time, we do
not believe that the adoption of FAS 109-1 or FAS 109-2 will have a material
impact on our consolidated financial position, results of operations or cash
flows.

In November 2004, the FASB Emerging Issues Task Force, or EITF, reached a
consensus in applying the conditions in Paragraph 42 of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining
Whether to Report Discontinued Operations" (EITF 03-13). Evaluation of whether
operations and cash flows have been eliminated depends on whether (1) continuing
operations and cash flows are expected to be generated, and (2) the cash flows,
based on their nature and significance, are considered direct or indirect. This
consensus should be applied to a component that is either disposed of or
classified as held for sale in fiscal periods beginning after December 15, 2004.
We do not believe that the adoption of EITF 03-13 will have a material impact on
our consolidated financial position, results of operations or cash flows.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs--An
Amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current-period charges regardless
of whether they meet the criterion of "so abnormal" as stated in ARB No. 43.
SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and is
required to be adopted by us in the first quarter of fiscal 2006, beginning on
January 1, 2006. We are currently evaluating the effect that the adoption of
SFAS No. 151 will have on our consolidated financial position, results of
operations and cash flows but do not expect SFAS No. 151 to have a material
impact.

LIQUIDITY AND CAPITAL RESOURCES

Our primary uses for cash are working capital, capital expenditures,
research and development expenditures, acquisitions and principal and interest
payments on indebtedness. Our primary sources of liquidity are cash reserves,
cash generated by operations and amounts available to be drawn under our
revolving credit facility. To the extent our cash requirements exceed our
sources of liquidity, we will be required to fund our cash requirements through
other means, such as through debt and equity financing activities or we will be
required to curtail our expenditures.

30

CASH FLOW

Working capital was $121.6 million as of December 31, 2004 and $89.4
million as of December 31, 2003, net of discontinued operations. Net cash
provided by operating activities was $41.2 million for the year ended December
31, 2004 and $35.6 million for the year ended December 31, 2003. The increase in
working capital and cash flow from operating activities was principally
attributable to higher operating levels across our business segments.

Net cash used in investing activities was $70.7 million for the year ended
December 31, 2004 and $64.9 million for the year ended December 31, 2003. Net
cash used in investing activities was principally the result of capital
expenditures, offset by lost-in-hole proceeds which represent funds we receive
from a customer when one of our tools is involuntarily damaged or lost
down-hole.

Net cash provided by financing activities was $3.1 million for the year
ended December 31, 2004 and $27.2 million for the year ended December 31, 2003.
Changes in net cash related to financing activities were primarily the result of
borrowings and repayments under our credit facility, which is described below.

For the year ended December 31, 2004, we made capital expenditures of $82.4
million, primarily for rental tool inventory, LWD and MWD tools, wireline
equipment and coil tubing units, including expenditures for the replacement of
equipment lost-in-hole. In addition, we made $15.5 million in research and
development expenditures for the year ended December 31, 2004.

ACQUISITIONS

During 2004, we consummated two acquisitions in the completion and workover
segment for total consideration of approximately $4.0 million, resulting in
goodwill of approximately $1.3 million.

CAPITAL RESOURCES

On June 30, 2004, we closed on a $237.5 million revolving credit facility
that matures on June 30, 2009. As of December 31, 2004, we had an outstanding
loan balance of $180.8 million and approximately $5.6 million in letters of
credit issued under our credit facility, resulting in an available borrowing
capacity of approximately $51.1 million.

Our credit facility bears interest, at our election, at either a variable
rate equal to LIBOR, plus a margin ranging from 1.5% to 2.5% depending upon our
leverage ratio, or an alternate base rate equal to the higher of (1) the prime
rate or (2) the federal funds rate plus 0.5%, plus a margin ranging from 0.5% to
1.5% depending upon our leverage ratio. As of December 31, 2004, we had elected
to pay interest on our outstanding borrowings at LIBOR plus the then applicable
margin of 2.0%.

Our credit facility is collateralized by a lien on substantially all of our
property and assets, a pledge of all of the capital stock of our domestic
subsidiaries and a pledge of not greater than 65% of the capital stock of each
of our top tier foreign subsidiaries. In addition, our credit facility is
guaranteed by all of our domestic subsidiaries. Our credit facility requires,
among other things, that we maintain certain financial ratios, including a
leverage ratio and a debt service coverage ratio, and a specified net worth. Our
credit facility further 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 we may make, the ability to pay dividends and the ability to
engage in certain business combination transactions.

As a result of the approximate $160.0 million repayment of our previous
credit facility, we wrote off approximately $3.1 million in financing costs that
had previously been deferred. This write-off has been included in the
Consolidated Statements of Operations and Comprehensive Income as interest
expense. Additionally, financing costs associated with our new credit facility
were approximately $1.6 million, which will be ratably amortized to interest
expense over the five year term of the credit facility.

31

CONTRACTUAL OBLIGATIONS

The following table aggregates information about our contractual cash
obligations (in thousands) as of December 31, 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 $75 million in 2005 and will make research and development
expenditures of approximately $18 million in 2005.

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.

OFF BALANCE SHEET ARRANGEMENTS

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. 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,
2004 and $1.8 million for the year ended December 31, 2003.

32

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 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 registered public accounting firm's reports thereon appear on
pages F-1 through F-22 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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. We maintain disclosure controls and
procedures, which are controls and procedures designed to ensure that the
information we are required to disclose in the reports we file with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms 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.

Management's Report on Internal Control over Financial Reporting. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed under the supervision of our Chief Executive Officer and
Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles.

As of December 31, 2004, our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, conducted an assessment of
the effectiveness of our internal control over financial reporting based on the
framework established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based
on this assessment, our management has determined that our internal control over
financial reporting as of December 31, 2004 was effective.

Our management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report appearing elsewhere in this Annual Report on Form 10-K,
which expresses unqualified opinions on our management's assessment and on the
effectiveness of our internal control over financial reporting as of December
31, 2004.

During the quarterly period ended December 31, 2004, there were 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.

Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal control over financial reporting will prevent and/or

33

detect all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected.

ITEM 9B. OTHER INFORMATION

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is hereby incorporated by reference to
the sections entitled "Information About Directors" and "Executive Officers of
the Company" 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, 2004.

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, 2004.

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, 2004 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, 2004.

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, 2004.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(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-22 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.

34

(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.

35

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 11th day of March, 2005.

36

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm..... F-2
Consolidated Balance Sheets as of December 31, 2004 and
2003...................................................... F-4
Consolidated Statements of Operations and Comprehensive
Income for the Years Ended December 31, 2004, 2003 and
2002...................................................... F-5
Consolidated Statements of Shareholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have completed an integrated audit of W-H Energy Services, Inc.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

CONSOLIDATED FINANCIAL STATEMENTS

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income, of
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of W-H Energy Services, Inc. and its subsidiaries (the
Company) at December 31, 2004 and 2003, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2004 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
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.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Also, in our opinion, management's assessment, included in "Management's
Report on Internal Control over Financial Reporting" appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the COSO. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management's assessment
and on the effectiveness of the Company's internal control over financial
reporting based on our audit. We conducted our audit of internal control over
financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of

F-2

the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Houston, Texas
March 11, 2005

F-3

CONSOLIDATED BALANCE SHEETS

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

F-4

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

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

F-5

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these 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 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; and
(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.

W-H's business depends in large part on the conditions in the oil and
natural gas industry and specifically on the amount of capital spending by its
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. 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.

DISCONTINUED OPERATIONS

In March 2004, W-H committed to the divestiture of its maintenance and
safety related products and services segment. Accordingly, this segment has been
included in the Consolidated Statements of Operations and Comprehensive Income
as discontinued operations and in the Consolidated Balance Sheets as assets and
liabilities held for sale. In April 2004, W-H completed the sale of Well Safe,
Inc., one of the two companies that formerly comprised the maintenance and
safety related products and services segment, for cash consideration of $28.0
million. In December 2004, W-H sold the remaining entity, Charles Holston, Inc.,
that formerly comprised this segment, for consideration of $2.0 million,
consisting of $1.0 million in cash and a $1.0 million subordinated promissory
note due December 31, 2009. These sales resulted in a loss of $5.1 million for
the year ended December 31, 2004. This loss is included as a component of
discontinued operations in the accompanying Consolidated Statements of
Operations and Comprehensive Income. Summary financial results for this segment
are as follows:

F-8

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

W-H sold Well Safe and Charles Holston pursuant to customary stock purchase
agreements in which it made customary representations and warranties, agreed to
customary covenants and agreed to indemnify the buyers of these businesses for
certain matters, subject to certain caps, limitations and deductibles.

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.

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.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

W-H extends credit to customers and other parties in the normal course of
business. W-H regularly reviews outstanding receivables and provides for
estimated losses through an allowance for doubtful accounts. In evaluating the
level of established reserves, W-H makes judgments regarding its 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 W-H was to determine that a customer may
not be able to make required payments, W-H would increase the allowance through
a charge to income in the period in which that determination is made.

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. W-H assesses the realizability of its inventories
based upon specific usage and future utility. A charge to results of operations
is taken when factors that would result in a need for a reduction in the
valuation, such as excess or obsolete inventory, are noted.

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.

F-9

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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. If 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 2004, 2003 or 2002.

GOODWILL AND OTHER INTANGIBLES

Goodwill represents the excess of the aggregate price paid by W-H in
acquisitions over the fair market value of the tangible and identifiable
intangible net assets acquired. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets",
separable intangible assets that are not deemed to have indefinite lives will be
amortized over their useful lives.

Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are not 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. If the carrying value of a reporting
unit exceeds its relative fair value, SFAS No. 142 requires that a second
impairment test be performed. 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 years ended December 31,
2004, 2003 and 2002, which resulted in W-H recording no goodwill impairment
expense.

DEBT ISSUE COSTS

Other assets include debt issue costs related to W-H's revolving credit
facility. W-H amortizes these costs as interest expense over the scheduled
maturity period of the debt. As a result of the repayment of its prior credit
facility, W-H expensed approximately $3.1 million of the unamortized debt
financing costs as interest expense during the year ended December 31, 2004.
Financing costs associated with W-H's current credit facility were approximately
$1.6 million, which will be ratably amortized to interest expense over the five
year term of the credit facility. See Note 6 to the Consolidated Financial
Statements for further discussion.

REVENUE RECOGNITION

W-H provides rental equipment and services to its customers on a day/hourly
rate basis and recognizes the related revenue on a per-day/hourly basis as the
work progresses. W-H also provides products to

F-10

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2004, 2003 and 2002, research and
development costs were $15.5 million, $11.2 million and $10.0 million,
respectively.

INCOME TAXES

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

W-H recognizes liabilities for anticipated tax issues based on its estimate
of whether, and the extent to which, additional taxes will be due. These
liabilities are adjusted accordingly as information on the associated tax issues
becomes available.

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.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Through December 31, 2004, W-H accounted for all stock-based employee
compensation plans under the recognition and measurement provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," (APB No. 25) and
related interpretations. Under APB No. 25, no stock-based employee costs are
reflected in net income, as all options granted under those plans had an
exercise price equal to or in excess of the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share as if W-H had applied the fair value
recognition provisions of

F-11

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123), 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, 2004, 2003 and
2002: risk-free interest rates of between 3.8%-5.0%; dividend rates of zero;
expected lives of between 5.9 and 8.6 years and expected volatilities of
50.7%-65.9%. The 3,745,192 options outstanding as of December 31, 2004 have a
remaining weighted average contractual life of 6.8 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.

As discussed more fully in "Recent Accounting Pronouncements" below, W-H
adopted the requirements of FASB Statement 123R effective January 1, 2005.

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 $0.9 million,
$3.2 million and $4.2 million for the years ended December 31, 2004, 2003 and
2002, respectively, and are reflected as foreign currency translation
adjustments in the consolidated statements of operations and comprehensive
income for the years ended December 31, 2004, 2003 and 2002.

EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing
income from continuing/discontinued operations available to common shareholders
by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share is computed considering the dilutive effect of stock
options and restricted shares. For the years ended December 31, 2004, 2003 and
2002, shares resulting from the assumed exercise of outstanding options and
restricted shares of 673,341, 752,672 and 1,010,919,

F-12

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively, were added to the denominator because the inclusion of such shares
would be dilutive. For the years ended December 31, 2004, 2003 and 2002,
additional shares resulting from the assumed exercise of outstanding options and
restricted shares of 1,404,661, 1,495,925 and 912,337, respectively, were
excluded from the computation of diluted earnings per share, because the
inclusion of such shares would be anti-dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123R "Share-Based Payment" (SFAS
123R). This statement revises SFAS No. 123, supercedes APB No. 25, and requires
companies to recognize the cost of employee stock options and other awards of
stock-based compensation based on the fair value of the award as of the grant
date. Currently, this type of compensation expense is not reflected in W-H's
Consolidated Statements of Operations and Comprehensive Income. The effective
date of this pronouncement is as of the beginning of the first interim or annual
period that begins after June 15, 2005. W-H plans to adopt the requirements of
SFAS 123R effective January 1, 2005.

In December 2004, the FASB published the following two final FASB Staff
Positions, effective immediately. FAS 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004," giving guidance
on applying FASB Statement No. 109, Accounting for Income Taxes, to the tax
deduction on qualified production activities provided by the American Jobs
Creation Act of 2004. FAS 109-2 "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004" provides guidance on the Act's repatriation provision. W-H is in the
process of reviewing the FAS 109-1 and FAS 109-2; however, at this time W-H does
not believe that the adoption of FAS 109-1 or FAS 109-2 will have a material
impact on its consolidated financial position, results of operations or cash
flows.

In November 2004, the FASB Emerging Issues Task Force (EITF) reached a
consensus in applying the conditions in Paragraph 42 of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining
Whether to Report Discontinued Operations" (EITF 03-13). Evaluation of whether
operations and cash flows have been eliminated depends on whether (1) continuing
operations and cash flows are expected to be generated, and (2) the cash flows,
based on their nature and significance, are considered direct or indirect. This
consensus should be applied to a component that is either disposed of or
classified as held for sale in fiscal periods beginning after December 15, 2004.
W-H does not believe that the adoption of EITF 03-13 will have a material impact
on its consolidated financial position, results of operations or cash flows.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- An
Amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, handling costs, and
wasted material (spoilage). Among other provisions, the new rule requires that
items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151
is effective for fiscal years beginning after June 15, 2005 and is required to
be adopted by W-H in the first quarter of fiscal 2006, beginning on January 1,
2006. W-H is currently evaluating the effect that the adoption of SFAS No. 151
will have on its consolidated financial position, results of operations and cash
flows but do not expect SFAS No. 151 to have a material impact.

F-13

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS

During 2004, W-H consummated two acquisitions in the cased-hole wireline
business of its completion and workover segment for total consideration of
approximately $4.0 million, resulting in goodwill of approximately $1.3 million.

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

DUTCH, INC.

In December 2003, W-H acquired Dutch, Inc. ("Dutch"), which 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 is being held in
escrow for a period of two years to satisfy certain types of indemnification
claims that W-H is permitted to make under the purchase and sale agreement.

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 short-term payable and 51,016 shares
of W-H common stock, of which 25,513 shares are being held in escrow for a
period of eighteen months to satisfy certain type of indemnification claims that
W-H is permitted to make under the purchase and sale agreement.

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 are being held in escrow for a period of
between two and three years to satisfy certain types of indemnification claims
that W-H is permitted to make under the purchase and sale agreement.

F-14

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 have not been included as the results were not material to current
operations.

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Activity in W-H's allowance for doubtful accounts for the years ended
December 31, 2004, 2003 and 2002, consists of the following (in thousands):

The components of inventories as of December 31, 2004 and 2003 are as
follows (in thousands):

F-15

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net property and equipment as of December 31, 2004 and 2003, consists of
the following (in thousands):

Depreciation expense charged to operations totaled approximately $44.5
million, $35.2 million and $28.4 million for the years ended December 31, 2004,
2003 and 2002, respectively.

Goodwill and other intangibles as of December 31, 2004 and 2003, consist of
the following (in thousands):

Amortization expense charged to operations totaled approximately $1.2
million, $0.8 million and $0.7 million for the years ended December 31, 2004,
2003 and 2002, respectively.

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

Accrued liabilities as of December 31, 2004 and 2003, consist of the
following (in thousands):

F-16

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. GOODWILL:

The changes in the carrying amount of goodwill for each of W-H's reportable
business segments for the years ended December 31, 2003 and 2004 were as follows
(in thousands):

6. DEBT:

Long-term debt as of December 31, 2004 and 2003 consists of the following
(in thousands):

F-17

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CREDIT FACILITY

On June 30, 2004, W-H closed on a $237.5 million revolving credit facility
(the "Credit Facility") that matures on June 30, 2009. As of December 31, 2004,
W-H had an outstanding loan balance of $180.8 million and approximately $5.6
million in letters of credit issued under the Credit Facility, resulting in an
available borrowing capacity of approximately $51.1 million.

The Credit Facility bears interest, at W-H's election, at either a variable
rate equal to LIBOR, plus a margin ranging from 1.5% to 2.5% depending upon
W-H's leverage ratio, or an alternate base rate equal to the higher of (1) the
prime rate or (2) the federal funds rate plus 0.5%, plus a margin ranging from
0.5% to 1.5% depending upon W-H's leverage ratio. As of December 31, 2004, W-H
had elected to pay interest on its outstanding borrowings at LIBOR plus the then
applicable margin of 2.0%.

W-H's Credit Facility is collateralized 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
domestic subsidiaries and a pledge of not greater than 65% of the capital stock
of each of W-H's top tier foreign subsidiaries. In addition, W-H's Credit
Facility is guaranteed by all of W-H's domestic subsidiaries. The Credit
Facility requires, among other things, that we maintain certain financial
ratios, including a leverage ratio and a debt service coverage ratio, and a
specified net worth. The Credit Facility further limits the amount of capital
expenditures W-H may make, the amount of debt W-H may incur outside of the
Credit Facility, the amount of future investments W-H may make, the ability to
pay dividends and the ability to engage in certain business combination
transactions.

As a result of the repayment of W-H's previous Credit Facility, W-H wrote
off approximately $3.1 million in financing costs that had previously been
deferred. This write-off has been included in the Consolidated Statements of
Operations and Comprehensive Income as interest expense. Additionally, financing
costs associated with this Credit Facility were approximately $1.6 million,
which will be ratably amortized to interest expense over the five year term of
the Credit Facility.

CONVERTIBLE SUBORDINATED NOTES

In connection with the CTS acquisition in 2001, W-H issued $4.5 million in
9% convertible subordinated notes to eight of the individuals 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 2014. Rental expense under operating leases
was approximately $8.2 million, $7.6 million and $6.2 million for the years
ended December 31, 2004, 2003 and 2002, respectively. Future minimum lease
payments under non-cancelable operating leases are as follows (in thousands):

F-18

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 original terms of two to three years, with certain automatic
renewal provisions and contain non-competition agreements. The agreements also
contain a termination clause, which requires a two-year payment (2.5 years in
the case of W-H's Chief Executive Officer) based on the officer's salary and
historical bonus amounts received, in the event of termination without cause or
certain change of control events.

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

LITIGATION

W-H is from time to time a party or otherwise subject to legal proceedings,
claims, investigations and other proceedings in the ordinary course of their
business. These matters typically involve tort, workers compensation, commercial
and infringement and other intellectual property claims. Where appropriate, W-H
makes provision for a liability with respect to these claims in its financial
statements in accordance with generally accepted accounting principles. These
provisions are reviewed periodically and adjusted to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, W-H believes that it has valid defenses with respect to the legal
matters pending against it. It is possible, nevertheless, that W-H's results of
operations or financial position could be adversely affected by the resolution
of one or more of these matters.

8. INCOME TAXES

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

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

F-19

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The significant components of the deferred tax assets and liabilities as of
December 31, 2004 and 2003, are as follows (in thousands):

Applicable U.S. deferred income taxes and related foreign dividend
withholding taxes have not been provided on approximately $0.9 million of
undistributed earnings and profits of the company's foreign subsidiaries. W-H
considers such earnings to be permanently reinvested outside the United States.
It is not practicable to estimate the amount of deferred income taxes associated
with these unremitted earnings.

As of December 31, 2004, W-H had deferred tax assets of $8.0 million
relating to $0.5 million of federal net operating loss ("NOL") carry-forwards,
$0.4 million of credit carry-forwards, $23.0 million of state NOL carry-forwards
and $6.9 million of foreign NOL carry-forwards. The federal NOL carry-forwards
expire in

F-20

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2019. Foreign losses related to the United Kingdom and Netherlands do not
expire; however, our Norwegian NOL carry-forwards expire in 2013 and 2014. State
NOL carry-forwards expire beginning in 2005 until 2019. The NOL and credit
carry-forwards can be used to reduce W-H's federal, state and foreign income
taxes payable in future years. W-H's ability to realize the entire benefit of
its deferred tax assets requires that W-H achieve certain future earnings levels
prior to the expiration of its NOL carry-forwards.

Valuation allowances have been established for uncertainties in realizing
the benefit of tax loss and credit carry-forwards. While W-H expects to realize
the net deferred tax assets, changes in future taxable income or in tax laws may
alter this expectation. W-H could be required to record an additional valuation
allowance against certain or all of its remaining deferred tax assets if market
conditions deteriorate or future earnings are below current estimates. As of
December 31, 2004, approximately $0.9 million of the valuation allowance relates
to state net operating loss carry-forwards and $1.0 million relates to foreign
net operating loss and credit carry-forwards. The valuation allowance decreased
approximately $2.0 million in 2004, increased $1.2 million in 2003 and decreased
approximately $0.9 million in 2002. The $2.0 million decrease in 2004 was
primarily due to release of the valuation allowance on the federal NOL and
foreign tax credits. It is now expected that the federal NOL will be fully
utilized and because of the passage of new tax legislation, the foreign tax
credit carry-forward period has been extended. As such, management expects the
company to be able to fully utilize the foreign tax credits. Additional amounts
were also provided on current foreign and state losses, in jurisdictions where
management does not believe W-H will be able to utilize in future periods.

W-H recognizes liabilities for anticipated tax issues based on its estimate
of whether, and the extent to which, additional taxes will be due. These
liabilities are adjusted accordingly as information on the associated tax issues
becomes available. As of December 31, 2004 and 2003, amounts reserved for such
contingencies were $7.2 million and $5.2 million, respectively.

9. RELATED-PARTY TRANSACTIONS

LEASE AGREEMENT

One of W-H's subsidiaries leases its facilities from a W-H officer. For
each of the years ended December 31, 2004, 2003 and 2002, 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 2004 and 2003, W-H
did not make any payments to PFP for services. In 2002, W-H made payments to PFP
for graphic design and other services of approximately $28,000. During the same
periods, PFP made payments to W-H of approximately $38,000, $38,000 and $30,000,
respectively, primarily for rental of office space.

10. SHAREHOLDERS' EQUITY

STOCK OPTIONS

In May 2004, 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
4,900,000 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, commencing on
the grant date, in 25% increments after each year of service has been completed
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

F-21

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exercised during the three month period following such termination, but only to
the extent vested at the time of such termination. As of December 31, 2004,
3,005,192 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. As of December 31,
2004, the remaining unexercised options to purchase 740,000 shares of common
stock had vested.

A summary of W-H's stock option activity for the years ended December 31,
2002, 2003 and 2004 is as follows:

The following table summarizes information about stock options outstanding
at December 31, 2004:

In January 2000, W-H issued options to purchase 190,575 shares of common
stock to employees. W-H recorded deferred stock compensation totaling
approximately $1.5 million for the options granted in the first quarter of 2000.
The deferred stock compensation was 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

F-22

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

each of the years ended December 31, 2004, 2003 and 2002, W-H recognized $ -- ,
$0.4 million and $0.4 million, respectively, in compensation expense relating to
these options.

RESTRICTED COMMON STOCK

On May 12, 2004, W-H's shareholders approved the grant of 75,000 shares of
restricted common stock to W-H's Chairman, President and Chief Executive
Officer. Deferred stock compensation of approximately $1.3 million generated by
this issuance has been recorded in shareholders' equity and is being amortized
to compensation expense under the provisions of FASB issued Interpretation No.
28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans -- and interpretation of APB Opinions No. 15 and 25." During the
year ended December 31, 2004, W-H recognized $0.5 million in compensation
expense relating to this restricted stock issuance.

11. 401(K) PLAN

W-H maintains a 401(k) plan that enables employees to contribute up to
specified percentages of their annual compensation. W-H may contribute a
matching amount for each participant equal to a discretionary percentage
determined annually by W-H. W-H may also contribute additional amounts at its
sole discretion. W-H matching contributions were approximately $2.2 million,
$1.2 million and $0.8 million for the years ended December 31, 2004, 2003 and
2002, respectively.

12. OPERATING 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 the following reportable segments: (i) drilling related products and
services and (ii) completion and workover 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 and in
selected areas internationally. 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.

F-23

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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, 2004:

As of and for the year ended December 31, 2003:

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

F-24

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

F-25

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. INTERIM FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of consolidated interim information for the
years ended December 31, 2004 and 2003 (amounts in thousands, except per share
data):

F-26

EXHIBIT INDEX

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

* filed herewith