BOOTS & COOTS INTERNATIONAL WELL CONTROL INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
_______________

FORM 10-K
_______________
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

COMMISSION FILE NUMBER 1-13817
_______________

BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
(Name of Registrant as specified in Its Charter)

DELAWARE 11-2908692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

11615 N. Houston Rosslyn 77086
Houston, Texas (Zip Code)
(Address of Principal Executive Offices)

281-931-8884
(Issuer's Telephone Number, Including Area Code)
_______________

Securities registered under Section 12(b) of the Exchange Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------- -----------------------------------------
Common Stock, $.00001 par value American Stock Exchange

Securities registered under Section 12(g) of the Exchange Act: NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 whether the registrant if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ].

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule (2b-2) [ ].

The aggregate market value of Common stock held by non-affiliate as of June
28, 2002 was $8,503,000.

The number of shares of the issuer's common stock outstanding on March 28,
2003 was 71,187,727.

DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 2003
Annual Meeting of Stockholder to be held on June 17, 2003, which will be filed
with the Securities and Exchange Commission within 120 days after December 31,
2002, are incorporated by reference into Part III.

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FORM 10-K

ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

PAGE
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Description of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 10
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 5. Market for Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . 10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . 21
Item 8. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . 21
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 10. Directors and Executive Officers,. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . 22
Item 13. Certain Relationships and Related Party Transactions . . . . . . . . . . . . . . . . . 22
Item 14. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . 22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

2

This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on expectations, estimates
and projections as of the date of this filing. These statements by their nature
are subject to risks, uncertainties and assumptions and are influenced by
various factors and, as a consequence, actual results may differ materially from
those expressed in forward-looking statements. See Item 7 of Part II -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements."

PART I
ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Boots & Coots International Well Control, Inc. (the "Company") is a
global-response oil and gas service company that specializes in responding to
and controlling oil and gas well emergencies, including blowouts and well fires.
In connection with these services, the Company has the capacity to supply the
equipment, expertise and personnel necessary to contain the oil and hazardous
materials spills and discharges associated with oil and gas emergencies and
restore affected oil and gas wells to production. Through its participation in
the proprietary insurance program WELLSURE(R), the Company provides lead
contracting and high-risk management services, under critical loss scenarios, to
the program's insured clients. Additionally, under the WELLSURE(R) program the
Company provides certain pre-event prevention and risk mitigation services. The
Company also provides high-risk well control management services, and pre-event
planning, training and consulting services.

RECENT DEVELOPMENTS

FINANCING ARRANGEMENT. On December 4, 2002, the Company entered into a
loan agreement with Checkpoint Business, Inc. ("Checkpoint") providing for short
term working capital up to $1,000,000. The effective interest rate of under the
loan agreement is 15% per annum. Checkpoint collateral includes substantially
all of the assets of the Company, including the stock of the Company's
Venezuelan subsidiary.

As of December 31, 2002 and March 28, 2003, the Company had borrowed
$500,000 and an additional $200,000, respectively, under this facility. In
January 2003, the Company received a notice of default from Checkpoint, wherein
it alleged several defaults under the loan agreement. As a condition of
receiving additional advances, in February 2003, the Company entered into an
agreement with Checkpoint in which it agreed to grant Checkpoint an option to
purchase its Venezuelan subsidiary for fair market value, as determined by
appraisal, under certain circumstances. In the event Checkpoint wishes to
exercise the option within certain time limits and is not permitted to do so
because the option agreement is set aside by a bankruptcy court or the Company
is unable to obtain the necessary consents to a sale of its subsidiary, then the
Company would be obligated to pay $250,000 in liquidated damages.

In January 2003, Checkpoint presented the Company with a restructuring
proposal that would entail a voluntary Chapter 11 bankruptcy filing and the
cancellation of the Company's common equity as part of the bankruptcy plan. The
Company considered this proposal and other alternatives that would allow it to
restructure its obligations and improve its liquidity and engaged legal and
financial consultants to assist it in its assessment of its alternatives. On
March 28, 2003, the Company decided against the restructuring proposal from
Checkpoint and paid in full the principal balance of $700,000 and interest
outstanding under its loan agreement with Checkpoint. The Company and
Checkpoint are currently discussing terminating the option agreement. The
Company continues to consider its restructuring alternatives, which, under the
proper circumstances may include a voluntary filing for protection under Chapter
11 of the Bankruptcy Code.

Amex Listing The American Stock Exchange ("AMEX") by letter dated March
15, 2002, required the Company to submit a reasonable plan to regain compliance
with AMEX's continued listing standards by December 31, 2002. On April 15,
2002, the Company submitted a plan that included interim milestones that the
Company would be required to meet to remain listed. AMEX subsequently notified
the Company that its plan had been accepted; however, on June 28, 2002, the
Company submitted an amendment to the plan to take into account, among other
things, certain restructuring initiatives that the Company had undertaken. The
Company has not been advised by AMEX whether or not it approved the June 28,
2002, amended plan. Since submitting the amended plan, the Company has been
actively pursuing alternatives that would allow it to fulfill the objectives
outline in the amended plan. However, the Company does not, at this time, have
any prospects or commitments for new financing or the restructuring of its
existing obligations that, if successfully completed, would result in
compliance with AMEX's continued listing standards.

3

AMEX may institute immediate delisting proceedings as a consequence of the
Company's failure to achieve compliance its continued listing standards. As of
the date hereof the Company has not been advised by AMEX of any immediate
delisting action.

AMEX continued listing standards require that listed companies maintain
stockholders' equity of $2,000,000 or more if the Company has sustained
operating losses from continuing operations or net losses in two of its three
most recent fiscal years or stockholders equity of $4,000,000 or more if it has
sustained operating losses from continuing operations or net losses in three of
its four most recent fiscal years. Further, the AMEX will normally consider
delisting companies that have sustained losses from continuing operations or net
losses in their five most recent fiscal years or that have sustained losses that
are so substantial in relation to their operations or financial resources, or
whose financial condition has become so impaired, that it appears questionable,
in the opinion of AMEX, as to whether the company will be able to continue
operations or meet its obligations as they mature.

Going Concern. The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
However, the uncertainties surrounding the sufficiency and timing of its future
cash flows, the current default on certain debt agreements and the lack of firm
commitments for additional capital raises substantial doubt about the ability of
the Company to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.

HISTORY OF COMPANY

The Company was incorporated in Delaware in April 1988, remaining largely
inactive until acquiring IWC Services, Inc., a Texas corporation on July 29,
1997. In the transaction, the stockholders of IWC Services became the holders
of approximately 93% of the outstanding shares of common stock of the Company
and the management of IWC Services assumed management of the Company. IWC
Services is a global-response oil and gas well control service company that
specializes in responding to and controlling oil and gas well emergencies,
including blowouts and well fires. In addition, IWC Services provides snubbing
and other non-critical well control services. IWC Services was organized in
June 1995 by six former key employees of the Red Adair Company.

Following the IWC Services transaction, the Company engaged in a series of
acquisitions. On July 31, 1997, the Company acquired substantially all of the
operating assets of Boots & Coots, L.P., a Colorado limited partnership, and the
stock of its subsidiary corporations, Boots & Coots Overseas, Ltd., and Boots &
Coots de Venezuela, S.A. Boots & Coots, L.P. and its subsidiaries were engaged
in oil well fire fighting, snubbing and blowout control services. Boots & Coots,
L.P. was organized by Boots Hansen and Coots Matthews, two former employees of
the Red Adair Company who, like the founders of IWC Services, left that firm to
form an independent company, which was a primary competitor of IWC Services. As
a consequence of the acquisition of Boots & Coots, L.P. the Company became a
leader in the worldwide oil well firefighting and blowout control industry,
reuniting many of the former employees of the Red Adair Company.

In September 1997, the Company acquired Abasco, Inc., a manufacturer of oil
and chemical spill containment equipment and products. In January 1998, the
Company acquired international Tool and Supply Corporation, a materials and
equipment procurement, transportation and logistics company. In February 1998,
the Company acquired Code 3, Inc., a provider of containment and remediation
services in hazardous materials and oil spills. In July 1998, the Company
acquired Baylor Company, a manufacturer of industrial products for the drilling,
marine and power generation industries. In November 1998, Code 3, Inc., then
known as "Special Services", acquired HAZ-TECH Environmental Services, Inc., a
provider of hazardous material and waste management and related services. As a
result of ongoing operating losses, the Company discontinued the operation of
Abasco and Special Services, and sold the Baylor Company. International Tool
and Supply Corporation ceased operations and filed for bankruptcy in April 2000.

Halliburton Alliance. The Company conducts business in a global strategic
alliance with the Halliburton Energy Services division of Halliburton Company.
The alliance operates under the name "WELLCALL(SM)" and draws on the expertise
and abilities of both companies to offer a total well control solution for oil
and gas producers worldwide. The Halliburton Alliance provides a complete range
of well control services including pre-event troubleshooting and contingency
planning, snubbing, pumping, blowout control, debris removal, fire fighting,
relief and directional well planning, and other specialized services.

Business Strategy. As a result of operating losses, the Company has been
forced to operate with a minimum of working capital. As a result, the Company
curtailed its business expansion program, discontinued the operations of ITS,
sold the assets of Baylor Company, Abasco and its Special Services divisions and
focused its efforts on its remaining core business segments, Prevention and
Response. Subject to capital availability, and recognizing that the well control
services business is a finite market with services dependent upon the occurrence
of blowouts which cannot be reasonably predicted, the Company intends to build
upon its demonstrated strengths in high-risk management while increasing
revenues from its pre-event and engineering services and non-critical event
services.

4

Executive Offices. The Company's principal executive office is located at
11615 N. Houston Rosslyn, Houston, Texas, 77086.

THE EMERGENCY RESPONSE SEGMENT OF THE OIL AND GAS SERVICE INDUSTRY

History. The emergency response segment of the oil and gas services
industry traces its roots to the late 1930's when Myron Kinley organized the
Kinley Company, the first oil and gas well firefighting specialty company.
Shortly after organizing the Kinley Company, Mr. Kinley took on an assistant
named Red Adair who learned the firefighting business under Mr. Kinley's
supervision and remained with the Kinley Company until Mr. Kinley's retirement.
When Mr. Kinley retired in the late 1950's, Mr. Adair organized the Red Adair
Company and subsequently hired Boots Hansen, Coots Matthews and Raymond Henry as
members of his professional firefighting staff. Mr. Adair later added Richard
Hatteberg, Danny Clayton, Brian Krause, Mike Foreman and Juan Moran to his
staff, and the international reputation of the Red Adair Company grew to the
point where it was a subject of popular films and the dominant competitor in the
industry. Boots Hansen and Coots Matthews remained with the Red Adair Company
until 1978 when they split off to organize Boots & Coots, an independent
firefighting, snubbing and blowout control company.

Historically, the well control emergency response segment of the oil and
gas services industry has been reactive, rather than proactive, and a small
number of companies have dominated the market. As a result, if an operator in
Indonesia, for example, experienced a well blowout and fire, he would likely
call a well control emergency response company in Houston that would take the
following steps:

- - Immediately dispatch a control team to the well location to assess the
damage, supervise debris removal, local equipment mobilization and site
preparation;

- - Gather and analyze the available data, including drilling history, geology,
availability of support equipment, personnel, water supplies and ancillary
firefighting resources;

- - Develop or implement a detailed fire suppression and well-control plan;

- - Mobilize additional well-control and firefighting equipment in Houston;

- - Transport equipment by air freight from Houston to the blowout location;

- - Extinguish the fire and bring the well under control; and

- - Transport the control team and equipment back to Houston.

On a typical blowout, debris removal, fire suppression and well control can
require several weeks of intense effort and consume millions of dollars,
including several hundred thousand dollars in air freight costs alone.

The 1990's were a period of rapid change in the oil and gas well control
and firefighting business. The hundreds of oil well fires that were started by
Iraqi troops during their retreat from Kuwait spurred the development of new
firefighting techniques and tools that have become industry standards. Moreover,
after extinguishing the Kuwait fires, the entrepreneurs who created the oil and
gas well firefighting industry, including Red Adair, Boots Hansen and Coots
Matthews, retired, leaving the Company's senior staff as the most experienced
active oil and gas well firefighters in the world. At present, the principal
competitors in the oil and gas well firefighting business are the Company, Wild
Well Control, Inc., and Cudd Pressure Control, Inc.

Trends. The increased recognition of the importance of risk mitigation
services, training and emergency preparedness, are having a profound impact on
the emergency response segment of the oil and gas services industry. Instead of
waiting for a blowout, fire or other disaster to occur, both major and
independent oil producers are coming to the Company for proactive preparedness
and incident prevention programs. These requests, together with pre-event
consultation on matters relating to well control training, blowout contingency
planning, on-site safety inspections and formal fire drills, are expanding the
market for the Company's engineering unit. Decreasing availability of financial
capacity in the re-insurance markets is causing underwriting syndicates to seek
significant renewal rate increases and higher quality risks in the "Control of
Well" segment of the energy insurance market. The Company believes these factors
enhance the viability of proven alternative risk transfer programs such as
WELLSURE(R), a proprietary insurance program in which the Company is the
provider of both pre-event and loss management services.

5

Volatility of Firefighting Revenues. The market for oil and gas well
firefighting and blowout control services is highly volatile due to factors
beyond the control of the Company, including changes in the volume and type of
drilling and work-over activity occurring in response to fluctuations in oil and
natural gas prices. Wars, acts of terrorism and other unpredictable factors may
also increase the need for oil and gas well firefighting and blowout control
services from time to time. As a result, the Company expects to experience large
fluctuations in its revenues from oil and gas well firefighting and blowout
control services. The Company's acquisitions of complementary businesses were
designed to broaden its product and service offerings and mitigate the revenue
and earnings volatility associated with its oil and gas well firefighting and
blowout control services. The contraction of the Company's service and product
offerings as a consequence of its financial difficulties has made it more
susceptible to this volatility. Accordingly, the Company expects that its
revenues and operating performance may vary considerably from year to year for
the foreseeable future.

The Company's principal products and services for its two business segments
include:

PREVENTION

Firefighting Equipment Sales and Service. This service line involves the
sale of complete firefighting equipment packages, together with maintenance,
monitoring, updating of equipment and ongoing consulting services. A typical
example of this service line is the industry supported Emergency Response Center
that the Company has established on the North Slope of Alaska and the Emergency
Response Center established in Algeria. The Company also provides ongoing
consulting services relating to the Emergency Response Centers, including
equipment sales, training, contingency planning, safety inspections and
emergency response drills.

Drilling Engineering. The Company has a highly specialized in-house
engineering staff which, in alliance with Halliburton Energy Services ,
provides engineering services, including planning and design of relief well
drilling (trajectory planning, directional control and equipment specifications,
and on-site supervision of the drilling operations); planning and design of
production facilities which are susceptible to well capping or other control
procedures; and mechanical and computer aided designs for well control
equipment.

Inspections. A cornerstone of the Company's strategy of providing
preventive well control services involves on-site inspection services for
drilling and work over rigs, drilling and production platforms, and field
production facilities. These inspection services are provided by the Company and
offered as a standard option in Halliburton's field service programs.

Training. The Company provides specialized training in well control
procedures for drilling, exploration and production personnel for both U.S. and
international operators. The Company's training services are offered in
conjunction with ongoing educational programs sponsored by Halliburton.

Strategic Event Planning (S.T.E.P.). A critical component of the services
offered by the Halliburton Alliance is a strategic and tactical planning process
addressing action steps, resources and equipment necessary for an operator to
control a blowout. This planning process incorporates organizational structures,
action plans, specifications, people and equipment mobilization plans with
engineering details for well firefighting, capping, relief well and kill
operations. It also addresses optimal recovery of well production status,
insurance recovery, public information and relations and safety/environmental
issues. While the S.T.E.P. program includes a standardized package of services,
it is easily modified to suit the particular needs of a specific client.

Regional Emergency Response Centers (SafeGuard). The Company has
established and maintains industry supported "Fire Stations" on the North Slope
of Alaska. The Company has sold to a consortium of producers the equipment
required to respond to a blowout or oil or gas well fire, and has agreed to
maintain the equipment and conduct on-site safety inspections and emergency
response drills. The Company also currently has Emergency Response Centers in
Houston, Texas, Anaco, Venezuela, and Algeria.

RESPONSE

Well Control. This service segment is divided into two distinct levels:
"Critical Event" response is ordinarily reserved for well control projects where
hydrocarbons are escaping from a well bore, regardless of whether a fire has
occurred; "Non-critical Event" response, on the other hand, is intended for the
more common sub-surface operating problems that do not involve escaping
hydrocarbons.

6

Critical Events. Critical Events frequently result in explosive fires,
loss of life, destruction of drilling and production facilities,
substantial environmental damage and the loss of hundreds of thousands of
dollars per day in production revenue. Since Critical Events ordinarily
arise from equipment failures or human error, it is impossible to
accurately predict the timing or scope of the Company's Critical Event
work. Critical Events of catastrophic proportions can result in significant
revenues to the Company in the year of the incident. The Company's
professional firefighting staff has over 200 years of aggregate industry
experience in responding to Critical Events, oil well fires and blowouts.

Non-critical Events. Non-critical Events frequently occur in
connection with workover operations or the drilling of new wells into high
pressure reservoirs. In most Non-critical Events, the blowout prevention
equipment and other safety systems on the drilling rig function according
to design and the Company is then called upon to supervise and assist in
the well control effort so that drilling operations can resume as promptly
as safety permits. While Non-critical Events do not ordinarily have the
revenue impact of a Critical Event, they are more common and predictable.
Non-critical Events can escalate into Critical Events.

Firefighting Equipment Rentals. This service includes the rental of
specialty well control and firefighting equipment by the Company primarily for
use in conjunction with Critical Events, including firefighting pumps, pipe
racks, Athey wagons, pipe cutters, crimping tools and deluge safety systems. The
Company charges this equipment out on a per diem basis. Rentals typically
average approximately 40% of the revenues associated with a Critical Event.

WELLSURE(R) Program. The Company and Global Special Risks, Inc., a managing
general insurance agent located in Houston, Texas, and New Orleans, Louisiana,
have formed an alliance that offers oil and gas exploration production
companies, through retail insurance brokers, a program known as "WELLSURE(R),"
which combines traditional well control and blowout insurance with the Company's
post-event response services and well control preventative services including
company-wide and/or well specific contingency planning, personnel training,
safety inspections and engineering consultation. Insurance provided under
WELLSURE(R) has been arranged with leading London insurance underwriters.
WELLSURE(R) program participants are provided with the full benefit of having
the Company as a safety and prevention partner. In the event of well blowouts,
the Company serves as the integrated emergency response service provider, as
well as lead contractor and project manager for control and restoration of wells
covered under the program.

DEPENDENCE UPON CUSTOMERS

The Company is not materially dependent upon a single or a few customers,
although one or a few customers may represent a material amount of business for
a limited period as a result of the unpredictable demand for well control and
firefighting services. The emergency response business is by nature episodic and
unpredictable. A customer that accounted for a material amount of business as a
result of an oil well blow-out or similar emergency may not account for a
material amount of business after the emergency is over.

HALLIBURTON ALLIANCE

In response to ongoing changes in the emergency response segment of the oil
and gas service industry, the Company entered into a global strategic alliance
in 1995 with Halliburton Energy Services. Halliburton is widely recognized as an
industry leader in the pumping, cementing, snubbing, production enhancement,
coiled tubing and related services segment of the oil field services industry.
This alliance, WELLCALL(SM), draws on the expertise and abilities of both
companies to offer a total well control solution for oil and gas producers
worldwide. The Halliburton Alliance provides a complete range of well control
services including pre-event troubleshooting and contingency planning, snubbing,
pumping, blowout control, debris removal, firefighting, relief and directional
well planning and other specialized services. The specific benefits that
WELLCALL(SM) provides to an operator include:

- Quick response with a global logistics system supported by an
international communications network that operates around the clock,
seven days a week

- A full-time team of experienced well control specialists that are
dedicated to safety

- Specialized equipment design, rental, and sales

7

- Contingency planning consultation where WELLCALL(SM) specialists meet
with customers, identify potential problems, and help develop a
comprehensive contingency plan

- A single-point contact to activate a coordinated total response to
well control needs.

Operators contracting with WELLCALL(SM) receive a Strategic Event Plan, or
S.T.E.P., a comprehensive contingency plan for well control that is
region-specific, reservoir-specific, site-specific and well-specific. The
S.T.E.P. plan provides the operator with a written, comprehensive and
coordinated action plan that incorporates historical data, pre-planned call outs
of Company and Halliburton personnel, pre-planned call outs of necessary
equipment and logistical support to minimize response time and coordinate the
entire well control effort. In the event of a blowout, WELLCALL(SM) provides the
worldwide engineering and well control equipment capabilities of Halliburton and
the firefighting expertise of the Company through an integrated contract with
the operator.

As a result of the Halliburton Alliance, the Company is directly involved
in Halliburton's well control projects that require firefighting and Risk
Management expertise, Halliburton is a primary service vendor to the Company and
the Company has exclusive rights to use certain firefighting technologies
developed by Halliburton. It is anticipated that future Company-owned Fire
Stations, if developed, will be established at existing Halliburton facilities,
such as the Algerian Fire Station, and that maintenance of the Fire Station
equipment will be supported by Halliburton employees. The Halliburton Alliance
also gives the Company access to Halliburton's global communications, credit and
currency management systems, capabilities that could prove invaluable in
connection with the Company's international operations.

Consistent with the Halliburton Alliance, the Company's focus has evolved
to meet its clients' needs in a global theater of operations. With the increased
emphasis by operators on operating efficiencies and outsourcing many engineering
services, the Company has developed a proactive menu of services to meet their
needs. These services emphasize pre-event planning and training to minimize the
likelihood of a blowout and minimize damages in the event of a blowout. The
Company provides comprehensive advance training, readiness, preparation,
inspections and mobilization drills which allow clients to pursue every possible
preventive measure and to react in a cohesive manner when an event occurs. The
Halliburton Alliance stresses the importance of safety, environmental protection
and cost control, along with asset protection and liability minimization.

The agreement documenting the alliance between the Company and Halliburton
(the "Alliance Agreement") provided that it would remain in effect for an
indefinite period of time and could be terminated prior to September 15, 2005,
only for cause, or by mutual agreement between the parties. Under the Alliance
Agreement, cause for termination was limited to (i) a fundamental breach of the
Alliance Agreement, (ii) a change in the business circumstances of either party,
(iii) the failure of the Alliance to generate economically viable business, or
(iv) the failure of either party to engage in good faith dealing. On April 15,
1999, in connection with a $5,000,000 purchase by Halliburton of the Company's
Series A Cumulative Senior Preferred Stock, the Company and Halliburton entered
into an expanded Alliance Agreement. While the Company considers its
relationship with Halliburton to be good and strives to maintain productive
communication with its chief Alliance partner, there can be no assurance that
the Alliance Agreement will not be terminated by Halliburton. The termination of
the Alliance Agreement could have a material adverse effect on the Company's
future operating performance.

REGULATION

The operations of the Company are affected by numerous federal, state, and
local laws and regulations relating, among other things, to workplace health and
safety and the protection of the environment. The technical requirements of
these laws and regulations are becoming increasingly complex and stringent, and
compliance is becoming increasingly difficult and expensive. However, the
Company does not believe that compliance with current laws and regulations is
likely to have a material adverse effect on the Company's business or financial
statements. Nevertheless, the Company is obligated to exercise prudent judgment
and reasonable care at all times and the failure to do so could result in
liability under any number of laws and regulations.

Certain environmental laws provide for "strict liability" for remediation
of spills and releases of hazardous substances and some provide liability for
damages to natural resources or threats to public health and safety. Sanctions
for noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties, and criminal prosecution. It is possible that
changes in the environmental laws and enforcement policies hereunder, or claims
for damages to persons, property, natural resources, or the environment could
result in substantial costs and liabilities to the Company. The Company's
insurance policies provide liability coverage for sudden and accidental
occurrences of pollution and/or clean-up and containment of the foregoing in
amounts which the Company believes are comparable to companies in the industry.
To date, the Company has not been subject to any fines or penalties for
violations of governmental or environmental regulations and has not incurred
material capital expenditures to comply with environmental regulations.

8

RESEARCH AND DEVELOPMENT

The Company is not directly involved in activities that will require the
expenditure of substantial sums on research and development. The Company does,
however, as a result of the Halliburton Alliance, benefit from the ongoing
research and development activities of Halliburton to the extent that new
Halliburton technologies are or may be useful in connection with the Company's
business.

COMPETITION

The emergency response segment of the oil and gas services business is a
rapidly evolving field in which developments are expected to continue at a rapid
pace. The Company believes that the Halliburton Alliance and the WELLSURE(R)
program have strengthened its competitive position in the industry by expanding
the scope of services that the Company offers to its customers. However, the
Company's ability to compete depends upon, among other factors, capital
availability, increasing industry awareness of the variety of services the
Company offers, expanding the Company's network of Fire Stations and further
expanding the breadth of its available services. Competition from other
emergency response companies, some of which have greater financial resources
than the Company, is intense and is expected to increase as the industry
undergoes additional change. The Company's competitors may also succeed in
developing new techniques, products and services that are more effective than
any that have been or are being developed by the Company or that render the
Company's techniques, products and services obsolete or noncompetitive. The
Company's competitors may also succeed in obtaining patent protection or other
intellectual property rights that might hinder the Company's ability to develop,
produce or sell competitive products or the specialized equipment used in its
business.

EMPLOYEES

As of March 31, 2003, the Company and its operating subsidiaries
collectively had 43 full-time employees, and 3 part-time personnel, who are
available as needed for emergency response projects. In addition, the Company
has several part-time consultants and also employs part-time contract personnel
who remain on-call for certain emergency response projects. The Company is not
subject to any collective bargaining agreements and considers its relations with
its employees to be good.

OPERATING HAZARDS; LIABILITY INSURANCE COVERAGE

The Company's operations involve ultra-hazardous activities that involve an
extraordinarily high degree of risk. Hazardous operations are subject to
accidents resulting in personal injury and the loss of life or property,
environmental mishaps and mechanical failures, and litigation arising from such
events may result in the Company being named a defendant in lawsuits asserting
large claims. The Company may be held liable in certain circumstances, including
if it fails to exercise reasonable care in connection with its activities, and
it may also be liable for injuries to its agents, employees and contractors who
are acting within the course and scope of their duties. The Company and its
subsidiaries currently maintain liability insurance coverage with aggregate
policy limits which are believed to be adequate for their respective operations.
However, it is generally considered economically unfeasible in the oil and gas
service industry to maintain insurance sufficient to cover large claims. A
successful claim for which the Company is not fully insured could have a
material adverse effect on the Company. No assurance can be given that the
Company will not be subject to future claims in excess of the amount of
insurance coverage which the Company deems appropriate and feasible to maintain.

RELIANCE UPON OFFICERS, DIRECTORS AND KEY EMPLOYEES

The Company's emergency response services require highly specialized
skills. Because of the unique nature of the industry and the (SM)all number of
persons who possess the requisite skills and experience, the Company is highly
dependent upon the personal efforts and abilities of its key employees. In
seeking qualified personnel, the Company will be required to compete with
companies having greater financial and other resources than the Company. Since
the future success of the Company will be dependent upon its ability to attract
and retain qualified personnel, the inability to do so, or the loss of
personnel, could have a material adverse impact on the Company's business.

CONTRACTUAL OBLIGATIONS TO CUSTOMERS; INDEMNIFICATION

The Company customarily enters into service contracts which contain
provisions that hold the Company liable for various losses or liabilities
incurred by the customer in connection with the activities of the Company,
including, without limitation, losses and liabilities relating to claims by

9

third parties, damage to property, violation of governmental laws, regulations
or orders, injury or death to persons, and pollution or contamination caused by
substances in the Company's possession or control. The Company may be
responsible for any such losses or liabilities caused by contractors retained by
the Company in connection with the provision of its services. In addition, such
contracts generally require the Company, its employees, agents and contractors
to comply with all applicable laws, rules and regulations (which may include the
laws, rules and regulations of various foreign jurisdictions) and to provide
sufficient training and educational programs to such persons in order to enable
them to comply with applicable laws, rules and regulations. In the case of
emergency response services, the Company frequently enters into agreements with
customers which limit the Company's exposure to liability and/or require the
customer to indemnify the Company for losses or liabilities incurred by the
Company in connection with such services, except in the case of gross negligence
or willful misconduct by the Company. There can be no assurance, however, that
such contractual provisions limiting the liability of the Company will be
enforceable in whole or in part under applicable law.

ITEM 2. DESCRIPTION OF PROPERTIES.

The Company owns a facility in northwest Houston, Texas, at 11615 N.
Houston Rosslyn Road, that includes approximately 2 acres of land, a 4,000
square foot office building and a 12,000 square foot manufacturing and warehouse
building. Additionally, the Company has leased office and equipment storage
facilities in various other cities within the United States and Venezuela. The
future commitments on these additional leases are immaterial. The Company
believes that these facilities will be adequate for its anticipated needs.

ITEM 3. LEGAL PROCEEDINGS

In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, Charles Phillips, certain other employees of the
Company, and several entities affiliated with Larry H. Ramming in the 269th
Judicial District Court, Harris County, Texas. The plaintiffs alleged various
causes of action, including fraud, breach of contract, breach of fiduciary duty
and other intentional misconduct relating to the acquisition of stock of a
corporation by the name of Emergency Resources International, Inc. ("ERI") by a
corporation affiliated with Larry H. Ramming and the circumstances relating to
the founding of the Company. In July 2002, the Company agreed to pay $500,000
in cash in four installments, the last installment being due in January 2003, in
partial settlement of the plaintiffs' claims against all of the defendants. As
to the remaining claims, the defendants filed motions for summary judgment. On
September 24, 2002 the court granted the defendants' motions for summary
judgment. The Company had defaulted on the settlement after paying one
installment of $100,000, but has since resettled the case on behalf of all Boots
& Coots entities and all employees of the Company (but not on behalf of Larry H.
Ramming, Charles Phillips, and the other entities affiliated with Larry H.
Ramming) by paying the remaining unpaid $400,000 in March, 2003 in exchange for
full and final release by all plaintiffs from any and all claims related to the
subject of the case.

The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.

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

There were no matter submitted to a vote of security holders during the fourth
quarter of 2002.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock is listed on the AMEX under the symbol "WEL."
The following table sets forth the high and low sales prices per share of the
common stock for each full quarterly period within the two most recent fiscal
years as reported on the AMEX:

10

HIGH AND LOW SALES PRICES
2001 2002
------------ ------------
HIGH LOW HIGH LOW
----- ----- ----- -----

First Quarter. . . . $0.96 $0.44 $0.46 $0.32
Second Quarter . . . 0.75 0.45 0.45 0.17
Third Quarter. . . . 0.85 0.51 0.22 0.06
Fourth Quarter . . . 0.69 0.35 0.24 0.06

On March 28, 2003 the last reported sale price of the common stock as
reported on AMEX was $0.83 per share.

As of March 28, 2003, the Company's common stock was held by approximately
232 holders of record. The Company estimates that it has a significantly larger
number of beneficial stockholders as much of its common stock is held by
broker-dealers in street name for their customers.

The Company has not paid any cash dividends on its common stock to date.
The Company's current policy is to retain earnings, if any, to provide funds for
the operation and expansion of its business. The Company's credit facilities
currently prohibit paying cash dividends. In addition, the Company is
prohibited from paying cash dividends on its common stock before full dividends,
including cumulative dividends, are paid to holders of the Company's preferred
stock.

The Company is not in compliance with the listing requirements of the
American Stock Exchange (See discussion in Item 1, Description of Business -
Amex Listing.)

SALES OF UNREGISTERED SECURITIES

During 2002, the Company issued an aggregate of 1,181 shares of Series C
Preferred Stock, 278 shares of Series D Preferred Stock, 5,651 shares of Series
E Preferred Stock, 9,041 shares of Series G Preferred Stock and 9,772 shares of
Series H Preferred Stock as quarterly dividends to holders of the same class of
preferred stock. These issuances were structured as exempt private placements
pursuant to Section 4(2) of the Securities Act of 1933.

From May to October 2002, an aggregate of 15,368 shares of outstanding
Series C Preferred Stock were converted into an aggregate of 2,049,105 shares of
common stock and an aggregate of 6,185 shares of outstanding Series H Preferred
Stock were converted into an aggregate of 823,999 shares of common stock. These
issuances were structured as exempt private placements pursuant to Section 4(2)
of the Securities Act of 1933.

During April, May and July 2002, the Company issued shares of common stock
to certain lenders in connection with their participation in the Company's
senior credit facility with Specialty Finance Fund 1, LLC. In all, an aggregate
of 546,668 shares were issued for this purpose. These issuances were structured
as exempt private placements pursuant to Section 4(2) of the Securities Act of
1933.

In March 2002, the Company issued 188 shares of Series C Preferred Stock to
settle a lawsuit. Shares of Series C Preferred Stock have a face value of $100
per share and are convertible into common stock at $0.75 per share. This
issuance was structured as an exempt private placement pursuant to Section 4(2)
of the Securities Act of 1933.

11

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain historical financial data of the
Company for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 which
has been derived from the Company's audited consolidated financial statements.
The results of operations of ITS, Baylor Company, Abasco and Special Services
are presented as discontinued operations. The data should be read in
conjunction with the consolidated financial statements, including the notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere.

YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------- ------------- ------------ -------------

INCOME STATEMENT DATA:
Revenues . . . . . . . . . . . . . . . . . . . . . . . $14,048,000 $ 14,126,000 $ 10,813,000 $16,938,000 $ 14,102,000
Operating income (loss). . . . . . . . . . . . . . . . (943,000) (6,088,000) (3,363,000) 4,407,000 (1,539,000)
Income (loss) from continuing operations
before extraordinary item . . . . . . . . . . . . . (3,116,000) (9,171,000) (8,820,000) 3,687,000 (2,525,000)
Income (loss) from discontinued
operations, net of income taxes . . . . . . . . . . 120,000 (21,945,000) (12,368,000) (2,359,000) (6,179,000)
Gain (loss) from sale of discontinued
operations, net of income taxes . . . . . . . . . . - - (2,555,000) - (476,000)
Net income (loss) before
extraordinary item. . . . . . . . . . . . . . . . . (2,996,000) (31,116,000) (23,743,000) 1,328,000 (9,180,000)
Extraordinary
item -gain (loss) on
debt extinguishment . . . . . . . . . . . . . . . . - - 2,444,000 - -
Net income (loss). . . . . . . . . . . . . . . . . . . . (2,996,000) (31,116,000) (21,299,000) 1,328,000 (9,180,000)

Net loss attributable to common
stockholders . . . . . . . . . . . . . . . . . . . (3,937,000) (32,360,000) (22,216,000) (1,596,000) (12,292,000)
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations . . . . . . . . . . . . . . . . $ (0.12) $ (0.67) $ (0.29) $ 0.02 $ (0.13)
============ ============= ============= ============ =============
Discontinued operations . . . . . . . . . . . . . . . $ - $ (0.27) $ (0.44) $ (0.06) $ (0.15)
============ ============= ============= ============ =============
Extraordinary item. . . . . . . . . . . . . . . . . . $ - $ - $ 0.07 $ - $ -
============ ============= ============= ============ =============
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (0.12) $ (0.94) $ (0.66) $ (0.04) $ (0.28)
============ ============= ============= ============ =============
Weighted average common
shares outstanding. . . . . . . . . . . . . . . . . 31,753,000 34,352,000 33,809,000 40,073,000 43,311,000

12

AS OF DECEMBER 31,
---------------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ------------- ------------ ------------ -------------

BALANCE SHEET DATA:
Total assets (1) . . . . . . . . . . $97,585,000 $ 62,248,000 $18,126,000 $17,754,000 $ 7,036,000
Long-term debt and notes payable,
including current maturities (2) 48,748,000 43,122,000 12,620,000 13,545,000 15,000,000
Working capital (deficit) (3). . . . 56,654,000 (14,757,000) 93,000 3,285,000 (16,994,000)
Stockholders' equity (deficit) . . . 20,236,000 (4,327,000) (6,396,000) (4,431,000) (13,988,000)
Common shares outstanding .. . . . 33,044,000 35,244,000 31,692,000 41,442,000 44,862,000

1. The reduction in total assets from 1998 to 1999 is a result of write downs
in 1999. The reduction in total assets from 1999 to 2000 is a result of the
sale of Baylor. The reductions in total assets from 2001 to 2002 a result
of selling the assets of Special Services and Abasco
2. The reduction of long-term debt and notes payable, including current
maturities from 1999 to 2000 is the result of a troubled debt restructuring
and payments of debt from the proceeds of the sale of Baylor.
3. Negative working capital in 1999 is due to the classification of long-term
debt as current due to failing certain debt covenants, partially offset by
net assets of discontinued operations being classified as current assets.
The change in working capital from 1999 to 2000 is a result of reduction of
current debt due to the effect of the troubled debt restructuring offset by
the reduction of current assets as a result of the sale of Baylor. The
change in working capital from 2001 to 2002 is primarily due to the
classification of long-term debt as current due to failing certain debt
covenants

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

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto and the other financial
information contained in the Company's periodic reports previously filed with
the Securities and Exchange Commission and incorporated herein by reference.

Summary consolidated operating results for the fiscal years ended December
31, 2000, 2001 and 2002 are as follows:

YEARS ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
------------- ------------ -------------

Revenues. . . . . . . . . . . . . . . . $ 10,813,000 $16,938,000 $ 14,102,000
Costs and expenses:
Cost of sales . . . . . . . . . . . . 4,006,000 3,085,000 5,809,000
Operating expenses. . . . . . . . . . 4,955,000 5,463,000 5,893,000
Selling, general and administrative . 3,005,000 2,739,000 2,737,000
Depreciation and amortization . . . . 1,213,000 1,244,000 1,202,000
Loan guaranty charge. . . . . . . . . 997,000 - -
Operating income (loss) . . . . . . . (3,363,000) 4,407,000 (1,539,000)
Interest (expense) and other income,
net. . . . . . . . . . . . . . . . (5,392,000) (385,000) (443,000)
Income tax expense. . . . . . . . . . 65,000 335,000 543,000
Income (loss) from continuing
operations before extraordinary
item. . . . . . . . . . . . . . . . (8,820,000) 3,687,000 (2,525,000)
Income (loss) from discontinued
operations, net of income taxes . . . (12,368,000) (2,359,000) (6,179,000)
Loss from sale of discontinued
operations net of income tax. . . . . (2,555,000) - (476,000)
Extraordinary gain on early debt
extinguishment, net of income taxes . 2,444,000 - -
Net income (loss). . . . . . . . . . (21,299,000) 1,328,000 (9,180,000)
Stock and warrant accretions. . . . . (53,000) (53,000) (53,000)
Preferred dividends accrued . . . . . (864,000) (2,871,000) (3,059,000)
Net loss attributable to common
stockholders .. . . . . . . $(22,216,000) $(1,596,000) $(12,292,000)

On January 1, 2001, the Company redefined the segments that it operates in
as a result of the discontinuation of ITS and Baylor's operations, as well as on
June 30, 2002, for the Abasco and Special Services business operations. All of
these operations are presented as discontinued operations in the consolidated
financial statements and therefore are excluded from the segment information for
all periods. The current segments are Prevention and Response. Intercompany
transfers between segments were not material. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. For purposes of this presentation, selling, general and

13

administrative and corporate expenses have been allocated between segments in
proportion to their relative revenue. Business segment operating data from
continuing operations is presented for purposes of management discussion and
analysis of operating results.

Most of the Company's operating expenses represent fixed costs for base
labor charges, rent and utilities. Consequently, operating expenses increase
only slightly as a result of responding to a critical event. In the past,
during periods of few critical events, resources dedicated to emergency response
were underutilized or, at times, idle, while the fixed costs of operations
continued to be incurred, contributing to significant operating losses. To
mitigate these consequences, the Company is actively expanding its non-event
service capabilities. These services primarily utilize existing personnel
resources to maximize utilization with only slight increases in fixed operating
costs.

The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. These services include training, contingency planning, well plan
reviews, services associated with the Company's Safeguard programs and service
fees in conjunction with the WELLSURE(R) risk management program. All of these
services are designed to significantly reduce the risk of a well blowout or
other critical response event.

The Response segment consists of personnel and equipment services provided
during an emergency, such as a critical well event or a hazardous material
response. The services provided are designed to minimize response time and
damage while maximizing safety. Response revenues typically provide high gross
profit margins.

Information concerning operations in different business segments for the
years ended December 31, 2000, 2001 and 2002 is presented below. Certain
classifications have been made to the prior periods to conform to the current
presentation.

YEAR ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
------------ ----------- ------------

REVENUES
Prevention. . . . . . . . . . . . . . $ 1,564,000 $ 5,189,000 $ 7,666,000
Response. . . . . . . . . . . . . . . 9,249,000 11,749,000 6,436,000
------------ ----------- ------------
$10,813,000 $16,938,000 $14,102,000
------------ ----------- ------------
COST OF SALES
Prevention. . . . . . . . . . . . . . $ 709,000 $ 1,232,000 $ 2,746,000
Response. . . . . . . . . . . . . . . 3,297,000 1,853,000 3,063,000
------------ ----------- ------------
$ 4,006,000 $ 3,085,000 $ 5,809,000
------------ ----------- ------------
OPERATING EXPENSES (1)
Prevention. . . . . . . . . . . . . . $ 1,029,000 $ 1,863,000 $ 3,547,000
Response. . . . . . . . . . . . . . . 3,926,000 3,600,000 2,346,000
------------ ----------- ------------
$ 4,955,000 $ 5,463,000 $ 5,893,000
------------ ----------- ------------
SELLING, GENERAL AND ADMINISTRATIVE (2)
Prevention. . . . . . . . . . . . . . $ 400,000 $ 839,000 $ 1,488,000
Response. . . . . . . . . . . . . . . 2,605,000 1,900,000 1,249,000
------------ ----------- ------------
$ 3,005,000 $ 2,739,000 $ 2,737,000
------------ ----------- ------------
DEPRECIATION AND AMORTIZATION (3)
Prevention. . . . . . . . . . . . . . $ 176,000 $ 342,000 $ 617,000
Response. . . . . . . . . . . . . . . 1,037,000 902,000 585,000
------------ ----------- ------------
$ 1,213,000 $ 1,244,000 $ 1,202,000
------------ ----------- ------------
OPERATING INCOME (LOSS) (4)
Prevention. . . . . . . . . . . . . . $ (858,000) $ 913,000 $ (732,000)
Response. . . . . . . . . . . . . . . (2,505,000) 3,494,000 (807,000)
------------ ----------- ------------
$(3,363,000) $ 4,407,000 $(1,539,000)
------------ ----------- ------------

(1) Operating expenses have been allocated pro rata between segments based
upon relative revenues.
(2) Selling, general and administrative and corporate expenses have been
allocated pro rata among segments based upon relative revenues.
(3) Corporate depreciation and amortization expenses have been allocated
pro rata among segments based upon relative revenues.
(4) Includes write down of loan guarantee charges of $997,000 in 2000.

14

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 WITH THE YEAR ENDED DECEMBER 31,
2001

Revenues

Prevention revenues were $7,666,000 for the year ended December 31, 2002,
compared to $5,189,000 for the year ended December 31, 2001, an increase of
$2,477,000 (47.7%) in the current year. The increase was primarily the result
of increased service fees associated with the WELLSURE(R) program and expanded
services and equipment sales provided under the Company's Safeguard program,
slightly offset by a decrease in domestic prevention activities.

Response revenues were $6,436,000 for the year ended December 31, 2002,
compared to $11,749,000 for the year ended December 31, 2001, a decrease of
$5,313,000 (45.2%) in the current year. The decrease was primarily the result of
a decrease of emergency response services as drilling activity declined in
response to weakening general economic and industry conditions. Moreover, the
2001 period contained five significant WELLSURE(R) events while there were only
two critical well events during the 2002 period.

Cost of Sales

Prevention cost of sales were $2,746,000 for the year ended December 31,
2002, compared to $1,232,000 for the year ended December 31, 2001, an increase
of $1,514,000 (122.9%) in the current year. The increase was primarily to the
result of increased manufacturing costs associated with an international
equipment sale under the Safeguard program.

Response cost of sales were $3,063,000 for the year ended December 31,
2002, compared to $1,853,000 for the year ended December 31, 2001, an increase
of $1,210,000 (65.3.0%) in the current year. The increase was primarily a
result of higher than usual third party costs incurred by the Company's in its
lead contracting roll on two response projects during 2002.

Operating Expenses

Consolidated operating expenses were $5,893,000 for the year ended December
31, 2002, compared to $5,463,000 for the year ended December 31, 2001, an
increase of $430,000 (7.8%) in the current year. This increase was primarily a
result of expanding engineering staffing levels, increases in support staff for
the WELLSURE(R) program and business development costs associated with the
Safeguard program. Also included were increases in operating overhead associated
with higher insurance premiums, professional fees and other personnel expenses.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses were $2,737,000
for the year ended December 31, 2002, compared to $2,739,000 for the year ended
December 31, 2001, a decrease of $2,000 from the prior year. The Company
subleasing space in its corporate headquarters and reductions in corporate
personnel initiated during the second quarter of 2002. The two years are very
similar since a proportionate amount of 2001 expenses have been allocated to
discontinued operations. As previously footnoted on the segmented financial
table, corporate selling, general and administrative expenses have been
allocated pro rata among the segments on the basis of relative revenue.

Depreciation and Amortization

Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between 2002 and 2001.
As previously footnoted on the segmented financial table, depreciation and
amortization expenses to related corporate assets have been allocated pro rata
among the segments on the basis of relative revenue as the basis for allocation.

Interest Expense and Other, Including Finance Costs

The increase in interest and other expenses of $58,000 for the year ended
December 31, 2002, as compared to the prior year period is primarily a result of
non-cash benefits of $1,073,000 related to favorable legal settlements that
allowed the Company to reduce its expense provisions related to the ITS
settlement as discussed above and was mostly offset by the loss on sale of
assets and the charge to income for the Calicutt settlement. The year ended
December 31, 2001 included $350,000 for potential claims in the ITS bankruptcy
proceeding, which has been settled for $286,000 during the current period, and
$143,000 in financing costs related to the KBK financing that commenced during
the period.

15

Income Tax Expense

Income taxes for the year ended December 31, 2002 and 2001 are a result of
taxable income in the Company's foreign operations of $543,000 and $335,000 for
the years ended December 31, 2002 and December 31, 2001, respectively.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 WITH THE YEAR ENDED DECEMBER 31,
2000

Revenues

Prevention revenues were $5,189,000 for the year ended December 31, 2001,
compared to $1,564,000 for the year ended December 31, 2000, representing an
increase of $3,625,000 (231.8%) in the current year. The increase was primarily
the result of expansion in strategic engineering services, including training,
contingency planning and well plan reviews for new and existing domestic and
foreign customers, as well as growth in the Safeguard and "WELLSURE(R)"
programs.

Response revenues were $11,749,000 for the year ended December 31, 2001,
compared to $9,249,000 for the year ended December 31, 2000, an increase of
$2,500,000 (27%) in the current year. The principal component of the increase
the 2001 period contained five significant WELLSURE(R) events while there were
only two WELLSURE(R) events during the 2002 period.

Cost of Sales

Prevention cost of sales were $1,232,000 for the year ended December 31,
2001, compared to $709,000 for the year ended December 31, 2000, an increase of
$523,000 (73.8%) in the current year. The increase was due to the reallocation
of resources from the Response segment to the Prevention segment due to the
large increase in activity in the Prevention segment during this period.

Response cost of sales were $1,853,000 for the year ended December 31,
2001, compared to $3,297,000 for the year ended December 31, 2000, a decrease of
$1,444,000 (43.8%) in the current year. The increase was a result of equipment
sold during a critical response in Algeria during the 2000 period.

Operating Expenses

Consolidated operating expenses were $5,463,000 for the year ended December
31, 2001, compared to $4,955,000 for the year ended December 31, 2000, an
increase of $508,000 (10.3%) in the current year. These costs are of a fixed
nature and there were no material increase or decrease in personnel or overhead
between these two years.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses were $2,739,000
for the year ended December 31, 2001, compared to $3,005,000 for the year ended
December 31, 2000, a decrease of $266,000 (8.9%) from the prior year. The year
ended December 31, 2000 selling, general and administrative costs were higher
primarily as a result of financing and consulting costs of $797,000, partially
offset in the current year by additions to the administrative, accounting
staffing and systems, and additional support of business development and sales
initiatives. As previously footnoted on the segmented financial table,
corporate selling, general and administrative expenses have been allocated pro
rata among the segments on the basis of relative revenue.

Depreciation and Amortization

Consolidated depreciation and amortization expenses increased by $31,000
(2.6%) primarily as a result of additions to the depreciable asset base between
2001 and 2000. As previously footnoted on the segmented financial table,
depreciation and amortization expenses to related corporate assets have been
allocated pro rata among the segments on the basis of relative revenue as the
basis for allocation.

Interest Expense and Other, Including Finance Costs

The decrease in interest expense and other of $5,007,000 for the year ended
December 31, 2001, as compared to the prior year period is a result of the
restructuring of the majority of the Company's senior and subordinated debt into
equity in December 2000. The year ended December 31, 2000 also included a
$1,679,000 non-cash financing charge for an inducement to convert certain

16

preferred stock into common stock; $1,060,000 of expenses related to warrants
issued to the participation interest in our senior credit facility and
associated advisory services; and charges of $598,000 related to the Comerica
debt. Other expense for the prior period also included approximately $1,609,000
in legal settlements and other financing related costs.

Income Tax Expense

Income taxes for the year ended December 31, 2001 and 2000 are a result of
taxable income in the Company's foreign operations for the year ended December
31, 2001.

LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS

"LIQUIDITY"

At December 31, 2002, the Company had a working capital deficit of
$16,994,000, a total stockholders' deficit of $13,988,000, and had incurred
losses from operations for the year then ended of $1,539,000. In addition, the
Company is currently in default under its loan agreements with The Prudential
Insurance Company of America and Specialty Finance Fund 1, LLC, and, as a
consequence, these lenders and the participants in the Specialty Finance credit
facility may accelerate the maturity of their obligations at any time. As of the
date of this annual report on Form 10-K, the Company has not received notice
from any lender of acceleration nor any demand for repayment. All of these
obligations have been classified as current liabilities at December 31, 2002 in
the accompanying consolidated balance sheet. See Note H for further discussion
of the Company's debt. The Company also has significant past due vendor
payables at December 31, 2002.

Subsequent to December 31, 2002, the Company's short term liquidity
improved as a consequence of certain asset sales, which resulted in net proceed
(after replacement costs) to the Company of approximately $2 million. A portion
of these proceeds were used to pay amounts owing of $700,000 plus interest under
the Company's credit facility with Checkpoint Business, Inc. (See Note H for
further discussion). The Company also applied a portion of the proceeds to pay
$400,000 to settle the Calicutt lawsuit (See Note K for further discussion). and
to reduce payables owing to certain of the Company's significant vendors.

The Company generates its revenues from prevention services and emergency
response activities. Response activities are generally associated with a
specific emergency or "event" whereas prevention activities are generally
"non-event" related services. Event related services typically produce higher
operating margins for the Company, but the frequency of occurrence varies widely
and is inherently unpredictable. Non-event services typically have lower
operating margins, but the volume and availability of work is more predictable.
Historically the Company has relied on event driven revenues as the primary
focus of its operating activity, but more recently the Company's strategy has
been to achieve greater balance between event and non-event service activities.
While the Company has successfully improved this balance, event related services
are still the major source of revenues and operating income for the Company.

The majority of the Company's event related revenues are derived from well
control events (i.e., blowouts) in the oil and gas industry. Demand for the
Company's well control services is impacted by the number and size of drilling
and work over projects, which fluctuate as changes in oil and gas prices affect
exploration and production activities, forecasts and budgets. The Company's
reliance on event driven revenues in general, and well control events in
particular, impairs the Company's ability to generate predictable operating cash
flows.

Subsequent to December 31, 2002, there has been a significant increase in
the demand for the Company's emergency response services, particularly
internationally and specifically in the Middle East in connection with the war
in Iraq. The Company currently has several employees either on standby or
actively working to control wells in Iraq, and in some cases it is realizing a
premium to its typical day rates for similar activities. While these
developments have positively impacted the Company's near-term liquidity there
can be no assurance that the cash flows generated from such activities will be
sufficient to meet the Company's near-term liquidity needs. In addition, while
the Company has recently been able to pay its critical vendors for current
services and materials, there remains significant overdue payables which the
Company has been unable to satisfy.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the sufficiency and timing of its future cash flows,
the current defaults of certain debt agreements with its lenders, and the lack
of firm commitments for additional capital raises substantial doubt about the
ability of the Company to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.

17

DISCLOSURE OF ON AND OFF BALANCE SHEET DEBTS AND COMMITMENTS:

FUTURE COMMITMENTS TO BE PAID IN THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
DESCRIPTION 2003 2004 2005 2006 2007 THEREAFTER
- ------------------------ ----------- ------- ------- ------- ------- -----------

Long term debt and
notes payable including
short term debt (1). . . $15,000,000 - - - - -
- ------------------------ ----------- ------- ------- ------- ------- -----------
Future minimum lease
payments . . . . . . . . $ 130,000 $46,000 $16,000 $12,000 $12,000 $ 6,000
- ------------------------ ----------- ------- ------- ------- ------- -----------

Total commitments. . . . $15,130,000 $46,000 $16,000 $12,000 $12,000 $ 6,000
- ------------------------ =========== ======= ======= ======= ======= ===========

(1) Accrued interest totaling $4,320,000 is included in the Company's 12%
Senior Subordinated Note at December 31, 2002 due to the accounting for a
troubled debt restructuring during 2000, but has been excluded from the
above presentation. Accrued interest calculated through December 31, 2002
will be deferred for payment until December 30, 2005. All of the debt
obligations have been classified as current liabilities at December 31,
2002 in the accompanying consolidated balance sheet. See Note H for further
discussion of the Company's debt. Payments on accrued interest after
December 31, 2002 will begin on March 31, 2003 and will continue quarterly
until December 30, 2005.

"Credit Facilities/Capital Resources"

On June 18, 2001, the Company entered into an agreement with KBK Financial,
Inc. ("KBK") pursuant to which the Company pledged certain of its accounts
receivable to KBK for a cash advance against the pledged receivables. The
agreement allows the Company to, from time to time, pledge additional accounts
receivable to KBK in an aggregate amount not to exceed $5,000,000. The Company
paid certain fees to KBK for the facility and will pay additional fees of one
percent per annum on the unused portion of the facility and a termination fee of
up to two percent of the maximum amount of the facility. The facility provides
the Company an initial advance of eighty-five percent of the gross amount of
each receivable pledged to KBK. Upon collection of the receivable, the Company
receives an additional residual payment net of fixed and variable financing
charges. The Company's obligations for representations and warranties regarding
the accounts receivable pledged to KBK are secured by a first lien on certain
other accounts receivable of the Company. The facility also provides for
financial reporting and other covenants similar to those in favor of the senior
lender of the Company. The Company had $2,383,000 and $109,000 of its accounts
receivable pledged to KBK that remained uncollected as of December 31, 2001 and
December 31, 2002, respectively and, accordingly, this amount has been
classified as a restricted asset on the balance sheet as of both dates.
Included in the December 31, 2001 and December 31, 2002 is $1,385,000 and
$38,000, respectively of restricted assets related to discontinued operations.
In addition, as of December 31, 2001 and December 31, 2002 the Company's cash
balances include $58,000 and $9,000, respectively representing accounts
receivable that had been collected by KBK and were in-transit to the Company but
which were potentially subject to being held as collateral by KBK pending
collection of uncollected pledged accounts receivable.

On April 9, 2002, the Company entered into a loan participation agreement
with certain party under which it borrowed an additional $750,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 11% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 100,000 shares of common
stock to the participation lender at closing. The participation had an initial
maturity of 90 days, which was extended for an additional 90 days at the
Company's option. The Company issued an additional 100,000 shares of common
stock to the participation lender to extend the maturity date. On October 9,
2002, the loan extension period matured. As of March 28, 2003, none of the loan
participation has been repaid nor has the Company received formal demand for
payment from the loan participant. However, in the loan documentation the
Company has waived the notices which might otherwise be required by law and, as
a consequence; the loan participants have the current ability to post the
collateral securing their notes for foreclosure.

On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 33,334 shares of
common stock to the participating lenders at closing and issued an additional
33,334 shares of common stock to extend the maturity of those notes for an
additional 90 days. On October 25, 2002, the loan extension period matured. As
of March 28, 2003, none of the loan participations have been repaid nor has the
Company received formal demand for payment from the loan participants. However,
in the loan documentation the Company has waived the notices which might
otherwise be required by law and, as a consequence; the loan participants have
the current ability to post the collateral securing their notes for foreclosure.

18

On July 5, 2002, the Company entered into a loan participation agreement
with a certain parties under which it borrowed an additional $100,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 25% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 130,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On September 28, 2002, the loan matured. As of March 28, 2003,
none of the loan participation has been repaid nor has the Company received
formal demand for payment from the loan participant. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence; the loan participants have the current
ability to post the collateral securing their notes for foreclosure.

On July 8, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 150,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On October 1, 2002, the loan matured. As of March 28, 2003, none
of the loan participation has been repaid nor has the Company received formal
demand for payment from the loan participant. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence; the loan participants have the current
ability to post the collateral securing their notes for foreclosure.

On December 4, 2002, the Company entered into a loan agreement with
Checkpoint Business, Inc. ("Checkpoint") providing for short term working
capital up to $1,000,000. The effective interest rate of under the loan
agreement is 15% per annum. Checkpoint collateral includes substantially all of
the assets of the Company, including the stock of the Company's Venezuelan
subsidiary.

As of December 31, 2002 and March 28, 2003, the Company had borrowed
$500,000 and an additional $200,000, respectively, under this facility. In
January 2003, the Company received a notice of default from Checkpoint, wherein
it alleged several defaults under the loan agreement. As a condition of
receiving additional advances, in February 2003, the Company entered into an
agreement with Checkpoint in which it agreed to grant Checkpoint an option to
purchase its Venezuelan subsidiary for fair market value, as determined by
appraisal, under certain circumstances. In the event Checkpoint wishes to
exercise the option within certain time limits and is not permitted to do so
because the option agreement is set aside by a bankruptcy court or the Company
is unable to obtain the necessary consents to a sale of its subsidiary, then the
Company would be obligated to pay $250,000 in liquidated damages.

In January 2003, Checkpoint presented the Company with a restructuring
proposal that would entail a voluntary Chapter 11 bankruptcy filing and the
cancellation of the Company's common equity as part of the bankruptcy plan. The
Company considered this proposal and other alternatives that would allow it to
restructure its obligations and improve its liquidity and engaged legal and
financial consultants to assist it in its asses(SM)ent of its alternatives. On
March 28, 2003, the Company decided against the restructuring proposal from
Checkpoint and paid in full the principal balance of $700,000 and interest
outstanding under its loan agreement with Checkpoint. The Company and
Checkpoint are currently discussing terminating the option agreement. The
Company continues to consider its restructuring alternatives, which, under the
proper circumstances may include a voluntary filing for protection under Chapter
11 of the Bankruptcy Code.

CRITICAL ACCOUNTING POLICIES

In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies," the Company has identified the
accounting principles which it believes are most critical to the reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or asses(SM)ent. The Company identified its
most critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.

Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. On a (SM)all number of turnkey contracts, revenue may be recognized
on the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract completion.

Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.

19

The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.

Effective January 1, 2002 the Company changed its policy on reporting
revenues on WELLSURE(R) events from gross to net, in accordance with EITF 99-19
"Reporting Revenue Gross as a Principal Versus Net as an Agent". All periods
presented have been restated to conform with the current year's presentation.

The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.
Effective January 1, 2002 the Company changed its policy on reporting revenues
on WELLSURE(R) events from gross to net. In accordance with EITF 99-19
"Reporting Revenue Gross as a Principal Versus Net as an Agent" all periods
presented have been restated to conform with the current year's presentation.

Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company
assesses its credit risk and provides an allowance for doubtful accounts for any
accounts which it deems doubtful of collection.

Income Taxes - The Company accounts for income taxes pursuant to the SFAS
No. 109 "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.

As of December 31, 2000, 2001 and 2002, the Company has net domestic
operating loss carry forwards of approximately $53,183,000, $46,065,000 and
$47,155,000, respectively, expiring in various amounts beginning in 2011. The
net operating loss carry forwards, along with the other timing differences,
generate a net deferred tax asset. The Company has recorded valuation allowances
in each year for these net deferred tax assets since management believes it is
more likely than not that the assets will not be realized.

RECENT ACCOUNTING STANDARDS

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143") which covers all legally enforceable obligations
associated with the retirement of tangible long-lived assets and provides the
accounting and reporting requirements for such obligations. SFAS No. 143 is
effective for the Company beginning January 1, 2003. Management does not believe
the adoption of SFAS No. 143 will have a material impact on Company's
consolidated financial position or results of operations.

In December 2002, the FASB issued Accounting for Stock-Based Compensation
("SFAS No. 148") amending SFAS No. 123, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The three methods provided in SFAS No. 148 include (1) the
prospective method which is the method currently provided for in SFAS No. 123,
(2) the retroactive restatement method which would allow companies to restate
all periods presented and (3) the modified prospective method which would allow
companies to present the recognition provisions of all outstanding stock-based
employee compensation instruments as of the beginning of the fiscal year of
adoption. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No.
123 to require disclosure in the summary of significant accounting policies of
the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock-based awards using the
fair value method. However, the disclosure provisions are required for all
companies with stock-based employee compensation, regardless of whether they
utilize the fair method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company does not intend on adopting the fair value method of
accounting for stock-based compensation of SFAS 123, and accordingly SFAS 148 is
not expected to have a material impact on the Company's reported results of
operations or financial position in 2003.

20

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
to identify any variable interest entities that must be consolidated. and thus
the Company does not expect the requirements of FIN No. 46 to have a material
impact on its financial condition or results of operations.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides save harbor
provisions for forward-looking information. Forward-looking information is
based on projections, assumptions and estimates, not historical information.
Some statements in this Form 10 - K are forward-looking and use words like
"may," "may not," "believes," "do not believe," "expects," "do not expect," "do
not anticipate," and other similar expressions. We may also provide oral or
written forward-looking information on other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can be
guaranteed. Actual events and results of operations may vary materially.

While it is not possible to identify all factors, we continue to face many
risks and uncertainties that could cause actual results to differ from our
forward-looking statements including those contained in the 10-K, our press
releases and Forms 10-Q, 8-K and 10-K filed with to the United States Securities
and Exchange Commission. We do not assume any responsibility t publicly
updating any of our forward-looking statements regardless of whether factors
change as a result of new information, future events or for any other reason.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk. The Company has performed sensitivity analyses to assess the impact of
this risk based on a hypothetical 10% increase in market interest rates. Market
rate volatility is dependent on many factors that are impossible to forecast,
and actual interest rate increases could be more severe than the hypothetical
10% increase.

The Company estimates that if prevailing market interest rates had been 10%
higher throughout 2000, 2001 and 2002, and all other factors affecting the
Company's debt remained the same, pretax earnings would have been lower by
approximately $122,000, $29,000 and $68,000 in 2000, 2001 and 2002,
respectively. With respect to the fair value of the Company's fixed-interest
rate debt, if prevailing market interest rates had been 10% higher at year-end
2000, 2001 and 2002, and all other factors affecting the Company's debt remained
the same, the fair value of the Company's fixed-rate debt, as determined on a
present-value basis, would have been lower by approximately $247,000, $212,000
and $34,000 at December 31, 2000, 2001 and 2002, respectively. Given the
composition of the Company's debt structure, the Company does not, for the most
part, actively manage its interest rate risk.

ITEM 8. FINANCIAL STATEMENTS.

Attached following the Signature Pages and Exhibits.

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

We have had no changes in our independent accountants since our Board of
Directors' August 12, 2002 appointment, based upon the recommendation of our
Audit committee, of Mann Frankfort Stein & Lipp CPAs, LLP as the Company's
independent auditors for the fiscal year ended December 31, 2002, replacing
Arthur Andersen LLP as our independent auditors. That change was reported by
the Company in a Current Report on Form 8-K dated and filed with the SEC on
August 13, 2002. There were no disagreements with our independent accountants.

21

A copy of the previously issued report dated March 14, 2002 of Arthur
Andersen LLP on the consolidated financial statements of the Company as of
December 31, 2000 and December 31, 2001 and for each of the years in the three
year period ended December 31, 2001 is included in this Form 10-K Report for the
year ended December 31, 2002, but such previously issued report has not been
reissued.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The section entitled "Election of Director's" in the Registrant's proxy
statement for the 2003 annual meeting of shareholders sets for the certain
information with respect to the directors of the Registrant and is incorporated
herein by reference.

The section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's proxy statement for the 2003 annual meeting of
stock holder sets forth certain information with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended, and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The section entitled "Executive Compensation" in the Registrant's proxy
statement for the 2003 annual meeting of stock holders sets forth certain
information with respect to the compensation of management of the Registrant,
and except for the report of the Compensation, Benefits and Stock Option
Committee of the Board of Directors and the information therein under "Executive
Compensation - Performance Graph" is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The section entitled "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Directors and Executive Officers" in the Registrant's
proxy statement for the 2003 annual meeting of stock holders sets forth certain
information with respect to the ownership of the Registrant's common stock and
are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The section entitled "Certain Transactions" in the Registrant's proxy
statement for the 2003 annual meeting of stock holders sets forth certain
information with respect to the certain relationships and related transactions,
and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this Report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Principal Accounting Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Principal Accounting Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

PART IV

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

(a) 1. Consolidated financial statements for the year ended December 31,
2002, included after signature page.

2. Financial statement schedules included in Consolidated financial
statements.

3. Exhibit Index

(a) Exhibits

22

Exhibit No. Document
- ------------ ------------------------------------------------------------------------------------------

3.01 - Amended and Restated Certificate of Incorporation(1)
3.02 - Amendment to Certificate of Incorporation(2)
3.02(a) - Amendment to Certificate of Incorporation(3)
3.03 - Amended Bylaws(4)
4.01 - Specimen Certificate for the Registrant's Common Stock(5)
4.02 - Certificate of Designation of 10% Junior Redeemable Convertible Preferred Stock(6)
4.03 - Certificate of Designation of Series A Cumulative Senior Preferred Stock(7)
4.04 - Certificate of Designation of Series B Convertible Preferred Stock(8)
4.05 - Certificate of Designation of Series C Cumulative Convertible Junior Preferred Stock(9)
4.06 - Certificate of Designation of Series D Cumulative Junior Preferred Stock(10)
4.07 - Certificate of Designation of Series E Cumulative Senior Preferred Stock(11)
4.08 - Certificate of Designation of Series F Convertible Senior Preferred Stock(12)
4.09 - Certificate of Designation of Series G Cumulative Convertible Preferred Stock(13)
4.10 - Certificate of Designation of Series H Cumulative Convertible Preferred Stock(14)
10.01 - Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton Company(15)
10.03 - Executive Employment Agreement of Brian Krause(16)
10.04 - 1997 Incentive Stock Plan(17)
10.05 - Outside Directors' Option Plan(18)
10.06 - Executive Compensation Plan(19)
10.07 - Halliburton Center Sublease(20)
10.08 - Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc. and
The Prudential Insurance Company of America(21)
10.09 - Participation Rights Agreement dated July 23, 1998, by
and among Boots & Coots International Well Control, Inc.,
The Prudential Insurance Company of America and certain
stockholders of Boots & Coots International Well Control, Inc.(22)
10.10 - Common Stock Purchase Warrant dated July 23, 1998, issued to The Prudential Insurance
Company of America (23)
10.11 - Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica Bank - Texas(24)
10.12 - Security Agreement dated October 28, 1998, between
Boots & Coots International Well Control, Inc. and Comerica Bank - Texas(25)
10.13 - Executive Employment Agreement of Jerry Winchester(26)
10.15 - Office Lease for 777 Post Oak(27)
10.16 - Open
10.17 - Open
10.18 - Third Amendment to Loan Agreement dated April 21, 2000 (28)
10.19 - Fourth Amendment to Loan Agreement dated May 31, 2000(29)
10.20 - Fifth Amendment to Loan Agreement dated May 31, 2000(30)
10.21 - Sixth Amendment to Loan Agreement dated June 15, 2000(31)
10.22 - Seventh Amendment to Loan Agreement dated December 29,2000(32)
10.23 - Subordinated Note Restructuring Agreement with The Prudential Insurance Company of
America dated December 28, 2000 (33)
10.25 - Preferred Stock and Warrant Purchase Agreement, dated April 15, 1999, with Halliburton
Energy Services, Inc. (34)
10.27 - Form of Warrant issued to Specialty Finance Fund I, LLC and to Turner, Voelker, Moore (35)
10.28 - Amended and Restated Purchase and Sale Agreement with National Oil Well, L.P.(36)
10.29 - KBK Financial, Inc. Account Transfer and Purchase Agreement(37)
10.30 - 2000 Long Term Incentive Plan(38)
10.31 - Eighth Amendment to Loan Agreement dated April 12, 2002(39)
10.32 - Ninth Amendment to Loan Agreement dated May 1, 2002(40)
10.33 - 1st Amendment to Subordinated Note Restructuring Agreement with The Prudential Insurance
Company of America dated March 29, 2002(41)
10.34 - 2nd Amendment to Subordinated Note Restructuring Agreement with The Prudential Insurance
Company of America dated June 29, 2002(42)
21.01 - List of subsidiaries(43)

23

Exhibit No. Document
- ------------ ------------------------------------------------------------------------------------------
*99.01 - Certification by Chief Executive Officer
*99.02 - Certification by Principal Accounting Officer

*Filed herewith

(1) Incorporated herein by reference to exhibit 3.2 of Form 8-K filed August
13, 1997.

(2) Incorporated herein by reference to exhibit 3.3 of Form 8-K filed August
13, 1997.

(3) Incorporated herein by reference to exhibit 3.02(a) of Form 10-Q filed
November 14, 2001.

(4) Incorporated herein by reference to exhibit 3.4 of Form 8-K filed August
13, 1997.

(5) Incorporated herein by reference to exhibit 4.1 of Form 8-K filed August
13, 1997.

(6) Incorporated herein by reference to exhibit 4.08 of Form 10-QSB filed May
19, 1998.

(7) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed July
17, 2000.

(8) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed July
17, 2000.

(9) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed July
17, 2000.

(10) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed July
17, 2000.

(11) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed April
2, 2001.

(12) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed April
2, 2001.

(13) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed April
2, 2001.

(14) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed April
2, 2001.

(15) Incorporated herein by reference to exhibit 10.1 of Form 8-K filed August
13, 1997.

(16) Incorporated herein by reference to exhibit 10.4 of Form 8-K filed August
13, 1997.

(17) Incorporated herein by reference to exhibit 10.14 of Form 10-KSB filed
March 31, 1998.

(18) Incorporated herein by reference to exhibit 10.05 of Form 10-Q filed May
14, 2002.

(19) Incorporated herein by reference to exhibit 10.06 of Form 10-Q filed May
14, 2002.

(21) Incorporated herein by reference to exhibit 10.22 of Form 8-K filed August
7, 1998.

(22) Incorporated herein by reference to exhibit 10.23 of Form 8-K filed August
7, 1998.

(23) Incorporated herein by reference to exhibit 10.24 of Form 8-K filed August
7, 1998.

(24) Incorporated herein by reference to exhibit 10.25 of Form 10-Q filed
November 17, 1998.

(25) Incorporated herein by reference to exhibit 10.26 of Form 10-Q filed
November 17, 1998.

24

(26) Incorporated herein by reference to exhibit 10.29 of Form 10-K filed April
15, 1999.

(27) Incorporated herein by reference to exhibit 10.31 of Form 10-K filed April
15, 1999.

(28) Incorporated herein by reference to exhibit 10.38 of Form 10-K filed July
17, 2000.

(29) Incorporated herein by reference to exhibit 10.39 of Form 10-K filed July
17, 2000.

(30) Incorporated herein by reference to exhibit 10.40 of Form 10-K filed July
17, 2000.

(31) Incorporated herein by reference to exhibit 10.41 of Form 10-K filed July
17, 2000.

(32) Incorporated herein by reference to exhibit 99.1 of Form 8-K filed January
12, 2001.

(33) Incorporated herein by reference to exhibit 10.23 of Form 10-K filed April
2, 2001.

(34) Incorporated herein by reference to exhibit 10.42 of Form 10-K filed July
17, 2000.

(35) Incorporated herein by reference to exhibit 10.47 of Form 10-Q filed
November 14, 2000.

(36) Incorporated herein by reference to exhibit 2 of Form 8-K filed October 11,
2000.

(37) Incorporated herein by reference to exhibit 10.29 of Form 10-Q filed August
13, 2001.

(38) Incorporated herein by reference to exhibit 10.31 of Form 10-Q filed
November 14, 2002.

(39) Incorporated herein by reference to exhibit 10.32 of Form 10-Q filed
November 14, 2002.

(40) Incorporated herein by reference to exhibit 10.33 of Form 10-Q filed
November 14, 2002.

(41) Incorporated herein by reference to exhibit 10.34 of Form 10-Q filed
November 14, 2002.

(42) Incorporated herein by reference to exhibit 21.01 of Form 10-Q filed May
14, 2002.

(b) Reports on Form 8-K

25

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
BOOTS & COOTS INTERNATIONAL WELL
CONTROL, INC.

By: /s/ Jerry Winchester
-------------------------------
Jerry Winchester,
Chief Executive Officer

By: /s/ Kevin Johnson
-------------------------------
Kevin Johnson
Principal Accounting Officer

Date: March 31, 2003

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry H. Ramming his true and lawful
attorney-in-fact and agent with full power of substitution to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intent and purposes as he could do in person, hereby ratifying and confirming
that said attorney-in-fact or his substitute, or any of them, shall do or cause
to be done by virtue here of. In accordance with the Exchange Act, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the date indicated.

SIGNATURE TITLE DATE
- ------------------------------- ------------------------------- --------------

By: /s/ K. KIRK KRIST Chairman of the Board of March 31, 2003
- ---------------------- Directors
K. Kirk Krist

By: /s/ JERRY L. WINCHESTER Chief Executive Officer and March 31, 2003
- ----------------------------- Director
Jerry L. Winchester

By: /s/ BRIAN KRAUSE President and Director March 31, 2003
- -----------------------
Brian Krause

By: /s/ THOMAS L. EASLEY Director March 31, 2003
- ----------------------------
Thomas L. Easley

By: /s/ W. RICHARD ANDERSON Director March 31, 2003
- -------------------------------
W. Richard Anderson

By: /s/ TRACY S. TURNER Director March 31, 2003
- ---------------------------
Tracy S. Turner

26

CERTIFICATION BY JERRY WINCHESTER PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14

I, Jerry Winchester, certify that:

1. I have reviewed this annual report on Form 10-K of Boots & Coots
International Well Control, Inc.;

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

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

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

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

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

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

5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

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

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

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

Date: March 31, 2003

/s/ Jerry Winchester
Jerry Winchester
Chief Executive Officer

27

CERTIFICATION BY KEVIN JOHNSON PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14

I, Kevin Johnson, certify that:

1. I have reviewed this annual report on Form 10-K of Boots & Coots
International Well Control, Inc.;

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

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

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

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

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

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

5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

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

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

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

Date: March 31, 2003

/s/ Kevin Johnson
Kevin Johnson
Principal Accounting Officer

28

Independent Auditors' Report

To the Board of Directors
Boots & Coots International Well Control, Inc.

We have audited the accompanying consolidated balance sheet of Boots & Coots
International Well Control, Inc. and subsidiaries as of December 31, 2002, and
the related consolidated statements of operations, cash flows, and stockholders'
equity (deficit) for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of Boots &
Coots International Well Control, Inc. as of December 31, 2001, and for each of
the two years in the period ended December 31, 2001, before the restatements and
revisions discussed below, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion, modified for a
going concern uncertainty, on those financial statements in their report dated
March 14, 2002.

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

In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Boots & Coots International Well Control, Inc. as of December 31, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to
the consolidated financial statements, the Company continues to have a net
capital deficiency, has a current significant net working capital deficit, is
currently in default on the majority of its debt agreements, and current
uncertainties surrounding the sufficiency and timing of its future cash flows
raise substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regards to these matters are also described in
Note A. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

As discussed above, the consolidated financial statements of Boots & Coots
International Well Control, Inc. as of December 31, 2001, and for each of the
two years in the period ended December 31, 2001, were audited by other auditors
who have ceased operations. These consolidated financial statements have been
restated and revised as follows:

- - As described in Note D, the Company discontinued its Special Services and
Abasco operations effective June 30, 2002. The 2001 and 2000 consolidated
financial statements, including disclosures, have been restated to reclassify
the related accounts from continuing operations to discontinued operations.

- - As disclosed in Note C, effective January 1, 2002, the Company changed
its accounting policy for recognizing response revenue on its WELLSURE(R)
program from reporting revenues at gross to reporting revenues at net. The 2001
and 2000 consolidated financial statements have been restated to give effect for
this change in accounting policy.

F-1

We audited the adjustments and disclosures that were included to restate and
revise the 2001 and 2000 consolidated financial statements. In our opinion, such
adjustments and disclosures are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of the Company other than with
respect to such adjustments and disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 and 2000 consolidated
financial statements taken as a whole.

Mann Frankfort Stein & Lipp CPAs, LLP

Houston, Texas
March 19, 2003, except for the last paragraph of note H, and note N, as
to which the date is March 28, 2003

F-2

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

This report is a copy of a previously issued report, the predecessor
auditor has not reissued this report, the previously issued report refers
to financial statements not physically included in this document, and the
prior-period financial statements have been revised or restated.

To the Board of Directors of
Boots & Coots International Well Control, Inc.

We have audited the accompanying consolidated balance sheets of Boots &
Coots International Well Control, Inc. (a Delaware corporation) and subsidiaries
as of December 31, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Boots & Coots International Well Control, Inc. and subsidiaries as of December
31, 2000 and 2001, and the results of their operations and their cash flows for
each of the years in the three year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note A to the consolidated financial statements, the Company experienced
recurring losses from operations during 1999 and 2000. During 2001 the Company
realized income from operations. However, the Company continues to have a net
capital deficiency, and current uncertainties surrounding the sufficiency and
timing of its future cash flows raise substantial doubt about the ability of the
Company to continue as a going concern. Management's plans in regards to these
matters are also described in Note A. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

ARTHUR ANDERSEN LLP

Houston, Texas
March 14, 2002

F-3

BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

DECEMBER 31, DECEMBER 31,
2001 2002
-------------- --------------

CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,000 $ 261,000
Receivables - net of allowance for doubtful accounts of $365,000 at
December 31, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . . 3,557,000 2,868,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,353,000 69,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,000 -
Assets of discontinued operations. . . . . . . . . . . . . . . . . . . . . 6,756,000 212,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . 843,000 620,000
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 12,950,000 4,030,000
-------------- --------------
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . 4,613,000 3,000,000
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,000 6,000
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,754,000 $ 7,036,000
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Short term debt and current maturities of long-term debt and notes payable $ 1,025,000 $ 15,000,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,155,000 2,939,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,481,000 1,897,000
Liabilities of discontinued operations.. . . . . . . . . . . . . . . . . . 3,004,000 1,188,000
-------------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 9,665,000 21,024,000
-------------- --------------

LONG-TERM DEBT AND NOTES PAYABLE, net of current maturities. . . . . . . . 12,520,000 -
-------------- --------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,185,000 21,024,000
-------------- --------------

COMMITMENTS AND CONTINGENCIES (Note K)

STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par, 5,000,000 shares authorized, 327,000 and
331,000 shares issued and outstanding at December 31, 2001 and 2002,
respectively) (Note I). . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock ($.00001 par, 125,000,000 shares authorized, 41,442,000 and
44,862,000 shares issued and outstanding at December 31, 2001 and 2002,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 56,659,000 59,832,000
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . - (438,000)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,090,000) (73,382,000)
-------------- --------------
Total stockholders' equity (deficit). . . . . . . . . . . . . . . . . . (4,431,000) (13,988,000)
-------------- --------------
Total liabilities and stockholders' equity (deficit). . . . . . . . . . $ 17,754,000 $ 7,036,000
============== ==============

See accompanying notes to consolidated financial statements.

F-4

BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended Year Ended Year Ended
DECEMBER 31, DECEMBER 31 DECEMBER 31,
2000 2001 2002
-------------- ------------- --------------

REVENUES . . . . . . . . . . . . . . . . . . . . . . . $ 10,813,000 $ 16,938,000 $ 14,102,000

COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . . . . 4,006,000 3,085,000 5,809,000
Operating expenses . . . . . . . . . . . . . . . . . 4,955,000 5,463,000 5,893,000
Selling, general and administrative. . . . . . . . . 3,005,000 2,739,000 2,737,000
Depreciation and amortization. . . . . . . . . . . . 1,213,000 1,244,000 1,202,000
Loan guaranty charge (NoteH) . . . . . . . . . . . . 997,000 - -
-------------- ------------- --------------
14,176,000 12,531,000 15,641,000
-------------- ------------- --------------

OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . (3,363,000) 4,407,000 (1,539,000)

INTEREST EXPENSE & OTHER, NET. . . . . . . . . . . . . 5,392,000 385,000 443,000
-------------- ------------- --------------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
extraordinary item and income taxes. . . . . . . . . (8,755,000) 4,022,000 (1,982,000)

INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . 65,000 335,000 543,000
-------------- ------------- --------------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
extraordinary item . . . . . . . . . . . . . . . . . $ (8,820,000) $ 3,687,000 $ (2,525,000)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS (INCLUDING
LOSS ON DISPOSAL OF $2,555,000, ZERO AND $476,000),
net of income taxes (Note D) . . . . . . . . . . . . (14,923,000) (2,359,000) (6,655,000)

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . . . $ (23,743,000) $ 1,328,000 $ (9,180,000)

EXTRAORDINARY GAIN ON EARLY DEBT EXTINGUISHMENT,
net of income taxes . . . . . . . . . . . . . . . . . 2,444,000 - -
-------------- ------------- --------------

NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . $ (21,299,000) $ 1,328,000 $ (9,180,000)

STOCK AND WARRANT ACCRETION. . . . . . . . . . . . . . (53,000) (53,000) (53,000)
PREFERRED DIVIDENDS ACCRUED. . . . . . . . . . . . . . (864,000) (2,871,000) (3,059,000)
-------------- ------------- --------------

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS . . . . . $ (22,216,000) $ (1,596,000) $ (12,292,000)
============== ============= ==============

BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Continuing operations . . . . . . . . . . . . . . . . $ (0.29) $ 0.02 $ (0.13)
============== ============= ==============
Discontinued operations . . . . . . . . . . . . . . . $ (0.44) $ (0.06) $ (0.15)
============== ============= ==============
Extraordinary item. . . . . . . . . . . . . . . . . . $ 0.07 $ - $ -
============== ============= ==============
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (0.66) $ (0.04) $ (0.28)
============== ============= ==============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASICAND DILUTED . . . . . . . . . . . . . . . . . . . 33,809,000 40,073,000 43,311,000
============== ============= ==============

See accompanying notes to consolidated financial statements.

F-5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
----------- --------- -------------- ------- ------------ -------------
BALANCES at December 31, 1999 132,000 $- 35,244,000 $- $32,951,000 $(37,278,000)

Common stock issued for services and
settlements. . . . . . . . . . . . . . . . . . - - 214,000 - 1,429,000 -
Common stock options exercised. . . . . . . . . . - - 47,000 - 15,000 -
Common stock options issued for services. . . . . - - - - 80,000 -
Common stock exchanged for preferred stock. . . . 57,000 - (5,689,000) - - -
Preferred stock and warrants issued for
debt restructuring . . . . . . . . . . . . . 130,000 - - - 7,125,000 -
Preferred stock issued upon conversion of debt. . 89,000 - - - 8,487,000 -
Preferred stock conversion to common stock. . . . (70,000) - 1,876,000 - - -
Preferred stock issued for services and
settlements. . . . . . . . . . . . . . . . . 23,000 - - - 1,987,000 -
Preferred stock dividends accrued or issued . . . 4,000 - - - 864,000 (864,000)
Warrant discount accretion. . . . . . . . . . . . - - - - 53,000 (53,000)
Warrants issued for services and convertible debt
financing . . . . . . . . . . . . . . . . . . - - - - 1,330,000 -
Transaction costs of convertible debt financing . - - - - (1,223,000) -
Net loss. . . . . . . . . . . . . . . . . . . . . - - - - - (21,299,000)
----------- --------- -------------- ------- ------------ -------------
BALANCES at December 31, 2000 . . . . . . . . . . . 365,000 $ - 31,692,000 $ - $53,098,000 $(59,494,000)
Common stock issued for services and
settlements . . . . . . . . . . . . . . . . . - - 959,000 - 481,000 -
Executive stock grant . . . . . . . . . . . . . . - - 150,000 - 94,000 -
Preferred stock issued for services. . . . . . . 1,000 - - - 59,000 -
Preferred stock conversion to common stock. . . . (64,000) - 8,574,000 - - -
Preferred stock dividends accrued . . . . . . . . 25,000 - - - 2,871,000 (2,871,000)
Warrant discount accretion. . . . . . . . . . . . - - - - 53,000 (53,000)
Warrants issued for services and convertible
debt financing. . . . . . . . . . . . . . . . - - - - 54,000 -
Warrants exercised. . . . . . . . . . . . . . . . - - 67,000 - 50,000 -
Transaction costs of convertible debt financing . - - - - (101,000) -
Net income. . . . . . . . . . . . . . . . . . . . - - - - - 1,328,000
----------- --------- -------------- ------- ------------ -------------
BALANCES at December 31, 2001 . . . . . . . . . . . 327,000 $ - 41,442,000 $ - $56,659,000 $(61,090,000)
Common stock issued for loans received. . . . . . - - 547,000 - 115,000 -
Preferred stock cancelled . . . . . . . . . . . . (1,000) - - - (75,000) -
Preferred stock issued for settlements . . . . . 1,000 - - - 21,000 -
Preferred stock conversion to common stock. . . . (22,000) - 2,873,000 - - -
Preferred stock dividends accrued . . . . . . . . 26,000 - - - 3,059,000 (3,059,000)
Warrant discount accretion. . . . . . . . . . . . - - - - 53,000 (53,000)
Net loss. . . . . . . . . . . . . . . . . . . . . - - - - - (9,180,000)
Foreign currency translation loss . . . . . . . . - - - - - -
----------- --------- -------------- ------- ------------ -------------
Comprehensive loss. . . . . . . . . . . . . . . . - - - - - (9,180,000)
----------- --------- -------------- ------- ------------ -------------
BALANCES at December 31, 2002 . . . . . . . . . . . 331,000 $ - 44,862,000 $ - $59,832,000 $(73,382,000)
=========== ========= ============== ======= ============ =============

ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE EQUITY
LOSS (DEFICIT)
------------- -------------

BALANCES at December 31, 1999 $- $(4,327,000)
Common stock issued for services and
settlements. . . . . . . . . . . . . . . . . . - 1,429,000
Common stock options exercised. . . . . . . . . . - 15,000
Common stock options issued for services. . . . . - 80,000
Common stock exchanged for preferred stock. . . . - -
Preferred stock and warrants issued for
debt restructuring . . . . . . . . . . . . . - 7,125,000
Preferred stock issued upon conversion of debt. . - 8,487,000
Preferred stock conversion to common stock. . . . - -
Preferred stock issued for services and
settlements. . . . . . . . . . . . . . . . . - 1,987,000
Preferred stock dividends accrued or issued . . . - -
Warrant discount accretion. . . . . . . . . . . . - -
Warrants issued for services and convertible debt
financing . . . . . . . . . . . . . . . . . . - 1,330,000
Transaction costs of convertible debt financing . - (1,223,000)
Net loss. . . . . . . . . . . . . . . . . . . . . - (21,299,000)
------------- -------------
BALANCES at December 31, 2000 . . . . . . . . . . . $ - $ (6,396,000)
Common stock issued for services and
settlements . . . . . . . . . . . . . . . . . - 481,000
Executive stock grant . . . . . . . . . . . . . . - 94,000
Preferred stock issued for services. . . . . . . - 59,000
Preferred stock conversion to common stock. . . . - -
Preferred stock dividends accrued . . . . . . . . - -
Warrant discount accretion. . . . . . . . . . . . - -
Warrants issued for services and convertible
debt financing. . . . . . . . . . . . . . . . - 54,000
Warrants exercised. . . . . . . . . . . . . . . . - 50,000
Transaction costs of convertible debt financing . - (101,000)
Net income. . . . . . . . . . . . . . . . . . . . - 1,328,000
------------- -------------
BALANCES at December 31, 2001 . . . . . . . . . . . $ - $ (4,431,000)
Common stock issued for loans received. . . . . . - 115,000
Preferred stock cancelled . . . . . . . . . . . . - (75,000)
Preferred stock issued for settlements . . . . . - 21,000
Preferred stock conversion to common stock. . . . - -
Preferred stock dividends accrued . . . . . . . . - -
Warrant discount accretion. . . . . . . . . . . . - -
Net loss. . . . . . . . . . . . . . . . . . . . . - (9,180,000)
Foreign currency translation loss . . . . . . . . (438,000) (438,000)
-------------
Comprehensive loss. . . . . . . . . . . . . . . . (9,618,000)
------------- -------------
BALANCES at December 31, 2002 . . . . . . . . . . . $ (438,000) $(13,988,000)
============= =============

See accompanying notes to consolidated financial statements.

F-6

BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
-------------- -------------- --------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21,299,000) $ 1,328,000 $ (9,180,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 1,213,000 1,244,000 1,202,000
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . 157,000 188,000 103,000
Extraordinary gain on debt extinguishment, net of income tax . . . . (2,444,000) - -
Loss from sale of discontinued operations. . . . . . . . . . . . . . 2,555,000 - 476,000
Non cash write off of the assets of discontinued operations. . . . . - - 1,913,000
Loss (gain) on sale of assets. . . . . . . . . . . . . . . . . . . . - (8,000) 4,000
Equity issued for services and settlements . . . . . . . . . . . . . 4,826,000 337,000 42,000
-------------- -------------- --------------
Net cash provided by or (used in) operating activities before
changes in assets and liabilities. . . . . . . . . . . . . . . . . (14,992,000) 3,089,000 (5,440,000)

Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,656,000) 1,924,000 586,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . - (3,521,000) 1,284,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,000 (138,000) 138,000
Prepaid expenses and other current assets. . . . . . . . . . . . . 491,000 (296,000) 223,000
Deferred financing costs and other assets. . . . . . . . . . . . . 2,871,000 18,000 185,000
Accounts payable, accrued liabilities and customer
advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,858,000 (2,826,000) (461,000)
Change in net assets of discontinued operations . . . . . . . . . . (1,891,000) (130,000) 1,759,000
-------------- -------------- --------------
Net cash provided by (used in) operating activities. . . . . . (9,050,000) (1,880,000) (1,726,000)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions . . . . . . . . . . . . . . . . . . (233,000) (175,000) (98,000)
Sale of net assets of discontinued operations, net of selling costs. 28,973,000 - 1,041,000
Proceeds from sale of property and equipment . . . . . . . . . . . . 379,000 24,000 44,000
-------------- -------------- --------------
Net cash provided by (used in) investing activities. . . . . . 29,119,000 (151,000) 987,000
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised . . . . . . . . . . . . . . . . . . . 15,000 - -
Debt repayments. . . . . . . . . . . . . . . . . . . . . . . . . . . - (100,000) -
Borrowings under line of credit. . . . . . . . . . . . . . . . . . . 27,417,000 - -
Proceeds from short term senior financing. . . . . . . . . . . . . . - - 2,101,000
Payments to pledging arrangement . . . . . . . . . . . . . . . . . . - - (966,000)
Repayments under line of credit. . . . . . . . . . . . . . . . . . . (41,738,000) - -
Proceeds from issuance of convertible debt . . . . . . . . . . . . . 8,700,000 - -
Repayments of senior subordinated note . . . . . . . . . . . . . . . (11,986,000) - -
Transaction costs of convertible debt financing. . . . . . . . . . . (1,223,000) - -
Proceeds from financing arrangements . . . . . . . . . . . . . . . . - 1,025,000 -
-------------- -------------- --------------
Net cash provided by (used in) financing activities. . . . . . (18,815,000) 925,000 1,135,000
-------------- -------------- --------------
Impact of foreign currency on cash . . . . . . . . . . . . . . - - (438,000)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . 1,254,000 (1,106,000) (42,000)
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . 155,000 1,409,000 303,000
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . $ 1,409,000 $ 303,000 $ 261,000
============== ============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . $ 1,357,000 $ 359,000 $ 28,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . 249,000 122,000 275,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in exchange for accrued services rendered. . . . - 351,000 -
Stocks issued for financing and services . . . . . . . . . . . . . . - 50,000 -
Stock and warrant accretions .. . . . . . . . . . . . . 53,000 53,000 53,000
Transaction costs of convertible debt financing (101,000)
Preferred stock dividends accrued .. . . . . . . . . . 864,000 2,871,000 3,059,000

See accompanying notes to consolidated financial statements.

F-7

BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. GOING CONCERN

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto and the other financial
information contained herein and in the Company's periodic reports filed with
the Securities and Exchange Commission.

At December 31, 2002, the Company had a working capital deficit of
$16,994,000, a total stockholders' deficit of $13,988,000, and had incurred
losses from operations for the year then ended of $1,539,000. In addition, the
Company is currently in default under its loan agreements with The Prudential
Insurance Company of America and Specialty Finance Fund 1, LLC, and, as a
consequence, these lenders and the participants in the Specialty Finance credit
facility may accelerate the maturity of their obligations at any time. As of
the date of this annual report on Form 10-K, the Company has not received notice
from any lender of acceleration nor any demand for repayment. All of these
obligations have been classified as current liabilities at December 31, 2002 in
the accompanying consolidated balance sheet. See Note H for further discussion
of the Company's debt. The Company also has significant past due vendor
payables at December 31, 2002.

Subsequent to December 31, 2002, the Company's short term liquidity
improved as a consequence of certain asset sales, which resulted in net proceeds
(after replacement costs) to the Company of approximately $2 million. A portion
of these proceeds were used to pay amounts owing of $700,000 plus interest under
the Company's credit facility with Checkpoint Business, Inc. (See Note H for
further discussion) The Company also applied a portion of the proceeds to pay
$400,000 to settle the Calicutt lawsuit (See Note K for further discussion) and
to reduce payables owing to certain of the Company's significant vendors.

The Company generates its revenues from prevention services and emergency
response activities. Response activities are generally associated with a
specific emergency or "event" whereas prevention activities are generally
"non-event" related services. Event related services typically produce higher
operating margins for the Company, but the frequency of occurrence varies widely
and is inherently unpredictable. Non-event services typically have lower
operating margins, but the volume and availability of work is more predictable.
Historically the Company has relied on event driven revenues as the primary
focus of its operating activity, but more recently the Company's strategy has
been to achieve greater balance between event and non-event service activities.
While the Company has successfully improved this balance, event related services
are still the major source of revenues and operating income for the Company.

The majority of the Company's event related revenues are derived from well
control events (i.e., blowouts) in the oil and gas industry. Demand for the
Company's well control services is impacted by the number and size of drilling
and work over projects, which fluctuate as changes in oil and gas prices affect
exploration and production activities, forecasts and budgets. The Company's
reliance on event driven revenues in general, and well control events in
particular, impairs the Company's ability to generate predictable operating cash
flows.

Subsequent to December 31, 2002, there has been a significant increase in
the demand for the Company's emergency response services, particularly
internationally and specifically in the Middle East in connection with the war
in Iraq. The Company currently has several employees either on standby or
actively working to control wells in Iraq, and in some cases it is realizing a
premium to its typical day rates for similar activities. While these
developments have positively impacted the Company's near-term liquidity there
can be no assurance that the cash flows generated from such activities will be
sufficient to meet the Company's near-term liquidity needs. In addition, while
the Company has recently been able to pay its critical vendors for current
services and materials, there remains significant overdue payables which the
Company has been unable to satisfy.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the sufficiency and timing of its future cash flows,
the current defaults of certain debt agreements with its lenders, and the lack
of firm commitments for additional capital raises substantial doubt about the
ability of the Company to continue as a going concern. The

F-8

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.

B. BUSINESS AND ORGANIZATION

Boots & Coots International Well Control, Inc. and subsidiaries (the
"Company"), is a global-response oil and gas service company that specializes in
responding to and controlling oil and gas well emergencies, including blowouts
and well fires. Through its participation in the proprietary insurance program
WELLSURE(R), the Company also provides lead contracting and high-risk management
services, under critical loss scenarios, to the program's insured clients.
Additionally, the WELLSURE(R) program designates that the Company provides
certain pre-event prevention and risk mitigation services defined under the
program. The Company also provides snubbing and other high-risk well control
management services, including pre-event planning, training and consulting.

In the past, during periods of low critical events, resources dedicated to
emergency response were underutilized or, at times, idle, while the fixed costs
of operations continued to be incurred, contributing to significant operating
losses. To mitigate these consequences, the Company began to actively expand its
non-event service capabilities, with particular focus on prevention and
restoration services. Prevention services include engineering activities, well
plan reviews, site audits, and rig inspections. More specifically, the Company
developed its WELLSURE program, which is now providing more predictable and
increasing service fee income, and began marketing its SafeGuard program, which
provides a full range of prevention services domestically and internationally.
The Company intends to continue its efforts to increase the revenues it
generates from prevention services in 2003.

C. SIGNIFICANT ACCOUNTING POLICIES:

Consolidation - The accompanying consolidated financial statements include
the financial transactions and accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.

Cash and Cash Equivalents - The Company considers all unrestricted highly
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.

Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. On a small number of turnkey contracts, revenue may be recognized on
the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract completion.

Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.

The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.

Effective January 1, 2002 the Company changed its policy on reporting
revenues on WELLSURE(R) events from gross to net, in accordance with EITF 99-19
"Reporting Revenue Gross as a Principal Versus Net as an Agent". All periods
presented have been restated to conform with the current year's presentation.

F-9

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company
assesses its credit risk and provides an allowance for doubtful accounts for any
accounts, which it deems doubtful of collection.

The activity in the allowance for doubtful accounts is as follows:

BALANCE AT BEGINNING OF CHARGE TO COSTS AND WRITE-OFFS BALANCE AT
PERIOD EXPENSES NET OF RECOVERIES END OF PERIOD
------------------------ -------------------- ------------------ --------------

For Year Ended December 31, 2000 $ 583,000 $ 157,000 _ $ 740,000

For Year Ended December 31, 2001 $ 740,000 $ 188,000 $ 563,000 $ 365,000

For Year Ended December 31, 2002 $ 365,000 $ 103,000 $ 103,000 $ 365,000

Restricted Assets - Restricted assets consist of $2,739,000 and $109,000 of
its accounts receivable pledged to KBK of which $1,386,000 and $39,000 were
related to discontinued operations (See Note H) that remained uncollected as of
December 31, 2001 and December 31, 2002, respectively.

Inventories - Inventories consist primarily of work-in-process and finished
goods. Inventories are valued at the lower of cost or market with cost
determined using the first-in first-out method.

Property and Equipment - Property and equipment are stated at cost.
Depreciation is provided principally using the straight-line method over the
estimated useful lives of the respective assets as follows: buildings and
improvements (15-31 years), well control and firefighting equipment (8 years),
shop and other equipment (8 years), vehicles (5 years) and office equipment and
furnishings (5 years). Facilities and leasehold improvements are amortized over
remaining primary lease terms.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated over the
remaining useful life of the equipment. Upon retirement or disposition of
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statement of operations.

Goodwill - The Company adopted "SFAS No. 142" Statement of Financial
Accounting Standards No. 142 "SFAS 142", "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under SFAS 142, goodwill is not amortized, but
rather is reviewed at least annually for impairment. Prior to the adoption of
SFAS 142, the Company amortized goodwill on a straight-line basis over periods
ranging from 15 to 40 years. Amortization expense of goodwill included in
continuing operations was $90,000, $4,000 and zero for the years ended December
31, 2000, 2001 and 2002, respectively, and amortization expense of goodwill
included in discontinued operations was $54,000, $54,000 and zero for the years
ended December 31, 2000, 2001 and 2002, respectively. As of January 1, 2002,
all goodwill was fully amortized except for the goodwill attributable to Special
Services of $1,845,000 included in discontinued operations.

F-10

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following pro-forma results of operations data for the years ended
December 31, 2000, 2001 and 2002 are presented as if the provisions of SFAS No.
142 had been in effect for all periods presented:

For the Three Years Ended December 31
----------------------------------------------
2000 2001 2002
---------------- ------------- -------------

Net loss, as reported $ (22,216,000) $ (1,596,000) $(12,292,000)
================ ============= =============
Add:
Cumulative effect of change in accounting
Principle - - -
Amortization of goodwill 144,000 58,000 -

Pro-forma net loss $ (22,072,000) $ (1,538,000) $(12,292,000)
================ ============= =============

Basic EPS:

Net loss, as reported $ (0.66) $ (0.04) $ (0.28)
================ ============= =============
Add:
Cumulative effect of change in accounting
Principle - - -
Amortization of goodwill 0.01 - -
================ ============= =============
Adjusted net loss $ (0.65) $ (0.04) $ (0.28)
================ ============= =============

Realization of Long Lived Assets -In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". The Company evaluates the recoverability of property and
equipment, and other long-lived assets, if facts and circumstances indicate that
any of those assets might be impaired. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset are compared
to the asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value.

Foreign Currency Transactions - The functional currency of the Company's
foreign operations, primarily in Venezuela, is the U.S. dollar. Substantially
all customer invoices and vendor payments are denominated in U.S. currency.
Revenues and expenses from foreign operations are remeasured into U.S. dollars
on the respective transaction dates and foreign currency gains or losses are
included in the consolidated statements of operations.

Comprehensive Income (Loss) - Comprehensive income (loss) consists of
foreign currency translations. In accordance with SFAS No. 52, "Foreign
Currency Translation", the assets and liabilities of its foreign subsidiaries,
denominated in foreign currency, are translated into US dollars at exchange
rates in effect at the consolidated balance sheet date. Revenues and expenses
are translated at the average exchange rate for the period. Related translation
adjustments are reported as comprehensive income (loss) which is a separate
component of stockholders equity.

Income Taxes - The Company accounts for income taxes pursuant to the SFAS
No. 109 "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.

Earnings Per Share - Basic and diluted income (loss) per common share is
computed by dividing net loss attributable to common stockholders by the
weighted average common shares outstanding during the years ended December 31,
2000, 2001 and 2002.

F-11

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The weighted average number of shares used to compute basic and diluted
earnings per share for the three years ended December 31, 2000, 2001, 2002,
respectively, is illustrated below:

For the Three Years Ended December 31
----------------------------------------------
2000 2001 2002
---------------- ------------- -------------

Numerator:
For basic and diluted earnings per share-
Net loss from continuing operations
attributable to common stockholders $ (22,216,000) $ (1,596,000) $(12,292,000)
================ ============= =============
Denominator:
For basic earnings per share-
Weighted-average shares 33,809,000 40,073,000 43,311,000
Effect of dilutive securities:
Preferred stock conversions, stock options
and warrants - - -
---------------- ------------- -------------
Denominator:
For diluted earnings per share -
Weighted-average shares and
Assumed conversions 33,809,000 40,073,000 43,311,000
================ ============= =============

For the years ended December 31, 2000, 2001 and 2002 the Company incurred a
loss to common stockholders before consideration of the income (loss) from
discontinued operations. As a result, the potential dilutive effect of stock
options, stock warrants and convertible securities was not included in the
calculation of basic or diluted earnings per share because to do so would have
been antidilutive for the periods presented.

The exercise price of the Company's stock options and stock warrants varies
from $0.43 to $5.00 per share. The Company's convertible securities have
conversion prices that range from $0.75 to $2.75, or, in certain cases, are
based on a percentage of the market price for the Company's common stock.
Assuming that the exercise and conversions are made at the lowest price provided
under the terms of their agreements, the maximum number of potentially dilutive
securities at December 31, 2002 would include: (1) 5,565,560 common shares
issuable upon exercise of stock options, (2) 35,236,254 common shares issuable
upon exercise of stock purchase warrants, (3) 1,333,333 common shares issuable
upon conversion of senior convertible debt, and (4) 83,632,543 common shares
issuable upon conversion of convertible preferred stock. The actual number may
be substantially less depending on the market price of the Company's common
stock at the time of conversion.

Fair Value of Financial Instruments - The carrying values of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the short-term maturities of these instruments. Management believes that the
carrying amount debt, exclusive of accrued interest included in debt, pursuant
to the Company's troubled debt restructuring in December 2000 (see Note H),
approximates fair value as the majority of borrowings bear interest at current
market interest rates for similar debt structures.

Recently Issued Accounting Standards -

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143") which covers all legally enforceable obligations
associated with the retirement of tangible long-lived assets and provides the
accounting and reporting requirements for such obligations. SFAS No. 143 is
effective for the Company beginning January 1, 2003. Management does not believe
the adoption of SFAS No. 143 will have a material impact on Company's
consolidated financial position or results of operations.

In December 2002, the FASB issued Accounting for Stock-Based Compensation
("SFAS No. 148") amending SFAS No. 123, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The three methods provided in SFAS No. 148 include (1) the
prospective method which is the method currently provided for in SFAS No. 123,
(2) the retroactive restatement method which would allow companies to restate
all periods presented and (3) the modified prospective method which would allow
companies to present the recognition provisions of all outstanding stock-based
employee compensation instruments as of the beginning of the fiscal year of
adoption. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No.
123 to require disclosure in the summary of significant accounting policies of
the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock-based awards using the
fair value method. However, the disclosure provisions are required for all
companies with stock-based employee compensation, regardless of whether they
utilize the fair method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company does not intend on adopting the fair value method of
accounting for stock-based compensation of SFAS 123, and accordingly SFAS 148 is
not expected to have a material impact on the Company's reported results of
operations or financial position in 2003.

F-12

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
to identify any variable interest entities that must be consolidated and thus
the Company does not expect the requirements of FIN No. 46 to have a material
impact on its financial condition or results of operations.

Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Significant estimates made by management include the allowance for doubtful
accounts, the valuation allowance for tax assets, valuation of equity securities
and accrued liabilities for potential litigation settlements. Actual results
could differ from these estimates.

Reclassifications - Certain reclassifications have been made in the prior
period consolidated financial statements to conform to current year
presentation.

D. DISCONTINUED OPERATIONS:

On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 in cash. Comerica
Bank-Texas, the Company's primary senior secured lender at the time, was paid in
full as a component of the transaction.

The Company's subsidiary ITS Supply Corporation ("ITS") filed in Corpus
Christi, Texas on May 18, 2000, for protection under Chapter 11 of the U.S.
Bankruptcy Code. ITS is now proceeding to liquidate its assets and liabilities
pursuant to Chapter 7 of Title 11. At the time of the filing, ITS had total
liabilities of approximately $6,900,000 and tangible assets of approximately
$950,000. The Company had an outstanding guaranty on ITS debt upon which a
judgment against the Company was entered by a State District Court in the amount
of approximately $1,833,000. The judgment was paid in full by the Company on
August 31, 2001. (See Note K)

On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS
Supply Corporation, the Company's subsidiary, filed a complaint against Comerica
Bank-Texas, the Company and various subsidiaries of the Company for a formal
accounting of all lockbox transfers that occurred between ITS and Comerica Bank,
et al and all intercompany transfers between ITS and the Company and its
subsidiaries to determine if any of the transfers are avoidable under Federal or
state statutes and seeking repayment to ITS of all such amounts. The Trustee
asserted that approximately $400,000 of lockbox transfers and $3,000,000 of
intercompany transfers were made between the parties. In September 2002, a
settlement agreement was reached between the parties and the Trustee withdrew
all claims for avoidable transfers.

On June 30, 2002, the Company made the decision and formalized a plan to
sell the assets of its Special Services and Abasco operations. The sales
proceeds were approximately $1,041,000. The operations of these two companies
are reflected as discontinued operations on the consolidated statements of
operations and as assets and liabilities of discontinued operations on the
consolidated balance sheets

F-13

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following represents a condensed detail of assets and liabilities adjusted
for write-downs:

DECEMBER 31, DECEMBER 31,
2001 2002
----------------------------

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,000 $
Receivables - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,637,000 174,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,386,000 38,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,000 -
Property, plant and equipment - net. . . . . . . . . . . . . . . . . . . . 1,599,000 -
Goodwill - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,845,000 -
------------- -------------
Total assets $ 6,756,000 $ 212,000
============= =============

Short term debt and current maturities of long-term debt and notes payable $ 1,178,000 $ 32,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,708,000 801,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000 355,000
------------- -------------
Total liabilities $ 3,004,000 $ 1,188,000
============= =============

Charges to income related to the year ended December 31, 2002:

Goodwill write down $1,845,000
Property, plant and equipment write down to fair value 495,000
Inventory write down to fair value 65,000
Future lease costs, net of estimated sublease proceeds 355,000
Severance costs 82,000
Other accruals 60,000
----------
2,902,000
Loss from operations 3,753,000
----------
Total charge to discontinued operations $6,655,000
==========

Reconciliation of change in net asset value of discontinued operations:

Balance of net asset (liability) of discontinued
operations at December 31, 2001 $ 3,752,000
Total charge to discontinued operations (6,655,000)
Intercompany transfers 1,927,000
------------
Balance of net liability of discontinued operations
at December 31, 2002 $ (976,000)
============

The following table presents the revenues, loss from operations and other
components attributable to the discontinued operations of ITS, the Baylor
Company, Abasco and Boots and Coots Special Services:

YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 2001 2002
--------------- ------------ ------------

Revenues . . . . . . . . . . . . . . . . . . . . . . $ 9,056,000 $11,661,000 $ 3,743,000
Income (loss) from operations before income taxes. . (12,368,000) (2,359,000) (4,334,000)
Provision (benefit) for income taxes . . . . . . . . - - -
Loss on disposal of Baylor, net of income taxes. . . (2,555,000) - -
Loss on disposal of Abasco and Special Services, net
of income taxes. . . . . . . . . . . . . . . . . . . - - (476,000)
Special Services Goodwill. . . . . . . . . . . . . . - - (1,845,000)
Net income (loss) from discontinued operations . . $ (9,813,000) $(2,359,000) $(6,655,000)
=============== ============ ============

F-14

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. DETAIL OF CERTAIN ASSET ACCOUNTS:

Inventories consisted of the following as of:

DECEMBER 31, DECEMBER 31
2001 ,2002
------------- -----------

Work in process . . . . . $ 138,000 -
------------- -----------
Total . . . . . $ 138,000 -
============= ===========

Prepaid expenses and other current assets consisted of the following as of:

DECEMBER31, DECEMBER 31,
2001 2002
------------ ----------------

Prepaid insurance. . . . . . . . . . . . . $ 595,000 $ 540,000
Other prepaid and current assets . . . . . 248,000 80,000
------------ ----------------
Total. . . . . . . . . . . . . . . . . $ 843,000 $ 620,000
============ ================

Property and equipment consisted of the following as of:

DECEMBER31, DECEMBER31,
2001 2002
------------- -------------

Land . . . . . . . . . . . . . . . . . . . $ 136,000 $ 136,000
Buildings and improvements . . . . . . . . 1,650,000 652,000
Well control and firefighting equipment. . 6,095,000 5,888,000
Shop and other equipment . . . . . . . . . 644,000 666,000
Vehicles . . . . . . . . . . . . . . . . . 357,000 368,000
Office equipment and furnishings . . . . . 696,000 741,000
------------- -------------
Total property and equipment . . . . . . . 9,578,000 8,451,000
Less: accumulated depreciation and
amortization . . . . . . . . . . (4,695,000) (5,451,000)
------------- -------------
Net property and equipment . . . . $ 4,613,000 $ 3,000,000
============= =============

F. ACCRUED LIABILITIES:

Accrued liabilities consisted of the following as of:

DECEMBER 31, DECEMBER 31,
2001 2002
----------------- -------------

Accrued loan guarantee charge and other settlements . $ 1,726,000 $ 230,000
Accrued income and other taxes . . . . . . . . . . . . . 430,000 552,000
Accrued salaries and benefits. . . . . . . . . . . . . . 446,000 303,000
Other accrued liabilities. . . . . . . . . . . . . . . . 1,879,000 812,000
----------------- -------------
Total. . . . . . . . . . . . . . . . . . . . . . . . $ 4,481,000 $ 1,897,000
================= =============

F-15

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G. INCOME TAXES:

The Company and its wholly-owned domestic subsidiaries file a consolidated
Federal income tax return. The provision for income taxes shown in the
consolidated statements of operations is made up of current, deferred and
foreign tax expense as follows:

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
------------- ------------- -------------

Federal
Current. . . . . . $ - $ 43,000 $ -
Deferred . . . . . - - -
State
Current. . . . . . - - -
Deferred . . . . . - - -
Foreign . . . . . . . . 65,000 292,000 684,000
------------- ------------- -------------
$ 65,000 $ 335,000 $ 684,000
============= ============= =============
Discontinued operations
Current. . . . . . - - -
Deferred . . . . . - - -
------------- ------------- -------------
$ 65,000 $ 335,000 $ 684,000
============= ============= =============

The above foreign taxes represent income tax liabilities in the respective
foreign subsidiary's domicile. The provision for income taxes differs from the
amount that would be computed if the income (loss) from continuing operations
before extraordinary item and income taxes were multiplied by the Federal income
tax rate (statutory rate) as follows:

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
-------------- -------------- --------------

Income tax rovision (benefit) at the statutory rate (34%). . $ (7,209,000) $ 429,000 $ (3,121,000)
Increase resulting from:
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . 65,000 292,000 684,000
Alternative minimum tax . . . . . . . . . . . . . . . . . - 43,000 -
State income taxes, net of related tax effect . . . . . . - - -
Unrecognized (utilized) net oerating losses for
continuing operations. . . . . . . . . . . . . . . . . 6,773,000 (554,000) 3,121,000
Foreign income deemed reatriated. . . . . . . . . . . . . 378,000 -
Goodwill amortization . . . . . . . . . . . . . . . . . . 19,000 19,000 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 39,000 106,000 -
-------------- -------------- --------------

$ 65,000 $ 335,000 $ 684,000
============== ============== ==============

As of December 31, 2000, 2001 and 2002, the Company has net domestic
operating loss carry forwards of approximately $53,183,000, $46,065,000 and
$47,155,000, respectively, expiring in various amounts beginning in 2011. The
net operating loss carry forwards, along with the other timing differences,
generate a net deferred tax asset. The Company has recorded valuation allowances
in each year for these net deferred tax assets since management believes it is
more likely that the assets will not be realized. The temporary differences
representing deferred tax assets and liabilities are as follows:

F-16

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, DECEMBER 31,
2001 2002
------------- -------------

Deferred income tax liabilities
Depreciation and amortization. . . . . . . $ (1,490,000) $ (1,824,000)
------------- -------------
Total deferred income tax liabilities. $ (1,490,000) $ (1,824,000)
============= =============

Deferred income tax assets
Net operating loss carry forward. . . . . $ 15,662,000 $ 18,082,000
Asset disposals . . . . . . . . . . . . . 89,000 292,000
Allowance for doubtful accounts . . . . . 104,000 121,000
Accruals. . . . . . . . . . . . . . . . . 312,000 428,000
Foreign tax credit. . . . . . . . . . . . 630,000 1,314,000
Alternative minimum tax credit. . . . . . 43,000 43,000
Other assets. . . . . . . . . . . . . . . 69,000 69,000
------------- -------------
Total deferred income tax assets. . $ 16,909,000 $ 20,349,000
============= =============

Valuation allowance . . . . . . . . . . . $(15,419,000) $(18,525,000)
------------- -------------
Net deferred income tax asset. . . . $ 1,490,000 $ 1,824,000
============= =============

Net deferred tax asset (liability) . $ - $ -
============= =============

H. LONG-TERM DEBT AND NOTES PAYABLE:

Long-term debt and notes payable consisted of the following:

DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------

12% Senior Subordinated Note. . . . . . . . . . . . . . . . $ 11,520,000 $ 11,596,000
Senior secured credit facility. . . . . . . . . . . . . . . 1,000,000 2,800,000
Other subordinated notes. . . . . . . . . . . . . . . . . . - 604,000
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 12,520,000 15,000,000
Less: current portion of long-term debt and note spayable - 15,000,000
------------ ------------
Total long-term debt and notes payable. . . . . . . . . . $ 12,520,000 $ -
============ ============

As of December 31, 1999, and continuing through December 28, 2000, the
Company was not in compliance with certain financial covenants of a $30,000,000
subordinated debt agreement with Prudential insurance Company of America
("Prudential") including the Company's EBITDA to total liabilities ratio.
Further, quarterly interest payments on the debt due to Prudential since July
23, 1999 had not been made by the Company.

A restructuring agreement was executed by both parties on December 30,
2000. The Prudential restructuring agreement provided that the aggregate
indebtedness due to Prudential be resolved by the Company: (i) paying
approximately $12,000,000 cash, (ii) establishing $7,200,000 of new subordinated
debt, ("12% Senior Subordinated Note") (iii) issuing $5,000,000 face value of
Series E Cumulative Senior Preferred Stock ($2,850,000 fair value) and (iv)
issuing $8,000,000 face value of Series G Cumulative Convertible Preferred Stock
($2,600,000 fair value). Additionally, as a component of the transaction,
Prudential received newly issued warrants to purchase 8,800,000 shares of the
Company's common stock for $0.625 per share, with a fair value of $1,232,000
fair value, and the Company agreed to re-price the existing warrants held by
Prudential to $0.625 per share, with a fair value of $443,000. In addition,
$500,000 is continently payable upon the Company's securing a new term loan with
a third party lender. All interest payments and dividends are paid in kind and
deferred for two years from the date of closing. Accrued interest calculated
through December 31, 2002 was deferred for payment until December 30, 2005.
Payments on accrued interest after December 31, 2002 will begin on March 31,
2003 and will continue quarterly until December 30, 2005. The 12% Senior
Subordinated Note is due in full on December 29, 2005 and has covenants which
require the Company to maintain certain financial ratios and also limits the
amount of borrowings from external sources.

The refinancing of the Company's debt with Prudential qualified as a
troubled debt restructuring under the provisions of SFAS 15. As a result of the
application of this accounting standard, the total indebtedness due to
Prudential, inclusive of accrued interest, was reduced by the cash and fair
market value of securities (determined by independent appraisal) issued by the
Company, and the residual balance of the indebtedness was recorded as the new
carrying value of the subordinated note due to Prudential. Consequently, the
$7,200,000 face value of the 12% Senior Subordinated Note is recorded on the
Company's balance sheet at $11,520,000. The additional carrying value of the
debt effectively represents an accrual of future interest expense due on the
face value of the subordinated note due to Prudential. The remaining excess of
amounts previously due Prudential over the new carrying value was $2,444,000 and
was recognized as an extraordinary gain. The face value of the note has been
increased as of December 31, 2002 to $9,014,000 for the inclusion of accrued and
unpaid interest through December 31, 2002.

F-17

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2002, the Company was not in compliance with the ratio
tests for the trailing twelve month period and the Company did not receive a
waiver from Prudential for this period. Under the Subordinated Note
Restructuring Agreement, failure to comply with the ratio tests is an event of
default and the note holder may, at its option, by notice in writing to the
Company, declare all of the Notes to be immediately due and payable together
with interest accrued thereon. Accordingly, the Company has classified this
obligation as a current liability on its balance sheet. As of March 28, 2003,
the Company has not received a written notice of default from Prudential.

During the year ended December 31, 2000, the Company received approximately
$8,700,000 in funds from the purchase of participation interests by an
investment group, Specialty Finance Fund I, LLC (Specialty Finance) in its
senior secured credit facility with Comerica - Bank, Texas ("Comerica"). In
connection with this financing, the Company issued 147,058 shares of common
stock and warrants representing the right to purchase an aggregate of 8,729,985
shares of common stock of the Company to the participation interest holders and
warrants to purchase an aggregate of 3,625,000 shares of common stock to the
investment group that arranged the financing, including warrants to purchase an
aggregate of 736,667 shares of common stock to Tracy S. Turner, a director of
the Company. The warrants have a term of five years and can be exercised by the
payment of cash in the amount of $0.625 per share as to 8,729,985 shares and
$0.75 per share as to 3,625,000 shares of common stock, or by relinquishing a
number of shares subject to the warrant with a market value equal to the
aggregate exercise price of the portion of the warrant being exercised. On
December 28, 2000, $7,729,985 of the participation interest, plus $757,315 in
accrued interest thereon, was exchanged for 89,117 shares of Series H Cumulative
Senior Preferred Stock in the Company. The remaining $1,000,000 of the
participation interest was outstanding as senior secured debt as of December 31,
2002. The Company has not received a waiver from Specialty Finance indicating
that they have no intention of taking any action that would accelerate any
payments from the Company of the amounts outstanding under the senior secured
credit facility. Accordingly, the $1,000,000 outstanding under this facility
has been included in current maturities of long-term debt in the accompanying
financial statements. Tracy S. Turner, a managing member of Specialty Finance is
also a member of the Company's Board of Directors.

On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 cash. Comerica
Bank-Texas, the Company's primary senior secured lender at that time, was paid
in full totaling $13,000,000 as a component of the transaction. Specialty
Finance as a participant in the Comerica senior facility, remains as the sole
senior secured lender.

The new financing obtained during 2000 from Specialty Finance and the
restructuring of the subordinated debt with Prudential has a potentially
significant dilutive impact on existing common stockholders. This could
adversely affect the market price for the Company's common stock and limit the
price at which new stock can be issued for future capital requirements.
Further, there can be no assurance that the Company will be able to obtain new
capital, and if new capital is obtained that it will be on terms favorable to
the Company.

On June 18, 2001, the Company entered into an agreement with KBK Financial,
Inc. ("KBK") pursuant to which the Company pledged certain of its accounts
receivable to KBK for a cash advance against the pledged receivables. The
agreement allows the Company to, from time to time, pledge additional accounts
receivable to KBK in an aggregate amount not to exceed $5,000,000. The Company
paid certain fees to KBK for the facility and will pay additional fees of one
percent per annum on the unused portion of the facility and a termination fee of
up to two percent of the maximum amount of the facility. The facility provides
the Company an initial advance of eighty-five percent of the gross amount of
each receivable pledged to KBK. Upon collection of the receivable, the Company
receives an additional residual payment net of fixed and variable financing
charges. The Company's obligations for representations and warranties regarding
the accounts receivable pledged to KBK are secured by a first lien on certain
other accounts receivable of the Company. The facility also provides for
financial reporting and other covenants similar to those in favor of the senior
lender of the Company. The Company had $2,383,000 and $109,000 of its accounts
receivable pledged to KBK that remained uncollected as of December 31, 2001 and
December 31, 2002, respectively and, accordingly, this amount has been
classified as a restricted asset on the balance sheet as of both dates.

F-18

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Included in the December 31, 2001 and December 31, 2002 is $1,385,000 and
$38,000, respectively of restricted assets related to discontinued operations.
In addition, as of December 31, 2001 and December 31, 2002 the Company's cash
balances include $58,000 and $9,000, respectively representing accounts
receivable that had been collected by KBK and were in-transit to the Company but
which were potentially subject to being held as collateral by KBK pending
collection of uncollected pledged accounts receivable.

On April 9, 2002, the Company entered into a loan participation agreement
with certain party under which it borrowed an additional $750,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 11% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 100,000 shares of common
stock to the participation lender at closing. The participation had an initial
maturity of 90 days, which was extended for an additional 90 days at the
Company's option. The Company issued an additional 100,000 shares of common
stock to the participation lender to extend the maturity date. On October 9,
2002, the loan extension period matured. As of March 28, 2003, none of the loan
participation has been repaid nor has the Company received formal demand for
payment from the loan participant. However, in the loan documentation the
Company has waived the notices which might otherwise be required by law and, as
a consequence, the loan participants have the current ability to post the
collateral securing their notes for foreclosure.

On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 33,334 shares of
common stock to the participating lenders at closing and issued an additional
33,334 shares of common stock to extend the maturity of those notes for an
additional 90 days. On October 25, 2002, the loan extension period matured. As
of March 28, 2003, none of the loan participations have been repaid nor has the
Company received formal demand for payment from the loan participants. However,
in the loan documentation the Company has waived the notices which might
otherwise be required by law and, as a consequence, the loan participants have
the current ability to post the collateral securing their notes for foreclosure.

On July 5, 2002, the Company entered into a loan participation agreement
with a certain parties under which it borrowed an additional $100,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 25% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 130,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On September 28, 2002, the loan matured. As of March 28, 2003,
none of the loan participation has been repaid nor has the Company received
formal demand for payment from the loan participant. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence, the loan participants have the current
ability to post the collateral securing their notes for foreclosure.

On July 8, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 150,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On October 1, 2002, the loan matured. As of March 28, 2003, none
of the loan participation has been repaid nor has the Company received formal
demand for payment from the loan participant. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence, the loan participants have the current
ability to post the collateral securing their notes for foreclosure.

On December 4, 2002, the Company entered into a loan agreement with
Checkpoint Business, Inc. ("Checkpoint") providing for short term working
capital up to $1,000,000. The effective interest rate of under the loan
agreement is 15% per annum. Checkpoint collateral includes substantially all of
the assets of the Company, including the stock of the Company's Venezuelan
subsidiary.

As of December 31, 2002 and March 28, 2003, the Company had borrowed
$500,000 and an additional $200,000, respectively, under this facility. In
January 2003, the Company received a notice of default from Checkpoint, wherein
it alleged several defaults under the loan agreement. As a condition of
receiving additional advances, in February 2003, the Company entered into an
agreement with Checkpoint in which it agreed to grant Checkpoint an option to
purchase its Venezuelan subsidiary for fair market value, as determined by

F-19

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

appraisal, under certain circumstances. In the event Checkpoint wishes to
exercise the option within certain time limits and is not permitted to do so
because the option agreement is set aside by a bankruptcy court or the Company
is unable to obtain the necessary consents to a sale of its subsidiary, then the
Company would be obligated to pay $250,000 in liquidated damages.

In January 2003, Checkpoint presented the Company with a restructuring
proposal that would entail a voluntary Chapter 11 bankruptcy filing and the
cancellation of the Company's common equity as part of the bankruptcy plan. The
Company considered this proposal and other alternatives that would allow it to
restructure its obligations and improve its liquidity and engaged legal and
financial consultants to assist it in its assessment of its alternatives. On
March 28, 2003, the Company decided against the restructuring proposal from
Checkpoint and paid in full the principal balance of $700,000 and interest
outstanding under its loan agreement with Checkpoint. The Company and
Checkpoint are currently discussing terminating the option agreement. The
Company continues to consider its restructuring alternatives, which, under the
proper circumstances may include a voluntary filing for protection under Chapter
11 of the Bankruptcy Code.

I. STOCKHOLDERS' EQUITY (DEFICIT):

Common and Preferred Stock

The Company's stockholders approved an increase in the authorized common
stock ($.00001 par) from 50,000,000 shares up to 125,000,000 shares during 2000.
As of December 31, 2001 and 2002, 41,442,000 and 44,862,000 shares were issued
and outstanding, respectively. The Company also has 5,000,000 shares of
preferred stock ($.00001 par) authorized for designation of which 327,000 and
331,000 shares were issued and outstanding as of December 31, 2001 and December
31, 2002, respectively. Under the Company's Amended and Restated Certificate of
Incorporation, the board of directors has the power, without further action by
the holders of common stock, to designate the relative rights and preferences of
the Company's preferred stock, when and if issued. Such rights and preferences
could include preferences as to liquidation, redemption and conversion rights,
voting rights, dividends or other preferences, over shares of common stock. The
board of directors may, without further action by the stockholders of the
Company, issue shares of preferred stock which it has designated. The rights of
holders of common stock will be subject to, and may be adversely affected by or
diluted by, the rights of holders of preferred stock.

In March 2000, in satisfaction of a dispute between the Company and certain
unaffiliated parties, the Company agreed to modify the terms of certain warrants
held by such parties to lower the exercise price on 100,000 warrants from $5.00
per share to $1.25 per share and to lower the exercise price on an additional
100,000 warrants to $1.50 per share. The Company also agreed to issue an
additional 952,153 shares of its common stock upon the conversion of 40,000
shares of Redeemable Preferred held by certain of such unaffiliated parties and
issued warrants to purchase 450,000 shares of common stock at an exercise price
of $1.25 per share, respectively. During 2000, the 40,000 shares of Redeemable
Preferred converted into 363,636 shares of common stock and an additional
952,153 shares of common stock were also issued. The Company relied upon Section
4(2) of the Act for the issuance of the warrant. The Company used no general
advertising or solicitation in connection with such issuance, there were a
limited number of parties, all of whom were accredited investors and
sophisticated and the Company had reason to believe that such purchasers did not
intend to engage in a distribution of such securities. During 2000 these
transactions resulted in a charge to expense of $1,429,000.

On April 28, 2000, the Company adopted the Certificate of Designation of
Rights and Preferences of the Series B Preferred Stock, which designates this
issue to consist of 100,000 shares of $.00001 par value per share with a face
value of $100 per share; has a dividend requirement of 10% per annum, payable
semi-annually at the election of the Company in additional shares of Series B
Preferred Stock in lieu of cash; has voting rights equivalent to 100 votes per
share; and, may be converted at the election of the Company into shares of the
Company's Common Stock on the basis of a $0.75 per share conversion rate.

In order for the Company to have available shares of authorized but
unissued or committed shares of common stock to accommodate the conversion
features of preferred stock issued in connection with the Specialty Finance
borrowing discussed in Note H, as well as common stock purchase warrants related
to this financing, the Company negotiated during the period from April through
June 2000 with certain of its common stock stockholders to contribute an
aggregate of 5,688,650 shares of common stock to the Company in exchange for
56,888 shares of Series B Preferred Stock. This total included certain
directors and officers of the Company who contributed 2,600,000 shares of common

F-20

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

stock they held in exchange for receipt of 26,000 shares of Series B Preferred
Stock. During 2000 and 2001 preferred dividends of additional 3,497 and 584
shares, respectively, were awarded to Holders of Series B Preferred Stock. On
January 26, 2001, all of the 56,888 shares and the 4,084 of shares related to
Preferred Stock dividends were converted into 8,129,636 shares of common stock.

On May 30, 2000 the Company adopted the Certificate of Designation of
Rights and Preferences of the Series C Cumulative Convertible Preferred Stock
("Series C Preferred Stock") that designates this issue to consist of 50,000
shares of $.00001 par value per share with a face value of $100 per share; has a
dividend requirement of 10% per annum, payable quarterly at the election of the
Company in additional shares of Series C Preferred Stock in lieu of cash; has
voting rights excluding the election of directors equivalent to one vote per
share of Common Stock into which preferred shares are convertible into, and may
be converted at the election of the Company into shares of the Company's Common
Stock on the basis of a $0.75 per share conversion rate. After eighteen months
from the issuance date a holder of Series C Preferred Stock may elect to have
future dividends paid in cash.

In August 2000, the Company issued an aggregate of 3,000 shares of its
Series C Preferred Stock and warrants to purchase an aggregate of 300,000 shares
of common stock at $0.75 per share to its outside directors as reimbursement for
expenses associated with their service as directors of the Company. The Company
charged $344,000 to expense as a result of these transactions. In August 2000,
the Company issued 1,500 shares of its Series C Preferred Stock and warrants to
purchase an aggregate of 150,000 shares at $0.75 per share to Larry Ramming, its
former Chief Executive Officer, in exchange for compensation and benefits not
paid to Mr. Ramming as required under his employment agreement. During 2000, the
Company charged $174,000 to expense as a result of these transactions.

In June 2000, the Company issued 9,750 shares of Series C Preferred Stock
and warrants to purchase an aggregate of 975,000 shares of common stock at $0.75
per share to The Ramming Family Limited Partnership (the "Partnership"), of
which Larry Ramming is a controlling person, in exchange for accrued obligations
relating to renewals, modifications, points, and releases in connection with a
loan to the Company in the original principal amount of $700,000. Subsequently,
the Company also issued to the Partnership a warrant to purchase 2,000,000
shares of common stock at $0.75 per share in satisfaction of its obligation to
do so at the inception of the loan. During 2002, the Company charged $238,000
to expense for these warrants.

During 2000, the Company issued 1,625 shares of its Series C Preferred
Stock to third party providers of financial advisory services and as payment for
other obligations; 2,000 shares of its Series C Preferred Stock and a warrant to
purchase 100,000 shares of common stock at $0.75 per share to a third party
provider of legal services; 2,000 shares of its Series C Preferred Stock to a
third party in settlement of litigation; warrants to purchase an aggregate of
300,000 shares of common stock at $0.75 per share to providers of legal
services; an option to purchase 5,000 shares of common stock at $0.75 per share
to a third party provider of consulting services; options to purchase 300,000
shares of common stock at $0.75 per share and 60,000 shares at $1.00 per share
to a third party provider of financial advisory services; options to purchase
100,000 shares of common stock at $1.25 per share and 100,000 shares at $0.75
per share to a third party provider of financial advisory services; and an
option to purchase to 35,000 shares at $0.75 per share to a consultant for
accounting services; an option to purchase 15,000 shares of common stock at
$0.75 per share to a director of the Company in connection with a personal loan
to the Company; and a warrant to purchase 41,700 shares of common stock at $0.75
per share to an officer and director of the Company in satisfaction of Company
obligations paid by such officer and director. The Company charged $758,000 to
expense as a result of these transactions. During 2001, the Company issued 750
shares of its Series C Preferred Stock to third party providers of legal
services and warrants to purchase 75,000 shares of common stock at $0.75 per
share for a third party provider of legal services. This resulted in a 2001
expense of $50,000.

On October 31, 2001, 3,332 shares of series C preferred stock were
converted into 444,295 shares of common stock.

During 2002, 1,181 shares of series C preferred stock were accrued as PIK
interest, 188 shares were issued as a legal settlement, 915 shares were
cancelled and 15,368 shares were converted into common stock.

F-21

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On June 20, 2000 the Company adopted the Certificate of Designation of
Rights and Preferences of the Series D Cumulative Junior Preferred Stock
("Series D Preferred Stock") that designates this issue to consist of 3,500
shares of $.0001 par value per share with a face value of $100 per share; has
dividend requirement of 8% per annum, payable quarterly at the election of the
Company in additional shares of Series D Preferred Stock in lieu of cash; has
voting rights; and is redeemable at any time at the election of the Company in
cash or the issuance of Common Stock purchase warrants on a 2 to 1 share basis
at an exercise price of $0.75 per share.

In April and December 2000, the Company issued 3,000 shares, of its Series
D Cumulative Junior Preferred Stock to three individuals in connection with the
borrowing transaction with Specialty Finance.

During 2002, 278 shares of series D preferred stock were accrued as PIK
interest.

In connection with the restructuring arrangement with Prudential and as
further discussed in Note H, during December 2000, the Company issued 50,000
shares of Series E Cumulative Senior Preferred Stock to Prudential which
provides for cash dividends at 12% after the third anniversary, and has the
right to convert to Series F Cumulative Convertible Preferred Stock after 5
years, which in turn is convertible to common stock at a rate of $0.6375 per
share. In addition the Company issued to Prudential 80,000 shares of Series G
Cumulative Convertible Preferred Stock; which has right to convert to common
stock at $1.19 per share minus the amount, if any, by which any shares of Series
H Cumulative Convertible Preferred Stock (see below) should have been converted
to Common Stock at a conversion price of less than $1.25 per share. The Company
also issued warrants to purchase 8,800,000 shares of common stock at $0.625 per
share.

During 2002, 5,651 and 9,041 shares of series E preferred stock and series
G preferred stock, respectively, were accrued as PIK interest. During 2002,
9,772, shares of series H preferred stock were accrued as PIK interest and 6,185
shares were converted into common stock.

In connection with the $8,700,000 borrowing with Specialty Finance
discussed in Note H, the Company issued 147,058 shares of common stock and
warrants representing the right to purchase an aggregate of 8,729,985 shares of
common stock of the Company to the participation interest holders and warrants
to purchase an aggregate of 3,625,000 shares of common stock to the investment
group that arranged the financing. The warrants have a term of five years and
can be exercised by the payment of cash in the amount of $0.625 per share as to
8,729,985 shares and $0.75 per share as to 3,625,000 shares of common stock, or
by relinquishing a number of shares subject to the warrant with a market value
equal to the aggregate exercise price of the portion of the warrant being
exercised. The fair value of the warrants issued in the transaction was
$986,000.

Subsequently, in connection with the Seventh Amendment to Loan Agreement
dated as of December 29, 2000, Specialty Finance agreed to convert $7,730,000 of
the participation interest, plus $757,000 in accrued interest thereon, into
89,117 shares of the Company's Series H Cumulative Convertible Preferred Stock.
The remaining $1,000,000 of the participation interest was outstanding as senior
secured debt as of December 31, 2000 and 2001. Specialty Finance Fund has the
right to convert shares of the Series H Stock, and all accrued but unpaid
dividends owing through the date of conversion, into shares of common stock.
The number of shares of common stock to be issued on each share of Series H
Stock is determined by dividing face value plus the amount of any accrued but
unpaid dividends on the Series H Stock by 85% of the ninety day average of the
high and low trading prices preceding the date of notice to the Company;
provided, that the conversion shall not use a price of less than $0.75 per share
and shall not be greater than $1.25 per share unless the conversion occurs
between January 1, 2001 and December 31, 2002, when the price shall not be
greater than $2.50 per share. If the Series H Stock is converted into common
stock, the Company will also be obligated to issue warrants providing the
holders of the Series H Stock with the right for a three year period to acquire
shares of common stock, at a price equal to the conversion price determined
above, equivalent to ten percent (10%) of the number of shares into which the
shares of Series H Stock are converted.

For the years ended December 31, 2000, 2001 and 2002, the Company accrued
$864,000 and $2,871,000, $3,059,000 respectively, for dividends relating to all
series of preferred stock.

F-22

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stockholder Rights Plan:

On November 29, 2001 the Company adopted a stockholder rights plan in order
to provide protection for the stockholders in the event of an attempted
potential acquisition of the Company. Under the plan, the Company has declared
a dividend of one right on each share of common stock of the company. Each
right will entitle the holder to purchase one one-hundredth of a share of a new
Series I Junior Participating Preferred Stock of the Company at an exercise
price of $5.00. The rights are not currently exercisable and will become
exercisable only after a person or group acquires 15% or more of the outstanding
common stock of the Company or announces a tender offer or exchange offer which
would result in ownership of 15% or more of the outstanding common stock. The
rights are subject to redemption by the Company for $0.001 per right at any
time, subject to certain limitations. In addition, the Board of Directors is
authorized to amend the Rights plan at any time prior to the time the rights
become exercisable. The rights will expire on December 17, 2011.

If the rights become exercisable, each right will entitle its holder (other
than such person or members of such group) to purchase, at the right's then
current exercise price, a number of the Company's shares of common stock having
a market value of twice such price or, if the Company is acquired in a merger or
other business combination, each right will entitle its holder to purchase, at
the right's then current exercise price, a number of the acquiring Company's
shares of common stock having a market value of twice such price. Prior to an
acquisition of ownership of 50% or more of the common stock by a person or
group, the Board of Directors may exchange the rights (other than rights owned
by such person or group, which will have become null and void and
nontransferable) at an exchange ratio of one share of common stock (or one
one-hundredth of a share of Series I Preferred Stock) per right.

Warrants:

On September 18, 1997, placement agents in connection with a private
placement offering for the sale of common stock were awarded 748,500 warrants in
connection with the acquisitions of ITS and Code 3 in 1998, the Company issued
warrants to purchase 2,000,000 and 500,000 shares, respectively of the Company's
common stock. In connection with the July 23, 1998, sale of the Subordinated
Notes referred to in Note H the Company issued to Prudential warrants to
purchase, commencing on July 23, 2000 and terminating with the later of July 23,
2008, or six months after the Subordinated Notes are fully retired, 3,165,000
shares of common stock (the "Warrants") of the Company. A summary of warrants
outstanding as of December 31, 2002 is as follows:

EXERCISE
PRICE NUMBER
EXPIRATION DATE PER SHARE OF SHARES
--------------- ---------- ----------

08/07/2003. . . . . . . . . $ 1.20 397,500
01/03/2004. . . . . . . . . 0.625 800,000
03/07/2004. . . . . . . . . 4.50 300,000
04/17/2003. . . . . . . . . 5.00 220,000
04/30/2003. . . . . . . . . 5.00 80,000
05/05/2003. . . . . . . . . 5.00 20,000
05/18/2003. . . . . . . . . 5.00 15,000
05/22/2003. . . . . . . . . 5.00 25,000
06/04/2003. . . . . . . . . 5.00 200,000
06/05/2003. . . . . . . . . 5.00 170,000
06/08/2003. . . . . . . . . 5.00 50,000
05/22/2003. . . . . . . . . 1.25 100,000
05/22/2003. . . . . . . . . 1.50 100,000
07/23/2008. . . . . . . . . 0.625 3,165,396
04/10/2008. . . . . . . . . 1.25 2,750,000
04/23/2004. . . . . . . . . 0.75 288,936
04/27/2004. . . . . . . . . 5.00 163,302
05/03/2004. . . . . . . . . 5.00 18,130
05/12/2004. . . . . . . . . 1.25 420,000
05/12/2004. . . . . . . . . 1.25 700,000
03/19/2005. . . . . . . . . 1.25 450,000
04/17/2007. . . . . . . . . 0.75 2,000,000
04/25/2005. . . . . . . . . 0.75 150,500
04/25/2007. . . . . . . . . 0.75 187,500
04/25/2007. . . . . . . . . 0.625 2,500,000
05/04/2007. . . . . . . . . 0.625 2,500,000
05/04/2007. . . . . . . . . 0.75 914,939
06/04/2007. . . . . . . . . 0.75 1,022,561

F-23

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

06/27/2005. . . . . . . . . 0.75 975,000
06/30/2007. . . . . . . . . 0.75 1,500,000
06/30/2007. . . . . . . . . 0.625 3,000,000
07/07/2005. . . . . . . . . 0.75 33,333
08/24/2005. . . . . . . . . 0.75 375,000
09/07/2005. . . . . . . . . 0.75 41,700
12/28/2007. . . . . . . . . 0.625 729,985
07/23/2008. . . . . . . . . 0.625 8,800,000
10/31/2006. . . . . . . . . 0.75 75,000
04/25/2005. . . . . . . . . 0.75 55,000
06/30/2005. . . . . . . . . 0.75 62,159
07/15/2005. . . . . . . . . 0.75 15,183
----------
35,236,254
==========

Stock Options:

A summary of stock option plans under which stock options remain
outstanding as of December 31, 2002 follows:

1996 Incentive Stock Plan authorizing the Board of Directors to provide a
number of key employees with incentive compensation commensurate with their
positions and responsibilities. The 1996 Plan permitted the grant of incentive
equity awards covering up to 960,000 shares of common stock. In connection with
the acquisition of IWC Services by the Company, the Company issued incentive
stock options covering an aggregate of 460,000 shares of common stock to
employees who were the beneficial owners of 200,000 options that were previously
granted by IWC Services. These incentive stock options are exercisable for a
period of 10 years from the original date of grant at an exercise price of $0.43
per share.

1997 Incentive Stock Plan authorizing the Board of Directors to provide key
employees with incentive compensation commensurate with their positions and
responsibilities. The 1997 Incentive Stock Plan permits the grant of incentive
equity awards covering up to 1,475,000 shares of common stock. Grants may be in
the form of qualified or non qualified stock options, restricted stock, phantom
stock, stock bonuses and cash bonuses. As of the date hereof, stock options
covering an aggregate of 1,475,000 shares of common stock have been made under
the 1997 Incentive Stock Plan. Such options vest ratably over a five-year period
from the date of grant.

1997 Executive Compensation Plan authorizing the Board of Directors to
provide executive officers with incentive compensation commensurate with their
positions and responsibilities. The 1997 Executive Compensation Plan permits the
grant of incentive equity awards covering up to 1,475,000 shares of common
stock. Grants may be in the form of qualified or non qualified stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses. As of December
31, 2002, stock option grants covering an aggregate of 780,000 shares of Common
Stock have been made under the Plan.

1997 Outside Directors' Option Plan authorizing the issuance each year of
an option to purchase 15,000 shares of common stock to each member of the Board
of Directors who is not an employee of the Company. The purpose of the
Directors' Plan is to encourage the continued service of outside directors and
to provide them with additional incentive to assist the Company in achieving its
growth objectives. Options may be exercised over a five-year period with the
initial right to exercise starting one year from the date of the grant, provided
the director has not resigned or been removed for cause by the Board of
Directors prior to such date. After one year from the date of the grant, options
outstanding under the Directors' Plan may be exercised regardless of whether the
individual continues to serve as a director. Options granted under the
Directors' Plan are not transferable except by will or by operation of law.
Through December 31, 2002, grants of stock options covering an aggregate of
159,000 shares of common stock have been made under the 1997 Outside Directors'
Option Plan.

2000 Long-Term Incentive Plan authorizes the Board of Directors to provide
full time employees and consultants (whether full or part time) with incentive
compensation in connection with their services to the Company. The plan permits
the grant of incentive equity awards covering up to 6,000,000 shares of common
stock. Grants may be in the form of qualified or non qualified stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses. As of the date
hereof, stock option grants covering an aggregate of 300,000 shares of common
stock have been made under the 2000 Long-Term Incentive Plan. Such options vest
ratably over a five-year period from the date of grant. Options granted to
consultants are valued using the Black Scholes pricing model and expensed over
the vesting period.

F-24

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In March 1999, the Company awarded 288,000 options as compensation to an
outside consultant at an exercise price of $2.50 per share, which vest over
twelve months and are exercisable over a five-year period from the date of
grant. Based on a Black-Scholes calculation, the Company recorded a $244,000
compensation charge related to the issuance of these options.

In 2000, the Company issued non-plan option grants to purchase 150,000
shares at $0.75 per share to each member of the board of directors (other than
Tracy Turner) and Dewitt Edwards, former Vice President and Secretary. As of
December 31, 2002, stock options covering an aggregate of 750,000 shares of
Common Stock have been made.

Additional non-plan option grants were issued during 2000 to third party
providers of consulting services in the amount of 600,000 shares and legal
services in the amount of 300,000 shares. As of December 31, 2002, non-plan
option grants covering an aggregate of 900,000 shares of Common Stock have been
made. This resulted in an aggregate 2000 expense of $174,000.

In April 2000, the Company voided stock options covering an aggregate of
3,007,000 shares of common stock by agreement with the option holders with the
understanding that the stock options would be repriced and reissued. During the
third quarter of 2000, options covering an aggregate of 2,841,000 shares of
common stock were reissued at an exercise price of $0.75. No compensation
expense was required to be recorded at the date of issue. However, the
reissuance of these options was accounted for as a variable plan, and the
Company was subject to recording compensation expense if the Company's stock
price rose above $0.75. In April 2001, Messrs. Ramming, Winchester and Edwards
agreed to voluntarily surrender 2,088,000 of these options at the request of the
Compensation Committee of the Board, because of the potential variable plan
accounting associated with these options. In October 2001 these individuals
received fully vested options to purchase 2,088,000 shares at an exercise price
of $0.55 per share. As of December 31, 2002, options to purchase 291,000 shares
pursuant to the reissuance in the third quarter of 2000 remain subject to
variable plan accounting.

Stock option activity for the years ended December 31, 2000, 2001 and 2002
was as follows:

WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
----------- ---------------

Outstanding December 31, 1999 . 3,622,000 $ 2.14
Granted . . . . . . . . . . . 4,565,000 0.76
Exercised . . . . . . . . . . (47,000) 0.43
Cancelled . . . . . . . . . . (197,000) 4.50
----------- ---------------
Outstanding December 31, 2000 . 7,943,000 $ 0.76
Granted . . . . . . . . . . . 2,088,000 0.55
Exercised . . . . . . . . . . - -
Cancelled . . . . . . . . . . (2,188,000) 0.79
----------- ---------------
Outstanding December 31, 2001 . 7,843,000 $ 0.70
=========== ===============
Granted . . . . . . . . . . . - -
Exercised . . . . . . . . . . - -
Cancelled . . . . . . . . . . (2,277,000) 0.72
----------- ---------------
Outstanding December 31, 2002 . 5,566,000 $ 0.69
=========== ===============

F-25

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summary information about the Company's stock options outstanding at
December 31, 2002.

Outstanding Exercisable
- -------------------------------------------------------------------- ----------------------------------
Weighted
Average Number
Number Outstanding Remaining Weighted Exercisable Weighted
Range of at Contractual Average At Average
Exercise Prices December 31, 2002 Life in Years Exercise Price December 31, 2002 Exercise Price
- ---------------- ------------------ ------------- --------------- ----------------- ---------------

0.43 92,000 5.00 $ 0.43 92,000 $ 0.43
0.55 2,088,000 9.00 $ 0.55 2,088,000 $ 0.55
0.75 3,151,000 5.78 $ 0.75 2,583,000 $ 0.75
1.00 - $1.25 235,000 2.47 $ 1.19 235,000 $ 1.19
- ---------------- ------------------ ------------- --------------- ----------------- ---------------
043 - $1.25 5,566,000 6.83 $ 0.69 4,998 ,000 $ 0.68
================ ================== ============= =============== ================= ===============

The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized for
stock option grants under its employee and director stock option plans if no
intrinsic value of the option exists at the date of the grant. In October 1995,
the FASB issued SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123"). SFAS No. 123 encourages companies to account for stock-based
compensations awards based on the fair value of the awards at the date they are
granted. The resulting compensation cost would be shown as an expense in the
consolidated statements of operations. Companies can choose not to apply the
new accounting method and continue to apply current accounting requirements;
however, disclosure is required as to what net income and earnings per share
would have been had the new accounting method been followed. Had compensation
expense for the Company's stock-based compensation plans been determined based
on the fair value at the grant dates for awards under stock option plans
consistent with the method of SFAS No. 123, the Company's reported net loss and
net loss per common share would have changed to the pro forma amounts indicated
below:

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
-------------- -------------- --------------

Net loss to common stockholders as reported. . . . . $ (22,216,000) $ (1,596,000) $ (12,292,000)
Less total stock based employer compensation exense
determined under fair value based method for all
awards, net of tax related effects . . . . . . . . . $ 1,541,000 $ 1,534,000 $ 742,000
Pro forma net loss to common stockholders. . . . . . $ (23,757,000) $ (3,130,000) $ (13,034,000)
Basic and diluted (loss)
Per share as reported. . . . . . . . . . . . . $ (0.66) $ (0.04) $ (0.28)
Pro forma. . . . . . . . . . . . . . . . . . . $ (0.70) $ (0.08) $ (0.30)

F-26

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The company used the Black-Scholes option pricing model to estimate the
fair value of options on the date of grant for 2000, 2001 and 2002. The
following assumptions were applied in determining the pro forma compensation
costs

YEAR END DECEMBER 31,
-------------------------
2000 2001 2002
--------- -------- ----

Risk-free interest rate. . . . . . . . 6.0% 6.0% NA
Expected dividend yield. . . . . . . . - NA
Expected option life . . . . . . . . . 10 yrs. 10 yrs NA
Expected volatility. . . . . . . . . . 141.9% 115.8% NA
Weighted average fair value of options
granted at market value. . . . . . . $ 0.52 $ 0.34 NA

The effects of applying SFAS No. 123 in the above disclosure may not be
indicative of future amounts as additional awards in future years are
anticipated.

401(k) Plan:

The Company sponsors a 40l (k) Plan adopted in 2000 for eligible employees
having six months of service and being at least twenty-one years of age.
Employees can make elective contributions of 1% to 15% of compensation, as
defined. During the years ended December 31, 2000, 2001 and 2002, the Company
contributed approximately $50,000, $65,000 and $83,000 under the Plan.

J. RELATED PARTY TRANSACTIONS

The Company's former Chairman and Chief Executive Officer, Larry H.
Ramming, and the Ramming Family Partnership of which Mr. Ramming is a
controlling person, was granted a waiver of the lock-up restrictions on their
shares of common stock with respect to a pledge of such shares to secure a loan,
the proceeds of which were used by Mr. Ramming on April 30, 1998 to purchase the
$7,000,000 remaining balance outstanding of the notes payable (the 10% Notes)
issued by the Company in connection with the acquisitions of ITS and Code 3. Mr.
Ramming agreed to extend the maturity dates of such notes to October 1, 1998 and
thereafter on a month-to-month basis, in exchange for a fee of 1% of the
principal balances of such note. As of December 31, 1998, the Company had paid
Mr. Ramming $5,783,000 to be applied toward the principal balance of the 10%
Notes held by Mr. Ramming and $383,000 in interest and extension fees. During
the period from January 1, 1999 through April 15, 1999, at which time Mr.
Ramming agreed to subordinate and delay future note payments so long as the
Comerica senior secured credit facility remained outstanding, additional
principal payments of $648,000 were paid to Mr. Ramming. As further
consideration for the certain bridge financing, Mr. Ramming was eligible to be
granted 2,000,000 options to purchase common stock at a per share price of $0.75
subject to issuance and availability of authorized and unissued or committed
common shares which was voluntarily deferred in exchange for the commitment of
the Company to issue subject to availability of authorized but unissued or
committed shares of common stock in the Company. This act was taken to make
available additional authorized but unissued and uncommitted shares in
connection with financing transactions completed subsequent to December 31,
1999. The aggregate obligation was satisfied in 2000 with the issuance of 9,750
shares of Series C Preferred Stock and warrants to purchase an aggregate of
975,000 shares of Common Stock at $0.75 per share as further discussed in Note
I. Management believes the terms and conditions of Mr. Ramming's loan to the
Company were favorable to the Company as compared to those that could have been
negotiated with outside parties.

As further described in Note I, the Company has entered into various
financing and equity transactions with the Company's former Chairman and Chief
Executive Officer, Larry H. Ramming and the Ramming Family Limited Partnership,
("The Partnership") of which Mr. Ramming is a controlling person. Management
believes the terms and conditions of the financing and equity transactions made
with Mr. Ramming and the partnership to the Company are as favorable to the
Company as could have been negotiated with outside parties.

F-27

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As discussed in Note H, the Company has entered into financing transactions
with an investment group, Specialty Finance. The managing member of Specialty
Finance is also a member of the Company's Board of Directors.

K. COMMITMENTS AND CONTINGENCIES:

Leases

The Company leases vehicles, equipment, office and storage facilities under
operating leases with terms in excess of one year.

At December 31, 2002, future minimum lease payments, net of subleases,
under these non-cancelable operating leases are as follows:

YEARS ENDING DECEMBER 31: AMOUNT
-------------------------- --------

2003 . . . . . . . . . . . $130,000
2004 . . . . . . . . . . . 46,000
2005 . . . . . . . . . . . 16,000
2006 . . . . . . . . . . . 12,000
2007 . . . . . . . . . . . 12,000
Thereafter . . . . . . . . 6,000
--------
$222,000
========

Rent expense for the years ended December 31, 2000, 2001 and 2002, was
approximately $806,000, $748,000 and $275,000 respectively.

Litigation

On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS
Supply Corporation, the Company's subsidiary, filed a complaint against Comerica
Bank-Texas, the Company and various subsidiaries of the Company for a formal
accounting of all lockbox transfers that occurred between ITS and Comerica Bank,
et al and all intercompany transfers between ITS and the Company and its
subsidiaries to determine if any of the transfers are avoidable under Federal or
state statutes and seeking repayment to ITS of all such amounts. The Trustee
asserted that approximately $400,000 of lockbox transfers and $3,000,000 of
intercompany transfers were made between the parties. In September, 2002 a
settlement agreement was reached between the parties and the Trustee withdrew
all claims for avoidable transfers. The Company credited other income for
$1,073,000 to reverse the accrual for this potential liability

In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, Charles Phillips, certain other employees of the
Company, and several entities affiliated with Larry H. Ramming in the 269th
Judicial District Court, Harris County, Texas. The plaintiffs alleged various
causes of action, including fraud, breach of contract, breach of fiduciary duty
and other intentional misconduct relating to the acquisition of stock of a
corporation by the name of Emergency Resources International, Inc. ("ERI") by a
corporation affiliated with Larry H. Ramming and the circumstances relating to
the founding of the Company. In July 2002, the Company agreed to pay $500,000
in cash in four installments, the last installment being due in January 2003, in
partial settlement of the plaintiffs' claims against all of the defendants. As
to the remaining claims, the defendants filed motions for summary judgment. On
September 24, 2002 the court granted the defendants' motions for summary
judgment. The Company had defaulted on the settlement after paying one
installment of $100,000, but has since resettled the case on behalf of all Boots
& Coots entities and all employees of the Company (but not on behalf of Larry H.
Ramming, Charles Phillips, and the other entities affiliated with Larry H.
Ramming) by paying the remaining unpaid $400,000 in March, 2003 in exchange for
full and final release by all plaintiffs from any and all claims related to the
subject of the case.

The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.

F-28

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. BUSINESS SEGMENT INFORMATION, REVENUES FROM MAJOR CUSTOMERS AND
CONCENTRATION OF CREDIT RISK:

Segments:

On January 1, 2001, the Company redefined the segments in which it operates
as a result of the discontinued operations of ITS and Baylor business operations
and further redefined the segments during 2002, as a result of the decision to
discontinue its Abasco and Special Services business operations. The current
segments are Prevention and Response. Intercompany transfers between segments
were not material. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies. For
purposes of this presentation, general and corporate expenses have been
allocated between segments on a pro rata basis based on revenue. ITS, Baylor,
Abasco and Special Services are presented as discontinued operations in the
condensed consolidated financial statements and are therefore excluded from the
segment information for all periods presented.

The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. The scope of these services include training, contingency planning,
well plan reviews, services associated with the Company's Safeguard programs and
services in conjunction with the WELLSURE(R) risk management program. All of
these services are designed to significantly reduce the risk of a well blowout
or other critical response event.

The Response segment consists of personnel and equipment services provided
during an emergency response such as a critical well event or a hazardous
material response. These services are designed to minimize response time and
damage while maximizing safety. Response revenues typically provide high gross
profit margins.

F-29

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Information concerning operations in the two business segments for the
three and nine months ended September 30, 2001 and 2002 is presented below.
General and corporate are included in the calculation of identifiable assets and
are included in the Prevention and Response segments.

PREVENTION RESPONSE CONSOLIDATED
------------ ------------ --------------

Year Ended December 31, 2000
Net operating revenues . . . . . . . . . . $ 1,564,000 $ 9,249,000 $ 10,813,000
Operating income (loss). . . . . . . . . . (893,000) (2,470,000) (3,363,000)
Identifiable operating assets. . . . . . . 2,622,000 15,504,000 18,126,000
Capital expenditures . . . . . . . . . . . - 260,000 260,000
Depreciation and amortization. . . . . . . 176,000 1,037,000 1,213,000
Interest expense . . . . . . . . . . . . . 619,000 3,659,000 4,278,000

Year Ended December 31, 2001
Net operating revenues . . . . . . . . . . $ 5,189,000 $11,749,000 $ 16,938,000
Operating income (loss). . . . . . . . . . 913,000 3,494,000 4,407,000
Identifiable operating assets. . . . . . . 5,439,000 12,315,000 17,754,000
Capital expenditures . . . . . . . . . . . - 221,000 221,000
Depreciation and amortization. . . . . . . 342,000 902,000 1,244,000
Interest expense . . . . . . . . . . . . . 68,000 155,000 223,000

Year Ended December 31, 2002
Net operating revenues . . . . . . . . . . $ 7,666,000 $ 6,436,000 $ 14,102,000
Operating Income (loss). . . . . . . . . . (732,000) (807,000) (1,539,000)
Identifiable operating assets. . . . . . . 3,828,000 3,208,000 7,036,000
Capital expenditures . . . . . . . . . . . - 98,000 98,000
Depreciation and amortization. . . . . . . 617,000 585,000 1,202,000
Interest expense . . . . . . . . . . . . . 416,000 349,000 765,000

Revenue from major customers and concentration of credit risk:

During the periods presented below, the following customers represented
significant concentrations of consolidated revenues:

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
------------ ------------ -------------

Customer A 34% 32% 14%
Customer B 15% - 11%
Customer C - 10% -

The Company's revenues are generated geographically as follows:

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
------------- ------------- -------------

Domestic customers 68% 75% 55%
Foreign customers. 32% 25% 45%

None of the Company's customers at December 31, 2000 and 2001 accounted for
greater than ten percent of outstanding accounts receivable. One customer in
Venezuela accounted fore more than 31% of the December 31, 2002 outstanding
accounts receivable. One customer in Kuwait totaled 10% of total revenues and
55% of foreign revenues during the year ended December 31, 2001.

The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management believes that any possible
deposit loss is minimal.

F-30

BOOTS AND COOTS INTERNATIONAL WELL-CONTROL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. QUARTERLY FINANCIAL DATA (UNAUDITED)

The table below summarizes the unaudited quarterly results of operations
for 2001 and 2002

QUARTER ENDED

2001 MARCH 31, 2001 JUNE 30, 2001 SEPTEMBER 30, 2001 DECEMBER 31, 2001
- ----------------------------------------- ---------------- --------------- -------------------- -------------------

Revenues $ 4,123,000 $ 5,087,000 $ 4,507,000 $ 3,221,000
Loss from continuing operations 1,318,000 1,425,000 284,000 660,000
Net income (loss) 767,000 976,000 117,000 (532 ,000)
Net income (loss) attributable to common
stockholders 33,000 282,000 (584,000) (1,327,000)

Net income (loss) per common share:
Basic 0.00 0.01 (0.01) (0.03)
Diluted 0.00 0.01 (0.01) (0.03)

QUARTER ENDED

2002 MARCH 31, 2002 JUNE 30, 2002 SEPTEMBER 30, 2002 DECEMBER 31, 2002
- ----------------------------------------- ---------------- --------------- -------------------- -------------------
Revenues $ 4,010,000 $ 3,984,000 $ 3,464,000 $ 2,644 ,000
Income (loss) from continuing operations (65,000) (1,738,000) 888,000 (1,610,000)
Net income (loss) (1,830,000) (7,160,000) 1,385,000 (1,575,000)
Net income (loss) attributable to common
stockholders (2,660,000) (7,922,000) 625,000 (2,335,000)

Net income (loss) per common share:
Basic (0.06) (0.19) 0.01 (0.04)
Diluted (0.06) (0.19) 0.01 (0.04)

Basic and diluted loss per common share for each of the quarters presented
above is based on the respective weighted average number of common and dilutive
potential common shares outstanding for each period and the sum of the quarters
may not necessarily be equal to the full year basic and diluted earnings per
common share amounts.

N. Events Subsequent to December 31, 2002

The following are disclosures of events subsequent to December 31, 2002 and
are not disclosed elsewhere in these consolidated financial statements:

Through March 28, 2003, 4,000 shares of the 12,000 total shares issued of
the Company's Junior Redeemable Convertible Preferred Stock ("Redeemable
Preferred") were converted into 48,125 shares of the Company's common stock. The
converted Jr. Preferred also included dividends which were paid in kind of 1,294
shares of preferred D.

Through March 28, 2003, 2,119 shares of 5,254 total remaining shares of the
Company's Series C Cumulative Convertible Preferred Stock ("Series C Preferred
Stock") were converted into 282,534 shares of the Company's common stock. The
converted Series C Preferred Stock conversion included dividends which were paid
in kind of 369 shares of Series C Preferred Stock.

Through March 28, 2003, 1,242 shares of 3,657 total shares of the Company's
Series D Cumulative Junior Preferred Stock ("Series D Preferred Stock") were
converted into 331,200 shares of the Company's common stock. The converted
Series D Preferred Stock conversion included dividends which were paid in kind
of 242 shares Series D Preferred Stock.

F-31

In March 2003, the Company's Subordinated Lender, Prudential, converted
83,232 shares of 97,240 total shares of the Company's series G cumulative
convertible preferred stock ("Series G") into 12,062,462 shares of the Company's
common stock. The converted series G consisted of the original 80,000 shares
issued at a $100 face value, along with dividends which were paid in kind of
3,232 shares. Prudential is the only holder of Series G.

Through March 28, 2003, 100,658 shares of 101,839 total remaining shares of
the Company's Series H Cumulative Convertible Preferred Stock ("Series H
Preferred Stock") were converted into 13,420,758 shares of the Company's common
stock. The converted Series H Preferred Stock conversion included dividends
which were paid in kind of 17,857 shares of Series H Preferred Stock.

Through March 28, 2003, the Company's former chairman exercised 900,000
shares of stock options. There were also 390,514 shares of common stock issued
under various stock option plans during from January 1, 2003 through March 28,
2003.

F-32