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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549****FORM 10-Q****(MarkOne)**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934******For the Quarterly Period ended September 30, 2005****   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934******For the Transition Period from**                    **to**                    ****Commission file number: 000-19580****T-3 ENERGY SERVICES, INC.**(Exact Name of Registrant as Specified in Its Charter)   **Delaware** **76-0697390**(State or Other Jurisdiction (IRS Employerof Incorporation or Organization) Identification No.)   **13111 Northwest Freeway, Suite 500**  **Houston, Texas** **77040**(Address of Principal Executive Offices) (Zip Code)(Registrant’s telephone number, including area code): **(713) 996-4110**     Indicate by check mark whether the registrant: (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes þ No o     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes o No þ     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange Act). Yes o No þ     At November 14, 2005, the registrant had 10,581,986 shares of common stock outstanding.  
 

**TABLE OF CONTENTS****FORM 10-Q**         Item    Page     **PART I**              1.  Financial Statements                 Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004   1     Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004   2     Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004   3     Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2005 and 2004   4     Notes to Condensed Consolidated Financial Statements   5           2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   13           3.  Quantitative and Qualitative Disclosures about Market Risks  29           4.  Controls and Procedures  29              **PART II**              1.  Legal Proceedings   30           2.  Unregistered Sales of Equity Securities and Use of Proceeds   30           3.  Defaults Upon Senior Securities   30           4.  Submission of Matters to a Vote of Security Holders   30           5.  Other Information   30           6.  Exhibits   31  Third Employment Agreement Letter Agreement Certification of CEO pursuant to Rule 13a-14a/15d-14a Certification of CFO pursuant to Rule 13a-14a/15d-14a Certification Pursuant to Section 906 Certification Pursuant to Section 906 i
 

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**T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEETS****(in thousands except for share amounts)**           **September 30,**  **December 31,**   **2005**  **2004**   **(unaudited)**     ASSETS        Current assets:        Cash and cash equivalents $523  $95 Accounts receivable – trade, net  16,619   13,296 Inventories  17,377   11,861 Notes receivable, current portion  491   1,160 Deferred income taxes  2,180   2,086 Prepaids and other current assets  3,312   3,114 Current assets of discontinued operations  13,305   18,226        Total current assets  53,807   49,838          Property and equipment, net  17,890   18,746 Notes receivable, less current portion  327   365 Goodwill, net  69,017   68,393 Other intangible assets, net  2,442   3,445 Other assets  882   1,554                 Total assets $144,365  $142,341                 LIABILITIES AND STOCKHOLDERS’ EQUITY        Current liabilities:        Accounts payable – trade $9,375  $6,355 Accrued expenses and other  10,673   6,408 Current maturities of long-term debt  47   44 Current liabilities of discontinued operations  4,467   4,048        Total current liabilities  24,562   16,855          Long-term debt, less current maturities  12,578   18,824 Other long-term liabilities  94   130 Deferred income taxes  993   2,216          Commitments and contingencies                 Stockholders’ equity:        Preferred stock, $.001 par value, 25,000,000 sharesauthorized, no shares issued or outstanding  —   — Common stock, $.001 par value, 25,000,000 shares authorized atSeptember 30, 2005 and 50,000,000 shares authorized atDecember 31, 2004, 10,581,986 shares issued andoutstanding atSeptember 30, 2005 and December 31, 2004  11   11 Warrants, 335,362 issued and outstanding at September 30, 2005and 517,862 issued and outstanding at December 31, 2004  644   853 Additional paid-in capital  123,174   122,962 Retained deficit  (18,548)  (19,933)Accumulated other comprehensive income  857   423        Total stockholders’ equity  106,138   104,316        Total liabilities and stockholders’ equity $144,365  $142,341        The accompanying notes are an integral part of these condensed consolidated financial statements.
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**T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)****(in thousands except per share amounts)**                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30,**   **2005**  **2004**  **2005**  **2004** Revenues:                Products $16,464  $10,566  $41,554  $31,066 Services  9,327   5,881   29,058   17,420                 25,791   16,447   70,612   48,486                  Cost of revenues:                Products  10,634   6,770   27,087   20,728 Services  6,140   3,687   18,424   11,067                 16,774   10,457   45,511   31,795                  Gross profit  9,017   5,990   25,101   16,691                  Operating expenses  5,578   3,800   15,714   11,725                               Income from operations  3,439   2,190   9,387   4,966                  Interest expense  146   548   1,219   1,884                  Interest income  15   57   69   170                  Other (income) expense, net  (10)  53   19   120                               Income from continuing operations beforeprovision for income taxes  3,318   1,646   8,218   3,132                  Provision for income taxes  1,214   686   3,052   1,228                               Income from continuing operations  2,104   960   5,166   1,904                  Income (loss) from discontinuedoperations, net of tax  (3,856)  169   (3,781)  (1,818)                              Net income (loss) $(1,752) $1,129  $1,385  $86                               Basic earnings (loss) per common share:                Continuing operations $.20  $.09  $.49  $.18 Discontinued operations  (.37)  .02   (.36)  (.17)             Net income (loss) per common share $(.17) $.11  $.13  $.01                               Diluted earnings (loss) per common share:                Continuing operations $.20  $.09  $.48  $.18 Discontinued operations  (.36)  .02   (.35)  (.17)             Net income (loss) per common share $(.16) $.11  $.13  $.01                               Weighted average common shares outstanding:                Basic  10,582   10,582   10,582   10,582              Diluted  10,716   10,582   10,659   10,584              The accompanying notes are an integral part of these condensed consolidated financial statements.
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**T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)****(in thousands)**           **Nine Months Ended**   **September 30,**   **2005**  **2004** Cash flows from operating activities:        Net income $1,385  $86 Adjustments to reconcile net income to net cashprovided by operating activities:        Loss from discontinued operations, net of tax  3,781   1,818 Bad debt expense  55   92 Depreciation and amortization  2,412   1,694 Amortization of deferred loan costs  235   767 Write-off of deferred loan costs  370   — Loss on sale of assets  23   157 Write-down of other intangible assets, net  —   150 Deferred taxes  (1,989)  533 Amortization of stock compensation  3   6 Changes in assets and liabilities:        Accounts receivable – trade  (3,415)  1,253 Inventories, net  (5,461)  (3,207)Prepaids and other current assets  (203)  2,113 Other assets  19   (38)Accounts payable – trade  2,920   (1,107)Accrued expenses and other  4,251   (51)Assets held for sale, net  —   119                 Net cash provided by operating activities  4,386   4,385                 Cash flows from investing activities:        Purchases of property and equipment  (1,043)  (1,367)Proceeds from sales of property and equipment  53   926                 Net cash used in investing activities  (990)  (441)                Cash flows from financing activities:        Net borrowings under revolving credit facility  8,790   — Payments on long-term debt  (15,033)  (12,266)Debt financing costs  —   (320)Collections on notes receivable  707   209                 Net cash used in financing activities  (5,536)  (12,377)                Effect of exchange rate changes on cash and cash equivalents  15   —                 Net cash provided by discontinued operations  2,553   10,427                 Net decrease in restricted cash  —   102                 Net increase in cash and cash equivalents  428   2,096 Cash and cash equivalents, beginning of period  95   17        Cash and cash equivalents, end of period $523  $2,113        The accompanying notes are an integral part of these condensed consolidated financial statements.
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**T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)****(in thousands)**                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30,**   **2005**  **2004**  **2005**  **2004** Net income (loss) $(1,752) $1,129  $1,385  $86                  Other comprehensive income (loss):                Foreign currency translation adjustment  631   —   434   —                               Comprehensive income (loss) $(1,121) $1,129  $1,819  $86              The accompanying notes are an integral part of these condensed consolidated financial statements.
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**T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)****1. BASIS OF PRESENTATION**     The accompanying unaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-Q and Regulation S-X.Accordingly, they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for complete financial statements.In the opinion of management, all adjustments (consisting of normal recurring adjustments)considered necessary for fair presentation have been included. These financial statements includethe accounts of T-3 Energy Services, Inc. and its subsidiaries (“T-3” or the “Company”). Allsignificant intercompany balances and transactions have been eliminated in consolidation.Operating results for the three and nine months ended September 30, 2005, are not necessarilyindicative of the results that may be expected for the year ended December 31, 2005. For furtherinformation, refer to the consolidated financial statements and footnotes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2004. Certainreclassifications were made to previously reported amounts in the consolidated financial statementsand notes to reflect discontinued operations as discussed in Note 2 and to make them consistentwith the current presentation format.*Equity Method Investments*     On July 20, 2005, the Company completed a joint participation agreement with Servicios YMaquinaria De Mexico, S.A. de C.V. (“SYMMSA”), a subsidiary of GRUPO R, a conglomerate of companiesthat provide services to the energy and industrial sectors in Mexico. Each party to the jointventure has equal operational control. Under the terms of the agreement, the Company will providethe joint venture with its pressure control products and services, trademark and trade name,license know how and other services. SYMMSA will provide the joint venture with the exclusive useof its real estate, building facilities, machinery and equipment, labor force and will assist thejoint venture in its marketing and sales efforts in Mexico. The Company will account for itsinvestment in the joint venture under APB No. 18, “The Equity Method of Accounting for Investmentsin Common Stock”. As of September 30, 2005, the Company did not yet have an investment in thejoint venture as the joint venture had not yet begun operations.*Stock-Based Compensation*     At September 30, 2005, the Company had a stock option plan, which is described more fully inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The Companyaccounts for that plan under the recognition and measurement principles of Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations.No stock-based employee compensation cost is reflected in net income, as all options granted underthose plans had an exercise price equal to the market value of the underlying common stock on thedate of grant. The following table illustrates the effect on net income and earnings per commonshare if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation” to stock-based employee plans (dollars in thousands, except per sharedata):                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30,**   **2005**  **2004**  **2005**  **2004** Net income (loss), as reported $(1,752) $1,129  $1,385  $86 Total stock-based employeecompensation expense determinedunder fair value method for allawards, net of related tax effects  (95)  (27)  383   (83)             Net income (loss), as adjusted $(1,847) $1,102  $1,768  $3 
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                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30,**   **2005**  **2004**  **2005**  **2004** Basic EPS:                As reported $(.17) $.11  $.13  $.01 As adjusted $(.17) $.10  $.17  $.00                  Diluted EPS:                As reported $(.16) $.11  $.13  $.01 As adjusted $(.17) $.10  $.17  $.00      For the purpose of estimating the fair value disclosures above, the fair value of each stockoption has been estimated on the grant date with a Black-Scholes option pricing model. Thefollowing assumptions for the three months ended September 30, 2005 and 2004 were computed on aweighted average basis: risk-free interest rate of 4.18% and 4.12%, respectively, expectedvolatility of 38.91% and 42.44%, respectively, expected life of 4 years for each period and noexpected dividends. The following assumptions for the nine months ended September 30, 2005 and2004 were computed on a weighted average basis: risk-free interest rate of 4.18% and 4.12%,respectively, expected volatility of 38.91% and 42.44%, respectively, expected life of 4 years foreach period and no expected dividends. For the nine months ended September 30, 2005, the effect onstock-based employee compensation was a benefit due to forfeitures of 185,000 options during thesecond quarter of 2005. The effects of applying SFAS No. 123 may not be indicative of futureamounts since additional future awards are anticipated and the estimation of values involvessubjective assumptions that may vary materially as a result of actual events.*Newly Issued Accounting Standards*     In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment,” which is a revisionof SFAS No. 123, “Accounting for Stock-Based Compensation.” Generally, the approach to accountingfor share-based payments in SFAS 123 (R) is similar to the approach described in SFAS 123.However, SFAS 123 (R) requires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective at the beginning of the annual period beginning after June 15, 2005. The Companyexpects to adopt the standard on January 1, 2006. The Company is currently evaluating the impactthis will have, but does not expect it to have a material impact on its financial condition,results of operations and cash flows.**2. DISCONTINUED OPERATIONS**     During the first quarter of 2004, the Company sold certain non-core assets within its Productssegment. The Company received $7.4 million in cash at closing that was immediately used to paydown the term loan under its senior credit facility. During the second and third quarters of 2004,the Company sold all of the remaining assets within its Products segment, except for certain assetsrelated to the Company’s custom coatings business, along with certain assets within its PressureControl segment for approximately $2.5 million. See Note 2 to the Company’s consolidated financialstatements included in the Company’s Annual Report on Form 10-K for the year ended December 31,2004 for additional information.     On September 29, 2005, the Company, along with its wholly-owned subsidiary, A&B Bolt & Supply,Inc. (“A&B”), entered into an Asset Purchase Agreement under which the Company would sellsubstantially all the assets of its Distribution segment operated by A&B. A&B distributes productsand supplies to the oil, gas and pipeline industries, including valves, pipe, fittings, fastenersand flanges. The transaction closed on October 12, 2005 for a purchase price of $8.8 million incash, subject to a post-closing working capital adjustment. The Company recorded a pre-tax loss of$4.7 million during the three and nine months ended September 30, 2005 for the sale of itsDistribution segment. This loss includes a goodwill impairment charge of $4.3 million and along-lived asset impairment charge of $0.4 million.     The Products and Distribution segments’ assets sold constituted businesses and thus theirresults of operations have been reported as discontinued operations during 2005 and 2004. TheCompany now operates under the one remaining historical reporting segment, Pressure Control. Accordingly, allhistorical segment results reflect the remaining operating structure.
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     In connection with the disposition of the Distribution segment, the Company reviewed itspresentation of segment information and concluded that it has one reporting segment, PressureControl. This segment classification is based on aggregation criteria defined in SFAS No. 131,“Disclosure About Segments of an Enterprise and Related Information”. Management now evaluates theoperating results of its Pressure Control reporting segment based upon its three product lines:pressure and flow control, wellhead and pipeline. The Company’s operating segments of pressure andflow control, wellhead and pipeline have been aggregated into one reporting segment as theoperating segments have the following commonalities: economic characteristics, nature of theproducts and services, type or class of customer, and methods used to distribute their products andprovide services. Accordingly, the Company has reevaluated its reporting units under SFAS No. 142,“Goodwill and Other Intangible Assets” based upon these three operating segments. Due to thisreevaluation of reporting units, the Company assessed the realizability of its recorded goodwill inaccordance with SFAS No. 142 at September 30, 2005. Goodwill was thus allocated based on therelative fair values of the three reporting units and then assessed for impairment. Management’sanalysis indicated that goodwill was not impaired as the fair value of its reporting units wasgreater than the carrying value.     Net revenues from discontinued operations for the three months ended September 30, 2005 and2004 were $9.4 million and $11.9 million, respectively. For the same periods, income (loss) beforeprovision (benefit) for income taxes from discontinued operations was approximately $(5.8) millionand $0.4 million, respectively. Net revenues from discontinued operations for the nine monthsended September 30, 2005 and 2004 were $28.2 million and $40.1 million, respectively. For the sameperiods, income (loss) before provision (benefit) for income taxes from discontinued operations wasapproximately $(5.7) million and $(2.3) million, respectively. Included in the loss before benefitfor income taxes for the three and nine months ended September 30, 2005 is interest expense of $0.1million and $0.4 million, respectively. The Company’s First Amended and Restated Credit Agreementdated as of September 30, 2004 requires the receipt of net cash proceeds from significantdispositions to be applied against outstanding principal balances under the senior credit facility.The Company’s policy is to only allocate interest to discontinued operations for interest on debtthat is required to be repaid as a result of a disposal transaction or interest on debt that isassumed by the buyer. As a result, interest expense has been allocated to discontinued operationsfor the period October 1, 2004 through September 30, 2005.**3. INVENTORIES**     Inventories consist of the following (dollars in thousands):           **September 30,**  **December 31,**   **2005**  **2004** Raw materials $4,299  $3,197 Work in process  6,236   2,985 Finished goods and component parts  6,842   5,679          $17,377  $11,861        **4. DEBT**     During August 2005, the Company amended its senior credit facility to provide for a separateCanadian revolving credit facility, which includes a revolving loan subfacility and a letter ofcredit subfacility of up to an aggregate of U.S. $4.0 million. The revolving credit facilitymatures on the same date as the senior credit facility, and is subject to the same covenants andrestrictions. The applicable interest rate is governed by the Company’s leverage ratio and rangesfrom the Canadian prime rate plus 0.75% to the Canadian prime rate plus 2.00%. T-3 Oilco EnergyServices Partnership, the Company’s Canadian subsidiary, may use the proceeds from any advancesmade pursuant to the revolving credit facility for general corporate and working capital purposesin the ordinary course of business or to fund Canadian acquisitions. The revolving credit facilityis guaranteed by the Company and all of its material subsidiaries, and is collateralized by a firstlien on substantially all of the assets of T-3 Oilco Energy Services Partnership.
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     During May 2005, the Company received consents from its senior lenders to repay the Company’s$15 million amended and restated subordinated term loan using advances made from its senior creditfacility. This debt extinguishment resulted in a write-down of deferred loan costs ofapproximately $0.4 million and such costs have been classified as interest expense in the Company’s2005 results of operations.     The Company’s senior credit facility provides for a $50 million revolving line of credit,maturing September 30, 2007, that can be increased by up to $25 million (not to exceed a totalcommitment of $75 million). The senior credit facility consists of a revolving credit facilitythat includes a swing line subfacility up to $5 million and a letter of credit subfacility up to $5million. As of September 30, 2005, the Company had $12.6 million borrowed under its senior creditfacility. See Note 6 to the Company’s consolidated financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004 for additional information relatedto the Company’s debt.**5. EARNINGS (LOSS) PER SHARE**     Basic income (loss) from continuing operations per common share is computed by dividing income(loss) from continuing operations by the weighted average number of common shares outstandingduring the period. Diluted income (loss) from continuing operations per common share is the sameas basic but includes dilutive stock options and warrants using the treasury stock method.     The following tables reconcile the numerators and denominators of the basic and diluted percommon share computations for net income (loss) for the three and nine months ended September 30,2005 and 2004, as follows (in thousands except per share data):           **Three Months Ended**   **September 30,**   **2005**  **2004** Numerator:        Income from continuing operations $2,104  $960 Income (loss) from discontinuedoperations  (3,856)  169        Net income (loss) $(1,752) $1,129                 Denominator:        Weighted average common sharesoutstanding — basic  10,582   10,582 Shares for dilutive stock options  134   —        Weighted average common sharesoutstanding andAssumed conversions — diluted  10,716   10,582                 Basic earnings (loss) per common share:        Continuing operations $.20  $.09 Discontinued operations  (.37)  .02        Netincome (loss) per common share $(.17) $.11                 Diluted earnings (loss) per common share:        Continuing operations $.20  $.09 Discontinued operations  (.36)  .02        Net income (loss) per common share $(.16) $.11             For the three months ended September 30, 2005, there were 21,613 options and 335,362 warrantsthat were not included in the computation of diluted earnings per share because their inclusionwould have been anti-dilutive. For the three months ended September 30, 2004, there were 581,345options and 517,862 warrants that were not included in the computation of diluted earnings pershare because their inclusion would have been anti-dilutive.
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           **Nine Months Ended**   **September 30,**   **2005**  **2004** Numerator:        Income from continuing operations $5,166  $1,904 Loss from discontinued operations  (3,781)  (1,818)       Netincome $1,385  $86                 Denominator:        Weighted average common sharesoutstanding — basic  10,582   10,582 Shares for dilutive stock options  77   2        Weighted average common sharesoutstanding andAssumed conversions — diluted  10,659   10,584                 Basic earnings (loss) per common share:        Continuing operations $.49  $.18 Discontinued operations  (.36)  (.17)       Netincome per common share $.13  $.01                 Diluted earnings (loss) per common share:        Continuing operations $.48  $.18 Discontinued operations  (.35)  (.17)       Netincome per common share $.13  $.01             For the nine months ended September 30, 2005, there were 85,553 options and 335,362 warrantsthat were not included in the computation of diluted earnings per share because their inclusionwould have been anti-dilutive. For the nine months ended September 30, 2004, there were 481,345 options and 517,862warrants that were not included in the computation of diluted earnings per share because theirinclusion would have been anti-dilutive.**6. REPORTABLE SEGMENT**     The Company’s determination of reportable segments considers the strategic operating unitsunder which the Company sells various types of products and services to various customers.     The accounting policies of the segment are the same as those of the Company. The Companyevaluates performance based on income from operations excluding certain corporate costs notallocated to the segment. Substantially all revenues are from domestic sources and Canada and allassets are held in the United States and Canada. As discussed in Note 2, the Company soldsubstantially all of the assets of its Products and Distribution segments except for certain assetsrelated to the Company’s custom coatings business. The Products and Distribution segments’ assetssold constituted businesses and thus their results of operations have been reported as discontinuedoperations during 2005 and 2004.     In connection with the disposition of the Distribution segment, the Company reviewed itspresentation of segment information and concluded that it has one reporting segment, PressureControl. This segment classification is based on aggregation criteria defined in SFAS No. 131.Management now evaluates the operating results of its Pressure Control reporting segment based uponits three product lines: pressure and flow control, wellhead and pipeline. The Company’soperating segments of pressure and flow control, wellhead and pipeline have been aggregated intoone reporting segment as the operating segments have the following commonalities: economiccharacteristics, nature of the products and services, type or class of customer, and methods usedto distribute their products and provide services. The Company now operates under the oneremaining historical reporting segment, Pressure Control. Accordingly, all historical segmentresults reflect the remaining operating structure. Segment information for the three and ninemonths ended September 30, 2005 and 2004 is as follows:
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               **(dollars in thousands)**   **Pressure**       **Three months ended September 30:** **Control**  **Corporate**  **Consolidated** **2005**            Revenues  $25,791  $—  $25,791 Depreciation and amortization   587   208   795 Income (loss) from operations   5,240   (1,801)  3,439 Capital expenditures  212   84   296 **2004**            Revenues  $16,447  $—  $16,447 Depreciation and amortization   368   189   557 Income (loss) from operations   3,601   (1,411)  2,190 Capital expenditures  690   47   737                **(dollars in thousands)**   **Pressure**       **Nine months ended September 30:** **Control**  **Corporate**  **Consolidated** **2005**            Revenues  $70,612  $—  $70,612 Depreciation and amortization   1,807   605   2,412 Income (loss) from operations   14,367   (4,980)  9,387 Capital expenditures  741   302   1,043 **2004**            Revenues  $48,486  $—  $48,486 Depreciation and amortization   1,138   556   1,694 Income (loss) from operations   9,339   (4,373)  4,966 Capital expenditures  1,050   317   1,367 **7. COMMITMENTS AND CONTINGENCIES**     The Company is, from time to time, involved in various legal actions arising in the normalcourse of business. In December 2001, a lawsuit was filed against the Company in the14th Judicial District Court of Calcasieu Parish, Louisiana. The lawsuit alleges thatcertain equipment purchased from and installed by a wholly owned subsidiary of the Company wasdefective in assembly and installation. The plaintiffs have alleged certain damages in excess of$5 million related to repairs and activities associated with the product failure and have alsoclaimed unspecified damages with respect to certain expenses, loss of production and damage to thereservoir.     In June 2003, a lawsuit was filed against the Company in the 61st Judicial Districtof Harris County, Texas. The lawsuit alleges that certain equipment purchased from and installedby a wholly owned subsidiary of the Company was defective. The plaintiffs initially alleged repairand replacement damages of $0.3 million. During the three months ended June 30, 2005, theplaintiffs alleged production damages in the range of $3 to $5 million. The Company has tenderedthe defense of these claims under its comprehensive general liability insurance policy and itsumbrella policy. Management does not believe that the outcomes of such legal actions involving theCompany will have a material adverse effect on the Company’s financial position, results ofoperations, or cash flows.     In July 2003, a lawsuit was filed against the Company in the U.S. District Court, EasternDistrict of Louisiana. The lawsuit alleges that a wholly owned subsidiary of the Company failed todeliver the proper bolts and/or sold defective bolts to the plaintiff’s contractor to be used inconnection with a drilling and production platform in the Gulf of Mexico. The plaintiffs claimthat the bolts failed and they had to replace all bolts at a cost of approximately $4 million. Thecomplaint names the plaintiff’s contractor and seven of its suppliers and subcontractors (includingthe Company’s subsidiary) as the defendants and alleges negligence on the part of all defendants.The Company has filed its motion to dismiss the lawsuit, denying responsibility for the claim. TheCompany has also filed a cross claim against its supplier. Management does not believe that theoutcome of such legal action will have a material adverse effect on the Company’s financialposition, results of operations,
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or cash flows.     The Company’s environmental remediation and compliance costs have not been material during anyof the periods presented. T-3 has been identified as a potentially responsible party with respectto one site designated for cleanup under the Comprehensive Environmental Response Compensation andLiability Act and similar state laws. The Company’s involvement at this site is believed to havebeen minimal. Because it is early in the process, no determination of the Company’s actualliability can be made at this time. As such, management has not currently accrued for any futureremediation costs related to this site. However, based upon the Company’s involvement with thissite, management does not expect that its share of remediation costs will have a material impact onits financial position, results of operations or cash flows.     On June 20, 2005, the Company announced that it had retained Simmons & CompanyInternational to assist in evaluating strategic alternatives to enhance stockholder value. As partof this process, the Company sold its Distribution segment in October 2005, and after considerationof other alternatives decided to pursue an expansion strategy. The Company and Simmons & CompanyInternational terminated the engagement on November 11, 2005.     On August 25, 2005, the Compensation Committee of the Board of Directors of the Companyapproved the First Amendment to Employment Agreement (the “Employment Agreement Amendment”) enteredinto between the Company and Gus D. Halas, the Company’s chairman, president and chief executiveofficer. The Employment Agreement Amendment provides for the payment by the Company to Mr. Halasof a transaction bonus in the event of a change in control of the Company on or prior to December31, 2005, based on the “transaction value per share.” If the transaction value per share, or theaggregate amount received for each share of the Company’s common stock by the Company’sstockholders in connection with a change in control, equals $20.00, the transaction bonus will beequal to $5,230,769. In the event the transaction value per share is higheror lower than $20.00, the amount of the transaction bonus will be increased or reduced by theproduct of $461,538 and the difference between the transaction value per share and $20.00. Forexample, if the transaction value per share were $16.59, the closing price of the Company’s commonstock on September 30, 2005, the transaction bonus would be approximately $3,656,924. If Mr.Halas’ employment is terminated by the Company other than for good cause (as defined in theEmployment Agreement Amendment), by Mr. Halas for circumstances constituting a constructivetermination (as defined in the Employment Agreement Amendment) or as a result of Mr. Halas’ deathor disability, Mr. Halas will be entitled to receive the transaction bonus if the transaction bonusbecomes payable as described above. If Mr. Halas’ employment is terminated by the Company for goodcause or by Mr. Halas other than for circumstances constituting a constructive termination, Mr.Halas will not be entitled to receive the transaction bonus.     In addition, the Employment Agreement Amendment provides that severance payments made to Mr.Halas in the event of the termination of Mr. Halas’ employment by the Company other than for goodcause or by Mr. Halas for circumstances constituting a constructive termination, will be made in alump sum instead of over the remaining term of the agreement as previously provided.     On October 26, 2005, a shareholder derivative lawsuit (Berger v. Halas, et al., C.A. No.1733-N) was filed in the Court of Chancery of the State of Delaware in New Castle County, againstthe Company (as a nominal defendant), Gus D. Halas, all other members of the Company’s Board ofDirectors, and First Reserve Fund VIII, L.P., the principal stockholder of the Company. Thislawsuit relates to the filing by the Company of a preliminary registration statement on Form S-1with the U.S. Securities and Exchange Commission on October 21, 2005. The complaint alleges abreach of the duty of loyalty and a bad faith breach of the duty of full disclosure by alldefendants. In addition, the complaint alleges that the payment of a transaction bonus to Mr.Halas in connection with the offering contemplated by the preliminary registration statement isimproper. The plaintiff seeks a temporary and a permanent injunction against the proposed sale andthe payment of the transaction bonus. The plaintiff also seeks a judgment awarding costs and feesincurred in filing and prosecuting the case. The defendants intend to vigorously pursue theirdefense. Management believes that the ultimate resolution of the case will not have a materialadverse impact on the financial condition or liquidity of the Company.     OnNovember 14, 2005, the Company entered into an agreement with First Reserve Fund VIII, L.P.and Mr.
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Halas further amending Mr. Halas’ Employment Agreement to provide that the transactionbonus payable thereunder will also become payable upon the consummation of a sale by First ReserveFund VIII, L.P. in a public offering, pursuant to a firm commitment underwriting, of at least 50%of the outstanding shares of the Company’s common stock. The agreement also extends the timeperiod during which the change in control of the Company must occur in order for the transactionbonus to be payable from December 31, 2005 to January 31, 2006. In addition, pursuant to the termsof the agreement, First Reserve Fund VIII, L.P. will make a capital contribution to the Company inorder to reimburse the Company for the payment of any transaction bonus to Mr. Halas, but only inthe event of a public offering meeting the requirements described above. The amount of the capitalcontribution will be equal to the transaction bonus less the tax benefits the Company will receivefrom the related federal and state tax deductions. The Company will account for the payment of thetransaction bonus, if any, as compensation expense in the period the obligation is incurred.     At September 30, 2005, the Company had no significant letters of credit outstanding.**8. STOCKHOLDERS’ EQUITY***Authorized Shares*     At the 2005 Annual Meeting of Stockholders held on June 1, 2005, the Company’s stockholdersapproved a proposal to amend the Company’s Certificate of Incorporation to decrease the number ofauthorized shares of common stock from 50,000,000 to 25,000,000. At September 30, 2005, theCompany’s authorized capital stock consisted of 25,000,000 shares of common stock, par value $.001per share, and 25,000,000 shares of preferred stock, par value $.001 per share.*Warrants*     During June 2005, warrants to acquire shares of the Company’s common stock expiredunexercised. At September 30, 2005, warrants to acquire 327,862 shares of common stock at $12.80per share and 7,500 shares of common stock at $14.00 per share remain outstanding. Theseoutstanding warrants are currently exercisable. The 327,862 warrants expire in December 2011 andthe 7,500 warrants expire between November 2005 and February 2006.
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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS****General**     The following discussion of our historical results of operations and financial condition forthe three and nine months ended September 30, 2005 and 2004 should be read in conjunction with thecondensed consolidated financial statements and related notes included elsewhere in this Form 10-Qand our financial statements and related management’s discussion and analysis of financialcondition and results of operations for the year ended December 31, 2004 included in our AnnualReport on Form 10-K.     On June 20, 2005, the Company announced that it had retained Simmons & Company Internationalto assist in evaluating strategic alternatives to enhance stockholder value. As part of thisprocess, the Company sold its Distribution segment in October 2005, and after consideration ofother alternatives decided to pursue an expansion strategy. The Company and Simmons & CompanyInternational terminated the engagement on November 11, 2005.     On September 29, 2005, we entered into an Asset Purchase Agreement under which we would sellsubstantially all the assets of our Distribution segment operated by A&B Bolt & Supply, Inc.(“A&B”). A&B distributes products and supplies to the oil, gas and pipeline industries, includingvalves, pipe, fittings, fasteners and flanges. The transaction closed on October 12, 2005 for apurchase price of $8.8 million in cash, subject to a post-closing working capital adjustment. Werecorded a pre-tax loss of $4.7 million during the three and nine months ended September 30, 2005for the sale of the Distribution segment. This loss includes a goodwill impairment charge of $4.3million and a long-lived asset impairment charge of $0.4 million.     We have historically operated under three reporting segments; however, during 2004 and October2005, we sold substantially all of the remaining assets of our Products and Distribution segments,respectively. The Products and Distribution segments’ assets sold constituted businesses and thustheir results of operations have been reported as discontinued operations during 2005 and 2004. Wenow operate under the one remaining historical reporting segment, Pressure Control. Accordingly,all historical segment results reflect the remaining operating structure.**Strategy and Capital Requirements**     Our current business strategy is to better position ourselves to capitalize on increaseddrilling activity in the oil and gas industry. We believe that this increased activity will resultin significant additional demand for our products and services. We plan to: **•** *Expand our manufacturing capacity through facility expansions and improvements*. Expandour manufacturing capacity to increase the volume and number of products we manufacture,with an emphasis on our pressure and flow control product line. We expect to investapproximately $6.3 million over the next 24 months on this expansion effort. Our expansionplans include: **•** doubling our existing BOP manufacturing capacity from ten to 20 units per month byupgrading and expanding our machining capabilities at our existing facilities;  **•** establishing manufacturing capacity for 12 multi-bowl wellhead units per month;  **•** opening two facilities for our wellhead product line;  **•** opening five facilities for our pipeline product line; and  **•** expanding our elastomer producing capacity in Canada.
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 **•** *Continue new product development*. We recently introduced 16 new products, and we willcontinue to focus on new product development across all of our product lines, with aparticular focus on pressure and flow control. We plan to introduce a comparable number ofnew products by the end of 2006.  **•** *Expand our geographic areas of operation*. We intend to expand our geographic areas ofoperation, with particular focus on field services for our wellhead and pipeline productlines. We are expanding our wellhead and pipeline repair and remanufacturing services byestablishing facilities in areas we believe will have high drilling activity, such as theBarnett Shale in North Texas, the Cotton Valley trend in the East Texas Basin and theFayetteville Shale in the Arkoma Basin. We are also evaluating expansion opportunities forour wellhead and pipeline product lines in the Rocky Mountain and the Appalachian regions.  **•** *Pursue strategic acquisitions*. Our acquisition strategy will focus on broadening ourmarkets and existing product offerings. For example, in October 2004, we acquired Oilco,through which we entered the Canadian market, acquired complementary pressure controlproducts, and expanded our product offerings to include elastomers.**How We Generate Our Revenue**     We manufacture, repair and service products used in the drilling and completion of newoil and gas wells, the workover of existing wells, and the production and transportation of oil andgas. Our products are used in both onshore and offshore applications. Our customer base, whichoperates in active oil and gas basins throughout the world, consists of leading drillingcontractors, exploration and production companies and pipeline companies, including Grey WolfDrilling, Nabors Drilling International, Diamond Offshore Drilling, Weatherford International andExxonMobil, among others.     We have three product lines within our pressure control reporting segment. Those productlines are pressure and flow control, wellhead and pipeline. Within each of those product lines, wesell new products and also provide aftermarket parts and services. New products are those wemanufacture or have manufactured for us by others who use our new product designs. Aftermarketproducts and services include all remanufactured products and parts and repair and field services.     Demand for our pressure and flow control and wellhead products and services is driven byexploration and development activity levels, which in turn are directly related to current andanticipated oil and gas prices. Demand for our pipeline products and services is driven bymaintenance, repair and construction activities for pipeline, gathering and transmission systems.     We typically bid for new product sales and repair work. Field service work is offered ata fixed rate plus expenses.**How We Evaluate Our Operations**     Our management uses the following financial and operational measurements to analyze theperformance of our products and services: **•** revenue and facility output;  **•** material and labor expenses as a percentage of revenue;  **•** selling, general and administrative expenses as a percentage of revenue;  **•** EBITDA; and  **•** financial and operational models.
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*Revenue and Facility Output*     We monitor our revenue and facility output and analyze trends to determine the relativeperformance of each of our facilities. Our analysis enables us to more efficiently operate ourfacilities and determine if we need to refine our processes and procedures at any one location toimprove operational efficiency.*Material and Labor Expenses as a Percentage of Revenue*     Material and labor expenses are composed primarily of cost of materials, labor costs andthe indirect costs associated with our products and services. With the exception of costs ofmaterials used in our products, the cost of these expenses as a percentage of revenue hashistorically remained relatively stable.     Our material costs primarily include the cost of inventory consumed in the manufacturingand remanufacturing of our products and in providing repair services. Increases in our materialcosts are frequently passed on to our customers. However, due to the timing of our marketing andbidding cycles, there generally is a delay of several weeks or months from the time that we incuran actual price increase until the time that we can pass on that increase to our customers.     Our labor costs consist primarily of wages at our facilities. As a result of increasedactivity in the oil and gas industry, there have been recent shortages of qualified machinists atsome of our facilities. We may have to raise wage rates to attract and train workers to expand ourcurrent work force.*Selling, General and Administrative Expenses as a Percentage of Revenue*     Our selling, general and administrative (“SG&A”) expenses include administrative andmarketing costs, the costs of employee compensation and related benefits, office and leaseexpenses, insurance costs and professional fees, as well as other costs and expenses not directlyrelated to our operations. Our management continually evaluates the level of our SG&A expenses inrelation to our revenue because these expenses have a direct impact on our profitability. Webelieve that our SG&A expenses will increase in 2006 due to costs of complying with theSarbanes-Oxley Act.*EBITDA*     We define EBITDA as income (loss) from continuing operations before net interest expense,income tax expense and depreciation and amortization expense. Our management uses EBITDA: **•** as a measure of operating performance that assists us in comparing our performance on aconsistent basis because it removes the impact of our capital structure and asset basefrom our operating results;  **•** as a measure for budgeting and for evaluating actual results against our budgets;  **•** to assess compliance with financial ratios and covenants included in our senior credit facility;  **•** in communications with lenders concerning our financial performance; and  **•** to evaluate the viability of potential acquisitions and overall rates of return.*Financial and Operational Models*     We couple our evaluation of financial data with performance data that tracks financiallosses due to safety incidents, product warranty and quality control; customer satisfaction;employee productivity; and management system compliance. The information is collected in aproprietary statistical tracking program that automatically compiles and statistically analyzesreal-time trends. This information helps us ensure that each of our facilities improves withrespect to customer and market demands.     *Loss Management*. We incur operational losses from employee injuries, product warrantyclaims and quality control costs. We track both incident rates and costs. We also track qualitycontrol and warranty expenses
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through specialized software. All direct expenses incurred due to warranty, quality controland safety incidents are statistically analyzed as a percentage of sales.     *Customer Satisfaction.*We monitor our customers’ level of satisfaction regarding ourdelivery, product quality, and service through customer surveys and other data collection methods.All information collected from the customer satisfaction assessments is statistically compiled totrack annual performance. All customer complaints are processed through a corrective actionprogram.     *Employee Productivity*. We have increased employee training since 2004. Each of ourfacilities is provided a benchmark under which its employees are evaluated through a collection ofpractical examinations, written examinations, presentations and in-house training videos. As thecollected information is evaluated, deficiencies are identified and corrective actions areassessed.     *Management System Compliance*. We currently use four management programs designed toconsistently manage all aspects of our operations at each facility, while providing useful tools tolimit operational liabilities and improve profitability. These programs incorporate variousperformance standards that are useful in the evaluation of operational performance in the pursuitof continual improvement. Compliance with the standards set forth in those programs is evaluatedseveral times a year through a combination of customer audits, third party audits and internalaudits. Each facility’s compliance with the standards is then evaluated and all deficienciesidentified are analyzed and corrective actions assessed. Corrective actions at each facility areused to implement preventative action at the remaining facilities.**How We Manage Our Operations**     Our management team uses a variety of tools to monitor and manage our operations,including: **•** safety and environmental management systems;  **•** quality management systems;  **•** statistical tracking systems; and  **•** inventory turnover rates.*Safety and Environmental Management Systems*     Our Safety Management System (“SMS”) monitors our training program as it relates to OSHAcompliance. Through a collection of regulatory audits and internal audits, we can evaluate eachfacility’s compliance with regulatory requirements and take corrective actions necessary to ensurecompliance.     We also use our SMS to ensure that employee training is conducted on a regular basis.Several employee qualification programs are managed from our SMS to ensure that our employeesperform their duties as safely as possible. All employees are individually evaluated with respectto their safety performance, and these evaluations are incorporated into all annual employeereviews.     Similar to the SMS, our Environmental Management System monitors compliance withenvironmental laws. Each of our facilities is continually evaluated against collected data toidentify possible deficiencies.*Quality Management Systems*     All processes, employee certification programs, and inspection activities are managedthrough our Quality Management Systems (“QMS”). Our QMS is based on several industrial standardsand is coupled with performance models to ensure continual monitoring and improvement of theprogram. Each of our facilities has a quality management team that is charged with assuring thatday-to-day operations are conducted consistently and within the protocols outlined in the QMS.Operational steps continually are monitored and evaluated against customer and industrialrequirements. To ensure that all QMS elements are operating as designed and to provide an additionlevel of support at each facility, we have assigned a quality director at each facility whomonitors individual facility performance and helps manage critical operations.
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*Statistical Tracking Systems*     We have developed a statistical tracking program that assists in the real timecompilation of data from each facility and then automatically assesses the data through variousdata analysis tools. Facility managers and operational executives are provided summary reports,providing information about their performance and how it compares to industrial and internalbenchmarks.*Inventory Turnover Rates*     The cost of our material inventory represents a significant portion of our cost ofrevenue from our product lines. As a result, maintaining an optimum level of inventory at each ofour facilities in an important factor in managing our operations. We continually monitor theinventory turnover rates for each of our product lines and adjust the frequency of inventory ordersas appropriate to maintain the optimum level of inventory based on activity level for each productline.**Critical Accounting Policies and Estimates**     The preparation of our financial statements requires us to make certain estimates andassumptions that affect the amounts reported in the financial statements and accompanying notes.Our estimation process generally relates to potential bad debts, obsolete and slow movinginventory, and the valuation of long-lived and intangible assets. Our estimates are based onhistorical experience and on our future expectations that we believe to be reasonable under thecircumstances. The combination of these factors results in the amounts shown as carrying values ofassets and liabilities in the financial statements and accompanying notes. Actual results coulddiffer from our current estimates and those differences may be material.     These estimates may change as events occur, as additional information is obtained and as ouroperating environment changes. Except as disclosed elsewhere within this Form 10-Q, there havebeen no material changes or developments in our evaluation of the accounting estimates and theunderlying assumptions or methodologies that we believe to be Critical Accounting Policies andEstimates from those as disclosed in our Annual Report on Form 10-K for the year ending December31, 2004.**Newly Issued Accounting Standards**     In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment,” which is a revisionof SFAS No. 123, “Accounting for Stock-Based Compensation.” Generally, the approach to accountingfor share-based payments in SFAS 123 (R) is similar to the approach described in SFAS 123.However, SFAS 123 (R) requires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective at the beginning of the annual period beginning after June 15, 2005. We expect toadopt the standard on January 1, 2006. We are currently evaluating the impact this will have, butdo not expect it to have a material impact on our financial condition, results of operations andcash flows.
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**Results of Operations**     The following table sets forth certain operating statement data for our segment for each ofthe periods presented (in thousands).                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30,**   **2005**  **2004**  **2005**  **2004** Revenues:                Pressure Control $25,791  $16,447  $70,612  $48,486                                  25,791   16,447   70,612   48,486              Cost of revenues:                Pressure Control  16,774   10,457   45,511   31,795                                  16,774   10,457   45,511   31,795              Gross profit:                Pressure Control  9,017   5,990   25,101   16,691                                  9,017   5,990   25,101   16,691              Operating expenses:                Pressure Control  3,777   2,389   10,734   7,352 Corporate  1,801   1,411   4,980   4,373                                  5,578   3,800   15,714   11,725              Income (loss) from operations:                Pressure Control  5,240   3,601   14,367   9,339 Corporate  (1,801)  (1,411)  (4,980)  (4,373)                                $3,439  $2,190  $9,387  $4,966              *Three Months ended September 30, 2005 Compared with Three Months ended September 30, 2004*     *Revenues.*Revenues increased $9.3 million, or 56.8%, in the three months ended September 30,2005 compared to the three months ended September 30, 2004. This increase was primarilyattributable to increased activity in the oil and gas industry, the purchase of Oilco during thefourth quarter of 2004 which allows us to recognize the full benefit of Oilco’s products andservices being offered in Canada, and the willingness of drilling contractors and oil and gascompanies to spend increased capital for their projects worldwide. In prior periods, theacceptance of our new products was limited to a few of our current major customers and was isolatedprimarily to the Gulf of Mexico region. Our T-3 brand identity has now been accepted bysubstantially all the major drilling contractors for use throughout the world. This increase waspartially offset by down time caused by Hurricanes Katrina and Rita. We estimate that this downtime delayed revenues of approximately $2.6 million for the three months ended September 30, 2005to future periods     *Cost of Revenues.*Cost of revenues increased $6.3 million, or 60.4%, in the three months endedSeptember 30, 2005 compared to the three months ended September 30, 2004 primarily as a result ofthe increase in revenues described above. Gross profit as a percentage of revenues was 35.0% in thethree months ended September 30, 2005 compared to 36.4% in the three months ended September 30,2004. Gross profit margin was lower in 2005 primarily due to the down time caused by HurricanesKatrina and Rita. We estimate that this down time resulted in approximately $0.6 million of costsrelated to lost absorption, downtime payroll and minor property damages for the three months endedSeptember 30, 2005.     *Operating Expenses.*Operating expenses increased $1.8 million, or 46.8%, in the three monthsended September 30, 2005 compared to the three months ended September 30, 2004. This increase wasprimarily attributable to the increase in revenues described above. Operating expenses as apercentage of revenues were 21.6% in the three months ended September 30, 2005 compared to 23.1% inthe three months ended September
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30, 2004. This decrease in operating expenses as a percentage of revenues is due to increasedsales activity and cost reduction strategies having more of an effect in 2005, partially offset byincreased regulatory requirements and consulting costs and down time caused by Hurricanes Katrinaand Rita.     Operating expenses for the Pressure Control segment increased $1.4 million, or 58.1%, inthe three months ended September 30, 2005 compared to the three months ended September 30, 2004.This increase was primarily attributable to the increase in revenues described above. Operatingexpenses as a percentage of revenues were 14.6% in the three months ended September 30, 2005compared to 14.5% in the three months ended September 30, 2004. The slight increase in operatingexpenses as a percentage of revenues was primarily a result of down time caused by HurricanesKatrina and Rita, partially offset by increased sales activity and cost reduction strategies havingmore of an effect in 2005.     Operating expenses for Corporate operations increased $0.4 million, or 27.6%, in the threemonths ended September 30, 2005 compared to the three months ended September 30, 2004. Thisincrease was primarily attributable to increased regulatory requirements and consulting costs.This increase was partially offset by cost reduction strategies having more of an effect in 2005.     *Interest Expense.*Interest expense for the three months ended September 30, 2005 was $0.1million compared to $0.5 million in the three months ended September 30, 2004. The decrease wasprimarily attributable to decreased debt levels and interest rates during 2005 and the allocationof $0.1 million of interest expense to discontinued operations during 2005.     *Income Taxes.*Income tax expense for the three months ended September 30, 2005 was $1.2million as compared to $0.7 million in the three months ended September 30, 2004. The increasewas primarily due to an increase in income before taxes. The effective tax rate was 36.6% in thethree months ended September 30, 2005 compared to 41.7% in the three months ended September 30,2004. The higher rate in the 2004 period resulted from the write-off of non-deductible goodwilland the effect of non-deductible expenses during 2004.     *Income from Continuing Operations.*Income from continuing operations was $2.1 million in thethree months ended September 30, 2005 compared with $1.0 million in the three months endedSeptember 30, 2004 as a result of the foregoing factors.     *Discontinued Operations.*During 2004 and October 2005, we sold substantially all of theassets of our Products and Distribution segments, respectively. These assets constitutedbusinesses and thus their results of operations have been reported as discontinued operations inthe three months ended September 30, 2005 and 2004. Income (loss) from discontinued operations,net of tax for the three months ended September 30, 2005 was ($3.9) million as compared to $0.2million in the three months ended September 30, 2004. The decrease in income is primarilyattributable to the pre-tax loss of $4.7 million for the sale of the Distribution segment during2005.*Nine Months ended September 30, 2005 Compared with Nine Months ended September 30, 2004*     *Revenues.*Revenues increased $22.1 million, or 45.6%, in the nine months ended September 30,2005 compared to the nine months ended September 30, 2004. This increase was primarily attributableto increased activity in the oil and gas industry, the purchase of Oilco during the fourth quarterof 2004 which allows us to recognize the full benefit of Oilco’s products and services beingoffered in Canada, and the willingness of drilling contractors and oil and gas companies to spendincreased capital for their projects worldwide. In prior periods, the acceptance of our newproducts was limited to a few of our current major customers and was isolated primarily to the Gulfof Mexico region. Our T-3 brand identity has now been accepted by substantially all the majordrilling contractors for use throughout the world. This increase was partially offset by down timecaused by Hurricanes Katrina and Rita. We estimate that this down time delayed revenues ofapproximately $2.6 million for the nine months ended September 30, 2005 to future periods.     *Cost of Revenues.*Cost of revenues increased $13.7 million, or 43.1%, in the nine months endedSeptember 30, 2005 compared to the nine months ended September 30, 2004 primarily as a result ofthe increase in
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revenues described above. Gross profit as a percentage of revenues was 35.5% in the nine monthsended September 30, 2005 compared to 34.4% in the nine months ended September 30, 2004. Grossprofit margin was higher in 2005 due to improved pricing as a result of the increase in activity inthe oil and gas industry, the mix between products and service revenues, and cost reductionstrategies having more of an effect in 2005, partially offset by down time caused by HurricanesKatrina and Rita. Also, gross profit margins for 2004 were negatively impacted due to increasedproduct modification and development expenses during 2004.     *Operating Expenses.*Operating expenses increased $4.0 million, or 34.0%, in the nine monthsended September 30, 2005 compared to the nine months ended September 30, 2004. This increase wasprimarily due to the increase in revenues described above. Operating expenses as a percentage ofrevenues were 22.3% in the nine months ended September 30, 2005 compared to 24.2% in the ninemonths ended September 30, 2004. This decrease in operating expenses as a percentage of revenuesis due to increased sales activity and cost reduction strategies having more of an effect in 2005,partially offset by increased regulatory requirements and consulting costs and down time caused byHurricanes Katrina and Rita.     Operating expenses for the Pressure Control segment increased $3.4 million, or 46.0%, inthe nine months ended September 30, 2005 compared to the nine months ended September 30, 2004.This increase was primarily due to the increase in revenues described above. Operating expenses asa percentage of revenues was 15.2% in the nine months ended September 30, 2005 and 2004.     Operating expenses for Corporate operations increased $0.6 million, or 13.9%, in the ninemonths ended September 30, 2005 compared to the nine months ended September 30, 2004. Thisincrease was primarily attributable to increased regulatory requirements and consulting costs.This increase was partially offset by cost reduction strategies having more of an effect in 2005.     *Interest Expense.*Interest expense was $1.2 million in the nine months ended September 30,2005 compared to $1.9 million in the nine months ended September 30, 2004. The decrease wasprimarily attributable to decreased debt levels and interest rates during 2005 and the allocationof $0.4 million of interest expense to discontinued operations during the nine months endedSeptember 30, 2005.     *Income Taxes.*Income tax expense for the nine months ended September 30, 2005 was $3.1 millionas compared to $1.2 million in the nine months ended September 30, 2004. The increase wasprimarily due to an increase in income before taxes. The effective tax rate was 37.1% in the ninemonths ended September 30, 2005 compared to 39.2% in the nine months ended September 30, 2004. Thehigher tax rate in the 2004 period resulted from the write-off of non-deductible goodwill and theeffect of non-deductible expenses during 2004.     *Income from Continuing Operations.*Income from continuing operations was $5.2 million in thenine months ended September 30, 2005 compared with $1.9 million in the nine months ended September30, 2004 as a result of the foregoing factors.     *Discontinued Operations.*During 2004 and October 2005, we sold substantially all of theassets of our Products and Distribution segments, respectively. These assets constitutedbusinesses and thus their results of operations have been reported as discontinued operations inthe nine months ended September 30, 2005 and 2004. Income (loss) from discontinued operations, netof tax for the nine months ended September 30, 2005 was ($3.8) million as compared to ($1.8)million in the nine months ended September 30, 2004. The increase in loss is primarilyattributable to the pre-tax loss of $4.7 million for the sale of the Distribution segment during2005, partially offset by the loss on sale of a portion of the Products segment during 2004.**Liquidity and Capital Resources**     At September 30, 2005, we had working capital of $29.2 million, current maturities oflong-term debt of $50,000, long-term debt (net of current maturities) of $12.6 million andstockholders’ equity of $106.1 million. Historically, our principal liquidity requirements anduses of cash have been for debt service, capital expenditures, working capital and acquisitionfinancing, and our principal sources of liquidity and cash have been from cash flows fromoperations, borrowings under long-term debt arrangements and issuances of equity
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securities. We have historically financed acquisitions through bank borrowings, sales of equity(primarily to First Reserve Fund VIII, L.P., our majority stockholder), debt from sellers andinternally generated funds.     *Net Cash Provided by Operating Activities.*Net cash provided by operating activities was $4.4million for both the nine months ended September 30, 2005 and 2004. Although the totals are thesame, the components differed between periods. Cash flow has decreased due to increased accountsreceivable and inventory purchases. This is offset by decreased prepaids, increased customerdeposits and increased accounts payable.     *Net Cash Used in Investing Activities.*Principal uses of cash for the nine months endedSeptember 30, 2005 and 2004 were for capital expenditures. Investing activities used cash of $1.0million in the nine months ended September 30, 2005 compared to $0.4 million in the same period in2004. For the nine months ended September 30, 2005 and 2004, we made capital expenditures ofapproximately $1.0 million and $1.4 million, respectively.     *Net Cash Used in Financing Activities.*Principal uses of cash in financing activities for thenine months ended September 30, 2005 and 2004 included payments on our long-term debt. Financingactivities used net cash of $5.5 million in the nine months ended September 30, 2005 compared to$12.4 million used in the same period in 2004. During 2005, we made principal payments of $15.0million on our long–term debt compared to $12.3 million in 2004. We also made net borrowings(repayments) on our senior credit facility of $8.8 million during 2005.     *Net Cash Provided by (Used In) Discontinued Operations.*For the nine months ended September30, 2005, net cash provided by discontinued operations was $2.6 million compared to $10.4 millionin the same period in 2004. Cash was provided by discontinued operations in 2004 primarily due toour receipt of $8.8 million in cash upon the sales of the Product segment’s assets.     *Principal Debt Instruments.*As of September 30, 2005, we had an aggregate of $12.6 millionborrowed under our senior credit facility and debt instruments entered into or assumed inconnection with acquisitions, as well as other bank financings. As of September 30, 2005,availability under our revolving credit facility was $29.7 million.     During May 2005, we received consents from our senior lenders to repay the $15 million amendedand restated subordinated term loan using advances made from our senior credit facility. Oursenior credit facility provides for a $50 million revolving line of credit, maturing September 30,2007, that we can increase by up to $25 million (not to exceed a total commitment of $75 million).As of September 30, 2005, we had $12.6 million borrowed under our senior credit facility. Thesenior credit facility consists of a revolving credit facility that includes a swing linesubfacility up to $5 million and a letter of credit subfacility up to $5 million. We expect to usethe proceeds from any advances made pursuant to the senior credit facility to refinanceindebtedness, for working capital purposes, capital expenditures, to fund acquisitions and forgeneral corporate purposes. The applicable interest rate of the senior credit facility is governedby our leverage ratio and ranges from prime plus 0.75% or LIBOR plus 1.75% to prime plus 2.00% orLIBOR plus 3.00%. At September 30, 2005, the senior credit facility bore interest ranging from5.13% to 7.50%, with interest payable quarterly or as LIBOR advances mature. The effectiveinterest rate, including amortization of deferred loan costs, was 13.40%. The effective interestrate, excluding amortization of deferred loan costs, was 9.08%. We are required to prepay thesenior credit facility under certain circumstances with the net cash proceeds of certain assetsales, insurance proceeds and equity issuances subject to certain conditions. The senior creditfacility provides, among other covenants and restrictions, that we comply with the followingfinancial covenants: a limitation on capital expenditures, a minimum fixed charge coverage ratio, aminimum consolidated net worth, and maximum leverage and senior leverage ratios. As of September30, 2005, we were in compliance with the covenants under the senior credit facility. The seniorcredit facility is collateralized by substantially all of our assets.     On August 25, 2005, we amended our senior credit facility to provide for a separate Canadianrevolving credit facility, which includes a revolving loan subfacility and a letter of creditsubfacility of up to an aggregate of U.S. $4.0 million. The revolving credit facility matures onthe same date as the senior credit facility, and is subject to the same covenants and restrictions.The applicable interest rate is governed by our leverage ratio and ranges from the Canadian primerate plus 0.75% to the Canadian prime rate plus 2.00%. T-3 Oilco Energy
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Services Partnership, our Canadian subsidiary, may use the proceeds from any advances madepursuant to the revolving credit facility for general corporate and working capital purposes in theordinary course of business or to fund Canadian acquisitions. The revolving credit facility isguaranteed by us and all of our material subsidiaries, and is collateralized by a first lien onsubstantially all of the assets of T-3 Oilco Energy Services Partnership.     We believe that cash generated from operations and amounts available under our senior creditfacility will be sufficient to fund existing operations, working capital needs, capital expenditurerequirements, including the planned expansion of our manufacturing capacity, continued productdevelopment and expansion of our geographic areas of operation, and financing obligations.     The timing, size or success of any strategic acquisition and the related potential capitalcommitments cannot be predicted. We expect to fund future acquisitions primarily with cash flowfrom operations and borrowings, including the unborrowed portion of our senior credit facility ornew debt issuances, but we may also issue additional equity either directly or in connection withan acquisition. There can be no assurance that acquisition funds may be available at termsacceptable to us.     OnNovember 14, 2005, we entered into an agreement with First Reserve Fund VIII, L.P. and Mr.Halas amending Mr. Halas’ current employment agreement to provide that the transaction bonuspayable thereunder will also become payable upon the consummation of a sale by First Reserve FundVIII, L.P. in a public offering, pursuant to a firm commitment underwriting, of at least 50% of theoutstanding shares of our common stock. The agreement also extends the time period during which achange in control of the Company must occur in order for the transaction bonus to be payable fromDecember 31, 2005 to January 31, 2006. In addition, pursuant to the terms of the agreement, FirstReserve Fund VIII, L.P. will make a capital contribution to the Company in order to reimburse us forthe payment of any transaction bonus to Mr. Halas, but only in the event of a public offeringmeeting the requirements described above. The amount of the capital contribution will be equal tothe transaction bonus less the tax benefits we will receive from therelated federal and state tax deductions. We willaccount for the payment of the transaction bonus, if any, as compensation expense in the period theobligation is incurred.     A summary of our outstanding contractual obligations and other commercial commitments atSeptember 30, 2005 is as follows (in thousands):                       Payments Due by Period Contractual Obligations Total  Less than 1 Year  1-3 Years  4-5 Years  After 5 Years Long-term debt $12,625  $47  $12,578  $—  $— Letters of credit  64   64   —   —   — Operating leases  4,484   1,469   2,131   854   30                 Total contractual obligations $17,173  $1,580  $14,709  $854  $30                 
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**Forward-Looking Information and Risk Factors**     Certain information in this Quarterly Report on Form 10-Q includes forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934. You can identify these forward-looking statements by the words “expects,”“projects,” “believes,” “anticipates,” “intends,” “plans,” “budgets,” “predicts,” “estimates” andsimilar expressions.     We have based the forward-looking statements relating to our operations on our currentexpectations, and estimates and projections about us and about the industries in which we operatein general. These statements are not guarantees of future performance and involve risks,uncertainties and assumptions. In addition, many of these forward-looking statements are based onassumptions about future events that may prove to be inaccurate. Actual outcomes and results maydiffer materially from what we have expressed or forecast in the forward-looking statements.***If we are unable to successfully manage our growth and implement our business plan, our results ofoperations will be adversely affected.***     We have experienced significant growth in the last twelve months. To maintain ouradvantage of delivering new products and providing aftermarket services more rapidly than ourcompetitors, we plan to further expand our operations by adding new facilities, upgrading existingfacilities and increasing manufacturing capacity. We believe our future success depends in part onour ability to manage this expansion. The following factors could present difficulties for us: **•** inability to integrate operations between existing and new or expanded facilities;  **•** shortage of operating equipment and raw materials necessary to operate our expanded business;  **•** lack of a sufficient number of qualified technical and operating personnel; and  **•** managing the increased costs associated with our expansion.***Our business depends on spending by the oil and gas industry, and this spending and ourbusiness may be adversely affected by industry conditions that are beyond our control.***     We depend on our customers’ willingness to make operating and capital expenditures toexplore for, develop and produce oil and gas. Industry conditions are influenced by numerousfactors over which we have no control, such as: **•** the level of drilling activity;  **•** the level of oil and gas production;  **•** the demand for oil and gas related products;  **•** domestic and worldwide economic conditions;  **•** political instability in the Middle East and other oil producing regions;  **•** the actions of the Organization of Petroleum Exporting Countries;  **•** the price of foreign imports of oil and gas, including liquefied natural gas;  **•** weather conditions;  **•** technological advances affecting energy consumption;  **•** the level of oil and gas inventories;  **•** the cost of producing oil and gas;
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 **•** the price and availability of alternative fuels;  **•** merger and divestiture activity among oil and gas producers; and  **•** governmental regulation.     The volatility of the oil and gas industry and the consequent impact on drilling activitycould reduce the level of drilling and workover activity by some of our customers. Any suchreduction could cause a decline in the demand for our products and services.***A decline in or substantial volatility of oil and gas prices could adversely affect the demandand prices for our products and services.***     The demand for our products and services is substantially influenced by current andanticipated oil and gas prices and the related level of drilling activity and general productionspending in the areas in which we have operations. Volatility or weakness in oil and gas prices (orthe perception that oil and gas prices will decrease) affects the spending patterns of ourcustomers and may result in the drilling of fewer new wells or lower production spending forexisting wells. This, in turn, could result in lower demand and prices for our products andservices.     Historical prices for oil and gas have been volatile and are expected to continue to bevolatile. For example, since 1999, oil prices have ranged from as low as approximately $10 per Bblto over $65 per Bbl. This volatility has in the past and may in the future adversely affect ourbusiness. A prolonged low level of activity in the oil and gas industry will adversely affect thedemand for our products and services.***We rely on a few key employees whose absence or loss could disrupt our operations or beadverse to our business.***     Many key responsibilities within our business have been assigned to a small number ofemployees. The loss of their services, particularly the loss of our Chairman, President and ChiefExecutive Officer, Gus D. Halas, and the managers of our wellhead and pipeline product lines, AlvinDueitt and Jimmy Ray, respectively, could be adverse to our business. Although we have employmentand non-competition agreements with Mr. Halas and some of our other key employees, as a practicalmatter, those agreements will not assure the retention of our employees, and we may not be able toenforce all of the provisions in any employment or non-competition agreement. In addition, we donot maintain “key person” life insurance policies on any of our employees. As a result, we are notinsured against any losses resulting from the death or disability of our key employees.***Shortages of raw materials may restrict our operations.***     The forgings and castings necessary for us to make our products are in high demand fromour competitors and from participants in other industries. There can be no assurance that we willbe able to continue to purchase these raw materials on a timely basis or at acceptable prices.Shortages could result in increased prices that we may be unable to pass on to customers. Inaddition, during periods of shortages, delivery times may be substantially longer. Any significantdelay in our obtaining raw materials would have a corresponding delay in the manufacturing anddelivery of our products. Any such delay might jeopardize our relationships with our customers andresult in a loss of future business.***Our industry has recently experienced shortages in the availability of qualified personnel.Any difficulty we experience replacing or adding qualified personnel could adversely affect ourbusiness.***     Our operations require the services of employees having technical training and experiencein our business. As a result, our operations depend on the continuing availability of suchpersonnel. Shortages of qualified personnel are occurring in our industry. If we should suffer anymaterial loss of personnel to competitors, or be unable to employ additional or replacementpersonnel with the requisite level of training and experience, our operations could be adverselyaffected. A significant increase in the wages paid by other employers could result in a reductionin our workforce, increases in wage rates, or both.
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***We intend to expand our business through strategic acquisitions. Our acquisitionstrategy exposes us to various risks, including those relating to difficulties in identifyingsuitable acquisition opportunities and integrating businesses and the potential for increasedleverage or debt service requirements.***     We have pursued and intend to continue to pursue strategic acquisitions of complementaryassets and businesses. Acquisitions involve numerous risks, including: **•** unanticipated costs and exposure to unforeseen liabilities;  **•** difficulty in integrating the operations and assets of the acquired businesses;  **•** our ability to properly maintain effective internal controls over an acquired companyto comply with recently adopted public reporting requirements; and  **•** risk of entering markets in which we have limited prior experience.     Our failure to achieve consolidation savings, to incorporate the acquired businesses andassets into our existing operations successfully or to minimize any unforeseen operationaldifficulties could have an adverse effect on our business.     In addition, we may incur indebtedness to finance future acquisitions and also may issueequity securities in connection with such acquisitions. Debt service requirements could represent aburden on our results of operations and financial condition and the issuance of additional equitysecurities could be dilutive to our existing stockholders.***The oilfield service industry in which we operate is highly competitive, which may result in aloss of market share or a decrease in revenue or profit margins.***     Many of our competitors have greater financial and other resources than we do. Ourproducts and services are subject to competition from a number of similarly sized or largerbusinesses. Factors that affect competition include timely delivery of products and services,reputation, manufacturing capabilities, availability of plant capacity, price, performance anddependability. Any failure to adapt to a changing competitive environment may result in a loss ofmarket share and a decrease in revenue and profit margins.***If we do not develop and commercialize new competitive products, our revenue may decline.***     To remain competitive in the market for pressure control products and services, we mustcontinue to develop and commercialize new products. If we are not able to develop commerciallycompetitive products in a timely manner in response to industry demands, our business and revenueswill be adversely affected. Our future ability to develop new products depends on our ability to: **•** design and commercially produce products that meet the needs of our customers;  **•** successfully market new products; and  **•** protect our proprietary designs from our competitors.     We may encounter resource constraints or technical or other difficulties that could delayintroduction of new products and services. Our competitors may introduce new products before we doand achieve a competitive advantage.     Additionally, the time and expense invested in product development may not result incommercial products or provide revenues. We could be required to write off our entire investment ina new product that does not reach commercial viability. Moreover, we may experience operatinglosses after new products are introduced and commercialized because of high start-up costs,unexpected manufacturing costs or problems, or lack of demand.
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***The cyclical nature of or a prolonged downturn in our industry could affect the carrying value ofour goodwill.***     Since 2003, we have had goodwill impairments related to continuing and discontinuedoperations totaling $31.0 million. As of September 30, 2005, we had approximately $69.0 million ofgoodwill after taking into account the impairment charges. Our estimates of the value of ourgoodwill could be reduced as a result of various factors, some of which are beyond our control.***We may be faced with product liability claims.***     Most of our products are used in hazardous drilling and production applications where anaccident or a failure of a product can cause personal injury, loss of life, damage to property,equipment or the environment, or suspension of operations. Despite our quality assurance measures,defects may occur in our products. Any defects could give rise to liability for damages, includingconsequential damages, and could impair the market’s acceptance of our products. To mitigate ourrisk of liability for damages, we attempt to disclaim responsibility for consequential damages, butour disclaimers may not be effective. We carry product liability insurance as a part of ourcommercial general liability coverage of $1 million per occurrence with a $2 million generalaggregate annual limit. Additional coverage may also be available under our umbrella policy. Ourinsurance may not adequately cover our costs arising from defects in our products or otherwise.***Liability to customers under warranties may materially and adversely affect our earnings.***     We provide warranties as to the proper operation and conformance to specifications of theproducts we manufacture. Failure of our products to operate properly or to meet specifications mayincrease our costs by requiring additional engineering resources and services, replacement of partsand equipment or monetary reimbursement to a customer. We have in the past received warrantyclaims, and we expect to continue to receive them in the future. To the extent that we incursubstantial warranty claims in any period, our reputation, our ability to obtain future businessand our earnings could be adversely affected.***Uninsured or underinsured claims or litigation or an increase in our insurance premiums couldadversely impact our results.***     We maintain insurance to cover potential claims and losses, including claims for personalinjury or death resulting from the use of our products. We carry comprehensive insurance, includingbusiness interruption insurance, subject to deductibles, at levels we believe are sufficient tocover existing and future claims. We do not believe any of the litigation to which we currently aresubject will result in any material uninsured or underinsured losses. However, it is possible anunexpected judgment could be rendered against us in cases in which we could be uninsured orunderinsured and beyond the amounts we currently have reserved or anticipate incurring. Significantincreases in the cost of insurance and more restrictive coverage may have an adverse impact on ourresults of operations. In addition, we may not be able to maintain adequate insurance coverage atrates we believe are reasonable.***Our operations are subject to stringent environmental laws and regulations that may expose usto significant costs and liabilities.***     Our operations in the U.S. and abroad are subject to stringent federal, state, provincialand local environmental laws and regulations governing the discharge of materials into theenvironment and environmental protection. These laws and regulations require us to acquire permitsto conduct regulated activities, and to incur capital expenditures to limit or prevent releases ofmaterials from our facilities, and to respond to liabilities for pollution resulting from ouroperations. Governmental authorities enforce compliance with these laws and regulations and thepermits issued under them, oftentimes requiring difficult and costly actions. Failure to complywith these laws, regulations and permits may result in the assessment of administrative, civil andcriminal penalties, the imposition of remedial obligations, and the issuance of injunctionslimiting or preventing some or all of our operations.     There is inherent risk of incurring significant environmental costs and liabilities in ourbusiness. Joint and several, and strict liability may be incurred in connection with discharges orreleases of petroleum hydrocarbons and wastes on, under or from our properties and facilities, manyof which have been used for industrial purposes
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for a number of years, oftentimes by third parties not under our control. Private parties whouse our products and facilities where our petroleum hydrocarbons or wastes are taken forreclamation or disposal may also have the right to pursue legal actions to enforce compliance aswell as to seek damages for non-compliance with environmental laws and regulations and for personalinjury or property damage. In addition, changes in environmental laws and regulations occurfrequently, and any such changes that result in more stringent and costly requirements could have amaterial adverse effect on our business. We may not be able to recover some or any of these costsfrom insurance.***We will be subject to political, economic and other uncertainties as we expand ourinternational operations.***     We intend to continue our expansion into international oil and gas producing areas suchas Mexico and Canada. Our international operations are subject to a number of risks inherent in anybusiness operating in foreign countries including, but not limited to: **•** political, social and economic instability;  **•** currency fluctuations; and  **•** government regulation that is beyond our control.     Our operations have not yet been affected to any significant extent by such conditions orevents, but as our international operations expand, the exposure to these risks will increase. Tothe extent we make investments in foreign facilities or receive revenues in currencies other thanU.S. dollars, the value of our assets and our income could be adversely affected by fluctuations inthe value of local currencies.***If we are unable to complete our assessment of the adequacy of our internal control overfinancial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors couldlose confidence in the reliability of our financial statements, which could result in a decrease inthe value of our common stock.***     Under Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to include ineach of our future annual reports on Form 10-K, beginning with our annual report for the fiscalyear ended December 31, 2006, a report containing our management’s assessment of the effectivenessof our internal control over financial reporting and a related attestation of our independentauditors. We are currently undertaking a comprehensive effort in preparation for compliance withSection 404. This effort includes the documentation and evaluation of our internal controls underthe direction of our management. We have been making various changes to our internal control overfinancial reporting as a result of our review efforts. To date, we have not identified any materialweaknesses in our internal control over financial reporting, as defined by the Public CompanyAccounting Oversight Board. Due to the number of controls to be examined, the complexity of theproject, as well as the subjectivity involved in determining effectiveness of controls, we cannotbe certain that all our controls will be considered effective. Therefore, we can give no assurancesthat our internal control over financial reporting will satisfy the new regulatory requirements. Ifwe are unable to successfully implement the requirements of Section 404, it will prevent ourindependent auditors from issuing an unqualified attestation report on a timely basis as requiredby Section 404. In that event, investors could lose confidence in the reliability of our financialstatements, which could result in a decrease in the value of our common stock.**Risks Related to Our Common Stock*****Two of our directors may have conflicts of interest because they are also directors orofficers of First Reserve Corporation. The resolution of these conflicts of interest may not be inour or our stockholders’ best interests.***     Two of our directors, Joseph R. Edwards and Ben A. Guill, are also current officers oremployees of First Reserve Corporation, which controls the general partner of First Reserve FundVIII, L.P. This may create conflicts of interest because these directors have responsibilities toFirst Reserve Fund VIII and its owners. Their duties as directors or officers of First ReserveCorporation may conflict with their duties as directors of the Company regarding business dealingsbetween First Reserve Corporation and the Company and other matters. The resolution of theseconflicts may not always be in our or our stockholders’ best interests.
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***We will renounce any interest in specified business opportunities, and First Reserve Fund VIII andits director designees on our board of directors generally will have no obligation to offer usthose opportunities.***     First Reserve Fund VIII has investments in other oilfield service companies that compete withthe Company, and First Reserve Corporation and its affiliates, other than T-3, may invest in othersuch companies in the future. We refer to First Reserve Corporation, its other affiliates and itsportfolio companies as the First Reserve group. Our certificate of incorporation provides that, solong as First Reserve Corporation and its affiliates continue to own at least 20% of the Company’scommon stock, we renounce any interest in specified business opportunities. Our certificate ofincorporation also provides that if an opportunity in the oilfield services industry is presentedto a person who is a member of the First Reserve group, including any individual who also serves asFirst Reserve Fund VIII’s director designee of the Company: **•** no member of the First Reserve group or any of those individuals will have anyobligation to communicate or offer the opportunity to the Company; and  **•** such entity or individual may pursue the opportunity as that entity orindividual sees fit,unless: **•** it was presented to a member of the First Reserve group in that person’scapacity as a director or officer of T-3; or  **•** the opportunity was identified solely through the disclosure of information byor on behalf of T-3.     These provisions of our certificate of incorporation may be amended only by an affirmative vote ofholders of at least 80% of its outstanding common stock. As a result of these charter provisions,our future competitive position and growth potential could be adversely affected.***Our ability to issue preferred stock could adversely affect the rights of holders of ourcommon stock.***     Our certificate of incorporation authorizes us to issue up to 25,000,000 shares ofpreferred stock in one or more series on terms that may be determined at the time of issuance byour board of directors. Accordingly, we may issue shares of any series of preferred stock thatwould rank senior to the common stock as to voting or dividend rights or rights upon ourliquidation, dissolution or winding up.***Certain provisions in our charter documents have anti-takeover effects.***     Certain provisions of our certificate of incorporation and bylaws may have the effect ofdelaying, deferring or preventing a change in control of us. Such provisions, including thoseregulating the nomination and election of directors and limiting who may call special stockholders’meetings, together with the possible issuance of our preferred stock without stockholder approval,may make it more difficult for other persons, without the approval of our board of directors, tomake a tender offer or otherwise acquire substantial amounts of our common stock or to launch othertakeover attempts that a stockholder might consider to be in such stockholder’s best interest.
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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**     Market risk generally represents the risk that losses may occur in the value of financialinstruments as a result of movements in interest rates, foreign currency exchange rates andcommodity prices.     We are exposed to some market risk due to the floating interest rates under our senior creditfacility and our Canadian credit facility. As of September 30, 2005, our revolving line of creditunder the senior credit facility, whose interest rate floats with prime or LIBOR, had a principalbalance of $12.6 million. A 1.0% increase in interest rates could result in a $0.1 millionincrease in interest expense on the existing principal balances. As of September 30, 2005, ourCanadian credit facility did not have a principal balance, and therefore, we did not have anyexposure to rising interest rates.     We are also exposed to some market risk due to the foreign currency exchange rates related toour Canadian operations. We conduct our Canadian business in the local currency, and thus theeffects of foreign currency fluctuations are largely mitigated because the local expenses of suchforeign operations are also denominated in the same currency. Assets and liabilities aretranslated using the exchange rate in effect at the balance sheet date, resulting in translationadjustments that are reflected as accumulated other comprehensive income in the stockholders’equity section on our consolidated balance sheet. Less than 1% of our net assets are impacted bychanges in foreign currency in relation to the U.S. dollar. We recorded a $0.4 million adjustmentto our equity account for the nine months ended September 30, 2005 to reflect the net impact of thechange in foreign currency exchange rate.**ITEM 4. CONTROLS AND PROCEDURES**Evaluation of Disclosure Controls and Procedures     As of the end of the period covered by this report, our management carried out an evaluation,with the participation of our principal executive officer (the “CEO”) and our principal financialofficer (the “CFO”), of the effectiveness of our disclosure controls and procedures pursuant toRule 13a-15 of the Securities Exchange Act of 1934. Based on those evaluations, the CEO and CFOhave concluded that our disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including the CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure.Changes in Internal Controls Over Financial Reporting     There have been no changes in our internal controls over financial reporting during the periodcovered by this report that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.
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**PART II****Item 1. Legal Proceedings**     On October 26, 2005, a shareholder derivative lawsuit (Berger v. Halas, et al., C.A. No.1733-N) was filed in the Court of Chancery of the State of Delaware in New Castle County, againstthe Company (as a nominal defendant), Gus D. Halas, all other members of the Company’s Board ofDirectors, and First Reserve Fund VIII, L.P., the principal stockholder of the Company. Thislawsuit relates to the filing by the Company of a preliminary registration statement on Form S-1with the U.S. Securities and Exchange Commission on October 21, 2005. The complaint alleges abreach of the duty of loyalty and a bad faith breach of the duty of full disclosure by alldefendants. In addition, the complaint alleges that the payment of a transaction bonus to Mr.Halas in connection with the offering contemplated by the preliminary registration statement isimproper. The plaintiff seeks a temporary and a permanent injunction against the proposed sale andthe payment of the transaction bonus. The plaintiff also seeks a judgment awarding costs and feesincurred in filing and prosecuting the case. The defendants intend to vigorously pursue theirdefense. Management believes that the ultimate resolution of the case will not have a materialadverse impact on the financial condition or liquidity of the Company.     On July 15, 2003, a lawsuit was filed by Chevron U.S.A., Inc. against the Company in the U.S.District Court, Eastern District of Louisiana. The lawsuit alleges that a wholly owned subsidiaryof the Company failed to deliver the proper bolts and/or sold defective bolts to the plaintiff’scontractor to be used in connection with a drilling and production platform in the Gulf of Mexico.The plaintiffs claim that the bolts failed and they had to replace all bolts at a cost ofapproximately $4 million. The complaint names the plaintiff’s contractor and seven of itssuppliers and subcontractors (including the Company’s subsidiary) as the defendants and allegesnegligence on the part of all defendants. The Company has filed its motion to dismiss the lawsuit,denying responsibility for the claim. The Company has also filed a cross claim against itssupplier. Management does not believe that the outcome of such legal action will have a materialadverse effect on the Company’s financial position, results of operations, or cash flows.**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**     None**Item 3. Defaults Upon Senior Securities**     None**Item 4. Submission of Matters to a Vote of Security Holders**     None**Item 5. Other Information**     OnNovember 14, 2005, the Company entered into an agreement with First Reserve Fund VIII, L.P.and Mr. Halas amending Mr. Halas’ employment agreement to provide that the transaction bonuspayable thereunder will also become payable upon the consummation of a sale by First Reserve FundVIII, L.P. in a public offering, pursuant to a firm commitment underwriting, of at least 50% of theoutstanding shares of the Company’s common stock. The agreement also extends the time periodduring which a change in control of the Company must occur in order for the transaction bonus to bepayable from December 31, 2005 to January 31, 2006. In addition, pursuant to the terms of theagreement, First Reserve Fund VIII, L.P. will make a capital contribution to the Company in orderto reimburse the Company for the payment of any transaction bonus to Mr. Halas, but only in theevent of a public offering meeting the requirements described above. The amount of the capitalcontribution will be equal to the transaction bonus less the tax benefits the Company will receivefrom the
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related federal and state tax deductions.     On March 23, 2005, our subsidiary, T-3 Management Services, L.P. (“T-3 Services”), enteredinto an employment agreement with Keith A. Klopfenstein, our Vice President of Operations, whichterminates on May 31, 2006. The agreement provides for an annual base salary of $127,200 andcontains standard confidentiality covenants with respect to our trade secrets and non-competitioncovenants until the later of (i) the first anniversary of the date of termination or resignation or(ii) such time as Mr. Klopfenstein no longer receives any payments under the agreement. If Mr.Klopfenstein is terminated for any reason other than due to death, disability or cause (as definedin the agreement), T-3 Services is required to make monthly severance payments equal to his monthlybase salary on termination for the lesser of one year or the remaining term of his employment. Inaddition, if within 18 months of a change of control transaction, Mr. Klopfenstein has a materialdemotion in his title or responsibilities or is transferred outside of Houston, Texas, and heresigns within 60 days after that demotion or transfer, the resignation will be deemed atermination without cause for purposes of the severance payments described above.**Item 6. Exhibits**     Exhibit Number Identification of Exhibit 10.1  First Amendment to First Amended and Restated Credit Agreement datedAugust 25, 2005, among T-3 Energy Services, Inc., T-3 Oilco EnergyServices Partnership, the Banks signatory thereto, Wells Fargo Bank,National Association, as agent for the Banks, and Comerica Bank(incorporated by reference to Exhibit 10.1 to the Company’s CurrentReport on Form 8-K dated August 26, 2005 (File No. 000-19580)).      10.2  Intercreditor Agreement dated August 25, 2005, among T-3 EnergyServices, Inc., T-3 Oilco Energy Services Partnership, Wells FargoBank, National Association, as agent for the Banks, and Comerica Bank(incorporated by reference to Exhibit 10.2 to the Company’s CurrentReport on Form 8-K dated August 26, 2005 (File No. 000-19580)).      10.3  First Amendment to Employment Agreement dated August 25, 2005,between T-3 Energy Services, Inc. and Gus D. Halas (incorporated byreference to Exhibit 10.2 to the Company’s Current Report on Form 8-Kdated August 26, 2005 (File No. 000-19580)).      10.4  Asset Purchase Agreement dated September 29, 2005, by and between A&BValve and Piping Systems, L.P., T-3 Energy Services, Inc. and A&BBolt & Supply, Inc. (incorporated by reference to Exhibit 2.1 to theCompany’s Current Report on Form 8-K dated October 5, 2005 (File No.000-19580)).      10.5  Third Employment Agreement dated March 23, 2005, by and between T-3Management Services, L.P. and Keith A. Klopfenstein.      10.6  LetterAgreement dated November 14, 2005, among First Reserve FundVIII, L.P., T-3 Energy Services, Inc. and Gus D. Halas.      31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a)or Rule 15d-14(a), promulgated under the Securities Exchange Act of1934, as amended      31.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a)or Rule 15d-14(a), promulgated under the Securities Exchange Act of1934, as amended      32.1  Certification Pursuant to 18 U.S.C. Section 1350, As Adopted PursuantTo Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief ExecutiveOfficer)      32.2  Certification Pursuant to 18 U.S.C. Section 1350, As Adopted PursuantTo Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief FinancialOfficer)
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**SIGNATURES****Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on the 14th day of November 2005.**      **T-3 ENERGY SERVICES, INC.**