Click here to Contents





|
|
|
|




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC  20549





FORM 10-K





Mark One:


| |  | Annual Report pursuant to    Section 13 or 15(d) of the Securities Exchange Act of 1934.   
| |  | -------------------------------------------------------------------------------------------
| |  | For the fiscal year ended December    31, 2005; or                                         
| |  |                                                                                            
| |  | Transition Report pursuant to    Section 13 or 15(d) of the Securities Exchange Act of 1934
| |  | For the transition period from    __________ to __________.                                




Commission File No. 0-18754





|WARRIOR    ENERGY SERVICES CORPORATION                   
|---------------------------------------------------------
|                                                         
|(Exact    name of Registrant as specified in its charter)




|Delaware                                                             |  | 11-2904094                             
|-------------------------------------------------------------------- |  | ---------------------------------------
|                                                                     |  |                                        
|(State or    other jurisdiction of    Incorporation or organization) |  | (IRS    Employer    Identification No.)
|                                                                     |  |                                        
|100 Rosecrest, Columbus,    Mississippi                              |  | 39701                                  
|                                                                     |  |                                        
|(Address    of Principal Executive Offices)                          |  | (Zip Code)                             




|(662)  329-1047                                        
|-------------------------------------------------------
|                                                       
|(Registrants    telephone number, including area code)




Securities Registered Pursuant to Section 12(b) of the  Act:  NONE





Securities Registered Pursuant to Section 12(g) of the Act:


(Title of Each Class)


Common Stock, par value $.0005 per share





Indicate by  check mark if the registrant is a well-known seasoned issuer, as defined in  Rule 405 of the Securities Act.


|    |   
|--- | --
|Yes | No




Indicate by  check mark if the registrant is not required to file reports pursuant to  Section 13 or Section 15(d) of the Act.


|    |   
|--- | --
|Yes | No




Indicate by  check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the  preceding twelve (12) months (or for such shorter period that the registrant  was required to file such reports), and (2) has been subject to such filing  requirements for the past ninety (90) days.


|    |   
|--- | --
|Yes | No




Indicate by  check mark if disclosure of delinquent filers pursuant to Item 405 of  Regulation S-K is not contained herein, and will not be contained, to the best  of registrants knowledge, in definitive proxy or information statements  incorporated by reference in Part III of this Form 10-K, or any amendment to  this Form 10-K.





Indicate by  check mark whether the registrant is a large accelerated filer, an accelerated  filer, or a non-accelerated filer.  See  definition of accelerated filer and large accelerated filer in Rule 12b-2 of  the Exchange Act.  (Check one):





|Large accelerated    filer |  | Accelerated filer |  | Non-accelerated    filer
|-------------------------- |  | ----------------- |  | ------------------------




Indicate by  check mark whether the registrant is a shell company (as defined in Rule 12b-2  of the Exchange Act).


|    |   
|--- | --
|Yes | No




State the  aggregate market value of the voting and non-voting common equity held by  non-affiliates computed by reference to the price at which the common equity  was last sold, or the average bid and asked price of such common equity, as of  the last business day of the registrants most recently completed second fiscal  quarter.


$4,952,120


(Non-affiliates have been determined on the basis of holdings set forth  under Item 12 of this Annual Report on Form 10-K.)





Indicate  the number of shares outstanding of each of the registrants classes of common  stock, as of the latest practicable date:


| | Class:  Common    Stock, par value $.0005 per share
| | ---------------------------------------------------
| | Outstanding at March 21, 2006:2,379,464 shares     




DOCUMENTS INCORPORATED BY  REFERENCE


No documents are  incorporated by reference into this Annual Report on Form 10-K





|
|
|
|






Click here to Cover





Table of Contents





|Item Number |                                                                                                                 |  | Page
|----------- | --------------------------------------------------------------------------------------------------------------- |  | ----
|            |                                                                                                                 |  |     
|            | Part I                                                                                                          |  |     
|            |                                                                                                                 |  |     
|Item 1.     | Business                                                                                                        |  | 3   
|            |                                                                                                                 |  |     
|Item 1A.    | Risk Factors                                                                                                    |  | 10  
|            |                                                                                                                 |  |     
|Item 1B.    | Unresolved Staff Comments                                                                                       |  | 21  
|            |                                                                                                                 |  |     
|Item 2.     | Properties                                                                                                      |  | 21  
|            |                                                                                                                 |  |     
|Item 3.     | Legal Proceedings                                                                                               |  | 21  
|            |                                                                                                                 |  |     
|Item 4.     | Submission of Matters to a Vote of    Security Holders                                                          |  | 22  
|            |                                                                                                                 |  |     
|            | Part II                                                                                                         |  |     
|            |                                                                                                                 |  |     
|Item 5.     | Market for Registrants Common    Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 23  
|            |                                                                                                                 |  |     
|Item 6.     | Selected Financial Data                                                                                         |  | 25  
|            |                                                                                                                 |  |     
|Item 7.     | Managements Discussion and    Analysis of Financial Condition and Results of Operations                        |  | 26  
|            |                                                                                                                 |  |     
|Item 7A.    | Quantitative and Qualitative    Disclosures About Market Risk                                                   |  | 44  
|            |                                                                                                                 |  |     
|Item 8.     | Financial Statements and    Supplementary Data                                                                  |  | 45  
|            |                                                                                                                 |  |     
|Item 9.     | Changes in and Disagreements With    Accountants on Accounting and Financial Disclosure                         |  | 45  
|            |                                                                                                                 |  |     
|Item 9A.    | Controls and Procedures                                                                                         |  | 45  
|            |                                                                                                                 |  |     
|Item 9B.    | Other Information                                                                                               |  | 46  
|            |                                                                                                                 |  |     
|            | Part III                                                                                                        |  |     
|            |                                                                                                                 |  |     
|Item 10.    | Directors and Executive Officers    of the Registrant                                                           |  | 47  
|            |                                                                                                                 |  |     
|Item 11.    | Executive Compensation                                                                                          |  | 50  
|            |                                                                                                                 |  |     
|Item 12.    | Security Ownership of Certain    Beneficial Owners and Management and Related Stockholder Matters               |  | 54  
|            |                                                                                                                 |  |     
|Item 13.    | Certain Relationships and Related    Transactions                                                               |  | 56  
|            |                                                                                                                 |  |     
|Item 14.    | Principal Accountant Fees and    Services                                                                       |  | 60  
|            |                                                                                                                 |  |     
|            | Part IV                                                                                                         |  |     
|            |                                                                                                                 |  |     
|Item 15.    | Exhibits and Financial Statement    Schedules                                                                   |  | 61  




2





---



Back to Contents





PART I





|Item 1. | Business
|------- | --------




Overview





Warrior  Energy Services Corporation (the Company and formerly known as Black Warrior  Wireline Corp.) is a natural gas and oil well services company that provides  cased-hole wireline and well intervention services to exploration and  production (E&P) companies.  The  Companys wireline services focus on cased-hole wireline operations, including  logging services, perforating, mechanical services, pipe recovery and plug and  abandonment services.  The Companys  well intervention services are primarily hydraulic workover services, commonly  known as snubbing services.  All of the  Companys services are performed at the well site and are fundamental to  establishing and maintaining the flow of natural gas and oil throughout the  productive life of the well.  The  Companys operations are concentrated in the major onshore and
offshore natural  gas and oil producing areas of the U.S., including offshore in the Gulf of  Mexico and onshore in Alabama, Arkansas, Colorado, Louisiana, Mississippi,  Montana, New Mexico, North Dakota, Oklahoma, Texas, Utah, and Wyoming.  The Company focuses on providing high  quality equipment and services in difficult environments, such as high pressure  and high temperature wells, and difficult pipe recovery operations.  The majority of the Companys revenues are  related to natural gas drilling and workover activity.





The  share numbers presented in this Report reflect the one-for-ten reverse stock  split the Company effected on December 27, 2005.





Significant  Acquisition and Recent Developments





Bobcat  Acquisition.On  December 16, 2005, the Company acquired Bobcat Pressure Control, Inc.  (Bobcat), a well services company with operations in Oklahoma and Texas that  provides snubbing, freezing, hot tap, rental tool and fishing services to  natural gas and oil well operators in the Mid-Continent area of the U.S.  This acquisition represents the Companys  entrance into the well intervention services segment of its business.  The Company purchased all of the outstanding  equity securities of Bobcat for approximately $53.2 million, including related  fees and expenses and repayment of substantially all of Bobcats  indebtedness.  The Companys acquisition  of Bobcat was funded with borrowings under the Companys Credit Agreements, a  portion of which is intended to be repaid out of the net proceeds the Company  receives from
the Companys proposed public offering.





Proposed  Public OfferingOn February 13, 2006, the Company filed with  the Securities and Exchange Commission (SEC) a registration statement on Form  S-l under the Securities Act of 1933, as amended, for the sale of up to $185.2  million of shares of common stock by the Company and certain selling  securityholders.  The Company expect to  use the proceeds it receives from its proposed public offering to simplify its  capital structure by eliminating outstanding derivative securities and to  reduce debt.  In connection with that  offering, the Company filed an application to list its common stock on the  Nasdaq National Market under the trading symbol WARR.





Investment  in Assets.The Company has made significant investments  in its asset base over the past several years by expanding its wireline fleet  from 38 trucks and 11 skids in 2002 to 51 trucks and 15 skids as of  December 31, 2005.  Through its  acquisition of Bobcat, the Company has also added a fleet of 14 snubbing  units.  The Company currently provides  its services from 25 operating bases in 10 states.





3





---



Back to Contents





Operating  Segments





The  Company currently conducts its business through two operating segments further  described below.  In its financial  statements for the year ended December 31, 2005, the Company included the  operating results of Bobcat, acquired on December 16, 2005, only during the  period subsequent to its acquisition:





Wireline Segment.  The Companys wireline segment,  which accounted for 99.0% of its revenues for the year ended December 31, 2005,  operated a fleet of 51 cased-hole wireline trucks, 15 offshore wireline skids  and three plug and abandonment (P&A) packages as of December 31,  2005.  All of the Companys wireline  trucks and offshore skids are equipped with top-of-the-line computer  systems.  The Company primarily provides  services in cased-hole environments.   Cased-hole wireline services are performed during and after the  completion of the well, and from time to time thereafter during the life of the  well.  Wireline services are performed  using a wire cable that is lowered from a truck or skid into a well with  various types of tools and instruments attached to the end of the cable.  Specific wireline services
include: logging  services, which includes cement bond logging, production logging and other  measurements; pipe recovery services; and perforating and mechanical  services.  The Company believes it is a  leading provider of pipe recovery services in the U.S., which requires  significant experience, expertise and specialized equipment.  Other services in the wireline segment  include P&A services, which are used at the end of a wells productive  life, and tubing conveyed perforating (TCP), which is a method of perforating  the casing in order to open the flow path in a well for hydrocarbons.  The Company operates four P&A packages  in connection with its P&A services.





| |  | Logging Services.  The truck or skid-mounted wireline logging    services are used to evaluate downhole well conditions such as production    patterns, the cement bonding effectiveness between the casing and the    formation and formation characteristics such as lithology and porosity.  These logging services are provided at    various stages of the process of drilling and completing natural gas and oil    wells as well as at various times thereafter until the well is depleted,    plugged and abandoned.  Such services    are provided using a wireline unit equipped with an armored cable that is    lowered by winch into an existing well.     The cable lowers instruments and tools into the well to perform a    variety of services and tests.  The    wireline units instrument cab contains electronic equipment to supply power    to the downhole instruments, to receive and record data from those    instruments in order
to produce the logs which define specific    characteristics of each formation and to display the data received from    downhole.  Each of the Companys    wireline units is equipped with a top-of-the-line computer system.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Pipe Recovery Services.     Experienced pipe recovery specialists use specialized free-point    wireline tools to find the point at which the tubing or drill pipe is stuck    in a well.  Once the free-point (the    lowest point in the well where the pipe is still free to move) is located,    then the pipe recovery specialist uses his judgment and experience to determine    how best to free the pipe.  Generally    the pipe will be backed off (un-screwed) at the joint just above the    free-point or the pipe may be cut with explosives, chemical or mechanical    cutters just above the free point.     Once the pipe is cut it can be removed from the well, allowing the rig    crew to go back to fish the remaining portion of the tubing or drillpipe    with grapples, jars and other specially made tools.                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Perforating    Services.Perforating involves positioning a    perforation gun that contains explosive jet charges down the wellbore next    to a productive zone.  A detonator is    fired and primer cord is ignited, which then detonates the jet charges.  The resulting explosion creates holes    through the casing and cement and into the formation, thus allowing the    formation fluid to flow into the wellbore and be                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           




4





---



Back to Contents





| |   | produced to the    surface.  The Company primarily    deploys its perforation gun by a conventional wireline cable, if appropriate,    or using conventional tubing or drill pipe, which is called tubing conveyed    perforating or TCP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Mechanical Services.     Cased-hole wireline equipment is often used to set plugs, packers,    dump cement and make other physical changes to a well bore.  The mechanical tools (such as plug setting    tools) are usually combined with a logging tool to ensure proper placement of    the plug or packer in the well.     Mechanical services are often provided along with logging or perforating    services on the same trip to the well site and are an integral part of the    drilling and completion process.                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Plugging    and Abandonment.  Cased-hole wireline equipment, pumping    equipment and hydraulic jacks are used in the process of permanently closing    natural gas and oil wells no longer capable of producing in economic    quantities at the end of their productive life.  A typical P&A job will include cutting the tubing and/or    casing with wireline explosives or other cutters, removing the salvageable    tubing with hydraulic jacks and then setting plugs and cementing the well    bore.  The P&A process generally    takes several days to complete. Plugging and abandonment work can provide    favorable operating margins and is less sensitive to natural gas and oil    pricing than drilling and workover activity since well operators must plug a    well in accordance with state or federal regulations when it is no longer    productive.




Well  Intervention Segment.  The Companys well intervention segment  accounted for 1% of revenues for the year ended December 31, 2005.   The Company included the operating results  of this segment only from the date of acquisition of Bobcat on December 16,  2005.  As a consequence of this  acquisition, the Company operated a fleet of 14 snubbing units as of December  31, 2005.  The Company primarily  provides snubbing services utilizing specialized high pressure snubbing  equipment that allows an operator to service a well without using other more  disruptive means to control the pressure in the well. Since snubbing is a  difficult and critical process, the snubbing segment of the natural gas and oil  services industry is limited to a relatively few operators who have the  expertise and knowledge required to perform such services safely and  efficiently. 
The Companys well  intervention segment also includes other related oil field services, such as  freezing services, hot tapping services, rental tools and fishing  services.





| |  | Snubbing    Services. Snubbing services use specialized hydraulic    well service units that permit an operator to complete underbalanced wells    and repair damaged casing, production tubing and downhole production    equipment in high-pressure, live-well environments. A snubbing unit makes    it possible to remove and replace downhole equipment while maintaining    pressure in the well.  Customers    benefit because these operations can be performed without killing the well    with heavy fluids, which can damage the productive formations, and because a    snubbing rig can perform many applications at a lower cost than other    alternatives. Since snubbing is difficult to perform, the snubbing segment of    the natural gas and oil services industry is limited to a relatively few    operators who have the experience and knowledge required to perform such    services safely and efficiently.     Applications for snubbing
units include live-well completions and    workovers, underground blowout control, underbalanced completions,    underbalanced drilling and the running of tubing, casing or drillpipe into or    out of pressurized wellbore.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Freezing    Services. Freezing technology provides wellhead and    pipe operations with pressure control and isolation for service and    maintenance.  Freezing technology    involves setting a bentonite gel plug by freezing it in place.  Freezing is an economic,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                




5





---



Back to Contents





| |   | temporary and nondamaging    technology often used with other services, such as hot tapping.  It is quickly deployed and applied for    fast response, does not damage installations and does not require kill    fluids.  Freezing technology    applications include changing or repairing damaged valves, entire wellheads    and controlling pressure in tubing or pipelines.                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Hot    Tapping Services.The Companys hot tapping services are used    to access a contained area that is or may be holding pressure.  The procedure can be designed to release    the pressure and contents, or in the case of a loaded pipeline, provide    access through a valve.  Hot tapping    is used in a variety of applications, including coiled tubing, wellheads,    valves, tubing, drill pipe and drill collars.  The Companys experienced well service personnel can be    dispatched 24 hours a day with hot tap drills and the related equipment. The    Companys hot tap equipment can be easily transported by truck, in well    service freeze units, or by third-party helicopter.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Rental    Tool Services. The Company rents specialized equipment and tools for the drilling, completion and    workover of onshore and offshore natural gas and oil wells.  Natural gas and oil producers and drilling    contractors often find it more economical to supplement their inventories of    tools, drillpipe and other specialized equipment with rental equipment.  The Company offers a broad range of rental    tools, including:                                                                                                                                                                                                                                                         




| |  | pressure control equipment;
| | - | ---------------------------
| |   |                            
| |  | drill string equipment;    
| |   |                            
| |  | pipe handling equipment;   
| |   |                            
| |  | fishing and downhole tools;
| |   |                            
| |  | stabilizers;               
| |   |                            
| |  | power swivels;             
| |   |                            
| |  | bottom-hole assemblies;    
| |   |                            
| |  | handling tools;            
| |   |                            
| |  | test pumps;                
| |   |                            
| |  | tubular handling tools; and
| |   |                            
| |  | hydraulic torque wrenches. 




| |  | Fishing    Services. The Company provides highly skilled    downhole services, including fishing, milling and cutting services, which    consist of removing or otherwise eliminating fish or junk (a piece of    equipment, a tool, a part of the drill string or debris) in a well that is    causing an obstruction.                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Coiled Tubing, Nitrogen Pumping and Fluid Pumping.  The Company is also    planning to enter complimentary well intervention product lines in 2006,    including coiled tubing, nitrogen pumping and fluid pumping.  Coiled tubing units compliment the    Companys snubbing units, providing an alternative conveyance system to    deliver completion and workover services.     The addition of nitrogen and fluid pumping




6





---



Back to Contents





| |  | services to the Companys well intervention    segment takes advantage of the synergies believed to exist with the Companys    snubbing and coiled tubing units, which are used to deploy nitrogen and    fluids into wells during completion and workover activities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Manufacturing  and Repair FacilitiesThe Company operates two manufacturing and  repair facilities that are located in Laurel, Mississippi and Decatur,  Texas.  The Laurel, Mississippi facility  manufactures and repairs wireline trucks, offshore wireline skids and P&A  packages.  The Decatur, Texas facility  primarily manufactures and repairs snubbing units and related equipment.  Substantially all of the equipment is  manufactured and repaired for the Companys use.





Competition





The  Companys primary competitors in the wireline segment are divisions of larger  diversified oilfield services companies, including Schlumberger, Ltd., Baker  Hughes, Inc., Halliburton Company and Weatherford International Ltd., and  smaller and midsize companies, such as W-H Energy Services, Inc., Complete  Production Services, Inc. and Superior Well Services, Inc.  In the well intervention segment, the  Company competes with RPC, Inc., Oil States International, Inc., Superior  Energy Services, Inc. and Complete Production Services, Inc., as well as a few  small private companies.





Competition  principally occurs in the areas of field personnel and equipment availability,  price, quality of products, technology and facility locations. Because most  services are awarded based on competitively quoted bids, price competition  remains a significant characteristic of the industry.  Salesmanship and equipment availability are also important  factors in securing the award of contracts.   The Companys ability to offer more reliable services in hostile  environments is believed by management to have reduced the extent of its  exposure to severe price competition.   The Company continues to make a conscious effort to compete, not just on  price, but also on its ability to offer premium services, experienced  personnel, and a safe working environment.





Customers and Markets





Although  the Company has two distinct service segments, the Company serves a similar  customer base across these segments.   The Companys customer base is comprised of over 600 E&P companies,  primarily independent and major natural gas and oil companies operating in the  U.S.  Some of the Companys key  customers include: Anadarko, Apache, Burlington Resources, Chesapeake, Chevron,  Denbury, El Paso, Newfield and Patina.   The Companys many years of experience in the natural gas and oil well  services business, its experienced workforce and high-quality asset base have  enabled the Company, it believes, to establish long-term customer relationships  which are beneficial to its business.





The  Company performs its wireline and well intervention services at the well site  for operators of the wells primarily pursuant to contracts entered into on a  bid basis at prices related to the Companys standard prices.





The  Companys services are provided based on its customers time schedule, weather  conditions, availability of the Companys personnel and equipment and  complexity of the operation.  Wireline  services generally take one to three days to perform.  Well intervention services generally last for two weeks or  more.  These services are provided using  company-owned equipment throughout the Companys service areas dispatched from  its 25 operating bases located throughout its service areas.





There  were no customers from which the Company earned in excess of 10% of its  revenues during any of the three years ended December 31, 2005.  The Company does not have any long-term  agreements with its customers, and services are provided pursuant to short-term  agreements negotiated by the Company with each customer.





The  Companys services are marketed by its executive officers and a sales staff of  approximately 30 persons working from its operating bases and sales  offices.  The Company relies extensively  on its reputation in the industry to create customer awareness of its services.





7





---



Back to Contents





Suppliers





The  Company purchases the materials used in providing its services from a variety  of non-affiliated suppliers.  The  Company believes that it is not substantially dependent on any single source of  supplies from any single vendor and that alternative sources are readily  available for substantially all of its consumable materials.





Employees





As
    of December 31, 2005, the Company employed approximately 480 persons on a
    full-time basis. Of those employees, 24 are management personnel, 23 are
    administrative personnel and approximately 433 are operational personnel.  None
    of the Companys employees is  represented by a labor union, and management
    is not aware of any current activities to unionize its employees.   Management
    considers its relationship with the Companys employees to be  good.





Environmental Regulation





The  Companys business is subject to stringent and comprehensive federal, state and  local laws regulating the discharge of materials into the environment or  otherwise relating to health and safety or the protection of the environment.  Federal and state governmental agencies issue regulations to implement and  enforce these laws, which are often difficult and costly to comply with.  Failure to comply with these laws and regulations often carries substantial  administrative, civil and criminal penalties and may result in the issuance of  injunctions limiting or prohibiting the Companys operations. Some laws and  regulations relating to protection of the environment may, in some  circumstances, impose joint and several, strict liability for environmental  contamination, rendering a person liable for environmental damages and cleanup  costs without regard to negligence or fault on the part
of that person. Strict  adherence with these regulatory requirements increases the Companys cost of  doing business and consequently affects the Companys profitability. The  Company believes that it is in substantial compliance with current applicable  environmental laws and regulations and that continued compliance with existing  requirements will not have a material adverse impact on its operations.  However, environmental laws and regulations have been subject to frequent  changes over the years, and the imposition of more stringent requirements could  have a materially adverse effect upon the Companys capital expenditures,  earnings or its competitive position.





The  Comprehensive Environmental Response, Compensation, and Liability Act, referred  to as CERCLA or the Superfund law, and comparable state laws impose strict  liability, without regard to fault or the legality of the original conduct on  certain classes of persons that are considered to be responsible for the  release of a hazardous substance into the environment. These persons include  the current and past owners and operators of the disposal site or sites where  the release occurred and companies that transport or disposed or arranged for  the transportation or disposal of the hazardous substances that have been  released at the site. Under CERCLA, these persons may be subject to joint and  several liability for the costs of cleaning up the hazardous substances that  have been released into the environment from properties currently or even  previously owned or operated by the Company as well as
from offsite properties  where the Companys wastes have been disposed, for damages to natural resources  and for the costs of some health studies. In addition, it is not uncommon for  neighboring landowners and other third parties to file claims for personal  injury and property damage allegedly caused by hazardous substances or other  pollutants released into the environment.





The  Companys operations generate wastes, including hazardous wastes, that are  subject to the federal Resource Conservation and Recovery Act, referred to as  RCRA.  Some wastes generated by the  exploration and production of natural gas and oil are exempt from treatment as  hazardous wastes including, for example, drilling fluids, produced water, and  well completion, treatment, and stimulation fluids.  However, these wastes may be regulated by the U.S. Environmental  Protection Agency, referred to as the EPA, or state environmental agencies as  non-hazardous waste. Moreover, in the ordinary course of the Companys  operations, industrial wastes such as paint wastes, waste solvents, and  laboratory wastes as well as certain





8





---



Back to Contents





wastes generated in the course of providing  well services may be regulated as hazardous waste under RCRA or hazardous  substances under CERCLA. The Company currently owns or leases, and have in the  past owned or leased, a number of properties that for many years have been used  for services in support of natural gas and oil exploration and production  activities. The Company has utilized operating and disposal practices that were  standard in the industry at the time, but hydrocarbons, hazardous substances,  or other wastes may have been disposed of or released on or under the  properties owned or leased by the Company or on or under other locations where  such wastes have been taken for disposal. In addition, the Company may own or  lease properties that in the past were operated by third parties whose  operations were not under the Companys control. Those properties and the  hydrocarbons, hazardous substances, or wastes disposed thereon may be
subject  to CERCLA, RCRA, and analogous state laws. Under such laws, the Company could  be required to remove previously disposed substances and wastes (including  substances disposed of or released by prior owners or operators), remediate  contaminated property (including groundwater contamination, whether from prior  owners or operators or other historic activities or spills), or perform  remedial plugging or pit closure operations to prevent future  contamination.  The Company believes that  it is in substantial compliance with the requirements of CERCLA and RCRA.





The  Companys operations are subject to the federal Water Pollution Control Act, or  the Clean Water Act, and analogous state laws, which impose restrictions and  strict controls regarding the discharge of pollutants into state waters or  waters of the U.S. except in accordance with issued permits. Under the Clean  Water Act, the EPA has adopted regulations concerning discharges of storm water  runoff. This program requires covered facilities to obtain individual permits  or seek coverage under a general permit. Some of the Companys properties may  require permits for discharges of storm water runoff and, as part of its  overall evaluation of its current operations, the Company is, as may be  necessary, applying for stormwater discharge permit coverage and updating  stormwater discharge management practices at some of its facilities. The  Company believes that it will be able to obtain,
or be included under, these  permits, where necessary, and make minor modifications to existing facilities  and operations that would not have a material effect on the Company.





The  Clean Water Act and the federal Oil Pollution Act of 1990, which contains  numerous requirements relating to the prevention of and response to oil spills into  waters of the U.S., require some owners or operators of facilities that store  or otherwise handle oil to prepare and implement spill prevention, control,  countermeasure and response plans relating to the possible discharge of oil  into surface waters. The Company believes it is in substantial compliance with  these regulations.





In  the course of operations, some of the Companys equipment may be exposed to  naturally occurring radiation associated with natural gas and oil deposits, and  this exposure may result in generation of wastes containing naturally occurring  radioactive material or NORM.  NORM  wastes exhibiting trace levels of naturally occurring radiation in excess of  established state standards are subject to special handling and disposal  requirements, and any storage vessels, piping, and work area affected by NORM  may be subject to remediation or restoration requirements.





The  Companys downhole wireline operations use densitometers containing sealed,  low-grade radioactive sources such as Cesium-137 that aid in determining the  density of downhole cement slurries, waters, and sands as well as help evaluate  the porosity of specified subsurface formations. The Companys activities  involving the use of densitometers are regulated by the U.S. Nuclear Regulatory  Commission and specified agencies of applicable agreement states that work  cooperatively in implementing the federal regulations. In addition, the  Companys downhole wireline services involve the use of explosive charges that are  regulated by the U.S. Department of Justice, Bureau of Alcohol, Tobacco,  Firearms, and Explosives. Standards implemented by these regulatory agencies  require the Company to obtain licenses or other approvals for the use of such  densitometers as well as explosive
charges. The Company has obtained these  licenses and approvals when necessary and believes that it is in substantial  compliance with these federal requirements.





9





---



Back to Contents





The  Company maintains insurance against some risks associated with underground  contamination that may occur as a result of well services activities. However,  this insurance is limited to activities at the wellsite and may not continue to  be available or may not be available at premium levels that justify its  purchase. The occurrence of a significant event not fully insured or  indemnified against could have a materially adverse effect on the Companys  financial condition and operations.





The  Company is also subject to the requirements of the federal Occupational Safety  and Health Act, or OSHA, and comparable state statutes that regulate the  protection of the health and safety of workers. In addition, the OSHA hazard  communication standard requires that information be maintained about hazardous  materials used or produced in operations and that this information be provided  to employees, state and local government authorities and citizens. The Company  believes that its operations are in substantial compliance with the OSHA requirements,  including general industry standards, record keeping requirements, and  monitoring of occupational exposure to regulated substances.





In  addition, the Companys activities are subject to various licensing  requirements and minimum safety procedures and specifications, anti-pollution  controls on equipment, waste discharge and other environmental and conservation  requirements imposed by federal and state regulatory authorities. Numerous  governmental agencies issue regulations to implement and enforce laws which are  often difficult and costly to comply with, and the violation of which may  result in the revocation of permits, issuance of corrective action orders,  assessment of administrative and civil penalties and even criminal proceedings.





Incorporation





The  Company and its predecessors have been engaged in providing natural gas and oil  well support services since 1984.  The  Company was incorporated under the laws of the State of Delaware in 1987 under  the name Teletek, Ltd. and in June 1989 changed its name to Black Warrior  Wireline Corp.  In August 2004, the  Company sold its directional drilling division.  In December 2005, the Company entered into the well intervention  services business through its acquisition of Bobcat and in February 2006, the  Company changed its name to Warrior Energy Services Corporation.





|Item 1A. | Risk    Factors
|-------- | ---------------




An  investment in the Companys common stock involves a high degree of risk. You  should carefully consider the following risk factors, together with the other  information contained in this Report, before deciding to invest in the  Companys common stock. If any of the following risks develop into actual  events, the Companys business, financial condition, results of operations or  cash flows could be materially adversely affected, the trading price of shares  of its common stock could decline, and you may lose all or part of your  investment.





Risks Related to the Company





| | The Companys business depends on the level of activity in    the natural gas and oil exploration and production industry and may be    adversely affected by industry conditions that are beyond its control.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  Company depends on  its customers willingness to make operating and capital expenditures to  explore for, develop and produce natural gas and oil. If these expenditures  decline, the Companys business will suffer. The Companys customers  willingness to explore for, develop and produce natural gas and oil depends  largely upon prevailing industry conditions that are influenced by numerous  factors over which management has no control, such as:





| |  | the supply of and demand for natural gas and oil;                                        
| | - | -----------------------------------------------------------------------------------------
| |   |                                                                                          
| |  | the current and expected level of domestic and    foreign prices for natural gas and oil;




10





---



Back to Contents





| |  | the cost of exploring for, developing, producing and    delivering natural gas and oil;                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                 
| |  | the decline rates of current production;                                                                                        
| |   |                                                                                                                                 
| |  | the discovery rates of new natural gas and oil    reserves;                                                                     
| |   |                                                                                                                                 
| |  | available pipeline and other transportation    capacity;                                                                        
| |   |                                                                                                                                 
| |  | weather conditions, including tropical storms and    hurricanes that can affect natural gas and oil operations over a wide area;
| |   |                                                                                                                                 
| |  | domestic and worldwide economic conditions;                                                                                     
| |   |                                                                                                                                 
| |  | political instability in natural gas- and    oil-producing countries;                                                           
| |   |                                                                                                                                 
| |  | hostilities, strikes and other disruptions affecting    the production and delivery of natural gas and oil;                     
| |   |                                                                                                                                 
| |  | variations in governmental regulations and tax laws    or the imposition of new governmental requirements on the industry;      
| |   |                                                                                                                                 
| |  | technical advances affecting energy consumption;                                                                                
| |   |                                                                                                                                 
| |  | the price and availability of alternative fuels;                                                                                
| |   |                                                                                                                                 
| |  | the ability of natural gas and oil producers to    raise equity capital and debt financing; and                                 
| |   |                                                                                                                                 
| |  | merger and divestiture activity among natural gas    and oil producers.                                                         




| | Any decline in natural gas and oil prices, exploration and    production activity levels, or the development of natural gas and oil    reserves could have a material adverse effect on the Companys business,    financial conditions, results of operations and cash flows.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  level of activity in the natural gas and oil exploration and production  industry is volatile. Expected trends in natural gas and oil production  activities may not continue and demand for the services provided by the Company  may not reflect the level of activity in the industry.  Any reduction in natural gas and oil prices  would likely affect natural gas and oil production levels and therefore affect  demand for the services the Company provides. Further, most of the Companys  services and products support drilling for and production of natural gas.  Therefore, a substantial reduction in  natural gas prices or natural gas production levels may have an adverse impact  on the Companys business, even if oil prices remain strong. Most industry  forecasts anticipate an increase of liquefied natural gas (LNG) imports from  overseas. Any significant increase in LNG
imports could adversely impact the  price for and activity related to natural gas and therefore may have an adverse  impact on the Companys business.





| | Because the natural gas and oil industry is cyclical, the    Companys operating results may fluctuate.
| | -------------------------------------------------------------------------------------------------------




Historically,  natural gas and oil prices have been volatile and are likely to continue to be  volatile.  For example, the reported  Henry Hub natural gas spot price has recently ranged in 2005 from $5.50 per mcf  to $15.39 per mcf.  Similarly, the  reported West Texas Intermediate (WTI) Cushing crude oil spot price has  recently ranged in 2005 from $42.12 per bbl to $69.81 per bbl.  During the year ended December 31, 2005,  natural gas and oil prices have been at historically high levels.  Prices may not remain at these levels. High  volatility, combined with recent high prices, have caused natural gas and oil  companies and drilling





11





---



Back to Contents





contractors to change their strategies and  expenditure levels. The Company has experienced in the past, and may experience  in the future, significant fluctuations in operating results based on these  changes. In addition, a reduction in commodity price levels or industry budgets  could reduce demand for the Companys services and adversely affect its  business.  Because a large number of the  Companys employees are parties to employment agreements with the Company that  provide for severance packages, in a downturn, the Company may elect not to  reduce costs by releasing employees who are parties to employment contracts or  may incur additional costs related to severance packages included in employment  agreements.





| | Operations in the Gulf of Mexico may be adversely impacted    by tropical storms and hurricanes.
| | ------------------------------------------------------------------------------------------------




Tropical  storms, hurricanes and the threat of tropical storms and hurricanes will often  result in the shutdown of natural gas and oil operations in the Gulf of Mexico  as well as land operations within the path and the projected path of the  tropical storms or hurricanes.  During a  shutdown period, the Company is unable to access wellsites and the Companys  services to those areas are also shut down.   Additionally, tropical storms or hurricanes may cause evacuation of  personnel and damage to offshore drilling rigs, resulting in suspension of  operations and damage to the Companys equipment.  The shutdowns, related evacuations and damage create  unpredictability in activity and utilization rates, which can have a material  adverse impact on the Companys business, financial condition, results of  operations and cash flows.





| | There is potential for excess equipment availability in    the Companys industry.
| | ----------------------------------------------------------------------------------




Because natural gas and oil prices and  drilling activity have been at historically high levels, oilfield services  companies have been acquiring additional equipment to meet their customers  increasing demand for services.  For  example, the Company plans to add 20 new wireline trucks, four additional  snubbing units and six coiled tubing/nitrogen pumping/fluid pumping packages in  2006 and 26 additional coiled tubing/nitrogen pumping/fluid pumping units in  2007 and 2008.  If these high levels of  price and drilling activity do not continue, there is a potential for excess  equipment availability in the oilfield services industry.  Such excess equipment availability could  result in an increased competitive environment for oilfield services companies,  which could lead to lower prices and utilization for the Companys services and  could have a material adverse
impact on its business, financial condition,  results of operations and cash flows.





| | The Company is highly dependent upon the level of natural    gas drilling and workover activity in the United States.
| | ---------------------------------------------------------------------------------------------------------------------




All  of the Companys fiscal operating revenue was derived from services provided in  the United States.  The areas in which  it operates are mature exploration and production regions that have experienced  substantial seismic survey and exploration activity for many years. Because a  large number of natural gas and oil prospects in these areas have already been  drilled, additional prospects of sufficient size and quality could be more  difficult to identify.  If activity in  natural gas and oil exploration, development and production in the Companys  areas of operation materially declines, it could have a material adverse impact  on its business, financial condition and results of operations.  The Company cannot predict the levels of  activity in its areas of operation in future periods.





| | The Company may be unable to employ a sufficient number of    skilled and qualified operational workers and experienced salespeople.
| | ------------------------------------------------------------------------------------------------------------------------------------




The  delivery of the Companys services and products requires operational workers  with specialized skills and qualifications who can perform physically  demanding, potentially hazardous work. As a result of the volatility of the  oilfield services industry and the demanding nature of the work, the Companys  operational workers may choose to pursue employment in fields that offer a more  desirable work environment at wage rates that are competitive. In addition, the  Companys sales personnel are largely responsible for developing and  maintaining satisfactory relationships with its customers and furthering its  ability to bid for and obtain contracts to provide additional services. The  Companys ability to be productive and profitable





12





---



Back to Contents





will depend upon its ability to employ and  retain skilled operational workers and experienced salespeople. Moreover, the  Companys ability to successfully implement its planned geographic, fleet and  product line expansions depends in part on its ability to increase the size of  its skilled labor force. The demand for skilled operational workers and  experienced salespeople is high, and the supply is limited in the Companys  market areas. A significant increase in the wages paid by competing employers  could result in a reduction of the Companys workforce, increases in the wage  rates that it must pay, or both. If either of these events were to occur, the  Companys capacity and profitability could be diminished and its growth  potential could be impaired.





| | The Companys executive officers, senior management and    certain other operations personnel are critical to its business, and these    officers and personnel may not remain with the Company in the future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  Companys future success depends heavily upon the continued service of its  executive officers, senior management and certain other operations  personnel.  If the Company loses the  services of one or more of its executive officers, senior management and  certain other operations personnel, including certain key personnel at its  manufacturing and repair facilities, its business, operating results and  financial condition could be materially adversely affected.





| | Because the Company recently acquired Bobcat, its    operating history may not be sufficient to evaluate its business and    prospects.
| | ---------------------------------------------------------------------------------------------------------------------------------------




The  Company recently acquired Bobcat, and the combined company has limited combined  operating history.  The historical  financial statements of the separate companies included in Note 2 to Notes to  Financial Statements for the years ended December 31, 2005, 2004 and 2003  included in this Report are based on the separate businesses of the Company and  Bobcat for the periods prior to the Bobcat acquisition. As a result, the  historical information may not give the reader an accurate indication of what  the Companys actual results would have been if the Bobcat acquisition had been  completed at the beginning of the periods presented or of what the Companys  future results of operations are likely to be. The Companys future results  will depend on its ability to efficiently manage its combined operations and  execute its business strategy, as well as other factors beyond its
control.





| | The Company may not be able to integrate successfully    Bobcats operations into its operations.
| | -------------------------------------------------------------------------------------------------




Integration of the two previously independent  companies will be a complex, time-consuming and costly process.  Failure to timely and successfully integrate  these companies may have a material adverse effect on the Companys business,  financial condition and results of operations.   The difficulties of integrating Bobcats operations will present  challenges to the Companys management, including:





| |  | operating a significantly larger combined company    with operations in natural gas and oil well services in which the Company has    not previously been involved;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                    
| |  | managing relationships with new customers;                                                                                                                         
| |   |                                                                                                                                                                    
| |  | integrating personnel with diverse backgrounds and    organizational cultures;                                                                                     
| |   |                                                                                                                                                                    
| |  | experiencing operational interruptions or the    possible loss of key employees, customers or suppliers;                                                           
| |   |                                                                                                                                                                    
| |  | establishing the internal controls and procedures    that the combined company will be required to maintain under the    Sarbanes-Oxley Act of 2002; and           
| |   |                                                                                                                                                                    
| |  | consolidating other corporate and administrative    functions.                                                                                                     




13





---



Back to Contents





The  combined company is also likely to incur unanticipated liabilities and costs,  some of which may be material.  Additionally, there can be no assurance that the Company will be  able to cross-sell its services and penetrate new markets successfully or that  it will obtain the anticipated or desired benefits of the Bobcat acquisition.  As a result, the anticipated benefits of the  Bobcat acquisition may not be fully realized, if at all.





| | If the Company does not experience expected synergies from    the Bobcat acquisition, it may not achieve increases in revenues that it    hopes to obtain.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------




The  Company may not be able to achieve the synergies it expects from the Bobcat  acquisition, including plans to cross-market its services across its combined  areas of operation, and attract new customers with its ability to provide a  larger range of services.





Subsequent  to the Companys acquisition of Bobcat, Mr. Bobby Joe Cudd, the founder of  Bobcat, died.  The death of  Mr. Cudd could adversely affect the Companys ability to retain Bobcats  customers and attract new customers.





| | The Companys inability to control the inherent risks of    acquiring and integrating businesses could adversely affect its operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------




Acquisitions  have been, and the Companys management believes acquisitions will continue to  be, a key element of its business strategy.   The Company may not be able to identify and acquire acceptable  acquisition candidates on favorable terms in the future.  The Company may be required to incur  substantial indebtedness to finance future acquisitions and also may issue  equity securities in connection with such acquisitions.  Such additional debt service requirements  may impose a significant burden on its results of operations and financial  condition.  The issuance of additional  equity securities could result in significant dilution to stockholders.  Acquisitions may not perform as expected  when the acquisition was made and may be dilutive to the Companys overall  operating results.  Additional risks the  Company will face include:





| |  | retaining and attracting key employees;                                
| | - | -----------------------------------------------------------------------
| |   |                                                                        
| |  | retaining and attracting new customers;                                
| |   |                                                                        
| |  | increased administrative burden;                                       
| |   |                                                                        
| |  | developing the Companys sales and marketing    capabilities;          
| |   |                                                                        
| |  | managing its growth effectively;                                       
| |   |                                                                        
| |  | integrating operations;                                                
| |   |                                                                        
| |  | operating a new line of business; and                                  
| |   |                                                                        
| |  | increased logistical problems common to large,    expansive operations.




If the Company fails to manage these risks  successfully, its business could be harmed.





| | If the Companys planned geographic, fleet and product    line expansions are not successful, its financial condition and results of    operations could be adversely affected, and it may not achieve increases in    revenues that it hopes to realize.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  Companys successful implementation of its geographic, fleet and product line  expansions, which include adding 20 new wireline trucks, four additional  snubbing units and six coiled tubing/nitrogen





14





---



Back to Contents





pumping/fluid pumping units in 2006
    and 26 additional coiled tubing/nitrogen pumping/fluid pumping packages in
    2007 and 2008, are subject to numerous risks and uncertainties, including:





| |  | shortages of necessary raw    materials or equipment;                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                        
| |  | construction delays;                                                                                                                                                   
| |   |                                                                                                                                                                        
| |  | cost overruns;                                                                                                                                                         
| |   |                                                                                                                                                                        
| |  | lack of customer demand    for the services the Company intends to provide with this new equipment;                                                                    
| |   |                                                                                                                                                                        
| |  | inability to obtain    financing;                                                                                                                                      
| |   |                                                                                                                                                                        
| |  | difficulties associated    with entering into new product lines, including competition from existing    service providers and integration with existing operations; and
| |   |                                                                                                                                                                        
| |  | shortages of qualified    personnel.                                                                                                                                   




Encountering any of these or any other  unforeseen problems in implementing its planned fleet expansion could have a  material adverse impact on the Companys business, financial condition, results  of operations and cash flows, and could prevent it from achieving increases in  revenues that it hopes to realize.





| | In order to execute its growth strategy, the Company may    require additional capital in the future, which may not be available to it.
| | ---------------------------------------------------------------------------------------------------------------------------------------




The  Companys business is capital-intensive and, to the extent it does not generate  sufficient cash from operations, it may need to raise additional funds through  public or private debt or equity financings to execute its growth  strategy.  Because substantially all of  the Companys existing and after acquired assets are pledged as collateral  under its current credit facilities, it will have difficulty pledging any  additional assets as collateral in connection with any future debt  financings.  Adequate sources of capital  funding may not be available when needed or may not be available on favorable  terms.  If the Company raises additional  funds by issuing equity securities, dilution to the holdings of existing  stockholders may result and covenants in its Credit Agreements may place restrictions  on the use of proceeds from the issuance of those securities.  If
funding is insufficient at any time in  the future, the Company may be unable to fund maintenance requirements and  acquisitions, take advantage of business opportunities or respond to  competitive pressures, any of which could harm its business.





| | The Companys customer base is concentrated, and loss of a    significant customer could cause its revenue to decline substantially.
| | ------------------------------------------------------------------------------------------------------------------------------------




Although  none of the Companys customers during the year ended December 31, 2005 individually  accounted for more than 10% of its revenue, collectively, its top five  customers accounted for approximately 25.3% of its revenue during such period  and its top ten customers accounted for approximately 36.7% of its revenue  during such period.  It is likely that  the Company will continue to derive a significant portion of its revenues from  a relatively small number of customers in the future. If a major customer  decided not to continue to use the Companys services, revenue would decline  and the Companys operating results and financial condition could be harmed.





| | The markets in which the Company operates are highly    competitive and have relatively few barriers to entry. To be successful, a    provider must provide services that meet the specific needs of natural gas    and oil exploration and production companies at competitive prices.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  markets in which the Company operates are highly competitive and have  relatively few barriers to entry.  The  principal competitive factors in the Companys markets are product and service  quality and





15





---



Back to Contents





availability, price, responsiveness,  experience, technology, equipment quality and reputation for safety.  The Companys competitors include large  national and multinational companies that have longer operating histories,  greater financial, technical and other resources and greater name recognition  than the Company does. Several of the Companys competitors provide a broader  array of services and have a stronger presence in more geographic markets. In  addition, the Company competes with several smaller companies capable of  competing effectively on a regional or local basis. The Companys competitors  may be able to respond more quickly to new or emerging technologies and  services and changes in customer requirements. Some contracts are awarded on a  bid basis, which further increases competition based on price. As a result of  competition, the Company may lose market share or be unable to maintain or  increase prices for its
present services or to acquire additional business  opportunities, which could have a material adverse effect on its business,  financial condition, results of operations and cash flows.





| | The restrictive and other covenants in the Companys    indebtedness could restrict its operations and make it more vulnerable to    adverse economic conditions. Substantially all of the Companys assets are    pledged under its credit facilities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  Company had outstanding at December 31, 2005 senior secured indebtedness  aggregating $30.2 million under the Companys Secured Amended and Restated  Credit Agreement with General Electric Capital Corporation (GECC) dated  December 16, 2005 (the Senior Secured Credit Agreement) and subordinated  secured indebtedness of $25.0 million under the Companys Second Lien Credit  Agreement with GECC dated December 16, 2005 (the Second Lien Credit  Agreement, and together with the Senior Secured Credit Agreement, the Credit  Agreements).  This indebtedness is  collateralized by substantially all of the Companys assets.  The instruments governing the Companys  indebtedness to GECC impose significant operating restrictions and financial  covenants on the Company.  Failure to  maintain compliance with these covenants could
result in the Company being  unable to make further borrowings under its revolving credit arrangement with  GECC, which borrowings are necessary to enable the Company to fund its ongoing  operations.  The financial covenants prohibit  the Company from making capital expenditures in any fiscal year in an aggregate  amount exceeding $6.5 million and require the Company to have a ratio of EBITDA  to fixed charges, including interest expense, scheduled payments of principal,  capital expenditures paid and income taxes paid, at the end of each fiscal  month commencing with the month ending:





| |  | on or after March 31, 2006, June 30, 2006 and    September 30, 2006, for the 3-, 6- and 9-month periods, respectively, then    ended of not less than 1.5:1.0; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                   
| |  | on or after December 31, 2006, for the 12-month    period then ended of not less than 1.5:1.0.                                                                    




Such  restrictions, as well as various other affirmative and negative covenants in  the Credit Agreements, affect, and in many respects significantly limit or  prohibit, among other things, the Companys ability to incur additional  indebtedness, pay dividends, repay indebtedness prior to its stated maturity,  sell assets or engage in mergers or acquisitions.  These restrictions also limit the Companys ability to effect  future financings, make certain capital expenditures, withstand a downturn in  the Companys business or the economy in general, or otherwise conduct  necessary corporate activities.  The  Credit Agreements place restrictions, and under certain circumstances,  prohibitions on the Companys ability to borrow money under the revolving  credit provisions of the Credit Agreements.   The Companys ability to borrow under the Credit Agreements is
necessary  to fund its ongoing operations, and a default under the Credit Agreements could  impair or terminate the Companys ability to borrow funds under the revolving  credit provisions.





If  the Company was to default on its indebtedness owing to GECC and such  indebtedness was accelerated so as to become due and immediately payable, there  can be no assurance that the Companys assets would be sufficient to repay in  full such indebtedness and its other liabilities on a timely basis.  In addition, the acceleration of the  Companys indebtedness owing to GECC would likely constitute a default under  other of the Companys indebtedness owing to other creditors that may be  outstanding at the time,





16





---



Back to Contents





which may result in such other indebtedness  also becoming immediately due and payable.  Moreover, because substantially all of the Companys assets are  pledged as collateral, a default could result in foreclosure and the Company  may have to discontinue operations.   Under any such circumstances, the holders of the Companys common stock  may realize little or nothing on their investment in the Company.





On  various occasions in the past, the Company was in violation of covenants  contained in its previous credit agreement with GECC entered into on September  14, 2001.  There can be no assurance  that the Company will not again violate certain of the covenants of the Credit  Agreements.





Please  read Item 7. Managements Discussion and Analysis of Financial Condition and  Results of OperationsLiquidity and Capital ResourcesDescription of the  Companys Indebtedness for a discussion of the Companys credit facilities.





| | The Companys operations are subject to hazards inherent    in the natural gas and oil industry.     These risks may not be fully covered by the Companys insurance policies.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Risks  inherent to the Companys industry, such as equipment defects, vehicle  accidents, fires, blowouts, explosions, uncontrollable flows of natural gas or  well fluids, storms and hurricanes can cause personal injury, loss of life,  suspension of operations, damage to formations, damage to facilities, business  interruption and damage to or destruction of property, equipment and the  environment. These risks could expose the Company not only to the loss of  uninsured equipment, but also to substantial liability for personal injury,  wrongful death, property damage, loss of natural gas and oil production,  pollution and other environmental damages. The frequency and severity of such  incidents will affect operating costs, insurability and relationships with  customers, employees and regulators.





The  Company works in a potentially dangerous business.  The Company monitors its operations for quality and safety.  The Companys safety procedures may not  always prevent damages.  The Companys  insurance coverage may be inadequate to cover its liabilities. In addition, the  Company may not be able to maintain adequate insurance in the future at rates  it considers reasonable and commercially justifiable, and insurance may not  continue to be available on terms as favorable as its current arrangements. The  occurrence of a significant uninsured claim, a claim in excess of the insurance  coverage limits maintained by the Company or a claim at a time when the Company  is not able to obtain liability insurance, could have a material adverse effect  on the Companys ability to conduct normal business operations and on its  financial condition, results of operations and
cash flows.





| | The Company is subject to extensive and costly    environmental laws and regulations that may require it to take actions that    will adversely affect its results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  Companys business is significantly affected by stringent and complex federal,  state and local laws and regulations governing the discharge of substances into  the environment or otherwise relating to environmental protection.  As part of the Companys business, it  handles, transports, and disposes of a variety of fluids and substances used or  produced by its customers in connection with their natural gas and oil  exploration and production activities. The Company also generates and disposes  of hazardous waste. The generation, handling, transportation, and disposal of  these fluids, substances, and waste are regulated by a number of laws,  including the Resource Recovery and Conservation Act, the Comprehensive  Environmental Response, Compensation, and Liability Act, the Clean Water Act,  the Safe Drinking Water Act, and analogous state laws. Failure to properly  handle,
transport, or dispose of these materials or otherwise conduct the  Companys operations in accordance with these and other environmental laws  could expose it to liability for governmental penalties, cleanup costs  associated with releases of such materials, damages to natural resources, and  other damages, as well as potentially impair its ability to conduct its  operations.  The Company could be  exposed to liability for cleanup costs, natural resource damages under these  and other environmental laws and other damages as a result of its conduct that  was lawful at the time it occurred or the conduct of, or conditions caused by,  prior operators or other third parties. Environmental laws and regulations have  changed in the past, and they are likely to change in the future. If existing





17





---



Back to Contents





regulatory requirements or enforcement  policies change, the Company may be required to make significant unanticipated  capital and operating expenditures.





Any failure by the Company to comply with  applicable environmental laws and regulations may result in governmental  authorities taking actions against its business that could adversely impact its  operations and financial condition, including the:





| |  | issuance of administrative, civil and criminal    penalties;               
| | - | ---------------------------------------------------------------------------
| |   |                                                                            
| |  | denial or revocation of permits or other    authorizations;                
| |   |                                                                            
| |  | imposition of limitations on the Companys    operations; and              
| |   |                                                                            
| |  | performance of site investigatory, remedial or other    corrective actions.




The  effect of environmental laws and regulations on the Companys business is  discussed in greater detail under Item 1. BusinessEnvironmental Regulation.





| | The Companys business could be adversely affected by    technological advancements in the future.
| | --------------------------------------------------------------------------------------------------




As  new well service technologies develop, the Company may be placed at a  competitive disadvantage, and competitive pressure may force it to implement  new technologies at a substantial cost.   The Company may not be able to successfully acquire or utilize new  technologies.  New technologies could  render the Companys current services obsolete or significantly reduce demand  for its current services.  As a result,  advancements in technology could have a material adverse effect on the  Companys business, financial condition, results of operations and cash flows.





| | If the Company fails to develop or maintain an effective    system of internal controls over financial reporting, it may not be able to    accurately report its financial results or prevent fraud.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Effective  internal controls over financial reporting are necessary for the Company to  provide reliable financial reports and effectively prevent fraud. The Companys  acquisition of Bobcat will present challenges in establishing internal controls  and procedures that the combined company will be required to maintain.  If the Company cannot provide reliable  financial reports or prevent fraud, its reputation and operating results could  be harmed. The Companys efforts to continue to develop and maintain internal  controls over financial reporting may not be successful, and it may be unable  to maintain adequate controls over its financial processes and reporting in the  future, including compliance with the obligations under Section 404 of the  Sarbanes-Oxley Act of 2002.  The Company  will be required to report, among other things, control deficiencies that  constitute a
material weakness or changes in internal controls that, or are  reasonably likely to, materially affect internal controls over financial  reporting.  If the Company fails to  implement the requirements of Section 404 in a timely manner, it may be subject  to sanctions or investigation by regulatory authorities such as the SEC or the  Nasdaq Stock Market, or Nasdaq.  In  addition, if any material weakness or deficiency is identified or is not  remedied, investors may lose confidence in the accuracy of the Companys  reported financial information, and its stock price could be significantly  adversely affected as a result.  Any  failure to develop or maintain effective internal controls, or difficulties  encountered in the Companys implementation or other effective improvement of  its internal controls, could harm its operating results.





| | A terrorist attack or armed conflict could harm the    Companys business.
| | --------------------------------------------------------------------------




Terrorist  activities, antiterrorist efforts and other armed conflicts involving the U.S.  or other countries may adversely affect the U.S. and global economies and could  prevent the Compay from meeting its financial and other obligations. If any of  these events occur, the resulting political instability and societal disruption  could reduce overall demand for natural gas and oil, potentially putting  downward pressure on





18





---



Back to Contents





demand for the Companys services and causing  a reduction in its revenues. Natural gas- and oil-related facilities could be  direct targets of terrorist attacks, and the Companys operations could be  adversely impacted if infrastructure integral to its customers operations is  destroyed or damaged. Costs for insurance and other security may increase as a  result of these threats, and some insurance coverage may become more difficult  to obtain, if available at all.





| | The Companys operations are subject to seasonal    variations in weather conditions.
| | -------------------------------------------------------------------------------------




Since  the Companys operations take place outdoors, the average number of hours  worked per day, and therefore the number of wells serviced per day, generally  is less in winter months than in summer months, due to an increase in snow,  rain, fog, cold conditions and a decrease in daylight hours in the winter  months.  The Company is also at risk for  hurricanes and tropical storms in the late summer and fall months.  Furthermore, the Companys customers demand  for its services in the first quarter is generally lower than at other times of  the year.  As a result, full-year  revenue and gross profits are not likely to be a direct multiple of any  particular quarter or combination of quarters.





Risks Related to the Companys Common Stock





| | Because the Company has no current plans to pay dividends    on its common stock, investors must look solely to stock appreciation for a    return on their investment in the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  Company has not declared or paid any dividends on its common stock, and it does  not currently anticipate paying any dividends on its common stock in the  foreseeable future. Instead, the Company currently intends to retain all future  earnings to fund the development and growth of its business.  In addition, the Company is prohibited from  paying dividends under its Credit Agreements.   Any future determination relating to its dividend policy will be at the  discretion of its board of directors and will depend on its results of  operations, financial condition, capital requirements and other factors deemed  relevant.





| | There has been limited trading activity in the Companys    common stock and a more active trading market may not develop.
| | --------------------------------------------------------------------------------------------------------------------------




The  Companys common stock has traded in limited volumes in the over-the-counter  market and quotations have appeared in the Pink Sheets.  The Company does not know if a more active  trading market will develop for its common stock or how its common stock will  trade in the future, which may make it more difficult for you to sell your  shares.





| | The Companys certificate of incorporation, bylaws and    Delaware law contain provisions that could discourage acquisition bids or    merger proposals, which may adversely affect the market price of its common    stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The  Companys certificate of incorporation authorizes its board of directors to  issue preferred stock without stockholder approval.  If the Companys board of directors elects to issue preferred  stock, it could be more difficult for a third party to acquire the Company.  In addition, some provisions of the Companys  certificate of incorporation, bylaws and Delaware law could make it more  difficult for a third party to acquire control of the Company, even if the  change of control would be beneficial to its stockholders, including:





| |  | the prohibition of stockholder action by written    consent, other than by unanimous written consent;                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                            
| |  | the ability of the Companys board of directors to    issue up to 2.5 million shares of preferred stock with voting and liquidation    rights superior to common stock; and
| |   |                                                                                                                                                                            
| |  | limitations on the ability of the Companys    stockholders to call special meetings.                                                                                      
| |   |                                                                                                                                                                            




19





---



Back to Contents





Delaware  law prohibits the Company from engaging in any business combination with any  interested stockholder, meaning generally that a stockholder who beneficially  owns more than 15% of the Companys common stock cannot acquire the Company for  a period of three years from the date this person became an interested  stockholder, unless various conditions are met, such as approval of the  transaction by the Companys board of directors.  These provisions could limit the price that investors might be  willing to pay in the future for shares of the Companys common stock.





Cautionary Statement for Purposes of the Safe Harbor  Provisions of the Private Securities Litigation Reform Act of 1995.





With  the exception of historical matters, the matters discussed in this Report are  forward-looking statements as defined under the Securities Exchange Act of  1934, as amended (the Exchange Act), that involve risks and  uncertainties.  The Company intends that  the forward-looking statements herein be covered by the safe-harbor provisions  for forward-looking statements contained in the Securities Exchange Act of 1934,  as amended, and this statement is included for the purpose of complying with  these safe-harbor provisions.





Forward-looking  statements include, but are not limited to, the matters described under Item  1A. Risk Factors as risk factors, as well as under Item 1.  Business Item 7.  Managements Discussion and Analysis of Financial Condition and  Results of Operations and Item 7A. Quantitative and Qualitative Disclosure  About Market Risk.  Such  forward-looking statements relate to the Companys ability to complete its  proposed public offering and restructure its balance sheet, generate revenues  and maintain profitability and cash flow, the stability and level of prices for  natural gas and oil, predictions and expectations as to the fluctuations in the  levels of natural gas and oil prices, pricing in the natural gas and oil  services industry and the willingness of customers to commit for natural gas  and oil well
services, the Companys ability to raise additional debt or equity  capital to meet its requirements and the Companys intended growth initiatives  and to obtain additional financing to fund that growth when required, the  Companys ability to maintain compliance with the covenants of its various loan  documents and other agreements pursuant to which its securities, including debt  instruments, have been issued and obtain waivers of violations that occur and  consents to amendments as required, the Companys ability to compete in the  premium natural gas and oil services market, the Companys ability to re-deploy  its equipment among regional operations as required, and the Companys ability  to provide services using state of the art tooling and its ability to  successfully integrate and operate the Bobcat operations.





Important  factors that may affect the Companys ability to meet these objectives or  requirements include:





| |  | adverse developments in    general economic conditions;                                   
| | - | ------------------------------------------------------------------------------------------
| |  | changes in capital    markets;                                                            
| |  | adverse developments in    the natural gas and oil industry;                              
| |  | developments in    international relations;                                               
| |  | the commencement or    expansion of hostilities by the United States or other governments;
| |  | events of terrorism; and                                                                  
| |  | declines and fluctuations    in the prices for natural gas and oil;                       




Material  declines in the prices for natural gas and oil can be expected to adversely  affect the Companys revenues.  The  Company cautions readers that various risk factors described in this Annual  Report could cause the Companys operating results and financial condition to  differ materially from those





20





---



Back to Contents





expressed in any forward-looking statements  it makes and could adversely affect the Companys financial condition and the  Companys ability to pursue its business strategy and plans, including its  ability to complete its proposed public offering.  Risk factors that could affect the Companys revenues,  profitability and future business operations, among others, are set forth under  Item 1A  Risk Factors.





|Item 1B. | Unresolved Staff Comments.
|-------- | --------------------------




The  Company is not an accelerated filer, as defined in Rule 12b-2 of the Exchange  Act, or a well-known seasoned issuer, as defined in Rule 405 of the Securities  Act of 1933, as amended, and is not required to respond to this Item.  The Company did not receive within 180 days  before December 31, 2005 any written comments from the Commission staff  regarding its periodic or current reports which comments remain unresolved.





|Item 2. | Properties
|------- | ----------




The  Company leases 5,000 square feet of office space in Columbus, Mississippi for a  five-year term expiring on December 31, 2006 for the Companys executive  offices.  The monthly rental is $5,000.  The Company also leases approximately 4,000  square feet of corporate and sales office space in Houston, Texas.  The monthly lease expense is approximately  $5,500 and has a term of five years ending August 2011, with an option to  cancel the lease after three years.





The  Company maintains district offices at 25 locations throughout the Companys  service areas and manufacturing facilities in Laurel, Mississippi and Decatur,  Texas.  Of such facilities, three are  owned by the Company and the others are leased with rental periods ranging from  a month-to-month basis to five years.   The aggregate annual rental for the leased facilities is approximately  $786,000.  Management believes that  these facilities are adequate for the Companys current requirements.





|Item 3. | Legal Proceedings
|------- | -----------------




In  March, 2006, one of the Companys shareholders presented it with a demand for  corrective action to remedy alleged breaches of fiduciary duty by William L.  Jenkins, Charles E. Underbrink and James H. Harrison.  The shareholder alleges that these directors breached their fiduciary  duties in connection with various transactions, including the exchange of the  Companys warrants for shares of its common stock in October and November 2005,  the extension of the expiration date of the Companys warrants in December  2004, the Companys failure to refinance certain of its derivative securities  by the end of 2004, the amendment of the Companys certificate of incorporation  in December 2005 and the triggering of the change of control payment due to Mr.  Jenkins in December 2005.  The shareholder  further alleges that these directors
were interested in such transactions, that  such transactions were not fair to the Company and that the St. James  Partnerships, Simmons & Company International, Ron E. Whitter and another  officer of the company participated in such breaches and/or aided and abetted  them.  The shareholder has indicated  that if the Company fails to take appropriate action to remedy the breaches  following the presentation of its demand, it intends to bring a derivative suit  on behalf of the Company.  The Companys  board of directors intends to take such steps as it considers appropriate to  investigate this matter.  However, based  on information received through March 29, 2006, the Company believes these  allegations are without merit and, if a suit is filed, the Company expects that  it will be vigorously defended.  The  Company does not expect the liability, if any, resulting from this matter to  have a material adverse effect on its current financial position, results of
operations or cash flows.





21





---



Back to Contents





The  Company is a defendant in a number of legal proceedings which management  considers to be ordinary routine litigation that is incidental to the Companys  business.  The Company does not expect  to incur any material liability as a consequence of such litigation.





|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------




By  written consent effective on November 23, 2005, the holders of 1,174,920 shares  of the Companys common stock, a majority of its common stock outstanding at  the time, approved the adoption of amendments to the Companys Restated  Certificate of Incorporation.  The  amendments (i) effected a share combination (a reverse stock split) whereby each  ten (10) shares of previously authorized, issued and outstanding shares of the  Companys common stock were combined into one (1) share of common stock, (ii)  reduced the number of shares of common stock the Company is authorized to issue  from 175,000,000 shares to 35,000,000 shares, (ii) granted to the Companys  Board of Directors the authority to issue the 2,500,000 shares of preferred  stock it is authorized to issue under its Certificate of Incorporation in one  or more series, without further
approval of stockholders and to establish the  rights and terms of each series, (iv) provide that, except as otherwise  required by law or provided by the terms of any series of its preferred stock,  special meetings of its stockholders for any purpose may be called at any time  only by a majority of its Board of Directors or the Chairman of its Board or  its President, and (v) provide that, except as otherwise required by law or  provided by the terms of any series of its preferred stock, stockholders may  not take any action by written consent, unless such action is taken by  unanimous written consent.





22





---



Back to Contents





PART II





|Item 5. | Market for Registrants Common Equity, Related Stockholder    Matters and Issuer Purchases of Equity Securities
|------- | ---------------------------------------------------------------------------------------------------------------




Market  Information





The  Companys common stock is traded in the over-the-counter market and quotations  appear in the Pink Sheets® under the trading symbol WGSV (formerly  BWWR).  The following table sets forth  the high and low bid prices for the Companys common stock in the  over-the-counter market for the periods indicated as provided by the Pink  Sheets.  On December 27, 2005, the  Company effected a one-for-ten reverse stock split of its common stock.  All bid prices in the following table give  effect to the reverse stock split.


|               |  | Bid Prices |     
|-------------- |  | ---------- | ----
|               |  |            |     
|2004           |  | High       |     
|               |  |            |     
|First Quarter  |  | $          | 3.90
|Second Quarter |  |            | 4.00
|Third Quarter  |  |            | 2.00
|Fourth Quarter |  |            | 2.00




|               |  | Bid Prices |      
|-------------- |  | ---------- | -----
|               |  |            |      
|2005           |  | High       |      
|               |  |            |      
|First Quarter  |  | $          | 2.70 
|Second Quarter |  |            | 6.10 
|Third Quarter  |  |            | 9.00 
|Fourth Quarter |  |            | 12.00




|                                       |  | Bid Prices |      
|-------------------------------------- |  | ---------- | -----
|                                       |  |            |      
|2006                                   |  | High       |      
|                                       |  |            |      
|First Quarter (through March 30, 2006) |  | $          | 19.00




There  has been very limited trading activity in the Companys common stock.  By reason of this limited trading activity,  the quoted prices for the Companys common stock have been subject to wide  fluctuations on very limited trading activity in the common stock.





The  foregoing amounts represent inter-dealer quotations without adjustment for  retail markups, markdowns or commissions, and do not represent the prices of  actual transactions.  The last sales  price for the Companys common stock on March 30, 2006, as reported by the Pink  Sheets, was $19.00 per share.





As  of March 22, 2006, the Company had approximately 450 stockholders of record and  the Company believes it had in excess of 500 beneficial holders of the  Companys common stock.





Proposed Public Offering and Application to List the  Companys Common Stock on the Nasdaq National Market





On  February 13, 2006, the Company filed with the Securities and Exchange  Commission a registration statement on Form S-l under the Securities Act of  1933, as amended, for the sale of up to $185.2 million of shares of common  stock by the Company and certain selling securityholders.  The Company expects to use the proceeds it  receives from its proposed public offering to simplify its capital structure by  eliminating





23





---



Back to Contents





outstanding derivative securities and to  reduce debt.  In connection with that  offering, the Company filed an application to list its common stock on the  Nasdaq National Market under the trading symbol WARR.





Dividends





The  Company has never paid a cash dividend on its common stock and it has no  present intention of commencing to pay dividends.  The Company is prohibited from paying dividends under the terms of  its Credit Agreements.





Recent Sales of  Unregistered Securities





During  the year ended December 31, 2005, the Company sold the following securities not  registered under the Securities Act of 1933, as amended:





Under  Recapitalization Agreements the Company entered into on October 6, 2005, (1)  Mr. Charles E. Underbrink and family members and affiliated entities (the  Underbrink Family Entities) exchanged all of their 1,193,841 warrants for  397,947 shares of common stock (on the ratio of three warrants for one share of  common stock), and they have agreed to convert the Subordinated Convertible  Notes they hold into shares of common stock at the closing of a currently  proposed public offering of shares of the Companys common stock and sell all  their shares to the Company at the closing of the public offering at the net  price per share the Company receives in the public offering, but not less than  $7.50 per share; and (2) St. James Capital Partners, L.P. and SJMB, L.P., (the  St. James Partnerships), private investment funds, agreed to sell to
the  Company at the closing of the public offering all of the warrants they hold at  a price, for each three warrants, equal to the net price per share the Company  receives in the offering, but not less than $7.50 per share.  They also agreed to convert their  Subordinated Convertible Notes into shares of the Companys common stock and  sell to the Company at the closing of the public offering those shares, plus  501,748 shares of common stock held by SJMB, L.P., at the net price per share  the Company receives in the offering, but not less than $7.50 per share.





On  October 7, 2005, the Company commenced a tender offer to holders of the  Companys outstanding common stock purchase warrants to exchange their warrants  for shares of the Companys common stock at the exchange rate of three warrants  for one share of the Companys common stock.   This offer remained open through November 14, 2005 and any acceptances  were irrevocable.  The offer was open to  all holders of the Companys warrants and was not subject to any minimum  acceptance.  The holders tendered  1,510,000 warrants in exchange for 503,333 shares of the Companys common  stock.  All warrants tendered to the  Company and accepted were retired.





The  transactions described above were exempt from the registration requirements of  the Securities Act by virtue of Section 3(a)(9) thereof.





Purchase of  Equity Securities by the Issuer and Affiliated Purchasers





Neither  the Company nor any affiliated purchaser, as defined in Rule 10b-18(a)(3),  repurchased any shares of the Companys Common Stock during the year ended  December 31, 2005.





24





---



Back to Contents





|Item 6. | Selected Financial Data
|------- | -----------------------




Set  forth below is certain financial information for each of the five years ended  December 31, 2005 ,2004, 2003, 2002 and 2001 taken from the Companys audited  financial statements.  Prior period  income statement items have been restated for continued operations.  Amounts are stated in thousands, except per  share data.





|                                             |  | December    31, |        
|-------------------------------------------- |  | --------------- | -------
|                                             |  |                 |        
|                                             |  | 2005            |        
|                                             |  |                 |        
|Revenues(1)                                  |  | $               | 73,667 
|Income (loss) from continuing operations     |  | $               | 15,413 
|Net income (loss) per common share  basic   |  | $               | 5.75   
|Net income (loss) per common share  diluted |  | $               | 4.41   
|Current assets                               |  | $               | 23,106 
|Total assets                                 |  | $               | 101,634
|Current liabilities                          |  | $               | 16,944 
|Total liabilities(2)                         |  | $               | 117,205
|Cash dividends                               |  |                 | -0-    




|                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------
|(1)  See Note    5 to Notes to Financial Statements for information regarding acquisitions    made by the Company.        
|(2)  See Note    9 to Notes to Financial Statements for information relating to the Companys    outstanding indebtedness.




25





---



Back to Contents





|Item 7. | Managements Discussion and Analysis of Financial Condition    and Results of Operation
|------- | ---------------------------------------------------------------------------------------




The  following discussion and analysis should be read in conjunction with the Item  6. Selected Financial Data and the financial statements and related notes  included elsewhere in this Report. The following discussion contains  forward-looking statements that reflect the Companys future plans, estimates,  beliefs and expected performance. The forward-looking statements are dependent  upon events, risks and uncertainties that may be outside the Companys control.  The Companys actual results could differ materially from those discussed in  these forward-looking statements. Factors that could cause or contribute to  such differences include, but are not limited to, market prices for natural gas  and oil, economic and competitive conditions, regulatory changes, capital  expenditures and other uncertainties, as well as those factors discussed below  and elsewhere in this
Report, particularly in Item 1A. Risk Factors and  Cautionary Statement for Purposes of the Safe Harbor Provisions of the  Private Securities Litigation Reform Act of 1995, all of which are difficult to  predict. In light of these risks, uncertainties and assumptions, the  forward-looking events discussed may not occur.





Overview





The  Company is a natural gas and oil well services company that provides cased-hole  wireline and well intervention services to E&P companies.  The Companys wireline services focus on  cased-hole wireline operations, including logging services, perforating,  mechanical services, pipe recovery and plugging and abandoning the well.  The Companys well intervention services are  primarily hydraulic workover services, commonly known as snubbing  services.  All of the Companys services  are performed at the well site and are fundamental to establishing and  maintaining the flow of natural gas and oil throughout the productive life of  the well.





The  Companys results of operations are affected primarily by the extent of  utilization and rates paid for its wireline and well intervention services,  which is dependent upon the upstream spending by the natural gas and oil  exploration and production companies that comprise its client base.  The Company derives a majority of its  revenues from services supporting production from existing natural gas and oil  operations. Demand for these production-related services is less volatile than  drilling-related services and tends to remain relatively stable, even in lower  natural gas and oil price environments, as ongoing maintenance spending is  required to sustain production.  As  natural gas and oil prices reach higher levels, demand for the Companys  production-related services generally increases as its customers engage in more  well servicing activities relating to existing
wells to maintain or increase  natural gas and oil production from those wells. Because some of the Companys  services are required to support drilling activities, the Company is subject to  changes in capital spending by its customers as natural gas and oil prices  increase or decrease.  The Company  showed improvement in its revenues during 2004 and 2005 over 2003 and 2002 as a  result of the increased natural gas and oil drilling and workover activity  during those years.





As  a result of the Bobcat acquisition, which represents the Companys introduction  into the well intervention services business, the Company currently operates in  two business segments: wireline services and well intervention services.  The Companys wireline segment includes the  business conducted by Warrior Energy prior to the Bobcat acquisition, and its  well intervention segment includes the business conducted by Bobcat  post-acquisition.





Revenues





The  majority of the Companys revenues are generated from major and large  independent natural gas and oil companies.   The primary factor influencing demand for the Companys services by  those customers is their level of drilling and workover activity, which, in  turn, depends primarily on the availability of drilling and workover prospects  and current and anticipated future natural gas and oil commodity prices and  production depletion rates.





26





---



Back to Contents





The  Companys services are generally provided at a price based on bids submitted  which in turn are based on the Companys current pricing, equipment and crew  availability and customer location and the nature of the service to be  provided.  These services are routinely  provided to the Companys customers and are subject to the customers time  schedule, weather conditions, availability of the Companys personnel and  complexity of the operation.  The Companys  wireline services generally take one to three days to perform while its well  intervention services generally take two weeks or longer to perform.  Service revenues are recognized at the time  services are performed.





The  Company generally charges for its wireline services on a per-well entry basis  and its well intervention services on a day-rate basis.  Depending on the specific service, a  per-well entry or day-rate may include one or more of these components: (1) a  set-up charge, (2) an hourly service rate based on equipment and labor, (3) an  equipment rental charge, (4) a consumables charge and (5) a mileage and fuel  charge.  The Company determines the  rates charged through a competitive bid process on a job-by-job basis or, for  larger customers, the Company may negotiate on an annual basis.  Typically, work is performed on a call out  basis, whereby the customer requests services on a job-specific basis, but does  not guarantee work levels beyond the specific job bid.





During  the years ended December 31, 2004 and December 31, 2005, approximately 49.9%  and 57.9%, respectively, of the Companys revenues were derived from onshore  activities and approximately 50.1% and 42.1%, respectively, of the Companys  revenues were derived from offshore activities.





Cost and Expenses





Operating  Costs.The Companys operating costs are comprised  primarily of labor expenses, repair and maintenance, material and fuel and  insurance. In a competitive labor market in the industry, it is possible that  the Company will have to raise wage rates to attract workers and retain or  expand its current work force. The Company believes it will be able to increase  service rates to its customers to compensate for wage rate increases. The  Company also incurs costs to employ personnel to sell and supervise its  services and perform maintenance on its fleet. These costs are not directly  tied to the Companys level of business activity. Because the Company seeks to  retain its experienced and well-qualified employees during cyclical downturns  in its business, and is required to pay severance under employment agreements  that cover a portion of its workforce, the Company
expects labor expenses to  increase as a percentage of revenues during future cyclical downturns. Repair  and maintenance is performed by the Companys crews, company maintenance  personnel and outside service providers. Increases in the Companys material  and fuel costs are frequently passed on to its customers. However, due to the  timing of the Companys marketing and bidding cycles, there is generally a  delay of several weeks or months from the time that it incurs an actual price  increase until the time that the Company can pass on that increase to its  customers. Insurance is generally a fixed cost regardless of utilization and  relates to the number of rigs, trucks, skids, snubbing units and other  equipment in the Companys fleet, employee payroll and safety record.





Selling,  General and Administrative Expenses.The Companys selling, general and  administrative expenses include administrative, marketing, employee  compensation and related benefits, office and lease expenses, insurance costs  and professional fees, as well as other costs and expenses not directly related  to field operations.  The Companys  management regularly evaluates the level of the Companys general and  administrative expenses in relation to its revenue because these expenses have  a direct impact on the Companys profitability.  The Company expects to incur additional expense in future periods  relating to incentive compensation paid to employees.





Success  Bonus and Change of Control Payments.  The Company expects to make  change of control and success bonus payments in the aggregate amount of $2.6  million to certain key employees immediately prior to or concurrently with the  closing of the Companys proposed public offering of shares of its common  stock.





27





---



Back to Contents





Interest  Expense.  Interest expense consists of interest  associated with the Companys revolving line of credit, term loan, convertible  notes and other debt as described in the notes to the Companys financial  statements contained elsewhere in this Report.   As a result of the Companys proposed public offering, the Company  expects that, when the proposed offering is completed and the net proceeds are  applied to the intended uses, its debt levels will be substantially lower than  their current levels which resulted from the acquisition of Bobcat on December  16, 2005.  The Company also expects that  its effective borrowing rate will be substantially less than that associated  with the outstanding convertible subordinated debt intended to be converted to  equity in connection with the proposed public offering.  Accordingly, subsequent to the proposed
public offering, interest expense is expected to be substantially lower than  the levels of interest expense following the Companys acquisition of  Bobcat.  There can be no assurance that  the proposed public offering will be completed.  Interest income primarily consists of interest earned on the  Companys cash balances.





Depreciation  Expense.  The Companys depreciation expense is based  on estimates, assumptions and judgments relative to capitalized costs, useful  lives and salvage values of the Companys assets. The Company generally  computes depreciation using the straight-line method.





Income  Taxes.  At December 31, 2005, the Company had  approximately $29.2 million of net operating losses (NOLs) available to  offset future taxable income.  These  NOLs will be applied to taxable income in 2006 prior to the Companys proposed  public offering and will be subject to additional IRS Section 382 limitations  subsequent to the Companys proposed public offering.





Discontinued  Activities.The Company sold its directional drilling  division on August 6, 2004 and the operations of that division are reported in  the financial statements in this Report as discontinued operations.





Results of Operations





The  following discussion includes the results of operations of Bobcat for the  period December 16, 2005 through December 31, 2005.  For further information relating to the results of operations of  Bobcat prior to the completion of the acquisition through September 30, 2005  and pro forma financial information reflecting the combined results of  operations of the Company and Bobcat for the nine months ended September 30,  2005 and the year ended December 31, 2004, see the Companys Amendment No. 1 to  its Current Report on Form 8-K filed on February 22, 2006.  See also Note 2 to the Notes to Financial  Statements For the Years Ended December 31, 2005, 2004 and 2003 included in  this Report for the pro forma statements of operations of the Company and  Bobcat for the years ended December 31, 2005 and 2004.





Year  Ended December 31, 2005 Compared to Year Ended December 31, 2004





Revenues





The  Companys total revenues increased by approximately $20.0 million for the year  ended December 31, 2005, as compared to 2004.   The pricing and utilization of the Companys services improved due to  the increase in well maintenance and drilling activity caused by higher natural  gas and oil prices.  The Company also  added eight additional wireline units during the year ended December 31, 2005  as well as approximately $769,000 of revenues from Bobcats operations  following the acquisition.





Operating Costs





The  Companys operating costs increased by approximately $9.1 million for the year  ended December 31, 2005 as compared to the same period of 2004.  Operating costs were 59.0% of revenues for  the year ended December 31, 2005, as compared to 64.1% of revenues for  2004.  The decrease in operating costs  as a percentage of revenues was primarily the result of the higher utilization  and pricing in the year ended December 31, 2005 compared with 2004.  Salaries and benefits increased by  approximately $4.9 million





28





---



Back to Contents





for the year ended December 31, 2005, as compared  to the same period in 2004.  Total  number of employees increased from 313 at December 31, 2004 to approximately  480 at December 31, 2005, including approximately 80 employees from the Bobcat  acquisition.  The increase in salaries  and benefits is primarily due to the increase in the number of employees in  2005 versus 2004.





Selling, General and Administrative Expenses





Selling,  general and administrative expenses increased by approximately $154,000 for the  year ended December 31, 2005.  As a  percentage of revenues, selling, general and administrative expenses decreased  to 13.1% for the year ended December 31, 2005, from 17.6% in for the same  period in 2004 due to relatively constant expenses and increased revenues.





Depreciation and Amortization





Depreciation  and amortization decreased by approximately $41,000 for the year ended December  31, 2005.  The decrease was primarily  due to certain assets becoming fully depreciated in the period.





Interest Expense





Interest  expense and amortization of debt discount decreased by approximately $724,000  for the year ended December 31, 2005, as compared to the same period in  2004.  The decline in interest expense  is attributable to the reduction in the Companys senior debt outstanding prior  to the Bobcat acquisition.





Change of Control Expense





Change  of control expense of $2.7 million was recognized in 2005 as a result of a  change in the general partner of St. James Capital Partners, L.P. which, under  the terms of certain key employment contracts, required payments to be made to  those employees.





Other Income (Expense)





Other  income (expense) decreased by approximately $285,000 for the year ended  December 31, 2005, as compared to the same period in 2004.  The decrease was primarily due to the  expensing of transaction expenses associated with a potential transaction which  was terminated in August 2005.





Income Taxes





The  provision for income taxes was approximately $175,000 in 2005 and $0 in  2004.  The Company realized a net loss  for the year ended December 31, 2004, thereby generating additional NOLs.  The Company recorded net income during the  year ended December 31, 2005, where NOLs were utilized to offset provision for  federal income taxes.  The provision for  income taxes represents state income tax and alternative minimum tax  provisions.  A full valuation allowance  has been recorded against the net deferred tax asset generated in prior years  from net operating losses to be carried forward.





Net Income





Net  income for the year ended December 31, 2005 was approximately $8.2 million  compared with a net loss of approximately $1.8 million for the same period of  2004.  Included in 2004 results was a  loss from operations of the discontinued directional drilling segment of  approximately $1.7 million during the year ended December 31, 2004.  The improved results for the year ended  December 31, 2005 over the same period in 2004 was primarily the result of an  increase in revenues resulting from an increase in demand for the Companys  services.





Discontinued Operations





The  Company sold its directional drilling division business on August 6, 2004 and  the operations of this division are reported in the financial statements  included in this Report as discontinued operations.  The comparisons detailed above reflect the Companys continuing  operations.





29





---



Back to Contents





Year  Ended December 31, 2004 Compared to Year Ended December 31, 2003





Revenues





The  Companys revenues from continuing operations increased by approximately $7.9  million or 17.3 % to $53.7 million for the year ended December 31, 2004 as  compared to revenues from continuing operations of $45.7 million for the year  ended December 31, 2003.  The  pricing and utilization of the Companys services improved due to the increase  in well maintenance and drilling activity caused by higher natural gas and oil  prices.  The Company also averaged three  additional wireline units for the year ended December 31, 2004 as compared  to the year ended December 31, 2003.





Operating Costs





Operating  costs increased by $4.0 million for the year ended December 31, 2004, as  compared to 2003.  This increase was due  primarily to the increase in the Companys revenues and the level of the  Companys operations in 2004 as compared to 2003.  Salaries and benefits increased by approximately $1.8 million for  2004 as compared to 2003.  This was due  primarily to the Companys increased employee base.  Operating costs as a percentage of revenues decreased to 64.1 %  in 2004 from 66.6 % in 2003 primarily because of the increased utilization of  the Companys assets as well as increases in pricing for the Companys  services.  The increases in pricing were  largely the outgrowth of and were dependent upon the increase in demand for  services in the natural gas and oil well services sector.





Selling, General and Administrative Expenses





Selling,  general and administrative expenses increased by approximately $209,000 to $9.5  million in 2004.  As a percentage of  revenues, selling, general and administrative expenses decreased to 17.6 % in  2004 from 20.2 % in 2003, primarily as a result of the increased revenue level  generated in 2004 which did not require a corresponding increase in selling,  general and administrative expenses.





Depreciation and Amortization





Depreciation  and amortization increased from $4.7 million in 2003 to $5.2 million in 2004,  primarily because of the increase in the Companys asset base resulting from  capital expenditures in the second half of 2003 and 2004.





Interest Expense





Interest  expense and amortization of debt discount decreased by approximately $531,000  for 2004 as compared to 2003.  This was  directly related to lower interest rates on outstanding senior debt in 2004 as  well as the reduced levels of senior debt outstanding in 2004.





Other Income





Net  gain on sale of fixed assets decreased in 2004 to a net gain of approximately  $53,000 from an approximate $239,000 net gain in 2003. Other income decreased  by approximately $98,000 in 2004.





Income Taxes





The  provision for income taxes was $0 in 2004 and 2003.   A full valuation allowance has been recorded against the net  deferred tax assets generated each year from the net operating losses to be  carried forward.





Net Loss





Net  loss for 2004 was $1.8 million, compared with a net loss of $5.5 million in  2003. The improvement in the Companys results in 2004 over 2003 was primarily  attributable to the increased demand for the Companys services in 2004  primarily resulting from the improved commodities prices in 2004 and offset by  the impairment recorded of $1.4 million resulting from the sale of the  directional assets.





30





---



Back to Contents





Liquidity and Capital Resources





The  Companys  primary liquidity needs are  to fund capital expenditures, such as expanding its wireline and well  intervention services, geographic expansion, acquiring and upgrading trucks,  skids and snubbing units, the addition of complementary service lines and  funding general working capital needs. In addition, the Company needs capital  to fund strategic business acquisitions. The Companys primary sources of funds  have historically been cash flow from operations, proceeds from borrowings  under bank credit facilities and the issuance of debt. Upon completion of the  Companys proposed public offering, the Company anticipates that it will rely  on cash generated from operations, borrowings under its revolving credit  facility and possible debt and equity offerings to satisfy its liquidity needs.  The Company believes that with the current
and anticipated operating  environment of the natural gas and oil industry, it will be able to meet its liquidity  requirements for the remainder of 2006. In addition to funding operating  expenses, cash requirements for 2006 are expected to be comprised mainly of  amortization payments on indebtedness and funding capital improvements. The  Companys planned growth initiatives are expected to require capital  expenditures of in excess of $100 million over the next three years. The  Companys ability to fund planned capital expenditures and to make acquisitions  will depend upon its future operating performance, and more broadly, on the  availability of equity and debt financing, which will be affected by prevailing  economic conditions in the Companys industry, and general financial, business  and other factors, some of which are beyond the Companys control.





Pursuant  to employment contracts, the Company expects to make success bonus payments to  certain key employees immediately prior to or concurrently with the closing of  its proposed public offering in the aggregate amount of approximately $2.6  million of which approximately $1.5 million is accrued as of December 31, 2005.





The  Companys outstanding indebtedness includes primarily senior indebtedness  aggregating approximately $55.2 million at December 31, 2005, other  indebtedness of approximately $1.2 million and approximately $40.1 million  (including approximately $18.2 million of accrued interest) owing  primarily to the St. James Partnerships as well as other holders of  subordinated notes.





Cash  provided by the Companys operating activities was approximately $17.5 million  for the year ended December 31, 2005 as compared to cash provided of  approximately $3.6 million for the same period in 2004 The increase in cash  provided by operating activities was due mainly as a result in the increase in  demand for the Companys services. During the year ended December 31, 2005,  investing activities used cash of approximately $53.2 million for the  acquisition of Bobcat and $8.3 million for the acquisition of property, plant  and equipment as compared to $7.5 million for the same period in 2004, more  than offset by $10.4 million in proceeds from the sale of the Multishot  division. During the year ended December 31, 2005, financing activities used  cash of approximately $11.6 million for principal payments on debt and  approximately $2.5 million for debt issuance costs offset by
proceeds from bank  and other borrowings and net draws on working capital revolving loans of  approximately $56.2.  In 2004, financing  activities used cash of approximately $23.0 million for principal payments on  debt and net payments on working capital revolving loans and other borrowings  and debt issuance costs of approximately $378,000 offset by proceeds from bank  and other borrowings of approximately $13.6 million.





31





---



Back to Contents





Cash  provided by the Companys operating activities was approximately $3.5 million  for the year ended December 31, 2004 as compared to cash provided by operating  activities of $10.6 million for the year ended December 31, 2003.  The decrease in cash provided by operating  activities was mainly a result of the change in the Companys prepaid assets  associated with the financing of insurance premiums, the assignment of current  assets and current liabilities in connection with the sale of the directional  drilling division and the timing of other current assets and liabilities.  Investing activities used cash of  approximately $7.5 million during the year ended December 31, 2004 for the  acquisition of property, plant and equipment and was offset by proceeds from  the sale of discontinued operations and fixed assets of $10.7 million.  During the year ended December 31,
2003,  acquisitions of property, plant and equipment used cash of $3.1 million offset  by proceeds of $685,000 from the sale of fixed assets.  Financing activities during the year ended  December 31, 2004 provided cash of $13.6 million offset by principal payments  on long-term notes and the Companys working capital revolving loan of $23.0  million and debt issuance costs of approximately $378,000.  Financing activities provided cash of $5.4  million from borrowings during the year ended December 31, 2003 offset by  principal payments on long-term notes and the Companys working capital  revolving loan of $10.3 million and debt issuance costs of approximately  $48,000.





During  the year ended December 31, 2005, the Company expended approximately $56.3  million for the acquisition of Bobcat financed under the Companys Senior  Secured Credit Agreement and approximately $961,000 for other property, plant  and equipment financed under notes payable.   During the year ended December 31, 2004, the Company expended  approximately $841,000 for the acquisition of property, plant and equipment  financed under notes payable.  During  the year ended December 31, 2003, the Company expended $3.3 million for the  acquisition of property, plant and equipment financed under the Companys  Senior Secured Credit Agreement and notes payable.





Contractual Obligations





The  following table sets forth information as of December 31, 2005 with respect to  the Companys known contractual obligations of the types specified below:





|                            |  | Payments    Due By Period |           
|--------------------------- |  | ------------------------- | ----------
|                            |  |                           |           
|Contractual Obligations     |  | Total                     |           
|                            |  |                           |           
|Long Term Debt(1)           |  | $                         | 78,343,883
|Capital Leases              |  |                           |          
|Purchase Obligations        |  |                           |          
|Change of Control Payment   |  | $                         | 1,535,388 
|Other Long-term Liabilities |  |                           |          




|   
|---
|(1)




32





---



Back to Contents





Description of the Companys Indebtedness





Senior  Secured Credit Agreement





On  December 16, 2005, the Company entered into the Senior Secured Credit Agreement  with GECC, providing for a term loan and revolving and capital expenditure  credit facilities in an aggregate amount of $50.0 million. The Senior Secured  Credit Agreement amended, restated and modified the credit agreement the  Company entered into with GECC as of September 14, 2001 and as it was amended  and restated on November 14, 2004, including the amendments thereto. The Senior  Secured Credit Agreement includes:





| |  | a revolving credit    facility of up to $15.0 million, but not exceeding a borrowing base of 85% of    the book value of eligible accounts receivable, less any reserves GECC may    establish from time to time,                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                          
| |  | a term loan of $30.0    million, and                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                          
| |  | a one-year capital    expenditure loan facility of up to $5.0 million, but not exceeding the lesser    of 80% of the hard costs of eligible capital equipment and 75% of the forced    liquidation value of eligible capital equipment, subject to adjustment by    GECC.




Eligible  accounts receivable are accounts in which the Company has an interest  excluding, among other items and, subject to certain exceptions, debtors  accounts outstanding that are not paid within the earlier of 60 days past the  due date or 90 days following the original invoice date, accounts of debtors  that have suspended business or commenced various insolvency proceedings and  accounts to the extent the account exceeds the credit limit established by GECC  in its reasonable credit judgment. GECC has the right to establish, modify and  eliminate reserves against eligible accounts receivable from time to time in  its reasonable judgment.





GECCs  agreement to make revolving loans expires on December 16, 2008 and its  agreement to make capital expenditure loans expires on December 16, 2006,  unless earlier terminated under the terms of the Senior Secured Credit  Agreement.





Interest  Rates. Initially, as  of the closing, the annual interest rate on borrowings under the revolving loan  facility is 0.75% above the index rate, and the annual interest rate on  borrowings under the term loan and capital expenditure loan facility is 2.25%  above the index rate. The index rate is a floating rate equal to the higher of  (i) the rate publicly quoted from time to time by the Wall Street Journal as  the prime rate, or (ii) the average of the rates on overnight Federal funds  transactions among members of the Federal Reserve System plus 0.5%. The  interest rate margin above the index rate may be adjusted from time to time on  a quarterly basis based on the Companys ratio of its funded debt to EBITDA for  the trailing twelve months prior to the determination. Subject to the absence  of an event of default and fulfillment of certain other conditions, the Company  can
elect to borrow or convert any loan and pay the annual interest at the  LIBOR rate plus applicable margins of 2.25% on the revolving loan and 3.75% on  the term loan and capital expenditure loan. If an event of default in the  nature of a failure to make any payment of principal of, interest on or fees  owing in respect to loans when due and payable or the commencement of  bankruptcy proceedings involving the Company has occurred, the annual interest  rate is increased by 2% and, if any other default or event of default has  occurred and is continuing, GECC may elect to increase the interest rate by  that amount.





Collateral. Advances under the Senior Secured Credit  Agreement are collateralized by a senior lien against substantially all of the  Companys assets.





Use  of Proceeds. Initial  borrowings under the Senior Secured Credit Agreement advanced on December 16,  2005 were $1.3 million borrowed under the revolving loan and $30.0 million  under the term loan. No





33





---



Back to Contents





borrowings were made under the capital  expenditure loan facility. The proceeds of the term loan were used to pay a  portion of the Bobcat acquisition purchase price, related fees and expenses and  repayment of substantially all Bobcat indebtedness, and approximately $2.1  million was placed in escrow for the repayment of principal and accrued  interest on subordinated secured indebtedness and approximately $2.8 million  was used for general corporate purposes.The  outstanding balance of approximately $6.3 million under the Companys previous  credit agreement with GECC was paid out of the Companys existing cash.





Maturity  of Loans. Borrowings  under the revolving loan are able to be repaid and re-borrowed from time to  time for working capital and general corporate needs, subject to the Companys  continuing compliance with the terms of the agreement. Any amounts outstanding  under the revolving loan are due and payable on December 16, 2008. The term  loan is to be repaid in 12 consecutive quarterly installments of $1.1 million  commencing January 1, 2006 with a final installment of $16.8 million due and  payable on January 1, 2009. The capital expenditure loan is to be repaid in  eight consecutive quarterly installments with each quarterly installment equal  to 1/20th of the borrowings funded prior to the expiration of the one-year term  of the facility and with a final installment in the amount of the remaining  principal balance due on December 16, 2008.





Mandatory  and Voluntary Prepayments. Borrowings under the Senior Secured Credit Agreement are subject to  certain mandatory pre-payments including, among other requirements, pre-payment  out of a portion of the net proceeds of any sale of stock by the Company in a  public offering. The Company must apply the net proceeds from any sale of its  stock, other than on exercise of existing warrants and conversion rights,  occurring before December 31, 2006 to the prepayment of loans. Such cash  proceeds, after deduction of underwriting discounts and commissions and other  reasonable costs the Company incurs are to be applied to the prepayment of (i)  loans outstanding under the Companys Senior Secured Credit Agreement, (ii)  loans outstanding under the Companys Second Lien Credit Agreement, and (iii)  to prepay or redeem all the Companys outstanding subordinated notes and shares
of its common stock owned by St. James Capital Partners, L.P., SJMB, L.P. and  other holders of the Companys subordinated secured notes as of December 16,  2005, the shares of the Companys common stock issued in exchange for warrants,  subordinated notes and other convertible securities pursuant to the recapitalization  agreements the Company entered into in October 2005, a fee in the amount of  $274,000 owing to SJMB, L.P. and Change of Control payments in the aggregate  amount of approximately $2.6 million the Company is required to make under the  terms of employment agreements with certain of the Companys employees, as the  term Change of Control is defined in those agreements (herein, amounts to be  paid under this subsection (iii) are referred to as Junior Capital), in the  following manner:





| | (A)    100% of the first $50.0 million in net proceeds received are to be applied to    prepay or redeem the Junior Capital;                                                                                                                                                                                                     
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                  
| | (B)    net proceeds in excess of $50.0 million and up to $75.0 million are to be    allocated 40% to prepay or redeem the Junior Capital, 30% to prepay loans    outstanding under the Companys Senior Secured Credit Agreement and 30% to    prepay loans outstanding under the Companys Second Lien Credit Agreement;        
| |                                                                                                                                                                                                                                                                                                                                  
| | (C)    net proceeds in excess of $75.0 million and up to $100.0 million are to be    allocated 60% to prepay or redeem the Junior Capital, 20% to prepay loans    outstanding under the Companys Senior Secured Credit Agreement and 20% to    prepay loans outstanding under the Companys Second Lien Credit Agreement;    and
| |                                                                                                                                                                                                                                                                                                                                  
| | (D)    net proceeds in excess of $100.0 million are to be allocated 80% to prepay or    redeem the Junior Capital, 10% to prepay loans outstanding under the    Companys Senior Secured Credit Agreement and 10% to prepay loans outstanding    under the Companys Second Lien Credit Agreement.                               




34





---



Back to Contents





To the extent the Junior Capital is paid or  repurchased in full under the foregoing provisions prior to the prepayment in  full of loans outstanding under the Companys Credit Agreements, the remaining  net proceeds are to be allocated 50% to loans outstanding under the Companys  Credit Agreements. If any event of default has occurred under the Companys  Senior Secured Credit Agreement and is continuing, and the Company has been  notified in writing of such event of default (or the Company has been notified  in writing of the equivalent event of default under the Second Lien Credit  Agreement), at the time the Company receives the net proceeds, 100% of such net  proceeds are to be allocated to the loans outstanding under the Companys  Senior Secured Credit Agreement, without application of any portion thereof to  Junior Capital or loans under the Second Lien Credit Agreement.





The  Company has proposed to GECC that the Senior Secured Credit Agreement and  Second Lien Credit Agreement be amended to provide that 100% of the net  proceeds realized from its proposed public offering that is to be applied to  the repayment of indebtedness owing to GECC be allocated to the repayment of  indebtedness outstanding under the Second Lien Credit Agreement and -0-% be  allocated to the repayment of indebtedness outstanding under the Senior Secured  Credit Agreement.  The Company is  awaiting a definitive response from GECC regarding this proposal.





If  the Company issues any shares of common stock, other than as described above,  or any debt at any time, the Company is required to prepay the loans  outstanding under the Senior Secured Credit Agreement in an amount equal to all  such proceeds, net of underwriting discounts and commissions and other  reasonable costs.





The  Company is also required to prepay annually, commencing with the fiscal year  ending December 31, 2006, loans and other outstanding obligations under the  Senior Secured Credit Agreement in an amount equal to 75% of the Companys  excess cash flow for the immediately preceding fiscal year. Excess cash flow is  defined, with respect to any fiscal year, as the Companys net income plus  depreciation, amortization and interest expense, to the extent deducted in  determining net income, minus capital expenditures, minus interest expense paid  or accrued and scheduled principal payments paid or payable, plus or minus,  extraordinary gains or losses which are cash items not included in net income,  plus taxes deducted in determining net income to the extent not paid in cash.





Any  mandatory prepayments made as provided above are to be applied substantially as  follows: first, to any fees then due and payable to GECC, second, to interest  then due and payable on the term loan and capital expenditure loan, pro rata  between the term loan and capital expenditure loan, third, to prepay the  scheduled principal installments on the term loan and capital expenditure loan,  allocated pro rata between the term loan and capital expenditure loan, and  applied to principal installments in inverse order of maturity, until the term  loan and capital expenditure loan have been prepaid in full; fourth, to  interest then due and payable on the revolving loan; and fifth, to the  principal balance of the revolving loan until the same shall have been paid in  full. The revolving loan is permanently reduced by the amount of any such  prepayments.





The  Company may at any time prepay all or part of the term loan or capital  expenditure loan, permanently reduce or terminate the capital expenditure  commitment, and permanently reduce but not terminate the revolving loan  commitment provided such prepayments or reductions are in the minimum amount of  $500,000 and integral multiples of $250,000, subject to the payment of certain  pre-payment fees declining from 1.0% in the event the termination or reduction  occurs during the first year, 0.5% in the event the termination or reduction  occurs during the second year, and 0.25% in the event the termination or  reduction occurs during the third year of the term of the Senior Secured Credit  Agreement. The Company is required to use, subject to certain exceptions, the  net proceeds from the sale of any assets or the stock of any subsidiary to  prepay all borrowings under the facilities. The Company is
required to repay  any borrowings in excess of the applicable borrowing availability, including  borrowings under the term loan in excess of 70% of the forced liquidation value  of eligible term loan equipment. The forced liquidation value





35





---



Back to Contents





of the eligible term loan equipment is  established by appraisal conducted from time to time but not more than twice  per year.





Conditions  to Advances.Future  advances are subject to the continuing accuracy of the Companys  representations and warranties as of such date (other than those relating  expressly to an earlier date), the absence of any event or circumstance  constituting a material adverse effect, as defined, the absence of any  default or event of default under the Senior Secured Credit Agreement, and the  borrowings not exceeding the applicable borrowing availability under the Senior  Secured Credit Agreement, after giving effect to such advance. A material  adverse effect is defined to include a material adverse effect on the  Companys business, assets, operations, prospects or financial or other  condition, on the Companys ability to pay any of the loans under the Senior  Secured Credit Agreement, on the collateral or on lenders liens or rights and  remedies
under the Senior Secured Credit Agreement. An event constituting a  material adverse effect also includes a decline in the Average Rig Count  (excluding Canada and international rigs) published by Baker Hughes, Inc.  falling below 800 for 12 consecutive weeks. Further conditions to each advance  under the capital expenditure facility require the delivery of evidence that  the advance is in compliance with the conditions of the Senior Secured Credit  Agreement with respect to amounts that may be borrowed to finance capital  expenditures.





Affirmative  and Negative Covenants.  Under the Senior Secured Credit Agreement, the Company is obligated to maintain  compliance with a number of affirmative and negative covenants. Affirmative  covenants the Company must comply with include requirements to maintain the  Companys corporate existence and continue the conduct of the Companys  business substantially as conducted in December 2005, promptly pay all taxes  and governmental assessments and levies, maintain the Companys corporate books  and records, maintain insurance in form and amounts and with insurers  reasonably acceptable to GECC, comply with applicable laws and regulations, maintain  key man life insurance on the life of William L. Jenkins, provide supplemental  disclosure to the lenders, refrain from violating the intellectual property of  others, conduct the Companys operations in compliance with
environmental laws,  provide a mortgage or deed of trust to the lenders granting a first lien on the  Companys real estate upon the request of the lenders, and provide certificates  of title on newly acquired equipment with the lenders lien noted.





Negative  covenants the Company may not violate include, among others and subject to  limitations and exceptions, (i) forming or acquiring a subsidiary, (ii) merging  with, acquiring all or substantially all the assets or stock of, or otherwise  combining with or acquiring, another person, (iii) making an investment in or  loan to another person, subject to certain exceptions for specified high grade  investments so long as there are no revolving loans outstanding, (iv) incurring  any indebtedness other than specified permitted indebtedness, (v) entering into  any transaction with an affiliate except in the ordinary course of the  Companys business and on fair and reasonable terms no less favorable than  would be obtained in a comparable arms length transaction with a  non-affiliated person, (vi) making loans to its employees in amounts exceeding  $50,000 individually and $250,000 in the
aggregate, (vii) issuing any shares of  the Companys common stock if any of its stock or the stock of a subsidiary is  pledged to GECC, making any change in its business objectives or operations  that could adversely affect repayment of the loans or could reasonably be  expected to have or result in a material adverse effect, making any change in  its capital structure, including the issuance of any stock, warrants or  convertible securities or any revision in the terms of outstanding stock except  for permitted payments to holders of subordinated debt and options granted  under an existing or future incentive option plan, or amending its charter or  by-laws in a manner that would adversely affect its duty or ability to repay  the indebtedness, or engaging in any business other than that engaged in by the  Company on December 16, 2005; (viii) creating or permitting to exist any liens  on its properties or assets, with the exception of (x) those granted to the  lenders under the Senior Secured
Credit Agreement or in existence on the date  of making the loan and permitted re-financings, extensions and renewals of such  liens provided the indebtedness secured is not increased and the lien does not  attach to any additional property, or (y) liens created after December 16, 2005  by conditional sale or other title retention agreements or in connection with  purchase money indebtedness with respect to equipment and





36





---



Back to Contents





fixtures acquired in the ordinary course of  business involving the incurrence of an aggregate amount of purchase money  indebtedness and capital lease obligations of not more than $2.0 million  outstanding at any one time or (z) liens securing the indebtedness under the  Second Lien Credit Agreement, (xi) selling any of its properties or other  assets, including the stock of any subsidiary, except inventory in the ordinary  course of business, obsolete or unused equipment or fixtures with an appraised  value not exceeding $200,000 per transaction and $500,000 per year, and other  equipment and fixtures with a book value not exceeding $200,000 per transaction  and $500,000 per year, (xii) breaching or failing to comply with the various financial  covenants in the credit agreement, (xiii) releasing any hazardous material that  would violate environmental laws or adversely impact the value of any  collateral; (xiv) engaging in a sale leaseback, synthetic lease
or similar  transaction, (xv) making any restricted payments, including payment of  dividends, stock or warrant redemptions, repaying subordinated notes, except as  otherwise permitted under the Senior Secured Credit Agreement, rescission of  the sale of outstanding stock, subject to certain exceptions including, among  others, permitted prepayments or redemptions of Junior Capital using the net  proceeds from a public offering of its common stock, payment of reasonable and  customary fees to its non-employee directors, reimbursement of the reasonable  expenses of St. James Capital Corp., St. James Capital Partners, L.P., SJMB,  LP, and SJMB, LLC in an amount not to exceed $60,000 per year, payment of a  $274,000 fee to SJMB, L.P. not later than December 31, 2006 or the date the  Company complete its first public offering of common stock after December 16,  2005, and Change of Control payments (as Change of Control is defined in  the employment agreements with the parties to
receive the payments) on and  after December 16, 2005 but before December 31, 2005 in the amount of  approximately $1.1 million, and, in connection with in a contemplated public  offering of shares of its common stock, in an aggregate amount not to exceed  approximately $2.7 million, (xvi) purchasing any real estate in excess of $250,000,  (xvii) engaging in any speculative hedging transactions; (xviii) amending  or changing the terms of its subordinated debt, (xix) changing or amending the  Second Lien Credit Agreement, or (xx) changing or amending the Bobcat  acquisition agreement.





The  financial covenants prohibit the Company from making capital expenditures in  any fiscal year commencing with the fiscal year ending December 31, 2006 in an  aggregate amount exceeding $6.5 million (excluding amounts financed under its  capital expenditure loan facility), plus in any subsequent period the amount by  which $6.5 million exceeds the amount of capital expenditures expended in the  prior period.





Commencing  with the fiscal quarter ending March 31, 2006, the Company is required to have  at the end of each fiscal quarter and for the 12-month period then ended, a  ratio of (a) EBITDA minus capital expenditures paid in cash during such period,  excluding capital expenditures financed under the Senior Secured Credit  Agreement, minus income taxes paid in cash during such period to (b) fixed  charges including, with certain exceptions, the total of principal and interest  payments during such period, of not less than 1.5:1.0. For the purpose of  calculating the ratio for the fiscal quarters ending March 31, 2006, June 30,  2006 and September 30, 2006, EBITDA and fixed charges are to be measured for  the period commencing on January 1, 2006 and ending on the last day of such  fiscal quarter.





The  Company is required to have, at the end of each fiscal month, a ratio of funded  debt to EBITDA as of the last day of such fiscal month and for the 12-month  period then ended of not more than the following:





| |  | 2.25:1.00 for the fiscal    months ending on January 31, 2006 through March 31, 2006;    
| | - | -----------------------------------------------------------------------------------------
| |  | 2.25:1.00 for the fiscal    months ending on April 30, 2006 through June 30, 2006;       
| |  | 2.00:1.00 for the fiscal    months ending on July 31, 2006 through September 30, 2006;   
| |  | 2.00:1.00 for the fiscal    months ending on October 30, 2006 through December 31, 2006; 
| |  | 2.00:1.00 for the fiscal    months ending on January 31, 2007 through March 31, 2007; and
| |  | 1.75:1.00 for each fiscal    month ending thereafter.                                    




The  Company is required to have, at the end of each fiscal month, EBITDA for the  12-month period then ended of not less than the following:





37





---



Back to Contents





| |  | $33,000,000 for the fiscal    months ending on January 31, 2006 through March 31, 2006;       
| | - | ----------------------------------------------------------------------------------------------
| |  | $33,000,000 for the fiscal    months ending on April 30, 2006 through June 30, 2006;          
| |  | $34,000,000 for the fiscal    months ending on July 31, 2006 through September 30, 2006;      
| |  | $34,000,000 for the fiscal    months ending on October 30, 2006 through December 31, 2006; and
| |  | $35,000,000 for each    fiscal month ending thereafter.                                       




Events  of Default. Events of  default under the Senior Secured Credit Agreement include, among others and  subject to certain limitations, (a) the failure to make any payment of  principal, interest, or fees when due and payable or to pay or reimburse GECC  for any expense reimbursable under the Senior Secured Credit Agreement within  ten days of demand for payment, (b) the failure to perform the covenants under  the Senior Secured Credit Agreement relating to use of proceeds, maintenance of  a cash management system, maintenance of insurance, delivery of certificates of  title for equipment, delivery of certain post-closing documents, and  maintenance of compliance with the Senior Secured Credit Agreements negative  covenants, (c) the failure to deliver to the lenders monthly un-audited,  quarterly un-audited and annual audited financial statements, an annual  operating plan, and other
reports, certificates and information as required by  the Senior Secured Credit Agreement, (d) the failure to perform any other  provision of the Senior Secured Credit Agreement (other than those set forth in  (b) above) which nonperformance remains un-remedied for 20 days or more, (e) a  default or breach under any other agreement or instrument to which the Company  is a party beyond any grace period that involves the failure to pay in excess  of $250,000 or causes or permits to cause indebtedness in excess of $250,000 to  become due prior to its stated maturity, (f) any information in a borrowing  base certificate or any representation or warranty or certificate or in any  written statement report, or financial statement delivered to GECC being untrue  or incorrect in any material respect, (g) a change of control, as defined, of  the Company, (h) the occurrence of an event having a material adverse effect,  (i) the initiation of insolvency, bankruptcy or liquidation proceedings, (j)  any final
judgment for the payment of money in excess of $250,000 is  outstanding against the Company and is not within thirty days discharged,  stayed or bonded pending appeal, (k) any material provision of or lien under  any document relating to the Senior Secured Credit Agreement ceases to be  valid, (l) the attachment, seizure or levy upon of the Companys assets which  continues for 30 days or more, and (m) William Jenkins ceases to serve as the  Companys chief executive officer, unless otherwise agreed by GECC. Upon the  occurrence of a default, which is defined as any event that with the passage of  time or notice or both would, unless waived or cured, become an event of  default, or event of default, the lenders may discontinue making revolving  loans and capital expenditure loans to the Company and increase the interest  rate on all loans. Upon the occurrence of an event of default, the lenders may  terminate the Senior Secured Credit Agreement, declare all indebtedness  outstanding under
the Senior Secured Credit Agreement due and payable, and  exercise any of their rights under the Senior Secured Credit Agreement which  includes the ability to foreclose on the Companys assets. In the event of a  bankruptcy or liquidation proceeding, all borrowings under the Senior Secured  Credit Agreement are immediately due and payable.





Second  Lien Credit Agreement





The  Term Loan. On  December 16, 2005, the Company entered into the Second Lien Credit Agreement  with GECC, providing for a term loan $25.0 million.





Interest  Rate. The annual  interest rate on borrowings under the term loan is 6.0% above the index rate.  The index rate is a floating rate equal to the higher of (i) the rate publicly  quoted from time to time by the Wall Street Journal as the prime rate, or (ii)  the average of the rates on overnight Federal funds transactions among members  of the Federal Reserve System plus 0.5%. Subject to the absence of an event of  default and fulfillment of certain other conditions, the Company can elect to  borrow or convert any loan and pay the annual interest at the LIBOR rate plus a  margin of 7.5%. If an event of default in the nature of a failure to make any payment  of principal of, interest on or fees owing in respect to loans when due and  payable or the commencement of bankruptcy proceedings involving the Company has  occurred, the annual interest





38





---



Back to Contents





rate is increased by 2% and, if any other  default or event of default has occurred and is continuing, GECC may elect to  increase the interest rate by that amount.





Collateral. The loan under the Second Lien Credit  Agreement is collateralized by a junior lien against substantially all of the  Companys assets, subordinate to the lien under the Senior Secured Credit  Agreement.





Use  of Proceeds. Initial  borrowings under the Second Lien Credit Agreement advanced on December 16, 2005  of $25.0 million were used to pay a portion of the Bobcat acquisition purchase  price.





Maturity  of Loan. Outstanding  borrowings under the Second Lien Credit Agreement are due and payable on March  16, 2009, unless previously repaid.





Mandatory  and Voluntary Prepayments. Borrowings under the Second Lien Credit Agreement are subject to  certain mandatory pre-payments including, among other requirements, pre-payment  out of a portion of the net proceeds of any sale of stock by the Company in a  public offering in a manner substantially identical to the mandatory repayment  provisions out of a portion of the net proceeds of any sale of stock by the  Company in a public offering under the terms of the Senior Secured Credit  Agreement described above.





As  is described above, the Company has proposed to GECC that the Senior Secured  Credit Agreement and Second Lien Credit Agreement be amended to provide that  100% of the net proceeds realized from its proposed public offering that is to  be applied to the repayment of indebtedness owing to GECC be allocated to the  repayment of indebtedness outstanding under the Second Lien Credit Agreement  and -0-% be allocated to the repayment of indebtedness outstanding under the  Senior Secured Credit Agreement.  The  Company is awaiting a definitive response from GECC regarding this proposal.





If  the Company issues any shares of common stock, other than as described above in  a public offering of the Companys securities, or any debt at any time, the  Company is required to prepay the loans outstanding under the Second Lien  Credit Agreement in an amount equal to all such proceeds, net of underwriting  discounts and commissions and other reasonable costs.





Any  mandatory prepayments made as provided above are to be applied substantially as  follows: first, to any fees then due and payable to GECC, second, to interest  then due and payable on the loan and, third, to prepay the principal of the  loan.





The  Company may at any time prepay all or part of the loan or capital expenditure  loan, subject to the payment of certain pre-payment fees declining from 2.0% in  during the first year, 1.0% during the second year, and 0.5% in the event the  termination or reduction occurs during the third year of the term of the Second  Lien Credit Agreement. The Company is required to use, subject to certain  exceptions, the net proceeds from the sale of any assets or the stock of any  subsidiary to prepay all borrowings under the facilities.





Closing  Conditions. Initial  borrowings under the Second Lien Credit Agreement were subject to the  fulfillment at or before the closing of closing conditions substantially  identical to the conditions to be fulfilled in connection with the closing  under the Senior Secured Credit Agreement described above.





Affirmative  and Negative Covenants.  Under the Second Lien Credit Agreement, the Company is obligated to maintain  compliance with a number of affirmative and negative covenants, including  financial covenants that are substantially identical to the covenants the  Company is obligated to comply with under the terms of the Senior Secured  Credit Agreement described above.





Events  of Default. Events of  default under the Second Lien Credit Agreement are substantially identical to  events of default under the Senior Secured Credit Agreement described above.





39





---



Back to Contents





Credit  Agreements - General





There  can be no assurance that the Company will be able to remain in compliance with  the financial and other covenants of the Senior Secured Credit Agreement and  the Second Lien Credit Agreement or be able to obtain such amendments, consents  or waivers with respect to potential violations of these covenants when  required. The Companys inability to do so may result in it being placed in  violation of those financial and other covenants. The Company can make no  assurances that it will remain in compliance with the Companys debt covenants  or generate sufficient cash flows to service its debt and fund operations.  Failure to comply with these debt covenants and or generate sufficient cash  flow from operations could significantly impair its liquidity position and  could result in GECC exercising mandatory prepayment options under the Senior  Secured Credit Agreement and Second Lien
Credit Agreement. Should the Company  be unable to borrow funds under the Senior Secured Credit Agreement or Second  Lien Credit Agreement if prepayment of those borrowings were required, the  Company can make no assurances that alternative funding could be obtained.





Reference  is made to the Senior Secured Credit Agreement and the Second Lien Credit  Agreement, filed as exhibits to the Companys Current Report on Form 8-K for  December 16, 2005 for a complete statement of the terms and conditions.





Subordinated  Secured Indebtedness - Note Extensions





In  connection with the Company entering into the GECC refinancing in November  2004, the Company agreed with the holders of its outstanding subordinated  secured notes to extend the maturity date of the notes from December 31, 2004  to February 13 and February 14, 2008 on $23.0 million of the total $23.9  million principal amount of the notes then outstanding.  The remainder of the outstanding principal  was repaid.  Concurrently with the  borrowings under the Senior Secured Credit Agreement and Second Lien Credit  Agreement, the maturity date of approximately $21.9 million principal amount of  the Companys outstanding subordinated secured promissory notes was extended to  June 15, 2009 and $2.1 million of such subordinated secured notes, including  accrued interest, was repaid.  The notes  bear interest at 15% per annum and are convertible into shares of the Companys
common stock at a conversion price of $7.50 per share, subject to an  anti-dilution adjustment for certain issuances of securities by the Company at  prices per share of common stock less than the conversion price then in effect,  in which event the conversion price is reduced to the lower price at which the  shares were issued.  As a condition to  extend the maturity date of the notes in connection with the GECC refinancing  in November 2004, the Company extended the expiration date of the Companys 6.6  million outstanding common stock purchase warrants to December 31, 2009.





Substantially  all of the Companys assets are pledged as collateral for the indebtedness  outstanding under the subordinated secured notes.  All of the debt and interest owed under the subordinated secured  notes is subordinated to the Companys Senior Secured Credit Agreement and  cannot be repaid until all the amounts owed pursuant to the Senior Secured  Credit Agreement and Second Lien Credit Agreement mature or have been repaid.





Following  completion of the Companys proposed public offering, the Company does not  expect to have any subordinated secured notes outstanding.





Other  Indebtedness.  In December 2004, the Company incurred  indebtedness of approximately $2.3 million in connection with financing the  payment of annual insurance premiums in that amount.  The indebtedness was payable in monthly installments that ended  in September 2005.





Recapitalization





In  October 2005, the Company initiated a series of steps undertaken for the purpose  of recapitalizing the Company through the elimination of the substantial amount  of derivative securities it has outstanding, among other steps intended to be  undertaken. These derivative securities include common stock purchase





40





---



Back to Contents





warrants to purchase 7,076,119 shares of the  Companys common stock and $35,019,173 of principal amount and accrued  interest, as of December 31, 2005, of its outstanding convertible subordinated  notes which, as of that date, are convertible at a conversion price of $7.50  per share into an aggregate of 4,669,223 shares of the Companys common stock.





On  October 6, 2005, the Company entered into agreements with the holders of  5,269,369 of the 7,076,119 warrants outstanding to exchange those warrants for  1,756,456 shares of the Companys common stock. Of the 5,269,369 warrants, an  aggregate of 4,075,528 are held by the St. James Partnerships, and 1,193,841  were held by the Underbrink Family Entities, which include Mr. Charles E.  Underbrink. Mr. Underbrink is one of the Companys directors and is the  Chairman of the general partner of SJMB, L.P. and, in October 2005, was the  Chairman of the general partner of St. James Capital Partners, L.P. The  exchange of warrants for shares of the Companys common stock by the Underbrink  Family Entities was completed on October 6, 2005 resulting in the issuance  of 397,947 shares, and the warrants to purchase 4,075,527 shares held by the  St. James Partnerships are to be
repurchased in connection with the Companys  proposed public offering.  In the event  the warrants to purchase 4,075,527 shares held by the St. James Partnerships  have not been purchased by the Company by June 30, 2006, the warrants will be  converted into 1,358,509 shares of common stock.





On  October 7, 2005, the Company commenced an offer to exchange shares of its  common stock for its remaining outstanding 1,806,750 common stock purchase  warrants. The Company offered to exchange one share of the Companys common stock  for each three warrants. Each warrant represents the right to purchase one  share of the Companys common stock at an exercise price of $7.50 per share.  The offer to exchange shares of the Companys common stock for warrants expired  on November 14, 2005, and the Company issued 503,167 shares of its common  stock in exchange for 1,509,500 common stock purchase warrants.





The  agreements with the St. James Partnerships and Underbrink Family Entities  provide that such persons will convert an aggregate of $20,277,374 of principal  and all accrued interest (which amounted to $16,734,434 through December 31,  2005) on the Companys outstanding convertible subordinated notes into shares  of the Companys common stock and, provided the price they are to receive is  not less than $7.50 per share, sell those shares to the Company, along with the  shares issued in exchange for their warrants, the shares issued on conversion  of notes and accrued interest in November 2005 and an additional 501,748 shares  held by SJMB, L.P., at the closing time of the Companys proposed public  offering. The purchase price paid by the Company for such shares will be the  price per share it receives in the public offering less commissions and  expenses of the underwriters in the
offering.  In addition, under the terms of a Registration Rights Agreement,  the holders of $3,041,361 principal amount and accrued interest (as of December  31, 2005) on outstanding convertible subordinated notes have the right to have  included 405,515 shares issuable on conversion of the principal and interest on  the notes, as well as the shares of the Companys common stock issued in  exchange for their warrants, in the registration statement relating to the  Companys proposed public offering.





If  the managing underwriter concludes that the amount of shares included in the  registration statement for the account of selling stockholders must be reduced,  the Companys Recapitalization Agreements with the Underbrink Family Entities  and the St. James Partnerships provide that the first shares to be cut back out  of the number of shares to be sold and required to be purchased by the Company  out of the net proceeds of its proposed public offering, are the shares held by  the Underbrink Family Entities (including Conversion Shares, Exchange Shares  and any other shares held).  If the  managing underwriter is of the view that a larger cutback is to be made in the  number of shares included in the proposed public offering for the account of  selling stockholders, the second classification of shares to be cut back out of  shares required to be purchased by the Company out of the net
proceeds of the  Companys proposed public offering will be the 501,748 shares held by SJMB,  L.P.  Thereafter, if the managing  underwriter is of the view that a larger cutback is to be made in the number of  shares included for the account of selling stockholders, the Conversion Shares,  Exchange Shares and Warrants held by the St. James Partnerships to





41





---



Back to Contents





be purchased by the Company at the closing of  the proposed public offering will be cut back pro rata based on the number of  Conversion Shares, Exchange Shares and Warrants proposed to be sold  collectively by the St. James Partnerships.   For these purposes and the pro rata calculations required, each three  Warrants would be treated as the equivalent of one Exchange Share and the first  of the securities to be cut back from purchase by the Company from the St.  James Partnerships would be the Conversion Shares and the last to be cut back  would be the Warrants.





Other Matters





Litigation  involving the St. James Partnerships, their general partners and Charles E.  Underbrink





The  St. James Partnerships, their general partners and Charles E. Underbrink, who  is one of the Companys directors and a director of one of the general partners  of the St. James Partnerships, were added as defendants in an amended complaint  filed in March 2005 in Texas by two of the limited partners of the St. James Partnerships.  The action was originally instituted in  December 2004 against the auditors of the St. James Partnerships. The  plaintiffs brought the action as a class action on behalf of all the limited  partners of the St. James Partnerships and are seeking class action  certification.  No claim has been  asserted against the Company and the Company is not a defendant in the  action.  However, the complaint and the  amended complaint in the action contain allegations that the Company  participated with Mr. Underbrink in actions the plaintiffs allege were
fraudulent and constituted securities violations. The Company has not concluded that it is probable that a claim  will be asserted against it and it does not believe that if a claim is asserted  that there is a reasonable possibility that the outcome would be unfavorable to  the Company or that any resulting liability would be material to its financial  condition.  In the Companys view, the  allegations in the complaint and amended complaint relating to it are baseless,  without factual foundation and untrue.





Recently  Issued Accounting Pronouncements





On  December 21, 2004, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) FAS  109-1, Application  of FASB Statement No. 109, Accounting for Income Taxes, to the Tax  Deduction on Qualified Production Activities Provided by the American Jobs  Creation Act of 2004, was issued. FSP FAS 109-1 clarifies that this tax  deduction should be accounted for as a special deduction in accordance with  Statement 109.  As such, the special  deduction has no effect on deferred tax assets and liabilities existing at the  date of enactment.  Rather, the impact  of this deduction will be reported in the period in which the deduction is  claimed on the Companys tax return beginning in 2005.





In  December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (SFAS  No. 123(R)).  This Statement requires  that the costs of employee share-based payments be measured at fair value on  the awards grant date using an option-pricing model and recognized in the  financial statements over the requisite service period.  This Statement does not change the  accounting for stock ownership plans, which are subject to American Institute  of Certified Public Accountants SOP 93-6, Employers Accounting for Employee Stock Ownership  Plans.  Statement 123(R)  supersedes Opinion 25, Accounting for Stock Issued to Employees  and its related interpretations, and eliminates the alternative to use Opinion  25s intrinsic value method of accounting, which the Company is currently  using.  Certain stock awards may be  considered liabilities
instead of equity components under SFAS No. 123(R).





SFAS  No. 123(R) allows for two alternative transition methods.  The first method is the modified prospective  application whereby compensation cost for the portion of awards for which the  requisite service has not yet been rendered that are outstanding as of the  adoption date will be recognized over the remaining service period.  The compensation cost for that portion of  awards will be based on the grant-date fair value of those awards as calculated  for pro forma disclosures under SFAS No. 123, as originally issued.  All new awards and awards that are modified,  repurchased, or cancelled after the adoption date will be accounted for under  the provisions of SFAS No. 123(R).  The  second method is the modified retrospective application, which requires that  the Company restate prior period financial statements.  The modified





42





---



Back to Contents





retrospective application may be applied  either to all prior periods or only to prior interim periods in the year of  adoption of this statement.  The Company  adopted the modified prospective application method on January 1, 2006 and does  not expect a material impact on its financial statements.





In  November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB  No. 43, Chapter 4, which is effective for inventory costs incurred  during fiscal years beginning after June 15, 2005.  The amendments made by SFAS No. 151 will improve financial  reporting by clarifying that abnormal amounts of idle facility expense,  freight, handling costs, and wasted materials (spoilage) should be recognized  as current-period charges and by requiring the allocation of fixed production  overheads to inventory based on the normal capacity of the production  facilities.  The adoption of Statement  151 did not have a significant effect on the Companys financial statements.





In  December 2003, the FASB issued Interpretation No. 46 (revised December 2003)  (FIN 46(R)), Consolidation of Variable Interest Entities, an interpretation of ARB  51. The primary objectives of FIN 46R are to provide guidance on the  identification of entities for which control is achieved through means other  than through voting rights (variable interest entities or VIEs) and how to  determine if a business enterprise should consolidate the VIEs. This new model  for consolidation applies to an entity for which either: the equity investors  (if any) do not have a controlling financial interest; or the equity investment  at risk is insufficient to finance the entitys activities without receiving  additional subordinated financial support from other parties. In addition, FIN  46(R) requires that all enterprises with a significant variable interest in a
 VIE make additional disclosures regarding their relationship with the VIE. The  interpretation requires public entities to apply FIN 46(R) to all entities that  are considered Special Purpose Entities in practice and under the FASB  literature that was applied before the issuance of FIN 46(R). The adoption of  FIN 46R had no effect on the Companys financial statements.





Inflation.





The  Companys revenues have been and are expected to continue to be affected by  fluctuations in the prices for natural gas and oil.  Inflation did not have a significant effect on its operations in  2005.





Significant  Accounting Policies





The  Companys Discussion and Analysis of Financial Condition and Results of  Operations is based upon its financial statements, which have been prepared in  accordance with accounting principles generally accepted in the U.S. The  preparation of these financial statements requires the Company to make  estimates and judgments that affect the reported amounts of assets,  liabilities, revenues and expenses, and related disclosures of contingent  assets and liabilities. On an on-going basis, the Company evaluates its estimates,  including those related to the allowance for bad debts, inventory, long-lived  assets, intangibles and goodwill. The Company bases its estimates on historical  experience and on various other assumptions that are believed to be reasonable  under the circumstances, the results of which form the basis for making  judgments about the carrying value of assets and liabilities
that are not  readily apparent from other sources. Actual results may differ from these  estimates under different assumptions or conditions.





Allowance  for Doubtful Accounts   The Companys allowance for doubtful accounts is maintained at an amount  equal to estimated losses in its accounts receivable.  The Company continually monitors the accounts receivable from its  customers for any collectability issues.   An allowance for doubtful accounts is established based on reviews of  individual customer accounts, recent loss experience, current economic  conditions, and other pertinent factors.   Accounts deemed uncollectible are charged to the allowance.  Provisions for bad debts and recoveries on  accounts previously charged off are added to the allowance.  All accounts outstanding more than 30 days  are considered past due.





Long-Lived  Assets  In  accordance with SFAS No. 144 Accounting for the Impairment or Disposal of  Long-Lived Assets, the Company recognizes impairment losses on  long-lived assets used in operations when indicators of impairment are present  and the undiscounted cash flows over the life of the assets are less than the  assets carrying amount. If an impairment exists, the amount of such impairment  is calculated





43





---



Back to Contents





based on projections of future discounted  cash flows. These projections use a discount rate and terminal value multiple  that would be customary for evaluating current natural gas and oil services  company transactions.





Goodwill  and Intangible Assets3⁄4Goodwill is stated at cost.  The Company implemented SFAS No. 142, Goodwill and  Other Intangible Assets on January 1, 2002 and ceased amortization  of goodwill and indefinite-lived intangible assets.  SFAS No. 142 requires an assessment of potential impairment upon  adoption and annually thereafter in the month it elected to perform its  analysis or more frequently if events or circumstances indicate that an  impairment may have occurred.   Intangible assets are stated at cost and are amortized over their  estimated useful lives.  Intangible  assets are subject to an assessment of potential impairment whenever events or  circumstances indicate that an impairment may have occurred.





The  Company considers external factors in making its assessment. Specifically,  changes in oil prices and other economic conditions surrounding the industry,  consolidation within the industry, competition from other natural gas and oil  well services providers, the ability to employ and maintain a skilled  workforce, and other pertinent factors are among the factors that could lead  its management to reassess the reliability of its goodwill and intangible  assets.





Property  and Equipment   Property and equipment are carried at original cost less applicable  depreciation.  Depreciation is  recognized on the straight line basis over lives ranging from two to ten years.  Major renewals and improvements are  capitalized and depreciated over each assets estimated remaining useful life.  Maintenance and repair costs are charged to expense as incurred. When assets  are sold or retired, the remaining costs and related accumulated depreciation  are removed from the accounts and any resulting gain or loss is included in  income. Property and equipment held and used by the Company is reviewed for  impairment whenever events or changes in circumstances indicate that the  carrying amounts may not be recoverable. The Company estimates the future  undiscounted cash flows of the affected assets to determine the recoverability  of carrying
amounts.





Revenue  Recognition3⁄4The Company derives revenues from performance  of services and the sale of equipment.   Service revenues are recognized at the time services are performed.  The Companys sales are not usually subject  to rights of return, and historically, sales returns have not been significant.  Revenue related to equipment sales is recognized when the equipment has been  shipped and title and risk of loss has been passed to the customer.  Deferred revenue, net of deferred related  cost of sales, is recorded as unearned revenues in the Companys balance sheet  based on the relative days completed on the job to total required.





Income  Taxes  The Company  accounts for income taxes under an asset and liability approach that requires  the recognition of deferred tax assets and liabilities for the expected future  tax consequences of events that have been recognized in its financial  statements or tax returns.  In  estimating future tax consequences, the Company generally considers all  expected future events other than enactments of changes in tax laws or rates.





Off-Balance Sheet Arrangements





The  Company had no off-balance sheet arrangements as of December 31, 2004 and 2005.





|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------




From  time to time, the Company holds financial instruments comprised of debt  securities and time deposits.  All such  instruments are classified as securities available for sale.  The Company does not invest in portfolio  equity securities, or commodities, or use financial derivatives for trading or  hedging purposes.  The Companys debt  security portfolio represents funds held temporarily pending use in its  business and operations.  The Company  manages these funds accordingly.  The  Company seeks reasonable assuredness of the safety of principal and market  liquidity by investing in rated fixed income securities while, at the





44





---



Back to Contents





same time, seeking to achieve a favorable  rate of return.  Its market risk  exposure consists of exposure to changes in interest rates and to the risks of  changes in the credit quality of issuers.   The Company typically invest in investment grade securities with a term  of three years or less.  The Company  believes that any exposure to interest rate risk is not material.  At December 31, 2005, the Company held no  investments.





Under  the Companys Credit Agreements with GECC, it is subject to market risk  exposure related to changes in the prime interest rate.  Assuming the Companys level of borrowings  from GECC at December 31, 2005 remained unchanged throughout 2006, if a 100  basis point increase in interest rates under the Credit Agreements from rates  in existence at December 31, 2005 prevailed throughout the year 2006, it would  increase the Companys 2006 interest expense by approximately $552,000.  The foregoing does not give effect to any  repayment of outstanding indebtedness under the Companys Credit Agreements out  of the net proceeds it may realize in its proposed public offering.





|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------




Financial  Statements of the Company meeting the requirements of Regulation S-K are filed  on the pages of this Item 8 of this Annual Report on Form 10-K, as listed  below:





| | Report of    Independent Registered Public Accounting Firm                                  | F-1
| | ------------------------------------------------------------------------------------------- | ---
| |                                                                                             |    
| | Balance    Sheets as of December 31, 2005, and 2004                                         | F-2
| |                                                                                             |    
| | Statements    of Operations for the Years Ended December 31, 2005, 2004 and 2003            | F-3
| |                                                                                             |    
| | Statements    of Stockholders Deficit for the Years Ended December 31, 2005, 2004, and 2003 | F-4
| |                                                                                             |    
| | Statements    of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003           | F-5
| |                                                                                             |    
| | Notes to    Financial Statements                                                            | F-7




|Item 9. | Changes in and Disagreements With Accountants on Accounting    and Financial Disclosure
|------- | ---------------------------------------------------------------------------------------




There  were no changes in the Companys independent registered public accountants  during the Companys fiscal years ended December 31, 2005 and 2004.





|Item 9A. | Controls    and Procedures
|-------- | --------------------------




Under  the supervision and with the participation of the Companys management,  including William Jenkins, its President and Chief Executive Officer, and  Ronald Whitter, its Chief Financial Officer, the Company has evaluated the  effectiveness of the design and operation of its disclosure controls and procedures  as of the end of the period covered by this report, and, based on their  evaluation, Mr. Jenkins and Mr. Whitter have concluded that these controls and  procedures are effective. There were no significant





45





---



Back to Contents





changes in the Companys internal controls or  in other factors that could significantly affect these controls subsequent to  the date of their evaluation.





Disclosure  controls and procedures are the Companys controls and other procedures that  are designed to ensure that information required to be disclosed by the Company  in the reports that it files or submits under the Exchange Act are recorded,  processed, summarized and reported, within the time periods specified in the  Securities and Exchange Commissions rules and forms. Disclosure controls and  procedures include, without limitation, controls and procedures designed to  ensure that information required to be disclosed by the Company in the reports  that it files or submits under the Exchange Act are accumulated and  communicated to its management, including Mr. Jenkins and Mr. Whitter, as  appropriate to allow timely decisions regarding required disclosure.





|Item 9B. | Other Information
|-------- | -----------------




No  information is required to be disclosed in response to this Item 9B.





46





---



Back to Contents





PART III





|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------




The  current and proposed members of the Companys board of directors and the  Companys current executive officers and each of their respective ages and  positions are as follows:


| | Name                     |  | Age |  | Position                                                       
| | ------------------------ |  | --- |  | ---------------------------------------------------------------
| |                          |  |     |  |                                                                
| | William L. Jenkins       |  | 52  |  | Chairman, President and Chief Executive Officer                
| | Robert J. McNally        |  | 35  |  | Director, Executive Vice President of Operations and    Finance
| | Ron E. Whitter           |  | 44  |  | Chief Financial Officer                                        
| | Charles E. Underbrink(1) |  | 51  |  | Director                                                       
| | James H. Harrison(1)     |  | 37  |  | Director                                                       
| |                          |  |     |  |                                                                
| | Proposed    Directors:   |  |     |  |                                                                
| | Gerald M. Hage(2)        |  | 58  |  |                                                                
| | Robert L. Hollier(2)     |  | 63  |  |                                                                
| | John T. McNabb, II(2)    |  | 61  |  |                                                                




|   
|---
|(1)
|(2)




Set  forth below is the description of the backgrounds of the Companys directors,  executive officers and proposed directors.





William  L. Jenkins has  been the Companys Chairman, President and Chief Executive Officer since March  1989.  From 1973 until 1980, Mr. Jenkins  held a variety of field engineering and training positions with Welex - A  Halliburton Company, in the South and Southwest.  From 1980 until March 1989, Mr. Jenkins worked with Triad Oil  & Gas, Inc., as a consultant, providing services to a number of natural gas  and oil companies.  During that time,  Mr. Jenkins was involved in the organization of a number of drilling and oil  field service companies, including a predecessor of the Companys, of which he  served as Secretary/Treasurer until 1988.   Mr. Jenkins has over 30 years of experience in the oil field service  business.





Robert  J. McNally is the  Companys Executive Vice President of Operations and Finance and has been  employed by the Company and has served as a Director since January 2006.  From 1994 through 2000, Mr. McNally held a  variety of field engineering, sales and marketing positions with Schlumberger  Ltd.  From July of 2000 through the end  of 2005, Mr. McNally was an Associate and then Vice President of Simmons &  Company International, a leading energy investment bank, in its corporate  finance department, primarily providing investment banking and corporate  finance advisory services to oilfield service companies.  As an employee of Simmons & Company  International, Mr. McNally served as the Companys primary financial  advisor from 2001 through 2005.





Ron  E. Whitter has been the Companys Chief Financial  Officer since August 1999.  Prior to  joining the Company, Mr. Whitter was employed by Oil States as Divisional  Controller.  From 1987 until 1993, Mr.  Whitter was employed by Norfolk Energy as Financial Accounting Manager and was  employed by Transco Energy from 1985 to 1987.   Mr. Whitter is a C.P.A.





Charles  E. Underbrink was  elected a Director in April, 1998.  For  more than the past five years, he has been employed as the Chairman of St.  James Capital Corp. and SJMB, L.L.C., Houston based merchant





47





---



Back to Contents





banking firms.  From the inception of St. James Capital Corp. and SJMB, L.L.C.  until March 1, 2001 he also served as the Chief Executive Officer of each.





James  H. Harrisonwas elected a Director in March, 2003.  He is the Chief Financial Officer of  St. James Capital Corp. and SJMB, L.L.C., Houston-based merchant banking  firms.  Prior to joining St. James  Capital Corp. and SJMB, L.L.C. in January of 1998, he served as a manager in  the Assurance division of Ernst & Young LLP, a national public accounting  firm.





Proposed Directors:





Gerald  M. Hageis expected to be elected as a Director prior  to the closing of the Companys proposed public offering.  Mr. Hage has been an independent oil service  consultant since 1988.  From 1994 to  1998, he served as Chief Executive Officer and Chairman of Phoenix Energy Services,  a provider of maintenance, inspection and emergency services to the natural gas  industry.  From 1988 to 1994, he was  President and Chief Executive Officer of Total Energy Services, a drilling and  production-services company.  From 1980  to 1988, Mr. Hage served as President of certain affiliates of Baker Hughes,  Inc.  From 1971 to 1980, he was Vice  President, Manufacturing of International Harvester.





Robert  L. Hollier is  expected to be elected as a Director prior to the closing of the Companys  proposed public offering.  From February  2004 until November 2005, Mr. Hollier was a Partner and Director of Lone Star  Fasteners, L.P., a manufacturer of bolting products for the energy  industry.  From August 2002 through  December 2005, Mr. Hollier was a Partner and Executive Director of Monosep,  Inc., a provider of water process and separation technology equipment and  services.  In August 1979, Mr. Hollier  founded OSCA, Inc., a Gulf of Mexico region provider of pressure pumping  services, completion tools and completion fluids, and served as its President  and Chief Executive Officer until June 2002.   From 1970 to 1979, he served as Vice President and Chief Operating  Officer of Gulf Coast Drilling Fluids, Inc.   From 1963 to 1970, he was employed by
Amoco Production Company.





John  T. McNabb, II is  expected to be elected as a Director prior to the closing of the Companys  proposed public offering.  Since March  1992, Mr. McNabb has served as Chairman of Growth Capital Partners, L.P., a  merchant banking firm that provides financial advisory services to middle  market companies throughout the United States.   And since 2001, he has served as a Principal of Southwest Mezzanine  Investments, the investment affiliate of Growth Capital Partners, L.P.  Prior thereto, Mr. McNabb was a Managing  Director of Bankers Trust New York Corporation and a board member of BT  Southwest, Inc., the southwest U.S. merchant banking affiliate of Bankers  Trust.  Mr. McNabb has also been  employed by the merchant banking and corporate finance affiliates of The Prudential  Insurance Company of America and by the Exploration and Production Division of
Mobil Oil Corporation.





Composition of the Board After the Companys Proposed Public  Offering





Currently,  the St. James Partnerships have the authority to designate one person to serve  on the Companys board.  However, the  Company and the St. James Partnerships have agreed to terminate this agreement  and, prior to the closing of the Companys proposed public offering, the  Company expects to elect Messrs. Hage, Hollier and McNabb to its board to serve  as independent directors.  Messrs.  Underbrink and Harrison are expected to resign as directors prior to the  closing of the Companys proposed public offering.





Committees





Audit  Committee. The Companys board of directors has  appointed an audit committee consisting of Messrs. Jenkins, Underbrink and  Harrison.  The Companys audit  committee, among other things, meets with the Companys independent registered  public accounting firm to review its accounting policies, internal controls and  other accounting and auditing matters; approves the engagement of its  independent registered public accounting firm; and reviews the engagement and  fees relating to the annual audit, special audit work and non-audit services  which may be recommended or required by the independent registered





48





---



Back to Contents





public accounting firm.  The  Companys securities are not currently listed on a registered national  securities exchange or in an automated inter-dealer quotation system and, accordingly,  it is not subject to the listing standards imposed by rules adopted under the  U.S. Securities Exchange Act of 1934, as amended.





Prior to  the closing of the Companys proposed public offering, the Company expects that  the current members of its audit committee will resign from its audit committee  and that its Board of Directors will appoint Messrs. Hage, Hollier and McNabb,  who are expected to be elected Directors prior to the closing of the Companys  proposed public offering, to its audit committee.  Each of such persons is expected to be determined to be an  independent director under the rules of the Nasdaq Stock Market.  The Company also intends to adopt a new  audit committee charter, under which its audit committees responsibilities  will include, among other responsibilities, (i) the appointment, compensation  and oversight of the work performed by its registered public accounting firm,  (ii) the adoption and assurance of compliance with a pre-approval policy with  respect to
services provided by its registered public accounting firm, at least  annually, (iii) the review of a report by its registered public accounting firm  as to relationships between the registered public accounting firm and the  Company so as to assure the independence of its registered public accounting  firm, (iv) the review of the annual audited and quarterly financial statements  with the Companys management and its registered public accounting firm, and  (v) discuss with its  registered public accounting firm their required disclosure relating to the  conduct of the audit, and (vi) implementation of and compliance with the  Sarbanes-Oxley Act of 2002.





Nominating  Committee.  Prior to the closing of the Companys  proposed public offering, the Company will establish a nominating committee  consisting entirely of independent directors.   The Company expects the board to appoint Messrs. Hage, Hollier and  McNabb to serve on this committee.  The  principal duty of the nominating committee is to recommend to the board of directors  proposed nominees for election to the board of directors by the stockholders at  annual meetings, including an annual review as to the renominations of  incumbents and proposed nominees for election by the board of directors to fill  vacancies that occur between stockholder meetings.  It is intended that the Companys board of directors will adopt  prior to the closing of the Companys proposed public offering a written  charter for the nominating committee.





Compensation  Committee.Prior to the closing of the Companys  proposed public offering, the Company will establish a compensation committee  comprised entirely of independent directors.   The Company expects the board to appoint Messrs. Hage, Hollier and  McNabb to serve on this committee.  The  compensation committee will administer the Companys stock plans and incentive  compensation plans, including its 2000 Stock Incentive Plan, and in this  capacity will make all option grants or awards to the Companys directors and  employees under such plans. In addition, the compensation committee will be  responsible for making recommendations to the board of directors with respect  to the compensation of its chief executive officer and its other executive  officers and for establishing compensation and employee benefit policies.  It is intended that the
Companys board of  directors will adopt prior to the closing of the Companys proposed public  offering a written charter for the compensation committee.





Compliance with Section 16(a) of the Securities Exchange Act  of 1934





Section  16(a) of the Securities Exchange Act of 1934 requires the Companys officers  and Directors, and persons who beneficially own more than ten percent (10%) of a  registered class of its equity securities, to file reports of ownership and  changes in ownership with the SEC.   Officers, directors and beneficial owners of more than ten percent (10%)  of the Companys Common Stock are required by SEC regulations to furnish the  Company with copies of all Section 16(a) forms that they file.  To the best of the Companys knowledge,  based solely on a review of such reports as filed with the SEC, all such  persons have complied with such reporting requirements during the Companys  most recent fiscal year.





49





---



Back to Contents





Code of  Ethics





The  Company has adopted a Code of Ethics that applies to its principal executive  officer and principal financial and accounting officer.  A copy of the Companys Code of Ethics was  filed as an exhibit to its Annual Report on Form 10-K for the year ended  December 31, 2003.





|Item 11. | Executive Compensation
|-------- | ----------------------




Executive Compensation - General





The  following table sets forth the compensation paid or awarded to the Companys  President and Chief Executive Officer and each other executive officer who  received compensation exceeding $100,000 during 2005 for all services rendered  the Company in each of the years 2003, 2004 and 2005.





Summary Compensation Table





|                            |      |                        |        |                           |       |                           |                              |   |                                  |  |                                |   |  |  |   |  |  |   |  |   |           |       
|--------------------------- | ---- | ---------------------- | ------ | ------------------------- | ----- | ------------------------- | ---------------------------- | - | -------------------------------- |  | ------------------------------ | - |  |  | - |  |  | - |  | - | --------- | ------
|Name and Principal Position |      | Annual    Compensation |        | Long-Term    Compensation |       | All Other    Compensation |                             
|                            |      |                        |        |                          
|                            | Year |                        | Salary |                           | Bonus |                           | Other    Annual Compensation |   | Securities    Underlying Options |  | Long-Term    Incentive Payouts |  
|                            |      |                        |        |                           |       |                           |                              |   |                                  |  |                                |   |  |  |  
|William L. Jenkins          |      |                        | 2005   |                           | $     | 350,000                   |                              | $ | 171,699                          |  |                                |  |  |  |  |  |  |  |  | $ | 1,536,604 | (1)(2)
|President                   |      |                        | 2004   |                           | $     | 350,000                   |                              | $ | 147,544                          |  |                                |  |  |  |  |  |  |  |  | $ | 66,384    | (1)(3)
|                            |      |                        | 2003   |                           | $     | 361,667                   |                              | $ | 73,555                           |  |                                |  |  |  |  |  |  |  |  | $ | 86,607    | (1)(3)
|Ron E. Whitter              |      |                        | 2005   |                           | $     | 135,000                   |                              |   |                                 |  |                                |  |  |  |  |  |  |  |  | $ | 134,000   | (4)(5)
|Chief Financial             |      |                        | 2004   |                           | $     | 128,333                   |                              |   |                                 |  |                                |  |  |  |  |  |  |  |  | $ | 9,000     | (4)   
|Officer                     |      |                        | 2003   |                           | $     | 102,042                   |                              | $ | 16,667                           |  |                                |  |  |  |  |  |  |  |  | $ | 9,000     | (4)   




|   
|---
|(1)
|(2)
|(3)
|(4)
|(5)




Stock Option  Exercises and Holdings at December 31, 2005





The  following table provides information with respect to the above named executive  officers regarding options to purchase shares of the Companys common stock  held at December 31, 2005.  Such  officers did not exercise any options during 2005.





50





---



Back to Contents





|                   |             |                                   |               |                   |             |     |               | Number of    Unexercised    Options at December 31, 2005 |         | Value of    Unexercised    In-the-Money Options    At December 31, 2005 (1) | 
|------------------ | ----------- | --------------------------------- | ------------- | ----------------- | ----------- | --- | ------------- | -------------------------------------------------------- | ------- | --------------------------------------------------------------------------- | 
|Name               |             | Shares    Acquired    on Exercise |               | Value    Realized |             |     |               |                                                          |         |                                                                             | 
|                   | Exercisable |                                   | Unexercisable |                   | Exercisable |     | Unexercisable |                                                         
|                   |             |                                   |               |                   |             |     |               |                                                          |         |                                                                             | 
|William L. Jenkins |             |                                   | -0-           |                   |             | -0- |               |                                                          | 300,000 |                                                                             | 
|Ron E. Whitter     |             |                                   | -0-           |                   |             | -0- |               |                                                          | 40,000  |                                                                             | 




|   
|---
|(1)




No  options were granted to the above named executive officers during 2005.





Other Plans





The  Company has not adopted any other long-term incentive plans or defined benefit  or actuarial pension plans.





Compensation of Directors





The  Companys non-employee Directors are authorized to receive compensation in the  amount of $5,000 each quarter.  In  addition, its Directors are reimbursed for their out-of-pocket expenses in  attending meetings of the Board of Directors and committees of the Board.





Under  the Companys 2000 Stock Incentive Plan, on the date of each annual meeting of  stockholders held after January 1, 2000, each non-employee Director  automatically receives an option grant for 5,000 shares on the date such person  joins the Board of Directors and each individual who is to continue to serve as  a non-employee Director is automatically granted a Non-Statutory Option to  purchase 500 shares of the Companys common stock, provided such individual has  served as a non-employee Board member for at least six (6) months.  No options were granted during 2005 under  the automatic grant provisions of the Plan because no annual meeting of  stockholders was held.  Upon his  election to the Board in February 2003, Mr. Harrison declined the automatic  option grant of 5,000 shares.





Employment Agreements





The  Company has entered into an employment agreement with Mr. William L. Jenkins,  its President and Chief Executive Officer, the term of which was extended in  March 2005 and December 2005 and currently expires on April 1, 2009.  Under the agreement, Mr. Jenkins serves as  President, Chief Executive Officer and a Director.  Mr. Jenkins receives a base salary of not less than $350,000 per  year and was granted warrants to purchase 250,000 shares of the Companys common  stock at an exercise price of $7.50 per share.   If the Company achieves, during any calendar quarter during the period  of Mr. Jenkins employment, a ratio of EBITDA to sales of 20% or more, Mr.  Jenkins will be paid a bonus for the quarter equal to 1% of the Companys  EBITDA during the quarter.  In the event  of a Change of Control, as defined, the Company agrees that the employment  agreement
will terminate and Mr. Jenkins will be paid a sum equal to three  times the compensation paid to Mr. Jenkins during the 12 months preceding the  Change of Control.  A Change of Control  is defined in the agreement as any of the following occurring after January 1,  2005: any person or group of persons acquiring 20% or more of the Companys  outstanding shares of voting capital stock, the sale of more than 25% of its  assets in a single or series of related transactions, a merger of the Company  with any other person or firm, during any period of 12 consecutive calendar  months, the individuals who were Directors at the beginning of such period  (including Directors whose election or nomination for election was approved by  at least two-thirds of the Directors then in office who were Directors at the  beginning of the period or whose election was so approved) cease for any reason  other than death or disability to constitute a majority of the Directors then  in office, St. James Capital Corp.
ceases to be the general partner, managing  partner or otherwise ceases to control St. James





51





---



Back to Contents





Capital Partners, L.P. or SJMB, L.L.C. ceases to be the general partner, managing partner or otherwise ceases to control SJMB, L.P.  On December 12, 2005, St. James Capital Corp. resigned as general partner of St. James Capital Partners, L.P.  As a result, Mr. Jenkins was entitled  to terminate his employment agreement and receive a payment of $1,535,388 under  the change of control provisions of the employment agreement.  On December 16, 2005, Mr. Jenkins and the  Company entered into an amendment to his employment agreement whereby Mr.  Jenkins agreed not to terminate his employment as a result of the change of the  general partner of St. James Capital Partners, L.P. in consideration of the  extension of the term of his employment to April 1, 2009.  In addition, the Company agreed to pay Mr.  Jenkins the $1,535,388 within three days of demand by Mr. Jenkins provided he  agreed not to make such a demand prior to January 1, 2006. 


It is expected that the $1,535,388 will be  paid to Mr. immediately prior to the closing of the Companys proposed public  offering.





In  the event of Mr. Jenkins death, subject to any restrictions contained in the  Companys credit agreement with GECC, the Company agreed to repurchase the  shares held by Mr. Jenkins at the fair market value of the shares and the  options held by Mr. Jenkins for the difference between the fair market value  and the option exercise price.  Under  the agreement, the fair market value is the average of the mid-point between  the bid and asked prices for its common stock for the 20 trading days preceding  death.  In the event of a sale of the  Company or a significant division thereof, the Company agreed to pay to Mr.  Jenkins a bonus equal to 1% of the gross sale proceeds or gross value of any  stock received, subject to a maximum payment of $500,000.  The employment agreement further provides  that, while in the Companys employ and thereafter, Mr. Jenkins will not
divulge or use any of the Companys confidential information and, during the  term of his employment, will not engage in activities in competition with the  Company.





The  Company agreed to keep in full force and effect, and Mr. Jenkins is entitled to  participate in, all employee benefit plans in effect on the date of the  agreement or other arrangements with at least equivalent benefits.  Mr. Jenkins is also entitled to the same  benefits package as the Companys other employees.





On  January 18, 2006, the Company entered into an employment agreement with Mr.  Robert McNally, effective January 1, 2006, to serve as the Companys Executive  Vice President and a Director for an initial term expiring December 31, 2008,  subject to automatic extensions thereafter for additional terms of one year  unless either party shall have given notice not less than 30 days prior to such  expiration that the term will not be extended.   Under the agreement, Mr. McNally receives a base salary of not less than  $300,000 per year and was granted an option to purchase 150,000 shares of the  Companys common stock exercisable in three equal annual installments beginning  on January 18, 2007 at an exercise price of $7.50 per share.  If the Company achieves, during any calendar  quarter during the period of Mr. McNallys employment, commencing with the  quarter ending March
31, 2006, a ratio of EBITDA to sales of 20% or more, Mr.  McNally will be paid a bonus for the quarter equal to 0.5% of the Companys  EBITDA during the quarter with an initial annual limitation on such payment of  $200,000, subject to increase of the annual limitation at the discretion of the  Companys chief executive officer and Board of Directors.  Mr. McNally received an execution bonus of  $50,000 upon execution of the agreement.





In  the event of a Change of Control, as defined in the employment agreement with  Mr. McNally, or in the event either Mr. McNally or Mr. Jenkins should not be  re-elected to the Companys Board of Directors at any shareholders meeting or  be required to resign pursuant to the Companys By-laws, Mr. McNally will have  the option to terminate the agreement and Mr. McNally will be paid a sum equal  to three times the compensation paid to Mr. McNally during the 12 months  preceding the Change of Control.   However, if a Change of Control occurs on or before December 31, 2006,  Mr. McNally is to be paid $1.5 million, which amount is equal to three times  the sum of Mr. McNallys maximum salary and bonus for the year 2006.  A Change of Control is defined in the  agreement as any of the following occurring after January 1, 2006: any person or  group of persons acquiring 20% or
more of the Companys outstanding shares of  voting capital stock, the sale of more than 25% of the Companys assets in a  single transactions or series of related transactions, a merger of the Company  with any other person or firm, or during any period of 12 consecutive calendar  months, the individuals who were Directors at the beginning of such period  (including





52





---



Back to Contents





Directors whose election or nomination for  election was approved by at least two-thirds of the Directors then in office  who were Directors at the beginning of the period or whose election was so  approved) cease for any reason other than death or disability commencing  January 1, 2006 to constitute a majority of the Directors then in office.  A Change of Control shall not be deemed to  occur as a result of the Companys proposed public offering of the Companys  securities.





The  employment agreement with Mr. McNally further provides that, while in the  Companys employ and thereafter, Mr. McNally will not divulge or use any of the  Companys confidential information and, during the term of his employment, will  not engage in activities in competition with the Company.  The Company agreed to keep in full force and  effect, and Mr. McNally is entitled to participate in, all employee benefit  plans in effect on the date of the agreement or other arrangements with at  least equivalent benefits.  Mr. McNally  is also entitled to the same benefits package as the Companys other employees.





The  Company entered into an employment agreement effective September 1, 2004 with  Mr. Ron E. Whitter, the Companys Chief Financial Officer and an amendment  thereto on March 27, 2006.  Mr.  Whitters compensation under the agreement as amended is $235,000 per year commencing  January 1, 2006.  The employment  agreement included a one-time signing bonus of $25,000 in 2004.  Mr. Whitters compensation is to be reviewed  on each anniversary date of the agreement for possible adjustments in line with  the policies and practices of the Companys managers and officers.  In addition to his salary, Mr. Whitter  receives a $750 monthly car allowance, the same benefits package as the  Companys other employees, including company-paid family health coverage so  long as the Companys senior executives receive the same benefit.  The agreement restricts Mr. Whitter
from  being employed or associated with any person engaged in the operation of a  wireline or directional drilling business in the general business area of the  Company for the duration of his employment.   The agreement as amended expires on December 31, 2008.  The amendment to the employment agreement  provides that subject to the closing of the Companys proposed public offering,  the Company will pay to Mr. Whitter a success bonus of $150,000.  Upon payment of the success bonus prior to  September 30, 2006, a provision in the agreement whereby in the event of a  Change of Control of the Company, the Company will pay Mr. Whitter $125,000 is  deleted from the agreement.  Under the  amendment, in the event the success bonus payment is not made on or prior to  September 30, 2006, the Companys agreement to make the success bonus payment  is eliminated from the agreement and the Change of Control provisions of the  agreement are modified to provide for a payment of
$150,000 to Mr. Whitter upon  a Change of Control.  Under the terms of  the Agreement as amended, no more than one Change of Control payment is to be  made to Mr. Whitter after September 30, 2006.   A Change of Control is defined under the agreement the same as under  Mr. Jenkins agreement, except a Change of Control is also triggered if  Mr. Jenkins ceases to be a Director or the Companys Chief Executive Officer or  President.  On December 12, 2005,  St. James Capital Corp. resigned as general partner of St. James Capital  Partners, L.P.  As a result, under the  terms of the agreement prior to its amendment, Mr. Whitter received a  payment of $125,000 as a consequence of the change of control provisions of the  employment agreement.





In  the event of a sale of the Company or a sale of substantially all of its  assets, the Company shall either (i) cause the purchaser to assume its rights  and obligations under the agreement, or (ii) terminate the agreement and pay to  Mr. Whitter an early termination fee equal to fifty (50%) percent of the  compensation due to Mr. Whitter during the remainder of the term of the  agreement.





53





---



Back to Contents





|Item 12. | Security Ownership of Certain Beneficial Owners and    Management and Related    Stockholder    Matters .
|-------- | ---------------------------------------------------------------------------------------------------------




The  following table sets forth certain information regarding the beneficial  ownership of the Companys common stock as of March 31, 2006 (a) by each person  who is known by the Company to own beneficially more than five percent (5%) of  the Companys common stock, (b) by each of the Companys Directors and named  executive officers, and (c) by all Directors and executive officers as a  group.  As of March 31, 2006, the Company  had 2,379,464  shares of common stock outstanding.


|Name and Address (1)(2)                                                                                                                            |  | Number of    Shares    Owned |           | Percentage    of    Outstanding Shares(3) | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | --------- | ----------------------------------------- | 
|                                                                                                                                                   |  |                              |           |                                           | 
|William L. Jenkins(4)                                                                                                                              |  |                              | 370,825   |                                           | 
|Robert J. McNally                                                                                                                                  |  |                              |          |                                           | 
|Ron E. Whitter(5)                                                                                                                                  |  |                              | 40,000    |                                           | 
|Charles E. Underbrink(6)c/o  St. James Capital Corp.    4299 San Felipe Suite     120 Houston, TX  77027                                           |  |                              | 8,106,670 |                                           | 
|James H. Harrison(7)c/o  St. James Capital Corp.     4299 San Felipe - Suite 120     Houston, TX  77027                                            |  |                              | 7,266,750 |                                           | 
|SJMB, L.P. (8)c/o SJMB,    L.L.C., general partner     4299 San Felipe - Suite 120 Houston, Texas  77027                                           |  |                              | 7,266,750 |                                           | 
|Samuel J. Brown, IV(9)St. James Capital Partners, L.P.     c/o Overcup Capital, L.L.C., general partner    12202 Overcup     Houston, Texas  77024 |  |                              | 2,072,749 |                                           | 
|Bendover Company(10)Alan W. Mann    M. Dale Jowers    1053 The Cliffs Blvd.     Montgomery, TX  77356                                              |  |                              | 331,424   |                                           | 
|All Directors and Officers as a Group (5 persons)                                                                                                  |  |                              | 8,517,496 |                                           | 




54





---



Back to Contents





|    
|----
|(1) 
|(2) 
|(3) 
|(4) 
|(5) 
|(6) 
|(7) 
|(8) 
|(9) 
|(10)




55





---



Back to Contents





Securities Authorized for Issuance Under Equity Compensation  Plans





The  Company has three equity compensation plans for its employees, Directors and  consultants pursuant to which options, rights or shares may be granted or  issued.  See Note 15 to the Notes to  Financial Statements for further information on the material terms of these  plans.





The  following table provides information as of December 31, 2005 with respect to  compensation plans (including individual compensation arrangements), under  which securities are authorized for issuance aggregated as to (i) compensation  plans previously approved by stockholders, and (ii) compensation plans not  previously approved by stockholders:





Equity Compensation Plan Information





|                                                              |  | (a)                                                                                               |           | (b)                                                                            |   | (c)                                                                                                                                               | 
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------ | - | ------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Plan Category                                                 |  | Number of    securities to be issued upon exercise of outstanding options, warrants and    rights |           | Weighted-average    exercise price of outstanding options, warrants and rights |   | Number of    securities remaining available for future issuance under equity compensation    plans (excluding securities reflected in column (a)) | 
|                                                              |  |                                                                                                   |           |                                                                                |   |                                                                                                                                                   | 
|Equity compensation plans approved by security    holders     |  |                                                                                                   | 1,880,000 |                                                                                | $ | 7.50                                                                                                                                              | 
|Equity compensation plans not approved by security    holders |  |                                                                                                   | -0-       |                                                                                |   |                                                                                                                                                   | 
|Total                                                         |  |                                                                                                   | 1,880,000 |                                                                                | $ | 7.50                                                                                                                                              | 




|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------




Commencing  in June 1997 through February, 1999, the Company entered into a series of  transactions whereby it sold to the St. James Partnerships, $19.4 million  principal amount of its convertible promissory notes (Convertible Notes) and  common stock purchase warrants (Warrants) to purchase an aggregate of  3,032,028 shares of its common stock for an aggregate consideration of $19.4  million.  The foregoing excludes an  additional $3.0 million borrowed in June 1997 that was repaid in October  1997.  Of these Convertible Notes and  Warrants, $1.0 million of Convertible Notes and Warrants to purchase 180,000  shares of common stock were subsequently transferred by one of the St. James  Partnerships in October 1998 to a person not affiliated with the Company.





In  December 1999 and February 2000, the Company sold to SJMB L.P., one of the St.  James Partnerships, certain other non-affiliated investors, and Mr. Underbrink,  who participated with the St. James Partnerships in the transaction, an  additional $7.0 million principal amount of its Convertible Notes and 2,870,000  Warrants.  The St. James Partnerships  originally acquired in the transaction $750,000 principal amount of the $7.0  million of the Convertible Notes and 307,500 Warrants.  Mr. Underbrink acquired in the transaction  $750,000 principal amount of Convertible Notes and 307,500 Warrants.





56





---



Back to Contents





On  various dates subsequent to February 2000, the St. James Partnerships purchased  from third parties an additional $1,200,000 principal amount of Convertible  Notes and 369,000 Warrants.





Subsequent  to its purchase of the Convertible Notes, on December 14, 2000, SJMB, L.P., one  of the St. James Partnerships, converted $1,750,000 principal amount of a  Convertible Note and $2,013,111 of accrued interest on a Convertible Note into  501,748 shares of the Companys common stock at a conversion price of $7.50 per  share.





During  the years ended December 31, 2005 and 2004, $3.5 million and $3.9 million,  respectively, of interest accrued on Convertible Notes owing by the Company to  the St. James Partnerships.  At December  31, 2005, the St. James Partnerships held an aggregate of $35,019,173 principal  amount of and accrued interest on the Companys Convertible Notes and 4,075,528  of the Companys Warrants.





The  Underbrink Family Entities held as of December 31, 2005, $1,677,375 principal  amount of Convertible Notes and $41,529 of accrued interest on  Convertible Notes which amounts are convertible into an aggregate of 229,187  shares. On November 21, 2005, the Underbrink Family Entities converted  $1,428,000 of accrued interest on Convertible Notes into 190,400 shares of the  Companys common stock at a conversion price of $7.50 per share.  During  the years ended December 31, 2005 and 2004, approximately $251,606 of interest  accrued each year on the Convertible Notes owing by the Company to the  Underbrink Family Entities.





In  connection with and as a condition to entering into the Companys Restated  Credit Agreement with GECC in November 2004, the holders of $23.1 million  principal amount of Convertible Notes, including all of the principal amount of  Convertible Notes owing to the St. James Partnerships and to the Underbrink  Family Entities, agreed with the Company to extend the maturity date of the  Convertible Notes from December 31, 2004 to February 13 and February 14,  2008.  In addition, in connection with  entering into the Restated Credit Agreement with GECC, the Company repaid approximately  $942,000 principal amount of the Convertible Notes.  None of these payments were to the St. James Partnerships or to  the Underbrink Family Entities.  As a  condition to extending the maturity date of the notes, the Company extended to  December 31, 2009 the expiration date of 6,605,119 Warrants,
including the  4,075,528 Warrants held by the St. James Partnerships and 1,057,091 Warrants  held by the Underbrink Family Entities.





In  September 2001, August 2004 and November 2004 an aggregate of $1,647,625 of the  aggregate principal balance of Convertible Notes was repaid, leaving a  remaining aggregate principal balance at December 31, 2005 of $5,352,375 on the  $7.0 million of Convertible Notes issued between December 1999 and February  2000 which principal amount is convertible into an aggregate of 713,650 shares  of common stock.  None of these payments  were to the St. James Partnerships or to the Underbrink Family Entities.





On  October 6, 2005, in connection with a recapitalization of the Company, the  Company entered into Recapitalization Agreements (the Recapitalization  Agreements) with each of the St. James Partnerships, who held, as of December  31, 2005, an aggregate of $35,019,173 principal amount of and accrued interest  on the Companys Convertible Notes, 4,075,528 Warrants and 501,748 shares of  common stock, and with the Underbrink Family Entities, who held, as of December  31, 2005, an aggregate of $1,718,904 principal amount of and accrued interest  on the Companys Convertible Notes, and 602,347 shares of the Companys common  stock.





The Recapitalization Agreements with the St.  James Partnerships and the Underbrink Family Entities provide that such  entities will convert, at the conversion price of $7.50 per share, the  principal of and all accrued interest on their Convertible Notes into shares of  the Companys common stock (the Conversion Shares) and sell to the Company  those Conversion Shares at the closing of the Companys proposed public  offering. The price at which the shares are to be purchased by the Company is  the price per share equal to the net price per share the Company receives in  its proposed public offering, after deducting underwriting discounts and the  underwriters expenses and fees, provided the agreement of the St. James  Partnerships and the Underbrink Family Entities to sell the shares is subject  to the net price per share to be





57





---



Back to Contents





received by them for each Conversion Share  being not less than $7.50 per share (subject to adjustment for stock splits,  divisions, reverse stock splits or share combinations). In addition the shares  that the St. James Partnerships agreed to sell to the Company includes 501,748  shares of common stock held by SJMB, L.P.





In  the Recapitalization Agreement between the Company and the Underbrink Family  Entities, the Underbrink Family Entities exchanged, effective October 6, 2005,  their 1,193,841 Warrants for 397,948 shares of common stock (the Exchange  Shares.)  The Underbrink Family  Entities further agreed to sell to the Company at the closing of its proposed  public offering their Exchange Shares at the price per share paid for one  Conversion Share.





The  St. James Partnerships, as the holders of Warrants to purchase an aggregate of  4,075,528 shares of common stock, agreed to sell all their Warrants to the  Company at the closing of its proposed public offering at a price for each  three warrants sold equal to the price per share paid for one Conversion Share.





Under  the terms of a Registration Rights Agreement dated December 17, 1999, the  holders of $3,041,361 principal amount of and accrued interest (as of December  31, 2005) on the Companys outstanding Convertible Notes have the right,  subject to certain limitations, to include in the Companys registration  statement relating to its proposed public offering the shares issuable on  conversion of the principal and interest on their Convertible Notes, as well as  503,167 shares of common stock issued in exchange for the common stock purchase  warrants which they exchanged in November 2005 for shares of the Companys  common stock described below.  The  managing underwriter of the Companys proposed public offering has the right, if  it concludes that the amount of shares included in the offering for the account  of selling stockholders must be reduced, to reduce the number of
shares to be  included in the registration statement for the account of the selling  stockholders.





If  the managing underwriter concludes that the amount of shares included in the  registration statement for the account of selling stockholders must be reduced,  the Companys Recapitalization Agreements with the Underbrink Family Entities  and the St. James Partnerships provide that the first shares to be cut back out  of the number of shares to be sold and required to be purchased by the Company  out of the net proceeds of its proposed public offering, are the shares held by  the Underbrink Family Entities (including Conversion Shares, Exchange Shares  and any other shares held).  If the  managing underwriter is of the view that a larger cutback is to be made in the  number of shares included in the proposed public offering for the account of  selling stockholders, the second classification of shares to be cut back out of  shares required to be purchased by the Company out of the net
proceeds of the  Companys proposed public offering will be the 501,748 shares held by SJMB,  L.P.  Thereafter, if the managing  underwriter is of the view that a larger cutback is to be made in the number of  shares included for the account of selling stockholders, the Conversion Shares,  Exchange Shares and Warrants held by the St. James Partnerships to be purchased  by the Company at the closing of the proposed public offering will be cut back  pro rata based on the number of Conversion Shares, Exchange Shares and Warrants  proposed to be sold collectively by the St. James Partnerships.  For these purposes and the pro rata  calculations required, each three Warrants would be treated as the equivalent  of one Exchange Share and the first of the securities to be cut back from  purchase by the Company from the St. James Partnerships would be the Conversion  Shares and the last to be cut back would be the Warrants.





On  October 7, 2005, the Company commenced a tender offer directed to the holders  of 1,806,750 of its outstanding Warrants seeking to exchange one share of its  common stock for three Warrants.  The  tender offer remained open for acceptance through November 14, 2005.  During that period, the holders tendered  1,509,500 Warrants in exchange for 503,167 shares of the Companys common  stock.  Mr. Jenkins, President and a  Director of the Company, participated in the exchange and tendered 150,000  Warrants in exchange for 50,000 shares of common stock.  After expiration of the tender offer, there  remained outstanding 297,250 Warrants, not including the 4,075,528 Warrants  that the St. James Partnerships have agreed to sell to the Company in connection  with the proposed public offering as described above.





58





---



Back to Contents





The  Company agreed in September 2001 to pay to SJMB, L.P. a fee of approximately  $274,000 in consideration of SJMB, L.P. providing cash collateral of $8.2  million deposited to secure the performance of a continuing guaranty extended  by SJMB, L.P. of the Companys borrowing from its senior secured lender in  2000.  The $274,000 sum due SJMB, L.P.  has not been paid and is expected to be paid at the time of the offering.





On  November 21, 2005, Mr. Underbrink converted $1,428,000 of accrued  interest on the Companys promissory notes into 190,400 shares of its common  stock at a conversion price of $7.50 per share.





Under the  terms of their Recapitalization Agreements entered into with the Company, the  Underbrink Family Entities and the St. James Partnerships are to receive  payments out of the net proceeds realized by the Company in its proposed public  offering for shares of common stock the Underbrink Family Entities and St.  James Partnerships hold and will receive upon conversion of the Convertible  Notes they hold at the closing of the proposed public offering.  The St. James Partnerships are also to  receive payment for the Warrants they hold that are to be sold to the  Company.  The amounts that the  Underbrink Family Entities and the St. James Partnerships are paid for their  securities will depend upon the price at which the Companys shares are sold in  the proposed public offering and the net proceeds received by the Company.  The Companys purchase of their shares and
warrants is subject to cutback under the terms of the Recapitalization  Agreements as described above.  At  present, the Company estimates that as a consequence of the terms of the  proposed public offering expected at this time and those cutback provisions, it  is unlikely that it will purchase any shares from the Underbrink Family  Entities at the closing of the proposed public offering.





Subject to  completion of the Companys proposed public offering, the St. James  Partnerships are expected to receive approximately $94.6 million out of the net  proceeds of the offering in connection with the repurchase by the Company of  equity securities held by them, including all the Warrants they hold, and the  Underbrink Family Entities are not expected to receive any of the net proceeds  of the offering.





On December  12, 2005, Overcup Capital, LLC replaced St. James Capital Corp. as general  partner of St. James Capital Partners, L.P.   St. James Capital Partners, L.P. is expected to receive a total of $24.5  million from the proposed public offering as a result of the Companys  repurchase of equity securities held by it.





In the  event an underwritten public offering is not completed by June 30, 2006, the  St. James Partnerships agreed to exchange their Warrants for shares of common  stock at an exchange rate of three Warrants for one share of common stock.





59





---



Back to Contents





|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------




The  following sets forth fees incurred by the Company for services provided by  Grant Thornton LLP for the years ended December 31, 2005 and 2004, the  Companys registered public accounting firm at those year ends:





|     |  | Audit Fees |         | Audit    Related Fees |   | Tax Fees |  | All Other    Fees |       
|---- |  | ---------- | ------- | --------------------- | - | -------- |  | ----------------- | ------
|     |  |            |         |                       |   |          |  |                   |       
|2005 |  | $          | 260,737 |                       | $ | 280,973  |  | $                 | 49,025
|2004 |  | $          | 235,498 |                       | $ | 27,579   |  | $                 | 14,975




The  Companys Board of Directors believes that the provision of the services during  the two years ended December 31, 2005 is compatible with maintaining the  independence of Grant Thornton LLP.  The  Companys Audit Committee approves before the engagement the rendering of all  audit and non-audit services provided to the Company by its registered public  accounting firm.  Engagements to render  services are not entered into pursuant to any pre-approval policies and  procedures adopted by the Audit Committee.





60





---



Back to Contents





PART IV





|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------




The  Exhibits required by Regulation S-K are set forth in the following list and are  filed either by incorporation by reference from previous filings with the  Securities and Exchange Commission or by attachment to this Annual Report on  Form 10-K as so indicated in such list.





|Exhibit |  | Designation                                                                                                                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |                                                                                                                                                                                                                                                                                                                                          
|2.1     |  | Purchase Agreement by and    among Bobcat Pressure Control, Inc., Bobby Joe Cudd Company, Bobby Joe Cudd,    Bill Benedick, Steve Johnston and Petro Capital I, L.P. and the Company dated    as of December 16, 2005 (incorporated by reference to Exhibit 2.01 to the    Companys Current Report on Form 8-K dated December 16, 2005).
|        |  |                                                                                                                                                                                                                                                                                                                                          
|3.1.1   |  | Restated Certificate of    Incorporation of the Company, as filed with the Secretary of State of the    State of Delaware on June 21, 1989 (incorporated by reference to the    Companys Annual Report on Form 10-KSB for the fiscal year ended December 31,    1990).                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                          
|3.1.2   |  | Certificate of Amendment    to the Companys Certificate of Incorporation as filed with the Secretary of    State of the State of Delaware on February 13, 2001 (incorporated by    reference to the Companys Registration Statement on Form S-8, effective date    March 21, 2001.)                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                          
|3.1.3   |  | Certificate of Amendment    to the Companys Certificate of Incorporation as filed with the Secretary of    State of Delaware and effective on December 27, 2005 (incorporated by    reference to Exhibit 3.1.3 of the Companys Registration Statement on Form    S-1 filed with the Commission on February 13, 2006).                  
|        |  |                                                                                                                                                                                                                                                                                                                                          
|3.1.4   |  | Certificate of Ownership    and Merger merging Warrior Energy Services Incorporated with and into Black    Warrior Wireline Corp. (incorporated by reference to Exhibit 3.1.4 of the Companys    Registration Statement on Form S-1 filed with the Commission on February 13,    2006).                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                          
|3.2     |  | By-Laws of the Company    (incorporated by reference to the Companys Registration Statement on Form    S-18, effective date December 6, 1988).                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                          
|10.1    |  | Agreement for Purchase and    Sale dated June 6, 1997 between Black Warrior Wireline Corp. and St. James    Capital Partners, L.P. (incorporated by reference to Exhibit 3 to the    Companys Current Report on Form 8-K dated June 6, 1997).                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                          
|10.2    |  | $2,000,000 Convertible    Promissory Note dated June 6, 1997 issued to St. James Capital Partners, L.P.    (incorporated by reference to Exhibit 4 to the Companys Current Report on    Form 8-K dated June 6, 1997).                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                          
|10.3    |  | $3,000,000 Bridge Loan    Promissory Note dated June 6, 1997 issued to St. James Capital Partners, L.P.    (incorporated by reference to Exhibit 5 to the Companys Current Report on    Form 8-K dated June 6, 1997).                                                                                                                   




61





---



Back to Contents





|10.4  |  | Warrant dated June 6, 1997    to purchase 546,000 shares of Common Stock issued to St. James Capital    Partners, L.P. (incorporated by reference to Exhibit 6 to the Companys    Current Report on Form 8-K dated December 31, 1997).                                      
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                              
|10.5  |  | Warrant dated June 6, 1997    to purchase 120,000 shares of Common Stock issued to St. James Capital    Partners, L.P. (incorporated by reference to Exhibit 7 to the Companys    Current Report on Form 8-K dated December 31, 1997).                                      
|      |  |                                                                                                                                                                                                                                                                              
|10.6  |  | Registration Rights    Agreement between Black Warrior Wireline Corp. and St. James Capital Partners,    L.P. dated June 6, 1997 (incorporated by reference to Exhibit 8 to the    Companys Current Report on Form 8-K dated June 6, 1997).                                 
|      |  |                                                                                                                                                                                                                                                                              
|10.7  |  | Agreement for Purchase and    Sale dated October 9, 1997 between Black Warrior Wireline Corp. and    St. James Capital Partners, L.P. (incorporated by reference to Exhibit 10.6    to the Companys Current Report on Form 8-K dated October 9, 1997).                      
|      |  |                                                                                                                                                                                                                                                                              
|10.8  |  | $2,900,000 Convertible    Promissory Note dated October 10, 1997 issued to St. James Capital    Partners, L.P. (incorporated by reference to Exhibit 10.7 to the Companys    Current Report on Form 8-K dated October 9, 1997).                                             
|      |  |                                                                                                                                                                                                                                                                              
|10.9  |  | Warrant dated    October 10, 1997 to purchase 725,000 shares of Common Stock issued    to St. James Capital Partners, L.P. (incorporated by reference to Exhibit    10.8 to the Companys Current Report on Form 8-K dated October 9, 1997).                                 
|      |  |                                                                                                                                                                                                                                                                              
|10.10 |  | Amendment No. 1 to    Registration Rights Agreement between Black Warrior Wireline Corp. and St.    James Capital Partners, L.P. dated October 10, 1997 (incorporated by    reference to Exhibit 10.9 to the Companys Current Report on Form 8-K dated    October 9, 1997). 
|      |  |                                                                                                                                                                                                                                                                              
|10.11 |  | Asset Purchase Agreement    dated as of January 1, 1998 between Black Warrior Wireline Corp. and Phoenix    Drilling Services, Inc. (incorporated by reference to Exhibit 10.1 to the    Companys Current Report on Form 8-K dated January 23, 1998).                       
|      |  |                                                                                                                                                                                                                                                                              
|10.12 |  | Agreement for Purchase and    Sale dated January 23, 1998 between Black Warrior Wireline Corp. and St.    James Capital Partners, L.P. (incorporated by reference to Exhibit 10.2 to    the Companys Current Report on Form 8-K dated January 23, 1998).                    
|      |  |                                                                                                                                                                                                                                                                              
|10.13 |  | $10,000,000 Convertible    Promissory Note dated January 23, 1998 issued to St. James Capital    Partners, L.P. (incorporated by reference to Exhibit 10.3 to the Companys    Current Report on Form 8-K dated January 23, 1998).                                           
|      |  |                                                                                                                                                                                                                                                                              
|10.14 |  | Warrant dated January    23, 1998 to purchase 200,000 shares of Common Stock issued to St. James    Capital Partners, L.P. (incorporated by reference to Exhibit 10.4 to the    Companys Current Report on Form 8-K dated January 23, 1998).                                
|      |  |                                                                                                                                                                                                                                                                              
|10.15 |  | Amendment No. 2 to    Registration Rights Agreement between Black Warrior Wireline Corp. and St.    James Capital Partners, L.P. dated January 23, 1998 (incorporated by    reference to Exhibit 10.5 to the Companys current Report on Form 8-K dated    January 23, 1998).




62





---



Back to Contents





|10.16   |  | Second Amended and    Restated Credit Agreement dated as of December 16, 2005 among the Company and    General Electric Capital Corporation, as agent and lender (incorporated by    reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated    December 16, 2005).                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.17   |  | Second Lien Credit    Agreement dated as of December 16, 2005 among the Company and General    Electric Capital Corporation, as agent and lender (incorporated by reference    to Exhibit 10.2 to the Companys Current Report on Form 8-K dated December    16, 2005).                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.18   |  | Amended and Restated    Employment Agreement effective as of January 1, 2002 with William L. Jenkins    (incorporated by reference to Exhibit 10.1 to the Companys Current Report on    Form 8-K dated March 16, 2005).                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.18.1 |  | Amendment to Extended and    Restated Employment Agreement dated January 1, 2002 entered into December 16,    2005 by and between the Company and William L. Jenkins (incorporated by    reference to Exhibit 10.03 to the Companys Current Report on Form 8-K dated    December 16, 2005).                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.19   |  | Asset Purchase Agreement    dated June 3, 2002 between Multi-Shot, LLC and the Company (incorporated by    reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated    June 3, 2004).                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.20   |  | First Amendment dated June    10, 2004 to Asset Purchase Agreement between Multi-Shot, LLC and the Company    (incorporated by reference to Exhibit 10.2 to the Companys Current Report on    Form 8-K dated June 3, 2004).                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.21   |  | Recapitalization Agreement    dated October 6, 2005 between the Company and Charles E. Underbrink,    Northgate, L.L.C., Hub, Inc., Charles E. Underbrink IRA, and the Charles E.    Underbrink Irrevocable Trust dated 10/10/92 for the benefit of Piper Aurora    Underbrink (incorporated by reference to Exhibit 10.1 to the Companys    Current Report on Form 8-K dated October 6, 2005).
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.22   |  | Recapitalization Agreement    dated October 6, 2005 between the Company and St. James Capital Partners,    L.P. (incorporated by reference to Exhibit 10.2 to the companys Current    Report on Form 8-K dated October 6, 2005).                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.22.1 |  | Amendment No. 1 to    Recapitalization Agreement dated October 6, 2005 between the Company and St.    James Capital Partners, L.P.*                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.23   |  | Recapitalization Agreement    dated October 6, 2005 between the Company and SJMB, L.P. (incorporated by    reference to Exhibit 10.3 to the Companys Current Report on Form 8-K dated    October 6, 2005).                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|10.23.1 |  | Amendment No. 1 to    Recapitalization Agreement dated October 6, 2005 between the Company and    SJMB, L.P.*                                                                                                                                                                                                                                                                                   




63





---



Back to Contents





|10.24   |  | Employment Agreement dated    as of January 1, 2006 entered into on January 18, 2006 between the Company    and Robert McNally (incorporated by reference to Exhibit 10.1 to the    Companys Current Report on Form 8-K dated January 18, 2006.
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |                                                                                                                                                                                                                                                 
|10.25   |  | Employment Agreement dated    September 1, 2004 between the Company and Ron Whitter.*                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                 
|10.25.1 |  | Amendment to Employment    Agreement dated September 1, 2004 between the Company and Ron Whitter.*                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                 
|14      |  | Code of Ethics.  (Filed as an Exhibit to the Companys    Annual Report on Form 10-K for the year ended December 31, 2003.)                                                                                                                     
|        |  |                                                                                                                                                                                                                                                 
|21      |  | Subsidiaries.     None.                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                 
|23.1    |  | Consent of Grant Thornton    LLP*                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                 
|31.1    |  | Certification of President    and Chief Executive Officer pursuant to Rule 13a-14(a)*                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                 
|31.2    |  | Certification of Chief    Financial Officer Pursuant to Rule 13a-14(a)*                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                 
|32.1    |  | Certification of President    and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed)*                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                 
|32.2    |  | Certification of Chief    Financial Officer Pursuant to Section 1350 (furnished, not filed)*                                                                                                                                                    




|                                                            
|------------------------------------------------------------
|* Filed or    furnished with this Annual Report on Form 10-K




64





---






Back to Contents





WARRIOR ENERGY SERVICES CORPORATION


Financial  Statements


For the  Years Ended December 2005,


2004 and  2003





---



Back to Contents





Report of Independent  Registered Public Accounting Firm





Board of Directors


Warrior Energy Services Corporation:





We have audited the accompanying balance sheets of Warrior Energy  Services Corporation, formerly Black Warrior Wireline Corp., (a Delaware  corporation) as of December 31, 2005 and 2004, and the related statements of  operations, stockholders deficit, and cash flows for each of the three years  in the period ended December 31, 2005. These financial statements are the  responsibility of the Companys management. Our responsibility is to express an  opinion on these financial statements based on our audits.





We conducted our audits in  accordance with the standards of the Public Company Accounting Oversight Board  (United States).  Those standards  require that we plan and perform the audit to obtain reasonable assurance about  whether the financial statements are free of material misstatement.  The Company is not required to have, nor  were we engaged to perform an audit of its internal control over financial  reporting.  Our audit included  consideration of internal control over financial reporting as a basis for  designing audit procedures that are appropriate in the circumstances, but not  for the purpose of expressing an opinion on the effectiveness of the Companys  internal control over financial reporting.   Accordingly, we express no such opinion.  An audit also includes examining, on a test  basis, evidence supporting the amounts and disclosures in the financial  statements, assessing the accounting principles used and
significant estimates  made by management, as well as evaluating the overall financial statement  presentation.  We believe that our  audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present  fairly, in all material respects, the financial position of Warrior Energy  Services Corporation as of December 31, 2005 and 2004, and the results of its  operations and its cash flows for each of the three years in the period ended  December 31, 2005, in conformity with accounting principles generally accepted  in the United States of America.





GRANT THORNTON LLP





Houston, Texas


March 29, 2006





F-1





---



Back to Contents





Warrior  Energy Services Corporation


Balance  Sheets


December  31, 2005 and 2004


---




|                                                                                                                                                                   |  | December    31,    2005 |             | December    31,    2004 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ----------- | ----------------------- | -
|                                                                                                                                                                   |  |                         |             |                         |  
|ASSETS                                                                                                                                                             |  |                         |             |                         |  
|Current assets:                                                                                                                                                    |  |                         |             |                         |  
|Cash and cash    equivalents                                                                                                                                       |  | $                       | 701,031     |                         | $
|Restricted cash                                                                                                                                                    |  |                         | 214,813     |                         |  
|Accounts receivable,    less allowance of $973,143 and $475,449, respectively                                                                                      |  |                         | 19,998,282  |                         |  
|Other receivables                                                                                                                                                  |  |                         | 215,629     |                         |  
|Prepaid expenses                                                                                                                                                   |  |                         | 7,314       |                         |  
|Other current assets                                                                                                                                               |  |                         | 1,969,273   |                         |  
|                                                                                                                                                                   |  |                         |             |                         |  
|Total current assets                                                                                                                                               |  |                         | 23,106,342  |                         |  
|Property, plant and equipment, less accumulated    depreciation                                                                                                    |  |                         | 31,750,477  |                         |  
|Other assets                                                                                                                                                       |  |                         | 3,001,036   |                         |  
|Goodwill (Note 8)                                                                                                                                                  |  |                         | 14,040,182  |                         |  
|Other intangible assets (Note 8)                                                                                                                                   |  |                         | 29,735,923  |                         |  
|                                                                                                                                                                   |  |                         |             |                         |  
|Total assets                                                                                                                                                       |  | $                       | 101,633,960 |                         | $
|                                                                                                                                                                   |  |                         |             |                         |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                              |  |                         |             |                         |  
|Current liabilities:                                                                                                                                               |  |                         |             |                         |  
|Accounts payable                                                                                                                                                   |  | $                       | 6,699,944   |                         | $
|Accrued salaries and    vacation                                                                                                                                   |  |                         | 2,926,975   |                         |  
|Other accrued expenses                                                                                                                                             |  |                         | 1,866,159   |                         |  
|Accrued interest    payable                                                                                                                                        |  |                         | 282,337     |                         |  
|Current maturities of    long-term debt                                                                                                                            |  |                         | 5,168,880   |                         |  
|                                                                                                                                                                   |  |                         |             |                         |  
|Total current    liabilities                                                                                                                                       |  |                         | 16,944,295  |                         |  
|Long-term debt, less current maturities                                                                                                                            |  |                         | 51,252,352  |                         |  
|Non current accrued interest payable to related    parties                                                                                                         |  |                         | 18,150,795  |                         |  
|Notes payable to related parties, net of unamortized    discount                                                                                                   |  |                         | 21,902,375  |                         |  
|Deferred taxes                                                                                                                                                     |  |                         | 8,955,590   |                         |  
|                                                                                                                                                                   |  |                         |             |                         |  
|Total liabilities                                                                                                                                                  |  |                         | 117,205,407 |                         |  
|                                                                                                                                                                   |  |                         |             |                         |  
|Commitments and contingencies (Notes 6,9,10,11,15 and 16)                                                                                                          |  |                         |            |                         |  
|Stockholders deficit:                                                                                                                                             |  |                         |             |                         |  
|Preferred stock, $.0005    par value, 2,500,000 shares authorized, none issued at December 31, 2005 or    December 31, 2004                                        |  |                         |            |                         |  
|Common stock, $.0005    par value, 35,000,000 shares authorized, 2,342,125 and 1,250,415 shares    issued and outstanding December 31, 2005 and 2004, respectively |  |                         | 11,709      |                         |  
|Additional paid-in    capital                                                                                                                                      |  |                         | 21,698,506  |                         |  
|Accumulated deficit                                                                                                                                                |  |                         | (36,698,269 | )                       |  
|Treasury stock, at cost                                                                                                                                            |  |                         | (583,393    | )                       |  
|                                                                                                                                                                   |  |                         |             |                         |  
|Total stockholders    deficit                                                                                                                                     |  |                         | (15,571,447 | )                       |  
|                                                                                                                                                                   |  |                         |             |                         |  
|Total liabilities and    stockholders deficit                                                                                                                     |  | $                       | 101,633,960 |                         | $
|                                                                                                                                                                   |  |                         |             |                         |  




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





F-2





---



Back to Contents





Warrior Energy Services Corporation


Statement of Operations


For the Years Ended December 31, 2005  and 2004 and 2003


---




|                                                                                                                                                                                                      |  | 2005 |            | 2004 |   | 2003       |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Revenues                                                                                                                                                                                              |  | $    | 73,666,923 |      | $ | 53,686,837 |  
|Operating costs                                                                                                                                                                                       |  |      | 43,494,914 |      |   | 34,411,488 |  
|Selling, general and administrative expenses                                                                                                                                                          |  |      | 9,619,871  |      |   | 9,466,169  |  
|Depreciation and amortization                                                                                                                                                                         |  |      | 5,208,316  |      |   | 5,179,237  |  
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Income from continuing    operations                                                                                                                                                                  |  |      | 15,343,822 |      |   | 4,629,943  |  
|Interest expense and amortization of debt discount    (Note 6)                                                                                                                                        |  |      | (4,096,317 | )    |   | (4,820,769 | )
|Net gain on sale of fixed assets                                                                                                                                                                      |  |      | 82,671     |      |   | 53,173     |  
|Change of control expense (Note 6)                                                                                                                                                                    |  |      | 2,705,396  |      |   |           |  
|Other income (expense)                                                                                                                                                                                |  |      | (240,266   | )    |   | 44,581     |  
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Income (loss) from    continuing operations before income taxes                                                                                                                                       |  |      | 8,384,514  |      |   | (93,072    | )
|Provision for income taxes                                                                                                                                                                            |  |      | 175,327    |      |   |           |  
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Income (loss) before discontinued    operations                                                                                                                                                       |  |      | 8,209,187  |      |   | (93,072    | )
|Discontinued operations (Note 5)                                                                                                                                                                      |  |      |            |      |   |            |  
|Loss from operations of    discontinued directional drilling segment (including loss on disposal of  $0, $1,317,481 and $0 for the years    ended  December 31, 2005, 2004 and    2003, respectively) |  |      |           |      |   | (1,673,361 | )
|Provision for income taxes                                                                                                                                                                            |  |      |           |      |   |           |  
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Net income (loss)                                                                                                                                                                                     |  | $    | 8,209,187  |      | $ | (1,766,433 | )
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Net income (loss) per share - basic:                                                                                                                                                                  |  |      |            |      |   |            |  
|Income(loss) before    discontinued operations                                                                                                                                                        |  | $    | 5.75       |      | $ | (.07       | )
|Discontinued operations                                                                                                                                                                               |  |      |           |      |   | (1.34      | )
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Net income (loss) per share - basic                                                                                                                                                                   |  | $    | 5.75       |      | $ | (1.41      | )
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Net income (loss) per share - diluted:                                                                                                                                                                |  |      |            |      |   |            |  
|Income(loss) before    discontinued operations                                                                                                                                                        |  | $    | 4.41       |      | $ | (.07       | )
|Discontinued operations                                                                                                                                                                               |  |      |           |      |   | (1.34      | )
|                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Net income (loss) per share - diluted                                                                                                                                                                 |  | $    | 4.41       |      | $ | (1.41      | )
|                                                                                                                                                                                                      |  |      |            |      |   |            |  




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





F-3





---



Back to Contents





Warrior Energy Services Corporation


Statements of Stockholders Deficit


For the Years Ended December 31,  2005, 2004 and 2003


---




|                                                   |  |                        |          |        | Common    Stock |           |  |                    |        |                        |   |            | Treasury    Stock |     
|-------------------------------------------------- |  | ---------------------- | -------- | ------ | --------------- | --------- |  | ------------------ | ------ | ---------------------- | - | ---------- | ----------------- | ----
|                                                   |  |                        |          |        |                 |           |  |                    |        |                        |   |            |                   |     
|                                                   |  | Loan to    Shareholder |          | Shares |                 | Par Value |  | Paid-In    Capital |        | Accumulated    Deficit |   | Shares     |                   | Cost
|                                                   |  |                        |          |        |                 |           |  |                    |        |                        |   |            |                   |     
|Balance, December 31, 2002                         |  | $                      | (144,184 | )      |                 | 1,250,415 |  | $                  | 6,252  |                        | $ | 20,275,063 |                   | $   
|Loan to Shareholder                                |  |                        | 82,391   |        |                 |           |  |                    |        |                        |   |            |                   |     
|Net loss for the year ended    December 31, 2003   |  |                        |         |        |                 |          |  |                    |       |                        |   |           |                   |     
|                                                   |  |                        |          |        |                 |           |  |                    |        |                        |   |            |                   |     
|Balance, December 31, 2003                         |  |                        | (61,793  | )      |                 | 1,250,415 |  |                    | 6,252  |                        |   | 20,275,963 |                   |     
|Loan to Shareholder                                |  |                        | 61,793   |        |                 |           |  |                    |        |                        |   |            |                   |     
|Net loss for the year ended    December 31, 2004   |  |                        |         |        |                 |          |  |                    |       |                        |   |           |                   |     
|                                                   |  |                        |          |        |                 |           |  |                    |        |                        |   |            |                   |     
|Balance, December 31, 2004                         |  |                        |         |        |                 | 1,250,415 |  |                    | 6,252  |                        |   | 20,275,963 |                   |     
|Shares issued upon    conversion of interest       |  |                        |         |        |                 | 190,400   |  |                    | 952    |                        |   | 1,427,048  |                   |     
|Shares issued upon    conversion of warrants       |  |                        |         |        |                 | 901,310   |  |                    | 4,505  |                        |   | (4,505     | )                 |     
|Net income for the year    ended December 31, 2005 |  |                        |         |        |                 |          |  |                    |       |                        |   |           |                   |     
|                                                   |  |                        |          |        |                 |           |  |                    |        |                        |   |            |                   |     
|Balance, December 31, 2005                         |  | $                      |         |        |                 | 2,342,125 |  | $                  | 11,709 |                        | $ | 21,698,506 |                   | $   
|                                                   |  |                        |          |        |                 |           |  |                    |        |                        |   |            |                   |     




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





F-4





---



Back to Contents





Warrior Energy Services Corporation


Statements of Cash Flows


For the Years Ended December 31,  2005, 2004 and 2003


---




|                                                                                            |  | 2005 |             | 2004 |   | 2003        |  
|------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                            |  |      |             |      |   |             |  
|Cash flows from operating    activities:                                                    |  |      |             |      |   |             |  
|Net    income (loss)                                                                        |  | $    | 8,209,187   |      | $ | (1,766,433  | )
|Adjustments    to reconcile net income (loss) to net cash provided by operating activities: |  |      |             |      |   |             |  
|Depreciation                                                                                |  |      | 5,038,250   |      |   | 6,630,847   |  
|Amortization                                                                                |  |      | 170,066     |      |   | 387,079     |  
|Asset    impairment                                                                         |  |      |            |      |   |            |  
|Amortization    of debt issue costs                                                         |  |      | 171,711     |      |   | 575,691     |  
|Amortization    of discount on notes payable                                                |  |      |            |      |   | 164,313     |  
|Amortization    of loan to shareholder                                                      |  |      |            |      |   | 61,793      |  
|Net    recoveries of doubtful accounts                                                      |  |      |            |      |   | (112,652    | )
|Net    gain on disposition of property, plant and equipment                                 |  |      | (82,671     | )    |   | (53,173     | )
|Loss    on disposition of discontinued operations                                           |  |      |            |      |   | 1,317,481   |  
|Change    in:                                                                               |  |      |             |      |   |             |  
|Accounts    receivable                                                                      |  |      | (4,784,088  | )    |   | 734,382     |  
|Prepaid    expenses                                                                         |  |      | 3,022,726   |      |   | (2,937,569  | )
|Other    current assets                                                                     |  |      | (11,037     | )    |   | (289,282    | )
|Inventories                                                                                 |  |      |            |      |   |            |  
|Other    assets                                                                             |  |      | 341,394     |      |   | (107,752    | )
|Accounts    payable and accrued liabilities                                                 |  |      | 5,407,334   |      |   | (1,042,631  | )
|                                                                                            |  |      |             |      |   |             |  
|Cash    provided by operating activities                                                    |  |      | 17,482,872  |      |   | 3,562,094   |  
|                                                                                            |  |      |             |      |   |             |  
|Cash flows from investing    activities:                                                    |  |      |             |      |   |             |  
|Acquisitions    of property, plant and equipment                                            |  |      | (8,258,043  | )    |   | (7,472,757  | )
|Purchase    of Bobcat Pressure Control, Inc., net of cash acquired                          |  |      | (53,208,735 | )    |   |            |  
|Change    in restricted cash                                                                |  |      | (214,813    | )    |   | 961,551     |  
|Proceeds    from sale of property, plant and equipment                                      |  |      | 165,062     |      |   | 371,172     |  
|Proceeds    from sale of discontinued operations                                            |  |      |            |      |   | 10,349,862  |  
|                                                                                            |  |      |             |      |   |             |  
|Cash    provided by (used in) investing activities                                          |  |      | (61,516,529 | )    |   | 4,209,828   |  
|                                                                                            |  |      |             |      |   |             |  
|Cash flows from financing    activities:                                                    |  |      |             |      |   |             |  
|Proceeds    from bank and other borrowings                                                  |  |      | 55,961,399  |      |   | 13,620,025  |  
|Principal    payments on long-term debt, notes payable and capital lease obligations        |  |      | (11,623,904 | )    |   | (19,866,741 | )
|Proceeds    (payments) from (on) working revolver, net                                      |  |      | 214,813     |      |   | (3,159,929  | )
|Debt    issue costs                                                                         |  |      | (2,465,600  | )    |   | (378,327    | )
|                                                                                            |  |      |             |      |   |             |  
|Cash    provided by (used in) financing activities                                          |  |      | 42,086,708  |      |   | (9,784,972  | )
|                                                                                            |  |      |             |      |   |             |  
|Net    increase (decrease) in cash and cash equivalents                                     |  |      | (1,946,949  | )    |   | (2,013,050  | )
|Cash    and cash equivalents, beginning of year                                             |  |      | 2,647,980   |      |   | 4,661,039   |  
|                                                                                            |  |      |             |      |   |             |  
|Cash    and cash equivalents, end of year                                                   |  | $    | 701,031     |      | $ | 2,647,980   |  
|                                                                                            |  |      |             |      |   |             |  
|Supplemental disclosure of    cash flow information:                                        |  |      |             |      |   |             |  
|Cash paid during the year    for:                                                           |  |      |             |      |   |             |  
|Interest                                                                                    |  | $    | 2,847,376   |      | $ | 2,303,791   |  
|                                                                                            |  |      |             |      |   |             |  
|Income    taxes                                                                             |  | $    |            |      | $ |            |  
|                                                                                            |  |      |             |      |   |             |  




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





F-5





---



Back to Contents





Warrior Energy Services Corporation


Statements of Cash Flows, Continued


For the Years Ended December 31,  2005, 2004 and 2003


---




|                                                                                                   |  | 2005 |            | 2004 |   | 2003    | 
|-------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ------- | 
|                                                                                                   |  |      |            |      |   |         | 
|Supplemental schedule of    noncash investing and financing activities:                            |  |      |            |      |   |         | 
|Acquisition    of property, plant and equipment financed under capital leases and notes    payable |  | $    | 55,961,399 |      | $ | 840,921 | 
|Shares    issued upon conversion of interest                                                       |  | $    | 1,428,000  |      | $ |        | 
|Shares    issued upon conversion of warrants                                                       |  | $    |           |      | $ |        | 




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





F-6





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




Note 1 - General Information





Warrior Energy Services Corporation (the Company and formerly known  as Black Warrior Wireline Corp.) is a natural gas and oil well services company  that provides cased-hole wireline and well intervention services to exploration  and production (E&P) companies.   The Companys wireline services focus on cased-hole wireline operations,  including logging services, perforating, mechanical services, pipe recovery and  plug and abandonment services.  The  Companys well intervention services are primarily hydraulic workover services,  commonly known as snubbing services.   All of the Companys services are performed at the well site and are  fundamental to establishing and maintaining the flow of natural gas and oil  throughout the productive life of the well.   The Companys operations are concentrated in the major onshore and  offshore natural gas and oil producing areas of the U.S., including
offshore in  the Gulf of Mexico and onshore in Alabama, Arkansas, Colorado, Louisiana,  Mississippi, New Mexico,  Oklahoma,  Texas, Utah, and Wyoming.  The Company  focuses on providing high quality equipment and services in difficult  environments, such as high pressure and high temperature wells, and difficult  pipe recovery operations.  The majority  of the Companys revenues are related to natural gas drilling and workover activity.





On December 16, 2005, the Company acquired 100% of the outstanding  equity securities of Bobcat Pressure Control, Inc. (Bobcat). The purchase  price was approximately $51.5 million in cash plus $1.7 million in acquisition  costs.  See Note 2 for more detail of  the acquisition.





On December 27, 2005, the Company completed a one-for-ten reverse stock  split.  All per share numbers in this  report have been adjusted to reflect this split.





Note 2   Acquisition of Bobcat





On December 16, 2005, the Company acquired 100% of the outstanding  equity securities of Bobcat.  The  purchase price was approximately $51.5 million in cash plus $1.7 million in  acquisition costs.  The acquisition has  been accounted for as a purchase, and, accordingly, the acquired assets and  liabilities have been recorded at their fair value at the date of  acquisition.  The operating results  arising from the acquisition of Bobcat are included in the Companys statement  of operations from the acquisition date.





The following table summarizes the estimated fair values of certain  assets acquired and liabilities assumed at the date of acquisition (December  16, 2005):


|                              |  | (000s) |       
|----------------------------- |  | ------- | ------
|                              |  |         |       
|Current assets                |  | $       | 6,513 
|Property, plant and equipment |  |         | 15,569
|Other assets                  |  |         | 671   
|Goodwill                      |  |         | 12,803
|Intangible assets             |  |         | 29,841
|                              |  |         |       
|Total assets acquired         |  |         | 65,397
|Current liabilities           |  |         | (2,999
|Deferred taxes                |  |         | (8,956
|Long-term  debt               |  |         | (233  
|                              |  |         |       
|                              |  | $       | 53,209
|                              |  |         |       




Intangible assets of $29.8 million are comprised of customer  relationships of $25.4 million, non-compete agreements of $2.6 million, and  trademarks and manufacturing technical expertise of $1.8 million.  All of the intangible assets other than the  customer relationships and non-compete agreements have indefinite useful  lives.  The Company has established an  estimated useful life of fifteen years for the customer relationships and three  years for the non-compete agreements.   The intangible assets with indefinite useful lives are subject to an  annual test of impairment as mandated by SFAS No. 142.





F-7





---



Back to Contents





Warrior Energy Services Corporation


Notes to Financial Statements


For the Years Ended December 31,  2005, 2004 and 2003


---




The purchase price was allocated based on the fair value of the assets  acquired and liabilities assumed, and the excess cost of  $12.8 million is recorded as goodwill and is  subject to an annual test of impairment as mandated by SFAS No. 142.  The Company has contingencies related to a  long-term service contract which could impact the purchase price allocation;  however, management believes that the ultimate resolution of these  contingencies will not have a material impact on the financial statements.





The following pro forma statements of operations for the years ended  December 31, 2005 and 2004 and assumes the Bobcat acquisition as of the  beginning of the period (in thousands, except per share data):





WARRIOR  ENERGY SERVICES CORPORATION


Pro  Forma Combined Statement of Operations


For  the Year Ended December 31, 2005


(in  thousands, except per share data)





|                                                |  |   | Warrior    Energy    as reported |   |   | Bobcat    Prior to    Acquisition |   |  | Pro Forma    Adjustments |      |   | Combined |  
|----------------------------------------------- |  | - | -------------------------------- | - | - | --------------------------------- | - |  | ------------------------ | ---- | - | -------- | -
|                                                |  |   |                                  |   |   |                                   |   |  |                          |      |   |          |  
|Revenues                                        |  | $ | 73,667                           |   | $ | 28,653                            |   |  |                          |      | $ | 102,320  |  
|Operating costs                                 |  |   | 43,495                           |   |   | 13,235                            |   |  |                          |      |   | 56,730   |  
|Selling, general and    administrative expenses |  |   | 9,620                            |   |   | 4,324                             |   |  |                          |      |   | 13,944   |  
|Depreciation and    amortization                |  |   | 5,208                            |   |   | 1,508                             |   |  | 2,558                    | (1)  |   | 9,274    |  
|                                                |  |   |                                  |   |   |                                   |   |  |                          |      |   |          |  
|Income    from operations                       |  |   | 15,344                           |   |   | 9,586                             |   |  |                          |      |   | 22,372   |  
|Interest expense                                |  |   | 4,096                            |   |   | 439                               |   |  | 5,546                    | (2)  |   | 9,642    |  
|                                                |  |   |                                  |   |   |                                   |   |  | (439                     | )(3) |   |          |  
|Net gain (loss) on sale of    fixed assets      |  |   | 82                               |   |   | (78                               | ) |  |                          |      |   | 4        |  
|Change of control expense                       |  |   | 2,705                            |   |   |                                  |   |  |                          |      |   | 2,705    |  
|Other income (expense)                          |  |   | (241                             | ) |   | (5                                | ) |  |                          |      |   | (246     | )
|                                                |  |   |                                  |   |   |                                   |   |  |                          |      |   |          |  
|Income    from operations before income taxes   |  |   | 8,384                            |   |   | 9,064                             |   |  |                          |      |   | 9,783    |  
|Provision for income taxes                      |  |   | 175                              |   |   | 3,399                             |   |  | (3,373                   | )(4) |   | 196      |  
|                                                |  |   |                                  |   |   |                                   |   |  |                          |      |   |          |  
|Net    income                                   |  | $ | 8,209                            |   | $ | 5,665                             |   |  |                          |      | $ | 9,587    |  
|                                                |  |   |                                  |   |   |                                   |   |  |                          |      |   |          |  
|Net income per share -    basic                 |  | $ | 5.75                             |   |   |                                   |   |  |                          |      | $ | 6.71     |  
|                                                |  |   |                                  |   |   |                                   |   |  |                          |      |   |          |  
|Net income per share -    diluted               |  | $ | 4.41                             |   |   |                                   |   |  |                          |      | $ | 4.93     |  
|                                                |  |   |                                  |   |   |                                   |   |  |                          |      |   |          |  




|   
|---
|(1)
|(2)
|(3)
|(4)




F-8





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




WARRIOR  ENERGY SERVICES CORPORATION


Pro  Forma Combined Statement of Operations


Year  Ended December 31, 2004


(in  thousands, except per share data)





|                                                                              |  | Warrior    Energy    as reported |        | Historical    Bobcat |   | Pro Forma    Adjustments |   | Combined |       
|----------------------------------------------------------------------------- |  | -------------------------------- | ------ | -------------------- | - | ------------------------ | - | -------- | ------
|                                                                              |  |                                  |        |                      |   |                          |   |          |       
|Revenues                                                                      |  | $                                | 53,687 |                      | $ | 16,224                   |   |          |       
|Operating costs                                                               |  |                                  | 34,412 |                      |   | 7,297                    |   |          |       
|Selling, general and    administrative expenses                               |  |                                  | 9,466  |                      |   | 3,024                    |   |          |       
|Depreciation and    amortization                                              |  |                                  | 5,179  |                      |   | 1,010                    |   |          | 2,558 
|                                                                              |  |                                  |        |                      |   |                          |   |          |       
|Gain    (loss) from continuing operations                                     |  |                                  | 4,630  |                      |   | 4,893                    |   |          |       
|Interest expense                                                              |  |                                  | 4,821  |                      |   | 606                      |   |          | 4,651 
|                                                                              |  |                                  |        |                      |   |                          |   |          | (606  
|Net gain on sale of fixed    assets                                           |  |                                  | 53     |                      |   | (25                      | ) |          |       
|Other income (loss)                                                           |  |                                  | 45     |                      |   | (13                      | ) |          |       
|                                                                              |  |                                  |        |                      |   |                          |   |          |       
|Income    (loss) from continuing operations before income taxes               |  |                                  | (93    | )                    |   | 4,249                    |   |          |       
|Provision for income taxes                                                    |  |                                  |       |                      |   | 1,611                    |   |          | (1,611
|                                                                              |  |                                  |        |                      |   |                          |   |          |       
|Income    (loss) before discontinued operations                               |  |                                  | (93    | )                    |   | 2,638                    |   |          |       
|Discontinued operations                                                       |  |                                  |        |                      |   |                          |   |          |       
|Income    (loss) from operations of discontinued directional drilling segment |  |                                  | (1,673 | )                    |   |                         |   |          |       
|Provision    for income taxes                                                 |  |                                  |       |                      |   |                         |   |          |       
|                                                                              |  |                                  |        |                      |   |                          |   |          |       
|Net    income (loss)                                                          |  | $                                | (1,766 | )                    | $ | 2,638                    |   |          |       
|                                                                              |  |                                  |        |                      |   |                          |   |          |       
|Net income (loss) per share    - basic and diluted:                           |  |                                  |        |                      |   |                          |   |          |       
|Income    (loss) before discontinued operations                               |  | $                                | (.07   | )                    |   |                          |   |          |       
|Discontinued    operations                                                    |  |                                  | (1.34  | )                    |   |                          |   |          |       
|                                                                              |  |                                  |        |                      |   |                          |   |          |       
|Net income (loss) per share    - basic and diluted                            |  | $                                | (1.41  | )                    |   |                          |   |          |       
|                                                                              |  |                                  |        |                      |   |                          |   |          |       




|   
|---
|(1)
|(2)
|(3)
|(4)




F-9





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




Note 3  Liquidity





While the Company reported net income of approximately $8,209,000 for  the year ended December 31, 2005, it also reported a net loss for the years  ended December 31, 2004 and 2003 of approximately ($1,770,000) and  ($5,550,000), respectively.  Cash flows  provided by operations were approximately $17,500,000, $3,500,000 and  $10,600,000 for the years ended December 31 2005, 2004, and 2003,  respectively.  The Company is highly  leveraged.  The Companys outstanding  indebtedness includes primarily senior indebtedness aggregating approximately  $55.2 million at December 31, 2005, other indebtedness of approximately $1.2  million and approximately $40.1 million (including approximately $18.2 million  of accrued interest) owing to SJMB, L.P. (SJMB),St. James Capital Partners,  L.P. (SJCP) and others who participated with SJMB in the purchase of  promissory notes and warrants of the Company (collectively St.
James) and  directors, who are related parties. The Companys debt and accrued interest  owed to St. James and the related parties is convertible into common stock and  is subordinate to the Companys indebtedness outstanding under the Second  Amended and Restated Credit Agreement with General Electric Capital Corp.  (GECC) (the Senior Secured Credit Agreement) and the Second Lien Credit  Agreement with GECC (the Second Lien Credit Agreement) (see Note 9).  In addition, no repayments of the related  party debt or accrued interest can be made until the Second and Amended and  Restated Credit Agreement is completely extinguished. The Company was allowed  to repay $1.1 million of the subordinated debt in connection with the  consummation of the Senior Secured Credit Agreement with GECC as described  below.





Senior  Secured Credit Agreement





On December 16, 2005, the Company entered into the Senior Secured  Credit Agreement with GECC, providing for a term loan and revolving and capital  expenditure credit facilities in an aggregate amount of $50.0 million. The  Senior Secured Credit Agreement amended, restated and modified the credit  agreement the Company entered into with GECC as of September 14, 2001 and as it  was amended and restated on November 14, 2004, including the amendments  thereto. The Senior Secured Credit Agreement includes:





| |  | a revolving credit facility of up to $15.0 million,    but not exceeding a borrowing base of 85% of the book value of eligible    accounts receivable, less any reserves GECC may establish from time to time,                                                        
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                       
| |  | a term loan of $30.0 million, and                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                       
| |  | a one-year capital expenditure loan facility of up    to $5.0 million, but not exceeding the lesser of 80% of the hard costs of    eligible capital equipment and 75% of the forced liquidation value of    eligible capital equipment, subject to adjustment by GECC.




Initial borrowings under the Senior Secured Credit Agreement advanced  on December 16, 2005 were $1.3 million borrowed under the revolving loan and  $30.0 million under the term loan. No borrowings were made under the capital  expenditure loan facility. The proceeds of the term loan were used to pay a  portion of the Bobcat acquisition purchase price, related fees and expenses and  repayment of substantially all Bobcat indebtedness, and approximately $2.1  million was placed in escrow for the repayment of principal and accrued  interest on subordinated secured indebtedness and approximately $2.8 million  was used for general corporate purposes.   The outstanding balance of approximately $6.3 million under the  Companys previous credit agreement with GECC was paid out of the Companys  existing cash.





Second  Lien Credit Agreement





On December 16, 2005, the Company entered into the Second Lien Credit  Agreement with GECC, providing for a term loan $25.0 million.





Initial borrowings under the Second Lien Credit Agreement advanced on  December 16, 2005 of $25.0 million were used to pay a portion of the Bobcat  acquisition purchase price.





F-10





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




Subordinated  Secured Indebtedness - Note Extensions





In connection with the Company entering into the GECC refinancing in  November 2004, the Company agreed with the holders of its outstanding  subordinated secured notes to extend the maturity date of the notes from  December 31, 2004 to February 13 and February 14, 2008 on $23.0 million of the  total $23.9 million principal amount of the notes then outstanding.  The remainder of the outstanding principal  was repaid.  Concurrently with the  borrowings under the Senior Secured Credit Agreement and Second Lien Credit  Agreement, the maturity date of approximately $21.9 million principal amount of  the Companys outstanding subordinated secured promissory notes was extended to  June 15, 2009 and $2.1 million of such subordinated secured notes, including  accrued interest, was repaid.  The notes  bear interest at 15% per annum and are convertible into shares of the Companys  common stock at a conversion price of $7.50 per share, subject
to an  anti-dilution adjustment for certain issuances of securities by the Company at  prices per share of common stock less than the conversion price then in effect,  in which event the conversion price is reduced to the lower price at which the  shares were issued.  As a condition to  extend the maturity date of the notes in connection with the GECC refinancing  in November 2004, the Company extended the expiration date of its 6.6 million  outstanding common stock purchase warrants to December 31, 2009.





Substantially all of the Companys assets are pledged as collateral for  the indebtedness outstanding under the subordinated secured notes.  All of the debt and interest owed under the  subordinated secured notes is subordinated to the Companys Senior Secured  Credit Agreement and cannot be repaid until all the amounts owed pursuant to  the Senior Secured Credit Agreement and Second Lien Credit Agreement mature or  have been repaid.





Strong and stable market conditions and the Companys ability to meet  intense competitive pressures are essential to the Companys maintaining a  positive liquidity position and meeting debt covenant requirements.  Decreases in market conditions or failure to  mitigate competitive pressures could result in non-compliance with its debt  covenants and the triggering of the prepayment clauses of the Companys  debt.  The Company believes that if  market conditions remain stable during 2006, the Company will be able to  generate sufficient cash flow to meet its working capital needs and comply with  its debt covenants until the maturity of its Senior Credit Facility on  September 14, 2007.  If market  conditions decline significantly, the Company may be required to obtain  additional amendments to its Senior Credit Facility, or obtain capital through  equity contributions or financing, including a possible merger or sale of  assets,
or other business combination.





Proposed  Public Offering





On February 13, 2006, the Company filed with the Securities and  Exchange Commission a registration statement on Form S-l under the Securities  Act of 1933, as amended, for the sale of up to $185.2 million of shares of  common stock by the Company and certain selling securityholders.  The Company intends to use the proceeds it  receives from its proposed public offering to simplify its capital structure by  eliminating outstanding derivative securities and to reduce debt. .In  connection with that offering, the Company filed an application to list its  common stock on the Nasdaq National Market under the trading symbol WARR.





Recapitalization





In October 2005, the Company initiated a series of steps undertaken for  the purpose of recapitalizing the Company through the elimination of the  substantial amount of derivative securities it has outstanding, among other  steps intended to be undertaken. These derivative securities include common  stock purchase warrants to purchase 7,076,119 shares of the Companys common  stock and $35,019,173 of principal amount and accrued interest, as of  December 31, 2005, of its outstanding convertible subordinated notes  which, as of that date, are convertible at a conversion price of $7.50 per  share into an aggregate of 4,669,223 shares of the Companys common stock.





On October 6, 2005, the Company entered into agreements with the  holders of 5,269,369 of 7,076,119 warrants outstanding to exchange those  warrants for 1,756,456 shares of the Companys common stock. Of the 5,269,369  warrants, an aggregate of 4,075,528 are held by St. James Capital Partners,  L.P. and SJMB, L.P. (the St. James Partnerships), and 1,193,841 were held by  Charles E. Underbrink and family members and affiliated entities (the  Underbrink Family Entities), which include Mr. Charles E. Underbrink.  Mr. Underbrink is one of the Companys





F-11





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




directors and is the Chairman of the general partner of SJMB, L.P. and,  in October 2005, was the Chairman of the general partner of St. James Capital  Partners, L.P. The exchange of warrants for shares of the Companys common  stock by the Underbrink Family Entities was completed on October 6, 2005,  resulting in the issuance of 397,947 shares of common stock, and the warrants  to purchase 4,075,527 shares held by the St. James Partnerships are to be  repurchased in connection with the Companys proposed public offering.  If the warrants to purchase 4,075,527 shares  held by the St. James Partnerships have not been purchased by the Company by  June 30, 2006, they will be converted into 1,358,509 shares of common stock.





On October 7, 2005, the Company commenced an offer to exchange shares  of its common stock for its remaining outstanding 1,806,750 common stock  purchase warrants. The Company offered to exchange one share of its common  stock for each three warrants. Each warrant represents the right to purchase  one share of the Companys common stock at an exercise price of $7.50 per  share. The offer to exchange shares of the Companys common stock for warrants  expired on November 14, 2005, and the Company issued 503,167 shares of its  common stock in exchange for 1,509,500 common stock purchase warrants.  Warrants to purchase 297,250 shares of  common stock remain outstanding.





The agreements with the St. James Partnerships and Underbrink Family  Entities provide that such persons will convert an aggregate of $20,277,374 of  principal and all related accrued interest (which amounted to $16,734,434  through December 31, 2005, after conversion of $1,428,000 of interest in  November 2005) on the Companys outstanding convertible subordinated notes into  shares of its common stock and, provided the price they are to receive is not  less than $7.50 per share, sell those shares to the Company, along with the  shares issued in exchange for their warrants, the shares issued on conversion  of accrued interest in November 2005 and an additional 501,748 shares held by  SJMB, L.P., at the closing time of the Companys proposed public offering  described above. The purchase price paid by the Company for such shares will be  the price per share it receives in the public offering less commissions and  expenses of the underwriters in the
offering.   In addition, under the terms of a Registration Rights Agreement, the  holders of $3,041,361 principal amount and accrued interest (as of December 31,  2005) on outstanding convertible subordinated notes have the right to have  included 405,515 shares issuable on conversion of the principal and interest on  the notes, as well as the shares of the Companys common stock issued in  exchange for their warrants, in the registration statement relating to the  Companys proposed public offering.





Note 4 - Significant Accounting  Policies





Cash and  Cash Equivalents - The Company considers all highly liquid  investments with original maturities of three months or less to be cash  equivalents.  The Company had at  December 31, 2005 and 2004 approximately $600,000 and $2.5 million,  respectively, of cash balances in excess of the Federal Deposit Insurance  Corporation insured limits.





Restricted  Cash - Restricted cash refers to the cash receipts from  customer sales that are allocated to the repayment of the revolving line of  credit; therefore, these funds are not available to the Company for general  corporate use.  At December 31, 2005 the  Company had a balance owed on its revolving line of credit of approximately  $215,000 which is reflected as Restricted cash on the balance sheet.





Accounts  Receivable - Included in accounts receivable are recoverable  costs and related profits not billed, which consist primarily of revenue  recognized on contracts for which billings had not been presented to the  contract owners.  There are no unbilled  amounts in accounts receivable at December 31, 2005 and 2004.





Allowance for Doubtful Accounts  - The allowance for doubtful accounts is maintained at an amount equal to  estimated losses in the Companys accounts receivable.  Management of the Company continually  monitors the accounts receivable from its customers for any collectability  issues.  An allowance for doubtful  accounts is established based on reviews of individual customer accounts,  recent loss experience, current economic conditions, and other pertinent  factors.  Accounts deemed uncollectible  are charged to the allowance.   Provisions for bad debts and recoveries on accounts previously  charged-off are added to the allowance.   All accounts outstanding more than 30 days are considered past due.





F-12





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




Property,  Plant and Equipment - Property, plant and equipment is stated  at cost. The cost of maintenance and repairs is charged to expense when  incurred; the cost of betterments is capitalized. The cost of assets sold or  otherwise disposed of and the related accumulated depreciation are removed from  the accounts and the gain or loss on such disposition is included in income.  Depreciation is computed using the straight-line method over the estimated  useful lives of the assets, which range from two to ten years. At December 31,  2005 and 2004, significantly all of the property, plant and equipment has been  pledged as collateral for the Companys borrowings (see Note 9).





Goodwill  and Intangible Assets- Goodwill is stated at cost.  The Company implemented Statement of  Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets  on January 1, 2002 and ceased amortization of goodwill and indefinite-lived  intangible assets.  SFAS No. 142  requires an assessment of potential impairment upon adoption and annually  thereafter in the month it elected to perform its analysis or more frequently  if events or circumstances indicate that an impairment may have occurred.  Intangible assets are stated at cost and are  amortized over their estimated useful lives.   The Companys intangible assets are amortized over a period ranging from  three to fifteen years.  Intangible  assets are subject to an assessment of potential impairment whenever events or  circumstances indicate that an impairment may have occurred.





The Company considers external factors in making its assessment.  Specifically, changes in natural gas and oil prices and other economic  conditions surrounding the industry, consolidation within the industry,  competition from other natural gas and oil well services providers, the ability  to employ and maintain a skilled workforce, and other pertinent factors are  among the factors that could lead management to reassess the reliability of its  intangible assets.





Long-Lived  Assets - In accordance with SFAS No. 144, Accounting  for the Impairment or Disposal of Long-Lived Assets, the Company  recognizes impairment losses on long-lived assets used in operations when  indicators of impairment are present and the undiscounted cash flows over the  life of the assets are less than the assets carrying amount. If an impairment  exists, the amount of such impairment is calculated based on projections of  future discounted cash flows. These projections use a discount rate and  terminal value multiple that would be customary for evaluating current natural  gas and oil service company transactions.





The Company considers external factors in making its assessment.  Specifically, changes in oil and natural gas prices and other economic  conditions surrounding the industry, consolidation within the industry,  competition from other natural gas and oil well service providers, the ability  to employ and maintain a skilled workforce and other pertinent factors are  among the items that could lead management to reassess the realizability and/or  amortization periods of its long-lived assets.





During 2003, management evaluated the recoverability of the Companys  long-lived assets in relation to its business segments.  The analysis was performed using the  proposed sale prices for the Companys directional drilling segment which was  sold in August 2004.  As a result of  this analysis an impairment was indicated for which the Company reduced the  carrying amount of property, plant and equipment for its former directional  drilling segment and recognized an impairment expense of $1.4 million.





Revolving Credit Facility -The  Companys Senior Secured Credit Agreement requires a lock-box arrangement,  which provides for all receipts to be swept daily to reduce borrowings  outstanding under the credit facility.   This arrangement, combined with the existence of a subjective  acceleration clause in the revolving credit facility, requires the  classification of outstanding borrowings under the revolving credit facility as  a current liability.  Cash which has  been deposited into the lock-box but which has not yet been applied against the  revolving credit facility is classified as restricted cash on the Balance  Sheet.





Income  Taxes - The Company accounts for income taxes under an asset  and liability approach that requires the recognition of deferred tax assets and  liabilities for the expected future tax consequences of events that have been  recognized in the Companys financial statements or tax returns. In estimating  future tax consequences, the Company generally considers all expected future  events other than enactments of changes in the tax laws or rates.





F-13





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




Stock-Based  Compensation - At December 31, 2005, the Company has three  stock-based employee compensation plans, which are described more fully in Note  15.  The Company accounts for those  plans under the recognition and measurement principles of 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 under those plans had an exercise price equal to the market  value of the underlying common stock on the date of grant.  The following table illustrates the effect  on net income and earnings per share if the Company had applied the fair value  recognition provisions of SFAS No. 123, Accounting  for Stock-Based Compensation,to stock-based employee compensation.


|                                                                                                                                                   |  | Year ended December 31, |          
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------
|                                                                                                                                                   |  |                         |          
|                                                                                                                                                   |  | 2005                    |          
|                                                                                                                                                   |  |                         |          
|Net income (loss), as reported                                                                                                                     |  | $                       | 8,209,187
|Add:  Total    stock-based employee compensation expense determined under fair value based    method for all awards, net of related tax effects(1) |  |                         | 71,394   
|                                                                                                                                                   |  |                         |          
|Pro forma net income (loss)                                                                                                                        |  | $                       | 8,280,581
|                                                                                                                                                   |  |                         |          
|Income (loss) per share:                                                                                                                           |  |                         |          
|Basic - as reported                                                                                                                                |  | $                       | 5.75     
|                                                                                                                                                   |  |                         |          
|Basic - pro forma                                                                                                                                  |  | $                       | 5.80     
|                                                                                                                                                   |  |                         |          
|Diluted - as reported                                                                                                                              |  | $                       | 4.41     
|                                                                                                                                                   |  |                         |          
|Diluted - pro forma                                                                                                                                |  | $                       | 4.44     
|                                                                                                                                                   |  |                         |          




|   
|---
|(1)




Use of  Estimates - The preparation of financial statements in  conformity with accounting principles generally accepted in the United States  of America requires management to make estimates and assumptions that affect  the amounts reported in the financial statements and accompanying notes. Actual  results could differ from these estimates.





Revenue  Recognition - The  Company derives revenues from performance of services and the sale of  equipment.  Service revenues are  recognized at the time services are performed.   The Companys sales are typically not subject to rights of return and,  historically, sales returns have not been significant.  Revenue related to equipment sales is  recognized when the equipment has been shipped and title and risk of loss have  passed to the customer.  Deferred  revenue, net of related deferred cost of sales, is recorded as unearned  revenues in Deferred Revenue in the accompanying balance sheets based on the  relative days completed on the job to total required.





Earnings  Per Share - The Company presents basic and diluted earnings  per share (EPS) on the face of the statement of operations and a  reconciliation of the numerator and denominator of the basic EPS computation to  the numerator and denominator of the diluted EPS computation.





Basic EPS excludes dilution and is computed by dividing income  available to common stockholders by the weighted-average number of common  shares outstanding for the period. Diluted EPS reflects the potential dilution  that could occur if securities or other contracts to issue common stock were  exercised or converted into common stock or resulted in the issuance of common  stock that shared in the earnings of the entity. The number of common stock  equivalents is determined using the treasury stock method. Options have a  dilutive effect under the treasury stock method only when the average market  price of the common stock during the period exceeds the exercise price of the  options.





Segment  Reporting - The Company reports its business segments in  accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and  Related Information, which establishes standards for the way that  public business enterprises report information about operating segments in  annual financial statements and requires





F-14





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




selected information about operating segments in interim financial  reports.  Financial information is  required to be reported on the basis that is used internally for evaluating  segment performance and deciding how to allocate resources to segments.  The financial information required includes  a measure of segment profit or loss, certain specific revenue and expense  items, segment assets and a reconciliation of each category to the general  financial statements.  The descriptive  information required includes the way that the operating segments were  determined, the products and services provided by the operating segments,  differences between the measurements used in reporting segment information and  those used in the general purpose financial statements and changes in the  measurement of segment amounts from period to period (see Note 19).





Recent  Accounting Pronouncements  On December 21, 2004, the  Financial Accounting Standards Board (FASB) issued Staff Position (FSP) FAS  109-1, Application  of FASB Statement No. 109, Accounting for Income Taxes, to the Tax  Deduction on Qualified Production Activities Provided by the American Jobs  Creation Act of 2004, was issued. FSP FAS 109-1 clarifies that this tax  deduction should be accounted for as a special deduction in accordance with  Statement 109.  As such, the special  deduction has no effect on deferred tax assets and liabilities existing at the  date of enactment.  Rather, the impact  of this deduction will be reported in the period in which the deduction is  claimed on the Companys tax return beginning in 2005.





In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based  Payment (SFAS No. 123(R)).   This Statement requires that the costs of employee share-based payments  be measured at fair value on the awards grant date using an option-pricing  model and recognized in the financial statements over the requisite service  period.  This Statement does not change  the accounting for stock ownership plans, which are subject to American  Institute of Certified Public Accountants SOP 93-6, Employers Accounting for Employee  Stock Ownership Plans.   Statement 123(R) supersedes Opinion 25, Accounting for Stock Issued to  Employees and its related interpretations, and eliminates the  alternative to use Opinion 25s intrinsic value method of accounting, which the  Company is currently using.  Certain  stock awards may be considered liabilities instead of equity components under  SFAS No.
123(R).





SFAS No. 123(R) allows for two alternative transition methods.  The first method is the modified prospective  application whereby compensation cost for the portion of awards for which the  requisite service has not yet been rendered that are outstanding as of the  adoption date will be recognized over the remaining service period.  The compensation cost for that portion of  awards will be based on the grant-date fair value of those awards as calculated  for pro forma disclosures under SFAS No. 123, as originally issued.  All new awards and awards that are modified,  repurchased, or cancelled after the adoption date will be accounted for under  the provisions of SFAS No. 123(R).  The  second method is the modified retrospective application, which requires that  the Company restates prior period financial statements.  The modified retrospective application may  be applied either to all prior periods or only to prior interim periods in
the  year of adoption of this statement.  The  Company adopted the modified prospective application method on January 1,  2006 and does not expect a material impact on its financial statements.





In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4,  which is effective for inventory costs incurred during fiscal years beginning  after June 15, 2005.  The amendments  made by SFAS No. 151 require that abnormal amounts of idle facility expense,  freight, handling costs, and wasted materials (spoilage) be recognized as  current-period charges and require the allocation of fixed production overheads  to inventory based on the normal capacity of the production facilities.  The Company does not believe that the  adoption of SFAS No. 151 will have a significant effect on its financial  statements.





In December 2003, the FASB issued Interpretation No. 46 (revised  December 2003) (FIN 46(R)), Consolidation  of Variable Interest Entities, an interpretation of ARB 51. The  primary objectives of FIN 46(R) are to provide guidance on the identification  of entities for which control is achieved through means other than through  voting rights (variable interest entities or VIEs) and how to determine if  a business enterprise should consolidate the VIEs. This new model for  consolidation applies to an entity for which either: the equity investors (if  any) do not have a controlling financial interest; or the equity investment at  risk is insufficient to finance the entitys activities without receiving  additional subordinated financial support from other parties. In addition, FIN  46(R) requires that all enterprises with a significant variable interest in a  VIE make additional disclosures regarding their
relationship with the VIE. The  interpretation requires public entities to apply FIN 46(R) to all entities that  are considered Special Purpose Entities in practice and under the FASB  literature that was applied before the issuance of FIN 46(R). The adoption of  FIN 46(R) had no effect on the Companys financial statements.





F-15





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




Note 5 - Discontinued Operations





On August 6, 2004, the Company completed the sale of its assets  associated with its directional drilling business, (referred to as the  Multi-Shot Business) pursuant to an Asset Purchase Agreement entered into on  June 3, 2004. The buyer of the Multi-Shot Business was a newly-organized Texas  limited liability company, with the name Multi-Shot, LLC, which included among  its members Allen Neel, formerly the Executive Vice President of the Company,  as well as two of the Companys other former employees employed in the  Multi-Shot Business.  These persons are  referred to as the Key Multi-Shot Employees.   The Company was advised that as of August 6, 2004, these persons held  less than a 10% equity interest in the buyer.





The transaction included the sale of all the Companys assets used in  the Multi-Shot Business, including certain real property located in Odessa,  Texas; improvements and fixtures located on the property; machinery and  equipment, receivables, inventories, tangible and intangible assets and all  books, records and files.





The purchase price was $11.0 million consisting of $10.4 million in  cash and approximately $628,000 payable by assignment and release by the Key  Multi-Shot Employees of their claims under their employment agreements with the  Company to change of control payments that may be due in the aggregate of that  amount.  The purchase price was subject  to adjustment at and as of the closing of the sale for increases and decreases  in the Multi-Shot Business net working capital of $270,000 as of November 30,  2003 and increases and decreases in its inventory of approximately $5,207,000  as of December 31, 2003.





In February 2005, the Company entered into a  Compromise Agreement with the buyer resolving certain matters that had arisen  under the Asset Purchase Agreement subsequent to the closing.  Among the matters resolved were the  determination of the final purchase price adjustment under the asset purchase  agreement and resolution of the capital expenditure note issued by the buyer at  the closing.  Pursuant to the Compromise  Agreement, the Company paid to the buyer $940,000, and the principal amount of  the buyers capital expenditure note, which was increased to approximately  $168,000, was deemed paid.  Among other  things, the Companys payment reflected a compromise with respect to any and  all claims of the buyer with respect to accounts receivable and also reflected  a compromise with respect to the final purchase price adjustment.  In addition, the Companys representations  warranties and covenants in the Asset
Purchase Agreement as to the Multi-Shot  Business relating to inventory, net working capital, purchase price  adjustments, financial statements, accounts receivable, condition of assets  (other than real property and leased real property) were agreed not to survive  the execution of the Compromise Agreement.   Otherwise, the representations warranties and covenants survive the  closing under the Asset Purchase Agreement to the extent provided in the  agreement.





Out of the net cash proceeds from the sale of the Multi-Shot Business,  approximately $9.6 million was applied to the reduction of indebtedness owing  to the Companys senior secured creditor.





Note 6 - Related Party Transactions





Change of control expense of $2.7 million was recognized in 2005 as a  result of a change in the general partner of St. James Capital Corp. which,  under the terms of certain key employee contracts, required payments to be made  to those employees.





The Company has executed notes payable to SJMB and SJCP.   The chairman and an employee of SJMB,  L.L.C., the general partner of SJMB, both serve on the Companys Board of  Directors.  At December 31, 2005 and  2004, notes due to SJMB, SJCP and other related parties totaled $21,902,375 and  $24,566,882, respectively.  The notes  bear interest at 15%.  Interest expense  associated with these notes was as follows:





|                 |  | 2005 |            | 2004 |   | 2003       | 
|---------------- |  | ---- | ---------- | ---- | - | ---------- | 
|                 |  |      |            |      |   |            | 
|Interest expense |  | $    | 3,461,000  |      | $ | 3,723,000  | 
|Accrued interest |  | $    | 18,151,000 |      | $ | 17,133,000 | 




F-16





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




In September 2001, the Company agreed to pay to SJMB a fee of  approximately $274,000 in consideration of SJMB providing cash collateral of  $8.2 million deposited to secure the performance of the continuing guaranty  extended by SJMB of the Companys former financing arrangement with Coast  Business Credit (Coast), a financial institution.  In addition, SJMB, L.L.C., the general partner of SJMB, received  a fee in September 2001 of $200,000 for services provided by SJMB, L.L.C. in  connection with the Company entering into a credit facility from GECC in  September 2001 (see Note 9).  Under the  terms of the Companys Senior Secured Credit Agreement, the Company is  restricted from paying any further sums to either SJMB or SJMB, L.L.C. until  GECC is repaid in full except that a fee of $274,000 can be paid to SJMB on the  date the Company completes its first offering of stock after December 16,  2005.   The $274,000
fee due to SJMB has  not yet been paid and is included in non-current liabilities at December 31,  2005.





In February 2001, the Company issued to a Director of the Company and  SJCP five-year warrants to purchase 70,000 and 40,000 shares, respectively, of  the Companys Common Stock at exercise prices of $7.50 per share.  The warrants were issued in consideration of  guarantees extended to Coast by the Director and SJCP in connection with the  Companys borrowings from Coast in 2000.





In connection with the five year employment agreement effective January  1, 2002 entered into with Mr. Jenkins to remain as the Companys President and  Chief Executive Officer, the Company agreed to loan Mr. Jenkins $190,000,  bearing interest at the applicable federal rate, to be repaid at the rate of  one-third of the principal, plus accrued interest on October 1 of each of the  years 2002, 2003 and 2004.  If Mr.  Jenkins remained employed by the Company on September 30 preceding the date  annual principal and interest is due on the loan, the sum due and owing the  following day is forgiven.  In the event  of a Change of Control, as defined, the death or permanent disability of Mr.  Jenkins or in the event his employment is terminated without cause, the entire  amount owing by Mr. Jenkins was to be forgiven.  The Company amortized the loan balance as compensation cost over  the life of the loan.  Compensation  expense related to
the loan for the years ended December 31, 2004 and 2003 was  approximately $62,000 and $82,000, respectively.  At December 31, 2004, the loan had been fully amortized and the  balance of the loan was $0.





See Notes 9 and 11 for financing arrangements and common stock  transactions with related parties.





Note 7 - Property, Plant and  Equipment





Property, plant and equipment include the following at December 31,  2005 and 2004:


|                                     |  | 2005 |            | 2004 |  
|------------------------------------ |  | ---- | ---------- | ---- | -
|                                     |  |      |            |      |  
|Land and building                    |  | $    | 157,250    |      | $
|Vehicles                             |  |      | 21,171,140 |      |  
|Operating equipment                  |  |      | 44,576,507 |      |  
|Office equipment                     |  |      | 1,680,172  |      |  
|                                     |  |      |            |      |  
|                                     |  |      | 67,585,069 |      |  
|Less: accumulated depreciation       |  |      | 35,834,592 |      |  
|                                     |  |      |            |      |  
|Net property, plant and    equipment |  | $    | 31,750,477 |      | $
|                                     |  |      |            |      |  




Depreciation expense for the years ended December 31, 2005, 2004 and  2003 was $5,038,250, $6,630,847 and $7,608,383, respectively.





Reference is made to Note 5 for discussion of  the sale of the Companys directional drilling business.





Note 8 - Goodwill and Intangible  Assets





On December 16, 2005, the Company acquired 100% of the outstanding  equity securities of Bobcat.  The  purchase price was approximately $51.5 million in cash plus $1.7 million in acquisition  costs.  The acquisition has been





F-17





---



Back to Contents





Warrior  Energy Services Corporation


Notes to  Financial Statements


For the  Years Ended December 31, 2005, 2004 and 2003


---




accounted for as a purchase, and, accordingly, the acquired assets and  liabilities have been recorded at their fair value at the date of  acquisition.  The operating results  arising from the acquisition of Bobcat since December 16, 2005 are included in  the Companys statement of operations.





The purchase price for Bobcat was allocated based on the fair value of  the assets acquired and liabilities assumed, and the excess cost of $12.8  million is recorded as goodwill and is subject to an annual test of impairment  as mandated by SFAS No. 142.





In 2003, in connection with the Companys plans to dispose of its  directional drilling division, management analyzed under SFAS No. 142 the  carrying value of its goodwill carried on its balance sheet arising out of the  1997 acquisition of Diamondback Directional, Inc and the 1998 acquisition of  Phoenix Drilling Services.  This  analysis resulted in a charge to operations for the year ended December 31,  2003 in the amount of approximately $1.7 million.





Changes in the carrying amount of the Companys goodwill and intangible  assets for the years ended December 31, 2005 and 2004 were as follows:


|                                                                           |  | Goodwill |            | Intangibleassets |   | Accumulatedamortization | 
|-------------------------------------------------------------------------- |  | -------- | ---------- | ---------------- | - | ----------------------- | 
|                                                                           |  |          |            |                  |   |                         | 
|Balance at December 31, 2002                                               |  | $        | 1,237,416  |                  | $ |                        | 
|                                                                           |  |          |            |                  |   |                         | 
|Balance at December 31, 2003                                               |  |          | 1,237,416  |                  |   |                        | 
|                                                                           |  |          |            |                  |   |                         | 
|Balance at December 31, 2004                                               |  |          | 1,237,416  |                  |   |                        | 
|Acquisition of Bobcat                                                      |  |          |            |                  |   |                         | 
|Trademarks, trade names                                                    |  |          |           |                  |   | 1,224,949               | 
|Non-compete agreements                                                     |  |          |           |                  |   | 2,588,988               | 
|Customer relationships                                                     |  |          |           |                  |   | 25,422,556              | 
|Manufacturing technical    expertise                                       |  |          |           |                  |   | 604,547                 | 
|Excess cost
      over fair value of net assets and related deferred taxes |  |          | 12,802,766 |                  |   |                        | 
|                                                                           |  |          |            |                  |   |                         | 
|Balance at December 31, 2005                                               |  | $        | 14,040,182 |                  | $ | 29,841,040              | 
|                                                                           |  |          |            |                  |   |                         | 




The  following table summarizes the estimated amortization of the intangible assets  for the next five years:





|Estimated amortization expense:      |  |   |           | 
|------------------------------------ |  | - | --------- | 
|For the year ended December 31, 2006 |  | $ | 2,557,833 | 
|For the year ended December 31, 2007 |  | $ | 2,557,833 | 
|For the year ended December 31, 2008 |  | $ | 2,522,367 | 
|For the year ended December 31, 2009 |  | $ | 1,694,837 | 
|For the year ended December 31, 2010 |  | $ | 1,694,837 | 




F-18





---



Back to Contents





Warrior Energy Services Corporation


Notes to Financial Statements


For the Years Ended December 31, 2005, 2004 and 2003


---




Note 9 - Long-Term Debt and Other Financing  Arrangements





At December 31, 2005 and 2004, long-term debt and other financing  arrangements consisted of the following:





|                                                                                                                                                                                                                                             |  | 2005 |            | 2004 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | -
|                                                                                                                                                                                                                                             |  |      |            |      |  
|Installment notes payable,    monthly payments required in varying amounts through July 2007, interest at    rates ranging from 2.90% to 7.17%.                                                                                              |  | $    | 1,206,419  |      | $
|Notes payable to General    Electric Capital Corporation, quarterly payments of $1,071,429 through    December 2008 with final installment of $17,142,852 due in January 2009,    interest at prime plus 2.25% (9.50% at December 31, 2005). |  |      | 30,000,000 |      |  
|Notes payable to General    Electric Capital Corporation due in total in March 2009, interest at prime    plus 6.00% (13.25% at December 31, 2005).                                                                                          |  |      | 25,000,000 |      |  
|Revolving line of credit to    General Electric Capital Corporation, interest at prime plus 0.75% (8.00% at    December 31, 2005).                                                                                                           |  |      | 214,813    |      |  
|                                                                                                                                                                                                                                             |  |      |            |      |  
|Less:                                                                                                                                                                                                                                        |  |      | 56,421,232 |      |  
|                                                                                                                                                                                                                                             |  |      |            |      |  
|Current    portion of long-term debt(see below)                                                                                                                                                                                              |  |      | 5,168,880  |      |  
|                                                                                                                                                                                                                                             |  |      |            |      |  
|Long-term    debt, less current maturities                                                                                                                                                                                                   |  | $    | 51,252,352 |      | $
|                                                                                                                                                                                                                                             |  |      |            |      |  




Notes payable to related parties consist of the following at December  31, 2005 and 2004:





|                                                                                                                                                                                                                                                  |  | 2005 |            | 2004 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | -
|                                                                                                                                                                                                                                                  |  |      |            |      |  
|Convertible notes payable    to SJCP, principal and interest due in June 2009, interest at 15%.    Convertible at $7.50 per share at any time up to 30 business days following    maturity                                                        |  | $    | 4,900,000  |      | $
|Convertible note payable to    SJMB, principal and interest due in June 2009, interest at 15%.  Convertible at $7.50 per share at any time    up to 30 business days following maturity                                                           |  |      | 13,700,000 |      |  
|Convertible note payable to    Falcon Seaboard,  principal and    interest due in February 2008, interest at 15% Repaid in December 2005.                                                                                                         |  |      |           |      |  
|15% convertible notes    payable to affiliates of SJMB and certain employees, principal and interest    originally due January 2001, extended to June 2009.  Convertible at $7.50 per share at anytime  up to 30 business days following maturity |  |      | 3,302,375  |      |  
|                                                                                                                                                                                                                                                  |  |      |            |      |  
|Less:                                                                                                                                                                                                                                             |  |      | 21,902,375 |      |  
|Current    portion of notes payable to related parties(see below)                                                                                                                                                                                 |  |      |           |      |  
|Total    long-term notes payable to related parties                                                                                                                                                                                               |  | $    | 21,902,375 |      | $
|                                                                                                                                                                                                                                                  |  |      |            |      |  




F-19





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003





On December 16, 2005, the Company entered into the Senior Secured  Credit Agreement with GECC, providing for a term loan and revolving and capital  expenditure credit facilities in an aggregate amount of $50.0 million. The  Senior Secured Credit Agreement amended, restated and modified the credit  agreement the Company entered into with GECC as of September 14, 2001 and as it  was amended and restated on November 14, 2004, including the amendments  thereto. The Senior Secured Credit Agreement includes:





| | a revolving credit facility of up to $15.0 million,    but not exceeding a borrowing base of 85% of the book value of eligible    accounts receivable, less any reserves GECC may establish from time to time,                                                        
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                       
| | a term loan of $30.0 million, and                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                       
| | a one-year capital expenditure loan facility of up    to $5.0 million, but not exceeding the lesser of 80% of the hard costs of    eligible capital equipment and 75% of the forced liquidation value of    eligible capital equipment, subject to adjustment by GECC.




Eligible accounts receivable are accounts in which we have an interest  excluding, among other items and, subject to certain exceptions, debtors  accounts outstanding that are not paid within the earlier of 60 days past the  due date or 90 days following the original invoice date, accounts of debtors  that have suspended business or commenced various insolvency proceedings and  accounts to the extent the account exceeds the credit limit established by GECC  in its reasonable credit judgment. GECC has the right to establish, modify and  eliminate reserves against eligible accounts receivable from time to time in  its reasonable judgment.





GECCs agreement to make revolving loans expires on December 16, 2008  and its agreement to make capital expenditure loans expires on December 16,  2006, unless earlier terminated under the terms of the Senior Secured Credit  Agreement.





Interest  Rates. Initially, as of the closing, the annual interest rate  on borrowings under the revolving loan facility is 0.75% above the index rate,  and the annual interest rate on borrowings under the term loan and capital  expenditure loan facility is 2.25% above the index rate. The index rate is a floating  rate equal to the higher of (i) the rate publicly quoted from time to time by  the Wall Street Journal as the prime rate, or (ii) the average of the rates on  overnight Federal funds transactions among members of the Federal Reserve  System plus 0.5%. The interest rate margin above the index rate may be adjusted  from time to time on a quarterly basis based on the Companys ratio of its  funded debt to EBITDA for the trailing twelve months prior to the  determination. Subject to the absence of an event of default and fulfillment of  certain other conditions, we can elect to borrow or convert any loan and pay  the annual interest at the
LIBOR rate plus applicable margins of 2.25% on the  revolving loan and 3.75% on the term loan and capital expenditure loan. If an  event of default in the nature of a failure to make any payment of principal,  interest on or fees owing in respect to loans when due and payable or the  commencement of bankruptcy proceedings involving us has occurred, the annual  interest rate is increased by 2% and, if any other default or event of default  has occurred and is continuing, GECC may elect to increase the interest rate by  that amount.





Collateral.  Advances under the Senior Secured Credit Agreement are collateralized by a  senior lien against substantially all of the Companys assets.





Use of  Proceeds. Initial borrowings under the Senior Secured Credit  Agreement advanced on December 16, 2005 were $1.3 million borrowed under the  revolving loan and $30.0 million under the term loan. No borrowings were made  under the capital expenditure loan facility. The proceeds of the term loan were  used to pay a portion of the Bobcat acquisition purchase price, related fees  and expenses and repayment of substantially all Bobcat indebtedness, and  approximately $2.1 million was placed in escrow for the repayment of principal  and accrued interest on subordinated secured indebtedness and approximately  $2.8 million was used for general corporate purposes.  The outstanding balance of approximately $6.3 million under the  Companys previous credit agreement with GECC was paid out of the Companys  existing cash.





Maturity  of Loans. Borrowings under the revolving loan are able to be  repaid and re-borrowed from time to time for working capital and general  corporate needs, subject to our continuing compliance with the terms of the  agreement.





F-20





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003





Any amounts outstanding under the revolving loan are due and payable on  December 16, 2008. The term loan is to be repaid in 12 consecutive quarterly  installments of $1.1 million commencing January 1, 2006 with a final  installment of $16.8 million due and payable on January 1, 2009. The capital  expenditure loan is to be repaid in eight consecutive quarterly installments  with each quarterly installment equal to 1/20th of the borrowings funded prior  to the expiration of the one-year term of the facility and with a final installment  in the amount of the remaining principal balance due on December 16, 2008.





Mandatory  and Voluntary Prepayments. Borrowings under the Senior  Secured Credit Agreement are subject to certain mandatory pre-payments  including, among other requirements, pre-payment out of a portion of the net  proceeds of any sale of stock by us in a public offering. We must apply the net  proceeds from any sale of our stock, other than on exercise of existing  warrants and conversion rights, occurring before December 31, 2006 to the  prepayment of loans. Such cash proceeds, after deduction of underwriting  discounts and commissions and other reasonable costs we incur are to be applied  to the prepayment of (i) loans outstanding under our Senior Secured Credit  Agreement, (ii) loans outstanding under our Second Lien Credit Agreement, and  (iii) to prepay or redeem all our outstanding subordinated notes and shares of  our common stock owned by St. James Capital Partners, L.P., SJMB, L.P. and  other holders of our subordinated secured notes as of
December 16, 2005, the  shares of our common stock issued in exchange for warrants, subordinated notes  and other convertible securities pursuant to the recapitalization agreements we  entered into in October 2005, a fee in the amount of $274,000 owing to SJMB,  L.P. and Change of Control payments in the aggregate amount of approximately  $2.6 million we are required to make under the terms of employment agreements  with certain of our employees, as the term Change of Control is defined in  those agreements (herein, amounts to be paid under this subsection (iii) are  referred to as Junior Capital), in the following manner:





| | (A) 100% of the first $50.0 million in net proceeds    received are to be applied to prepay or redeem the Junior Capital;                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (B) net proceeds in excess of $50.0 million and up    to $75.0 million are to be allocated 40% to prepay or redeem the Junior    Capital, 30% to prepay loans outstanding under our Senior Secured Credit    Agreement and 30% to prepay loans outstanding under our Second Lien Credit    Agreement;     
| | (C) net proceeds in excess of $75.0 million and up    to $100.0 million are to be allocated 60% to prepay or redeem the Junior    Capital, 20% to prepay loans outstanding under our Senior Secured Credit    Agreement and 20% to prepay loans outstanding under our Second Lien Credit    Agreement; and
| | (D) net proceeds in excess of $100.0 million are to    be allocated 80% to prepay or redeem the Junior Capital, 10% to prepay loans    outstanding under our Senior Secured Credit Agreement and 10% to prepay loans    outstanding under our Second Lien Credit Agreement.                               




To the extent the Junior Capital is paid or repurchased in full under  the foregoing provisions prior to the prepayment in full of loans outstanding  under our Credit Agreements, the remaining net proceeds are to be allocated 50%  to loans outstanding under our Credit Agreements. If any event of default has  occurred under our Senior Secured Credit Agreement and is continuing, and we  have been notified in writing of such event of default (or we have been  notified in writing of the equivalent event of default under the Second Lien  Credit Agreement), at the time we receive the net proceeds, 100% of such net  proceeds are to be allocated to the loans outstanding under our Senior Secured  Credit Agreement, without application of any portion thereof to Junior Capital  or loans under the Second Lien Credit Agreement.





If the Company issues any shares of common stock, other than as  described above, or any debt at any time, we are required to prepay the loans  outstanding under the Senior Secured Credit Agreement in an amount equal to all  such proceeds, net of underwriting discounts and commissions and other  reasonable costs.





The Company is also required to prepay annually, commencing with the  fiscal year ending December 31, 2006, loans and other outstanding obligations  under the Senior Secured Credit Agreement in an amount equal to seventy-five  percent 75% of our excess cash flow for the immediately preceding fiscal year.  Excess cash flow is defined, with respect to any fiscal year, as our net income  plus depreciation, amortization and interest expense, to the extent deducted in  determining net income, minus capital expenditures, minus interest expense paid  or accrued and





F-21





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003


scheduled principal payments paid or payable, plus or minus, extraordinary gains or losses which are cash items not included in net income, plus taxes deducted in determining net income to the extent not paid in cash. Any mandatory prepayments made as provided above are to be applied  substantially as follows: first, to any fees then due and payable to GECC,  second, to interest then due and payable on the term loan and capital  expenditure loan, pro rata between the term loan and capital expenditure loan,  third, to prepay the scheduled principal installments on the term loan and  capital expenditure loan, allocated pro rata between the term loan and capital  expenditure loan, and applied to principal installments in inverse order of  maturity, until the term loan and capital expenditure loan have been prepaid in  full; fourth, to interest then due and payable on the revolving loan; and  fifth, to the principal balance of the revolving loan until the same shall have  been paid in full. The revolving loan is permanently reduced by the amount of  any such prepayments.





The Company may at any time prepay all or part of the term loan or  capital expenditure loan, permanently reduce or terminate the capital  expenditure commitment, and permanently reduce but not terminate the revolving  loan commitment provided such prepayments or reductions are in the minimum  amount of $500,000 and integral multiples of $250,000, subject to the payment  of certain pre-payment fees declining from 1.0% in the event the termination or  reduction occurs during the first year, 0.5% in the event the termination or  reduction occurs during the second year, and 0.25% in the event the termination  or reduction occurs during the third year of the term of the Senior Secured  Credit Agreement. The Company is required to use, subject to certain  exceptions, the net proceeds from the sale of any assets or the stock of any  subsidiary to prepay all borrowings under the facilities. The Company is  required to repay any borrowings in excess of the applicable
borrowing  availability, including borrowings under the term loan in excess of 70% of the  forced liquidation value of eligible term loan equipment. The forced  liquidation value of the eligible term loan equipment is established by  appraisal conducted from time to time but not more than twice per year.





Conditions  to Advances. Future advances are subject to the continuing  accuracy of our representations and warranties as of such date (other than  those relating expressly to an earlier date), the absence of any event or  circumstance constituting a material adverse effect, as defined, the absence  of any default or event of default under the Senior Secured Credit Agreement,  and the borrowings not exceeding the applicable borrowing availability under  the Senior Secured Credit Agreement, after giving effect to such advance. A  material adverse effect is defined to include a material adverse effect on  our business, assets, operations, prospects or financial or other condition, on  our ability to pay any of the loans under the Senior Secured Credit Agreement,  on the collateral or on lenders liens or rights and remedies under the Senior  Secured Credit Agreement. An event constituting a material adverse effect also  includes a
decline in the Average Rig Count (excluding Canada and  international rigs) published by Baker Hughes, Inc. falling below 800 for 12  consecutive weeks. Further conditions to each advance under the capital  expenditure facility require the delivery of evidence that the advance is in  compliance with the conditions of the Senior Secured Credit Agreement with  respect to amounts that may be borrowed to finance capital expenditures.





Affirmative  and Negative Covenants. Under the Senior Secured Credit  Agreement, the Company is obligated to maintain compliance with a number of  affirmative and negative covenants. Affirmative covenants the Company must  comply with include requirements to maintain our corporate existence and  continue the conduct of the Companys business substantially as conducted in  December 2005, promptly pay all taxes and governmental assessments and levies,  maintain our corporate books and records, maintain insurance in form and amounts  and with insurers reasonably acceptable to GECC, comply with applicable laws  and regulations, maintain key man life insurance on the life of William L.  Jenkins, provide supplemental disclosure to the lenders, refrain from violating  the intellectual property of others, conduct our operations in compliance with  environmental laws, provide a mortgage or deed of trust to the lenders granting  a first lien on the
  Companys real estate upon the request of the lenders, and  provide certificates of title on newly acquired equipment with the lenders  lien noted. Negative covenants the Company may not violate include, among others and subject to limitations and exceptions, (i) forming or acquiring a subsidiary, (ii) merging with, acquiring all or substantially all the assets or stock of, or otherwise combining with or acquiring, another person, (iii) making an investment in or loan to another person, subject to certain exceptions for specified high grade investments so long as there are no revolving loans outstanding, (iv) incurring any indebtedness other than specified permitted indebtedness, (v) entering into any





F-22





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003
  transaction with an  affiliate except in the ordinary course of the Companys business and on fair  and reasonable terms no less favorable than would be obtained in a comparable  arms length transaction with a non-affiliated person, (vi) making loans to its  employees in amounts exceeding $50,000 individually and $250,000 in the  aggregate, (vii) issuing any shares of the Companys
  common stock if any of its  stock or the stock of a subsidiary is pledged to GECC, making any change in its  business objectives or operations that could adversely affect repayment of the  loans or could reasonably be expected to have or result in a material adverse  effect, making any change in its capital structure, including the issuance of  any stock, warrants or convertible securities or any revision in the terms of  outstanding stock except for permitted payments to holders of subordinated debt  and options granted under an existing or future incentive option plan, or  amending its charter or by-laws in a manner that would adversely affect its  duty or ability to repay the indebtedness, or engaging in any business other  than that engaged in by the Company on December 16, 2005; (viii) creating or  permitting to exist any liens on its properties or assets, with the exception  of (x) those granted to the lenders under the Senior Secured Credit Agreement  or in existence on the date of making the
  loan and permitted re-financings,  extensions and renewals of such liens provided the indebtedness secured is not  increased and the lien does not attach to any additional property, or (y) liens  created after December 16, 2005 by conditional sale or other title retention  agreements or in connection with purchase money indebtedness with respect to  equipment and fixtures acquired in the ordinary course of business involving  the incurrence of an aggregate amount of purchase money indebtedness and  capital lease obligations of not more than $2.0 million outstanding at any one  time or (z) liens securing the indebtedness under the Second Lien Credit  Agreement, (xi) selling any of its properties or other assets, including the  stock of any subsidiary, except inventory in the ordinary course of business,  obsolete or unused equipment or fixtures with an appraised value not exceeding  $200,000 per transaction and $500,000 per year, and other equipment and  fixtures with a book value not exceeding
  $200,000 per transaction and $500,000  per year, (xii) breaching or failing to comply with the various financial  covenants in the credit agreement, (xiii) releasing any hazardous material that  would violate environmental laws or adversely impact the value of any  collateral; (xiv) engaging in a sale leaseback, synthetic lease or similar  transaction, (xv) making any restricted payments, including payment of  dividends, stock or warrant redemptions, repaying subordinated notes, except as  otherwise permitted under the Senior Secured Credit Agreement, rescission of  the sale of outstanding stock, subject to certain exceptions including, among  others, permitted prepayments or redemptions of Junior Capital using the net  proceeds from a public offering of its common stock, payment of reasonable and  customary fees to its non-employee directors, reimbursement of the reasonable  expenses of St. James Capital Corp., St. James Capital Partners, L.P., SJMB,  LP, and SJMB, LLC in an amount not to exceed
  $60,000 per year, payment of a  $274,000 fee to SJMB, L.P. not later than December 31, 2006 or the date the  Company complete its first public offering of common stock after December 16,  2005, and Change of Control payments (as Change of Control is defined in  the employment agreements with the parties to receive the payments) on and  after December 16, 2005 but before December 31, 2005 in the amount of  approximately $1.1 million, and, in connection with in a contemplated public  offering of shares of its common stock, in an aggregate amount not to exceed approximately  $2.7 million, (xvi) purchasing any real estate in excess of $250,000,  (xvii) engaging in any speculative hedging transactions; (xviii) amending  or changing the terms of its subordinated debt, (xix) changing or amending the  Second Lien Credit Agreement, or (xx) changing or amending the Bobcat  acquisition agreement.





The financial covenants prohibit the Company from making capital  expenditures in any fiscal year commencing with the fiscal year ending December  31, 2006 in an aggregate amount exceeding $6.5 million (excluding amounts  financed under its capital expenditure loan facility), plus in any subsequent  period the amount by which $6.5 million exceeds the amount of capital  expenditures expended in the prior period.





Commencing with the fiscal quarter ending March 31, 2006, the Company  is required to have at the end of each fiscal quarter and for the 12-month  period then ended, a ratio of (a) EBITDA minus capital expenditures paid in  cash during such period, excluding capital expenditures financed under the  Senior Secured Credit Agreement, minus income taxes paid in cash during such  period to (b) fixed charges including, with certain exceptions, the total of  principal and interest payments during such period, of not less than 1.5:1.0.  For the purpose of calculating the ratio for the fiscal quarters ending March  31, 2006, June 30, 2006 and September 30, 2006, EBITDA and fixed charges are to  be measured for the period commencing on January 1, 2006 and ending on the last  day of such fiscal quarter.





The Company is required to have, at the end of each fiscal month, a  ratio of funded debt to EBITDA as of the last day of such fiscal month and for  the 12-month period then ended of not more than the following:





F-23





---



Back to Contents


Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003
 
 
  2.25:1.00 for the fiscal months ending on January    31, 2006 through March 31, 2006;
  2.25:1.00 for the fiscal months ending on April 30,    2006 through June 30, 2006;
  2.00:1.00 for the fiscal months ending on July 31,    2006 through September 30, 2006;
  2.00:1.00 for the fiscal months ending on October    31, 2006 through December 31, 2006;
  2.00:1.00 for the fiscal months ending on January    31, 2007 through March 31, 2007; and
  1.75:1.00 for each fiscal month ending thereafter. 
 The Company is required to have, at the end of each fiscal month,  EBITDA for the 12-month period then ended of not less than the following:
 
 
  $33,000,000 for the fiscal months ending on January    31, 2006 through March 31, 2006;
  $33,000,000 for the fiscal months ending on April    30, 2006 through June 30, 2006;
  $34,000,000 for the fiscal months ending on July 31,    2006 through September 30, 2006;
  $34,000,000 for the fiscal months ending on October    31, 2006 through December 31, 2006; and
  $35,000,000 for each fiscal month ending thereafter. 
 Events  of Default. Events of default under the Senior Secured Credit  Agreement include, among others and subject to certain limitations, (a) the  failure to make any payment of principal, interest, or fees when due and  payable or to pay or reimburse GECC for any expense reimbursable under the  Senior Secured Credit Agreement within ten days of demand for payment, (b) the  failure to perform the covenants under the Senior Secured Credit Agreement  relating to use of proceeds, maintenance of a cash management system,  maintenance of insurance, delivery of certificates of title for equipment,  delivery of certain post-closing documents, and maintenance of compliance with  the Senior Secured Credit Agreements negative covenants, (c) the failure to  deliver to the lenders monthly un-audited, quarterly un-audited and annual  audited financial statements, an annual operating plan, and other reports,  certificates and information as required by the
Senior Secured Credit  Agreement, (d) the failure to perform any other provision of the Senior Secured  Credit Agreement (other than those set forth in (b) above) which nonperformance  remains un-remedied for 20 days or more, (e) a default or breach under any  other agreement or instrument to which we are a party beyond any grace period  that involves the failure to pay in excess of $250,000 or causes or permits to  cause indebtedness in excess of $250,000 to become due prior to its stated  maturity, (f) any information in a borrowing base certificate or any  representation or warranty or certificate or in any written statement report,  or financial statement delivered to GECC being untrue or incorrect in any  material respect, (g) a change of control, as defined, of the Company, (h) the  occurrence of an event having a material adverse effect, (i) the initiation of  insolvency, bankruptcy or liquidation proceedings, (j) any final judgment for  the payment of money in excess of $250,000 is outstanding
against the Company  and is not within thirty days discharged, stayed or bonded pending appeal, (k)  any material provision of or lien under any document relating to the Senior  Secured Credit Agreement ceases to be valid, (l) the attachment, seizure or  levy upon of the Companys assets which continues for 30 days or more, and (m)  William Jenkins ceases to serve as the Companys chief executive officer,  unless otherwise agreed by GECC. Upon the occurrence of a default, which is  defined as any event that with the passage of time or notice or both would,  unless waived or cured, become an event of default, or event of default, the  lenders may discontinue making revolving loans and capital expenditure loans to  the Company and increase the interest rate on all loans. Upon the occurrence of  an event of default, the lenders may terminate the Senior Secured Credit  Agreement, declare all indebtedness outstanding under the Senior Secured Credit  Agreement due and payable, and exercise any of
their rights under the Senior  Secured Credit Agreement which includes the ability to foreclose on our assets.  In the event of a bankruptcy or liquidation proceeding, all borrowings under  the Senior Secured Credit Agreement are immediately due and payable.
 
 Second  Lien Credit Agreement
 
 The  Term Loan. On December 16, 2005, the Company entered into the  Second Lien Credit Agreement with GECC, providing for a term loan $25.0  million.
 
 Interest  Rate. The annual interest rate on borrowings under the term  loan is 6.0% above the index rate. The index rate is a floating rate equal to  the higher of (i) the rate publicly quoted from time to time by the Wall Street  Journal as the prime rate, or (ii) the average of the rates on overnight  Federal funds transactions among members of the
 
 F-24
 
   Back to Contents



Warrior Energy Services Corporation
  Notes to Financial Statements
  For the Years Ended December 31, 2005, 2004 and 2003



Federal Reserve System plus 0.5%. Subject to the absence of an event of default and fulfillment of certain other conditions, we can elect to borrow or convert any loan and pay the annual interest at the LIBOR rate plus a margin of 7.5%. If an event of default in the nature of a failure to make any payment of principal of, interest on or fees owing in respect to loans when due and payable or the commencement of bankruptcy proceedings involving us has occurred, the annual interest rate is increased by 2% and, if any other default or event of default has occurred and is continuing, GECC may elect to increase the interest rate by that amount.
  Collateral. The loan under the Second Lien Credit Agreement is collateralized by a junior  lien against substantially all of the Companys assets, subordinate to the lien  under the Senior Secured Credit Agreement.



Use of  Proceeds. Initial borrowings under the Second Lien Credit  Agreement advanced on December 16, 2005 of $25.0 million were used to pay a  portion of the Bobcat acquisition purchase price.



Maturity  of Loan. Outstanding borrowings under the Second Lien Credit  Agreement are due and payable on March 16, 2009, unless previously repaid.



Mandatory  and Voluntary Prepayments. Borrowings under the Second Lien  Credit Agreement are subject to certain mandatory pre-payments including, among  other requirements, pre-payment out of a portion of the net proceeds of any  sale of stock by the Company in a public offering in a manner substantially  identical to the mandatory repayment provisions out of a portion of the net  proceeds of any sale of stock by the Company in a public offering under the  terms of the Senior Secured Credit Agreement described above.



If the Company issues any shares of common stock, other than as  described above in a public offering of our securities, or any debt at any  time, the Company is required to prepay the loans outstanding under the Second  Lien Credit Agreement in an amount equal to all such proceeds, net of  underwriting discounts and commissions and other reasonable costs.



Any mandatory prepayments made as provided above are to be applied  substantially as follows: first, to any fees then due and payable to GECC, second,  to interest then due and payable on the loan and, third, to prepay the  principal of the loan.



The Company may at any time prepay all or part of the loan or capital  expenditure loan, subject to the payment of certain pre-payment fees declining  from 2.0% during the first year, 1.0% during the second year, and 0.5% in the  event the termination or reduction occurs during the third year of the term of  the Second Lien Credit Agreement. The Company is required to use, subject to  certain exceptions, the net proceeds from the sale of any assets or the stock  of any subsidiary to prepay all borrowings under the facilities.



Closing  Conditions. Initial borrowings under the Second Lien Credit  Agreement were subject to the fulfillment at or before the closing of closing  conditions substantially identical to the conditions to be fulfilled in  connection with the closing under the Senior Secured Credit Agreement described  above.



Affirmative  and Negative Covenants. Under the Second Lien Credit  Agreement, the Company is obligated to maintain compliance with a number of  affirmative and negative covenants, including financial covenants that are  substantially identical to the covenants we are obligated to comply with under  the terms of the Senior Secured Credit Agreement described above.



Events  of Default. Events of default under the Second Lien Credit  Agreement are substantially identical to events of default under the Senior  Secured Credit Agreement described above.



Credit  Agreements - General



There can be no assurance that the Company will be able to remain in  compliance with the financial and other covenants of the Senior Secured Credit  Agreement and the Second Lien Credit Agreement or be able to obtain such  amendments, consents or waivers with respect to potential violations of these  covenants when required. The Companys inability to do so may result in it  being placed in violation of those financial and other covenants. The Company  can make no assurances that it will remain in compliance with our debt  covenants or generate sufficient cash flows to service its debt and fund  operations. Failure to comply with these debt covenants and or generate  sufficient cash flow from operations could significantly impair its liquidity  position and could result in GECC exercising mandatory prepayment options under  the Senior Secured Credit Agreement and Second



F-25




Back to Contents



Warrior Energy Services Corporation
  Notes to Financial Statements
  For the Years Ended December 31, 2005, 2004 and 2003



Lien Credit Agreement. Should the Company be unable to borrow funds under the Senior Secured Credit Agreement or Second Lien Credit Agreement if prepayment of those borrowings were required, the Company can make no assurances that alternative funding could be obtained. Reference is made to the Senior Secured Credit Agreement and the Second  Lien Credit Agreement, filed as exhibits to the Companys Current Report on  Form 8-K for a complete statement of the terms and conditions.



Subordinated  Secured Indebtedness - Note Extensions



In connection with the Company entering into the GECC refinancing in  November 2004, the Company agreed with the holders of its outstanding  subordinated secured notes to extend the maturity date of the notes from  December 31, 2004 to February 13 and February 14, 2008 on $23.0 million of the  total $23.9 million principal amount of the notes then outstanding.  The remainder of the outstanding principal  was repaid.  Concurrently with the  borrowings under the Senior Secured Credit Agreement and Second Lien Credit  Agreement, the maturity date of approximately $21.9 million principal amount of  the Companys outstanding subordinated secured promissory notes was extended to  June 15, 2009 and $2.1 million of such subordinated secured notes, including accrued  interest, was repaid.  The notes bear  interest at 15% per annum and are convertible into shares of the Companys  common stock at a conversion price of $7.50 per share, subject
to an  anti-dilution adjustment for certain issuances of securities by the Company at  prices per share of common stock less than the conversion price then in effect,  in which event the conversion price is reduced to the lower price at which the  shares were issued.  As a condition to  extend the maturity date of the notes in connection with the GECC refinancing  in November 2004, the Company extended the expiration date of our 6.6 million  outstanding common stock purchase warrants to December 31, 2009.



All of the debt and interest owed under the  subordinated secured promissory notes is subordinated to the Senior Credit  Agreement and the Second Lien Credit Agreement and cannot be repaid until all  the amounts owed pursuant to the Credit Facility have been repaid.



Substantially all of the Companys  assets are pledged as collateral for the indebtedness outstanding under the  Secured Credit Agreement and the Second Lien Credit Agreement and subordinated secured promissory notes.



Maturities  of debt are as follows:



Fiscal Year2006
  
  $
  5,168,8802007
  
  
  4,602,7172008
  
  
  4,506,7782009
  
  
  64,045,2322010
  
  
  Thereafter
   
   
   $
  78,323,607

Note 10  - Commitments



The Company leases land, office space and equipment under various  operating leases. The leases expire at various dates through 2010.  Rent expense from continuing operations was  approximately $3,168,000, $1,760,000 and $1,648,000 for the years ended  December 31, 2005, 2004 and 2003, respectively.



The future minimum lease payments required under noncancelable leases  with initial or remaining terms of one or more years at December 31, 2005 were  as follows:



F-26




Back to Contents



Warrior Energy Services Corporation
  Notes to Financial Statements
  For the Years Ended December 31, 2005, 2004 and 2003



Fiscal Year
  
  OperatingLeases2006
  
  $
  785,9922007
  
  
  507,3972008
  
  
  398,3732009
  
  
  240,0252010
  
  
  76,446Thereafter
  
  
  Total    minimum lease payments
  
  $
  2,008,233

Pursuant to employment contracts, the Company expects to make success  bonus payments to certain key employees concurrently with the closing of its  public offering in the aggregate amount of approximately $2.6 million of which  $1.5 million is accrued as of December 31, 2005.



Note 11 - Common Stock Transactions and Warrants



In October 2005, the Company initiated a series of steps undertaken for  the purpose of recapitalizing the Company through the elimination of the  substantial amount of derivative securities it has outstanding, among other  steps intended to be undertaken. These derivative securities include common  stock purchase warrants to purchase 7,076,119 shares of the Companys common  stock and $35,019,173 of principal amount and accrued interest, as of December  31, 2005, of the Companys outstanding convertible subordinated notes which, as  of that date, are convertible at a conversion price of $7.50 per share into an  aggregate of 4,669,223 shares of the Companys common stock.



On October 6, 2005, the Company entered into agreements with the  holders of 5,269,369 of the 7,076,119 warrants outstanding to exchange those  warrants for 1,756,456 shares of the Companys common stock. Of the 5,269,369  warrants, an aggregate of 4,075,528 are held by the SJCP and SJMB, and  1,193,841 were held by the Underbrink Family Entities, which include Mr. Charles  E. Underbrink. Mr. Underbrink is one of the Companys directors and is the  Chairman of the general partner of SJMB and, in October 2005, was the Chairman  of the general partner of SJCP. The exchange of warrants for shares of the  Companys common stock by the Underbrink Family Entities was completed on  October 6, 2005 resulting in the issuance of 397,947 shares, and the  warrants to purchase 4,075,527 shares held by SJCP and SJMB are to be  repurchased in connection with the Companys proposed public offering.



On October 7, 2005, the Company commenced an offer to exchange shares  of its common stock for its remaining outstanding 1,806,750 common stock  purchase warrants. The Company offered to exchange one share of our common  stock for each three warrants. Each warrant represents the right to purchase  one share of the Companys common stock at an exercise price of $7.50 per  share. The offer to exchange shares of the Companys common stock for warrants  expired on November 14, 2005, and the Company issued 503,167 shares of its  common stock in exchange for 1,509,500 common stock purchase warrants.



The agreements with SJCP, SJMB and the Underbrink Family Entities  provide that such persons will convert an aggregate of $20,277,374 of principal  and all accrued interest (which amounted to $16,734,434 through December 31,  2005) on the Companys outstanding convertible subordinated notes into shares  of our common stock and, provided the price they are to receive is not less  than $7.50 per share, sell those shares to the Company, along with their  remaining warrants, the shares issued in exchange for certain of their  warrants, the shares issued on conversion of accrued interest in November 2005  and an additional 501,748 shares held by SJMB, at the closing time of the Companys  proposed public offering. The purchase price paid by the Company for such  shares will be the price per share it receives in the public offering less  commissions and expenses of the underwriters in the offering.  In addition, under the terms of a Registration
Rights Agreement, the holders of $3,041,361 principal amount and accrued  interest (as of December 31, 2005) on outstanding convertible subordinated  notes have the right to have included 405,515 shares issuable on conversion of  the principal and interest on the notes, as well as the shares of the Companys  common stock issued in exchange for their warrants, in the registration  statement relating to the Companys proposed public offering.



F-27



Back to Contents



Warrior Energy Services Corporation
  Notes to Financial Statements
  For the Years Ended December 31, 2005, 2004 and 2003



As of December 31, 2005, the Companys certificate of incorporation  permits it to issue up to 35,000,000 shares of common stock, of which 2,342,125  shares were issued and outstanding at December 31, 2005 and 1,250,415 shares  were issued and outstanding at December 31, 2004.  The Company has outstanding as of December 31, 2005 and 2004  common stock purchase warrants, options and convertible debt securities entitled  to purchase or be converted into an aggregate of 8,019,484 and 13,382,167  shares, respectively, of the Companys common stock at exercise and conversion  prices ranging from $7.50 to $26.30.



During 2004, the Company became obligated to issue five-year warrants  to purchase 802,856 shares of common stock to SJMB and related parties of SJMB  exercisable at $7.50 per share in connection with the extension of their  indebtedness (see Note 9).  These  warrants were issued in 2005.



During 2003, the Company issued five-year warrants to purchase 518,766  of common stock to SJMB and related parties of SJMB exercisable at $7.50 per  share in connection with the extension of their indebtedness (see Note 9).



During 2002, the Company issued five-year warrants to purchase 250,000  shares of common stock to William L. Jenkins, President and Chief Executive  Officer exercisable at $7.50 per share pursuant to his amended employment  agreement effective January 1, 2002 and expiring December 31, 2005 and extended  in March 2005 through January 1, 2008.



During 2002, the Company issued five-year warrants to purchase 242,209  to SJMB and affiliates of SJMB exercisable at $7.50 per share in connection  with the extension of their indebtedness (see Note 9).



During 2001, the Company issued to the Chairman of SJMB, L.L.C. and to  SJCP five-year warrants to purchase 70,000 and 400,000 shares, respectively, of  the Companys Common Stock at exercise prices of $7.50 per share.  The warrants were issued in consideration of  guarantees extended to a lender by the Chairman of SJMB, L.L.C. and SJCP in  connection with the Companys borrowings in 2000 and the guarantees of the  Chairman of SJMB, L.L.C. and SJCP of that indebtedness.



The warrants issued during 2004, 2003, 2002, 2001, 2000 and 1999 are  subject to Full Ratchet anti-dilution provisions. In December of 1999, the  Company issued the 14,350,000 warrants at an exercise price of $7.50.  Consequently, the anti-dilution provisions  on all warrants subject to the provision were triggered. Upon each adjustment  of the exercise price, the holder of the warrant shall thereafter is entitled  to purchase, at the exercise price resulting from the adjustment, the number of  shares of common stock obtained by multiplying the exercise price in effect  immediately prior to the adjustment by the number of shares purchasable prior  to the adjustment and dividing the product thereof by the exercise price  resulting from the adjustment. The following table summarizes information about  warrants outstanding at December 31, 2005:



SJCP Expires 12/31/09
  
  SJMB Expires 12/31/09
  
  Guarantor affiliated with SJCP Expires 12/31/09
  
  Lenders affiliated with SJMB  Expires 12/31/09
  
  Falcon Seaboard     Expires 12/31/09
  
  Harris Webb  &    Garrison Expires 3/15/03
  
  W. L. Jenkins Employment Agreement Expires 12/31/06
  
  TotalBalance, 12/31/02
  
  
  732,028
  
  
  2,756,250
  
  
  70,000
  
  
  2,570,841
  
  
  180,000
  
  
  38,462
  
  
  250,000
  
  
  6,597,580issuance
  
  
  
  
  
  146,250
  
  
  
  
  
  372,516
  
  
  
  
  
  
  
  
  
  
  
  518,766Balance, 12/31/03
  
  
  732,028
  
  
  2,902,500
  
  
  70,000
  
  
  2,943,357
  
  
  180,000
  
  
  38,462
  
  
  250,000
  
  
  7,116,347expirations/cancelled
  
  
  
  
  
  
  
  
  
  
  
  (1,245,623
  )
  
  
  
  
  (38,462
  )
  
  
  
  
  (1,284,084
  )issuance
  
  
  
  
  
  
  
  
  
  
  
  802,856
  
  
  
  
  
  
  
  
  
  
  
  802,856Balance, 12/31/04
  
  
  732,028
  
  
  2,902,500
  
  
  70,000
  
  
  2,500,591
  
  
  180,000
  
  
  
  
  
  250,000
  
  
  6,635,118exchange commitment
  
  
  (488,018
  )
  
  (1,788,000
  )
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (2,276,019
  )tender offer exchange
  
  
  
  
  
  
  
  
  (70,000
  )
  
  (2,383,341
  )
  
  
  
  
  
  
  
  (250,000
  )
  
  (2,703,341
  )Balance, 12/31/05
  
  
  244,009
  
  
  1,114,500
  
  
  
  
  
  117,250
  
  
  180,000
  
  
  
  
  
  
  
  
  1,655,759

F-28




Back to Contents



Warrior Energy Services Corporation
  Notes to Financial Statements
  For the Years Ended December 31, 2005, 2004 and 2003



Note 12 - Income Taxes



The (benefit)/provision for income taxes consists of the following for  the years ended December 31, 2005, 2004, and 2003:



2005
  
  2004
  
  2003Federal:Current
  
  $
  163,442
  
  $
  
  
  $
  Deferred
  
  
  
  
  
  
  
  
  163,442
  
  
  
  
  
  State:Current
  
  
  11,885
  
  
  
  
  
  Deferred
  
  
  
  
  
  
  
  
  11,885
  
  
  
  
  
  Total
  
  $
  175,327
  
  $
  
  
  $
  

The (benefit)/provision for federal income taxes differs from the  amount computed by applying the federal income tax statutory rate of 34% to the  Companys income/(loss) before income taxes, as follows:



2005
  
  2004
  
  2003Provision (benefit) at    federal statutory rate
  
  $
  2,850,736
  
  $
  (600,587
  )
  $
  (1,409,979
  )State income taxes, net of    federal benefit
  
  
  276,689
  
  
  (58,292
  )
  
  (136,851
  )Nondeductible expenses
  
  
  86,728
  
  
  103,137
  
  
  105,180Accrued liabilities and    other
  
  
  
  
  
  (522,358
  )
  
  (117,993
  )Increase (decrease) in    valuation allowance
  
  
  (3,038,826
  )
  
  1,078,100
  
  
  1,559,643Provision    (benefit) for federal income taxes
  
  $
  175,327
  
  $
  
  
  $
  

At December 31, 2005 and 2004, the Company has available federal tax  net operating loss carryforwards (NOLs) of approximately $29,304,631 and  $35,556,000, respectively, that unless previously utilized, expire at various  dates beginning 2011 through 2024. The Companys utilization of NOLs is  subject to a number of uncertainties, including the ability to generate future  taxable income.  In addition, the Company  has been subject to a number of ownership changes as defined under Internal  Revenue Code Section 382. As a result, Section 382 imposes additional  limitations on utilization of certain of the Companys NOLs.  Subsequent to the Companys proposed public  offering it expects to begin paying income taxes on its taxable income.



F-29




Back to Contents



Warrior Energy Services Corporation
  Notes to Financial Statements
  For the Years Ended December 31, 2005, 2004 and 2003



Deferred income taxes reflect the impact of temporary differences  between amounts of assets and liabilities recorded for financial reporting  purposes and such amounts as measured in accordance with tax laws. The items,  which comprise a significant portion of the deferred tax assets and  liabilities, are as follows:



2005
  
  2004Gross deferred tax assets:Allowance    for doubtful accounts receivable
  
  $
  159,198
  
  $
  177,342Accrued    bonuses and other
  
  
  696,034
  
  
  227,694Operating    loss and tax credit carryforwards
  
  
  11,142,902
  
  
  13,293,059Goodwill
  
  
  1,958,940
  
  
  2,904,108Valuation    allowance
  
  
  (6,441,690
  )
  
  (14,627,450
  )Gross    deferred tax asset
  
  
  7,515,384
  
  
  1,974,753Gross deferred tax    liabilities:Property,    plant and equipment
  
  
  (6,193,290
  )
  
  (1,862,085
  )Other
  
  
  (112,669
  )
  
  (112,668
  )Intangible    assets
  
  
  (10,165,015
  )Gross    deferred tax liability
  
  
  (16,470,974
  )
  
  (1,974,753
  )Net    deferred tax asset (liability)
  
  $
  (8,955,590
  )
  $
  

The Company is required to record a valuation allowance when it is more  likely than not that some portion or all of the deferred tax assets will not be  realized. At December 31, 2005 and 2004, the Company has recorded a valuation  allowance of $6,441,690 and $14,627,450 against the gross deferred tax asset.



In assessing the realizability of deferred tax assets, management  considers future reversals of existing deferred tax liabilities, projected  future taxable income exclusive of temporary differences and available tax planning  strategies.  In 2005, the Company  recorded a decrease in the valuation allowance of $8.2 million.  The decrease was recorded as a $3.0 million  reduction of the provision for income taxes and as a $5.2 million reduction of  the deferred tax liability and goodwill associated with the acquisition of  Bobcat (see Note 2).



F-30



<




Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003
 
 Note 13  - Income (Loss) Per Share





The calculation of basic and diluted EPS is as follows:





|                                                                                                            |  | For the    Year Ended 2005 |            | For the    Year Ended 2004 |  | For the    Year Ended 2003 | 
|----------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | -------------------------- |  | -------------------------- | 
|                                                                                                            |  |                            |            |                            |  |                            | 
|                                                                                                            |  | Income    (Numerator)      |            | Shares    (Denominator)    |  | Per Share    Amount        | 
|                                                                                                            |  |                            |            |                            |  |                            | 
|Net income    (loss) per share - basic                                                                      |  |                            |            |                            |  |                            | 
|Income (loss) before    discontinued operations and extraordinary items available to common    stockholders |  | $                          | 8,209,187  |                            |  | 1,428,760                  | 
|Discontinued operations                                                                                     |  |                            |           |                            |  | 1,428,760                  | 
|                                                                                                            |  |                            |            |                            |  |                            | 
|Net income (loss) per share    - basic                                                                      |  | $                          | 8,209,187  |                            |  | 1,428,760                  | 
|                                                                                                            |  |                            |            |                            |  |                            | 
|Net income    (loss) per share - diluted                                                                    |  |                            |            |                            |  |                            | 
|Income (loss) before    discontinued operations and extraordinary items available to common    stockholders |  | $                          | 11,670,294 |                            |  | 2,644,308                  | 
|                                                                                                            |  |                            |            |                            |  |                            | 
|Discontinued operations                                                                                     |  |                            |           |                            |  | 2,644,308                  | 
|                                                                                                            |  |                            |            |                            |  |                            | 
|Net loss per share - diluted                                                                                |  | $                          | 11,670,294 |                            |  | 2,644,308                  | 
|                                                                                                            |  |                            |            |                            |  |                            | 
|                                                                                                            |  |                            |            |                            |  |                            | 




The following adjustments were made to the numerators and denominators  of basic and diluted earnings per share:





|                                                                                                                      |  | Income    (Numerator) |            | Weighted    average number of outstanding shares (Denominator) |  | Amount per    share | 
|--------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ---------- | -------------------------------------------------------------- |  | ------------------- | 
|                                                                                                                      |  |                       |            |                                                                |  |                     | 
|Basic EPS                                                                                                             |  |                       |            |                                                                |  |                     | 
|Income available to coomon    stockholders                                                                            |  | $                     | 8,209,187  |                                                                |  | 1,428,760           | 
|Effects of    dilutive securities                                                                                     |  |                       |            |                                                                |  |                     | 
|Options to purchase common    stock                                                                                   |  |                       |            |                                                                |  | 160,573             | 
|Warrants to purchase common    stock                                                                                  |  |                       |            |                                                                |  | 250,986             | 
|Convertible debt                                                                                                      |  |                       |            |                                                                |  | 803,989             | 
|Interest on convertible debt                                                                                          |  |                       | 3,461,107  |                                                                |  |                     | 
|                                                                                                                      |  |                       |            |                                                                |  |                     | 
|Income available to common    stockholders adjusted for interest expense of assumed conversion of    convertible debt |  | $                     | 11,670,294 |                                                                |  | 2,644,308           | 
|                                                                                                                      |  |                       |            |                                                                |  |                     | 




F-31





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003





Options issued to purchase 1,059,800 shares of common stock and  warrants to purchase 1,655,759 shares of common stock at prices ranging from  $7.50 to $26.30 were outstanding during 2005.   Of the 1,059,800 options outstanding during 2005, all but 500 options  are exercisable at $7.50 and all of the 1,655,759 warrants are exercisable at  $7.50.





Options issued to purchase 1,059,280 shares of common stock and  warrants to purchase 6,855,118 shares of common stock at price ranging from  $7.50 to $66.30 were outstanding during 2004, but were not included in the  computation of the 2004 diluted EPS because the effect would be anti-dilutive.  There were 484,720 options to purchase  common stock cancelled during 2004 that were not included in the computation of  2004 diluted EPS because the effect would be anti-dilutive





Convertible debt instruments, including convertible interest, which  would result in the issuance of 5,303,925, 5,467,769 and, 5,176,170 shares of  common stock, if the conversion features were exercised, were outstanding  during 2005, 2004 and 2003 respectively, but were not included in the  computation of the 2005, 2004 or 2003 diluted EPS because the effect would be  anti-dilutive. The conversion price of these instruments was $7.50 per share at  December 31, 2005, 2004 and 2003 and remained outstanding at December 31, 2005.





Note 14 - Major Customers





Most of the Companys business activity is with customers engaged in  drilling and operating natural gas and oil wells primarily in the major onshore  and offshore natural gas and oil producing areas of the U.S., including  offshore in the Gulf of Mexico and onshore in Alabama, Colorado, Louisiana, Mississippi,  Montana, New Mexico, North Dakota, Oklahoma, Texas, Utah, and Wyoming.  Substantially all of the Companys accounts  receivable at December 31, 2005 and 2004 are from such customers. Performance  in accordance with the credit arrangements is in part dependent upon the  economic condition of the oil and natural gas industry in the respective  geographic areas. The Company does not require its customers to pledge  collateral on their accounts receivable.





There were no customers from whom the Company earned in excess of 10%  of its revenues during the years ended December 31, 2005, 2004 or 2003.





Note 15 - Stock Options





The 2000 Stock Incentive Plan (2000 Incentive Plan) provides for the  granting of incentive stock options or non-qualified stock options to purchase  shares of the Companys common stock to key employees and non-employee  directors or consultants.  The 2000  Incentive Plan authorizes the issuance of options to purchase up to an  aggregate of 1,750,000 shares of common stock with maximum option terms of ten  years from the date of the grant.  There  are five types of grants that can be made under the 2000 Incentive Plan. The  Discretionary Option Grant Program allows eligible individuals in the Companys  employ or service (including officers and consultants) to be granted options to  purchase shares of common stock at an exercise price equal to not less than the  fair market value of the stock at the date of the grant.  All grants made in 2000 were made under this  program.  The Stock Issuance Program is  a
non-compensatory program under which individuals in the Companys employ or  service may be issued shares of common stock directly through the purchase of  such shares at a price not less than the fair market value at the time of  issuance or as a bonus tied to performance.   The Salary Investment Option Grant Program is a compensatory program  that, if activated by the plan administrator, will allow executive officers and  other highly compensated employees the opportunity to apply a portion of their  base salary to the acquisition of special below market stock grants.  The Automatic Option Grant Program causes  options to be granted automatically at periodic intervals to eligible  non-employee members of the Board of Directors to purchase shares of common stock  at an exercise price equal to their fair market value at the date of the  grant.  The Director Fee Option Grant  Program is a compensatory program that, if activated by the plan administrator,  would allow non-employee
Board members the opportunity to apply a portion of  any annual retainer fee otherwise payable to them in cash each year to the  acquisition of special below market option grants.





The Board and shareholders approved the 2000 Incentive Plan on February  11, 2000 and an amendment on February 9, 2001, respectively.  At December 31, 2005, 1,954,250 shares had  been granted, of which 902,000 shares were cancelled and 697,750 remained to be  granted under this plan.





F-32





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003





The 1997 Omnibus Incentive Plan (1997 Omnibus Plan) provides for the  granting of either incentive stock options or nonqualified stock options to  purchase shares of the Companys common stock to key employees responsible for  the direction and management of the Company. The 1997 Omnibus Plan authorizes  the issuance of options to purchase up to an aggregate of 60,000 shares of  common stock, with maximum option terms of ten years from the date of grant.  During 1998, the Board authorized an amendment to the 1997 Omnibus Plan to  allow additional issuances of options to purchase 40,000 shares of common  stock. This amendment increases the total aggregate number of shares under the  1997 Omnibus Plan to 100,000.  The  amendment was approved by the shareholders on February 9, 2001.  At December 31, 2005 and 2004, 7,530 options  were outstanding.  At December 31, 2005,  92,470 options remain available to be granted.   Options
to purchase 35,520 shares of common stock were cancelled during  2004 and no options were cancelled during 2005.





The 1997 Non-Employee Stock Option Plan (1997 Non-Employee Plan)  provides for the granting of nonqualified stock options to purchase shares of  the Companys common stock to non-employee directors and consultants. The 1997  Non-Employee Plan authorizes the issuance of options to purchase up to an  aggregate of 10,000 shares of common stock, with maximum option terms of ten  years from the date of grant. During 1998, the Board authorized an amendment to  the 1997 Non-Employee Plan to allow additional issuances of options to purchase  20,000 shares of common stock. This amendment increases the total aggregate  number of shares under the 1997 Non-Employee Plan to 30,000.  The amendment was approved by the  shareholders on February 9, 2001.  At  December 31, 2005 and 2004, no options were outstanding, respectively.  At December 31, 2005, 30,000 options remain  available to be granted.  Pertinent  information regarding stock
options is as follows:





F-33





---



Back to Contents





Warrior Energy Services Corporation


Notes to Financial Statements


For the Years Ended December 31, 2005, 2004 and 2003





|                                          |  |                  |           |                        |   |                              |  |                                               |      |                   | 
|----------------------------------------- |  | ---------------- | --------- | ---------------------- | - | ---------------------------- |  | --------------------------------------------- | ---- | ----------------- | 
|                                          |  | Number ofOptions |           | Range ofExercisePrices |   | WeightedAverageExercisePrice |  | WeightedAverageFair Valueof StockatGrant Date |      | VestingProvisions | 
|                                          |  |                  |           |                        |   |                              |  |                                               |      |                   | 
|Options outstanding,    December 31, 2002 |  |                  | 1,745,200 |                        |   | $7.50-$66.30                 |  | $                                             | 7.64 |                   | 
|                                          |  |                  |           |                        |   |                              |  |                                               |      |                   | 
|Options cancelled                         |  |                  | (200,680  | )                      | $ | 7.50                         |  | $                                             | 7.50 |                   | 
|                                          |  |                  |           |                        |   |                              |  |                                               |      |                   | 
|                                          |  |                  | (200,680  | )                      |   |                              |  |                                               |      |                   | 
|Options outstanding,    December 31, 2003 |  |                  | 1,544,520 |                        |   | $7.50-$66.30                 |  | $                                             | 7.66 |                   | 
|                                          |  |                  |           |                        |   |                              |  |                                               |      |                   | 
|Options cancelled                         |  |                  | (484,720  | )                      | $ | 7.50                         |  | $                                             | 7.50 |                   | 
|                                          |  |                  |           |                        |   |                              |  |                                               |      |                   | 
|                                          |  |                  | (484,720  | )                      |   |                              |  |                                               |      |                   | 
|Options outstanding,    December 31, 2004 |  |                  | 1,059,800 |                        |   | $7.50-$26.30                 |  | $                                             | 7.51 |                   | 
|                                          |  |                  |           |                        |   |                              |  |                                               |      |                   | 
|Options outstanding,    December 31, 2005 |  |                  | 1,059,800 |                        |   | $7.50-$26.30                 |  | $                                             | 7.51 |                   | 
|                                          |  |                  |           |                        |   |                              |  |                                               |      |                   | 




F-34





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003





The following table summarizes information about stock options  outstanding at December 31, 2005:





|               |  | Options    Outstanding    |           |                                         |  |                              | Options    Exercisable |                          
|-------------- |  | ------------------------- | --------- | --------------------------------------- |  | ---------------------------- | ---------------------- | -------------------------
|               |  |                           |           |                                         |  |                              |                        |                          
|ExercisePrices |  | NumberOutstanding12/31/05 |           | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |                        | NumberExercisable12/31/05
|               |  |                           |           |                                         |  |                              |                        |                          
|$  7.50        |  |                           | 1,059,300 |                                         |  | 4.86                         |                        | $                        
|$26.30         |  |                           | 500       |                                         |  | 1.24                         |                        | $                        
|               |  |                           |           |                                         |  |                              |                        |                          
|               |  |                           | 1,059,800 |                                         |  | 4.86                         |                        | $                        
|               |  |                           |           |                                         |  |                              |                        |                          




The fair value of each option grant is estimated on the grant date  using the Black-Scholes option-pricing model with the following  weighted-average assumptions:





|                        |  | 2005 |        | 2004 |  | 2003   |  
|----------------------- |  | ---- | ------ | ---- |  | ------ | -
|                        |  |      |        |      |  |        |  
|Dividend yield          |  |      | 0      | %    |  | 0      | %
|Expected life (years)   |  |      | 5.00   |      |  | 5.00   |  
|Expected volatility     |  |      | 118.41 | %    |  | 115.26 | %
|Risk-free interest rate |  |      | 4.34   | %    |  | 3.70   | %




Note 16  - Contingencies





The Company is the subject of various legal actions in the ordinary  course of business. Management does not believe the ultimate outcome of these  actions will have a materially adverse effect on the financial position,  results of operations or cash flows of the Company.





In March, 2006, one of the Companys shareholders presented it with a  demand for corrective action to remedy alleged breaches of fiduciary duty by  William L. Jenkins, Charles E. Underbrink and James H. Harrison.  The shareholder alleges that these directors  breached their fiduciary duties in connection with various transactions, including  the exchange of the Companys warrants for shares of its common stock in  October and November 2005, the extension of the expiration date of the  Companys warrants in December 2004, the Companys failure to refinance certain  of its derivative securities by the end of 2004, the amendment of the Companys  certificate of incorporation in December 2005 and the triggering of the change  of control payment due to Mr. Jenkins in December 2005.  The shareholder further alleges that these  directors were interested in such transactions, that such transactions were not  fair to the Company and
that the St. James Partnerships, Simmons & Company  International, Ron E. Whitter and another officer of the company participated  in such breaches and/or aided and abetted them.  The shareholder has indicated that if the Company fails to take  appropriate action to remedy the breaches following the presentation of its  demand, it intends to bring a derivative suit on behalf of the Company.  The Companys board of directors intends to  take such steps as it considers appropriate to investigate this matter.  However, based on information received  through March 23, 2006, the Company believes these allegations are without  merit and, if a suit is filed, the Company expects that it will be vigorously  defended.  The Company does not expect  the liability, if any, resulting from this matter to have a material adverse  effect on its current financial position, results of operations or cash flows.





The St. James Partnerships, their
general partners and Charles E. Underbrink, who is a Director of the Company and
a director of the general partners of the St. James Partnerships were added as
defendants in an amended complaint filed in March 2005 in Texas by two of the
limited partners of the St. James Partnerships.  The action was originally
instituted in December 2004 against the auditors of the St. James Partnerships.
The plaintiffs brought the action as a class action on behalf of all the limited
partners of the St. James Partnerships and are seeking class action
certification.  No claim has been asserted against the Company and the
Company is not a defendant in the action.  However, the complaint and the
amended complaint in the action contain allegations that the Company
participated with Mr. Underbrink in actions the plaintiffs allege were
fraudulent and constituted securities violations.  The





F-35





---



Back to Contents





Warrior Energy Services Corporation


Notes to Financial Statements


For the Years Ended December 31, 2005, 2004 and 2003








Company has not
concluded that it is probable that a claim will be asserted against it and does
not believe that if a claim is asserted that there is a reasonable possibility
that the outcome would be unfavorable to the Company or that any resulting
liability would be material to the Companys financial
condition.





Note 17  - Fair Value of Financial Instruments





The following methods and assumptions were used to estimate the fair  value of each class of financial instruments for which it is practicable to  estimate fair value:





Cash and  Cash Equivalents, Restricted Cash, Accounts Receivable, Current Portion of  Long-Term Debt and Accounts Payable - The carrying amount is  a reasonable estimate of the fair value because of the short maturity of these  instruments.





Long-Term  Debt - The carrying value of the Companys long-term debt  approximates fair value due to the variable nature of the interest rate and the  interest rate reset periods.





Related Party Debt  - Management is unable to estimate the fair value of the Companys related  party debt.  This debt is due in 2009  but is subject to subordination to the Companys senior debt. The debt and  accumulated accrued interest in aggregate is carried at a book value of $40.1  million in the statement of financial position at December 31, 2005.  This debt is convertible at a conversion  price of $7.50 per share, which is significantly below the market price of the  Companys common stock at December 31, 2005, and it is significantly below the  Companys expectations for the price per share to be received in the planned  public equity offering.  While the  Company is unable to estimate the fair value of its related party debt, the  Company reasonably believes it exceeds the book value because of its  convertibility.





Note 18 -  Employee Benefit Plan





The Company maintains a Retirement Savings  Plan (the 401(k) Plan) for its employees, which allows participants to make  contributions by salary reduction pursuant to Section 401(k) of the Internal  Revenue Code.  The Companys contributions  to the 401(k) Plan are discretionary.   Employees vest in their contributions immediately and vest in the  Companys contributions ratably over six years.  The Company made no contributions to the 401(k) Plan for the  years ended December 31, 2005, 2004, and 2003.





Note 19 - Segment and Related Information





With the acquisition of Bobcat, the Company currently conducts its  business through two operating segments as described below.  The Company included operating results from  its acquisition of Bobcat subsequent to its acquisition on December 16, 2005:





Wireline  Segment.  The  Companys wireline segment, which accounted for 99.0% of its revenues for the  year ended December 31, 2005, operated a fleet of 51 cased-hole wireline trucks  and 15 offshore wireline skids and three P&A packages as of  December 31, 2005.  All of the  Companys wireline trucks and offshore skids are equipped with top-of-the-line  computer systems.  The Company primarily  provides services in cased-hole environments.   Cased-hole wireline services are performed during and after the  completion of the well, and from time to time thereafter during the life of the  well.  Wireline services are performed  using a wire cable that is lowered from a truck or skid into a well with  various types of tools and instruments attached to the end of the cable.  Once in the well, the instruments can  transmit data back to a computer system in the truck or skid for analysis.  Specific
wireline services include: logging  services such as cement bond evaluation, production logging and other  measurements; pipe recovery services; and perforating and mechanical services  such as setting plugs and packers.   Other services in the wireline segment include plug and abandonment (P&A)  services, which are used at the end of a wells productive life, and tubing  conveyed perforating (TCP), which is a method of perforating the casing in  order to open the flow path in a well for hydrocarbons.  The Company operates four P&A packages  in connection with its P&A services.





Well  Intervention Segment.   The Companys well intervention segment accounted for 1% of revenues for  the year ended December 31, 2005. The Company included well intervention  revenues from the date of acquisition on December 16, 2005 only.  The Company operated a fleet of 14 snubbing  units as of December 31, 2005.  The





F-36





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003


Company primarily provides snubbing services utilizing specialized high pressure snubbing equipment that allows an operator to service a well without using other more disruptive means to control the pressure in the well.  The Companys well intervention segment also includes other related oil field services, such as freezing services, hot tapping services, rental tools and fishing services.


|                                         |  |          |            |              |   | Well       |   |   |            | 
|---------------------------------------- |  | -------- | ---------- | ------------ | - | ---------- | - | - | ---------- | 
|2005                                     |  | Wireline |            | Intervention |   | Total      |  
|                                         |  |          |            |              |   |            |   |   |            | 
|Segment revenues                         |  | $        | 72,897,743 |              | $ | 769,180    |   | $ | 73,666,923 | 
|Segment operating and    sg&a expenses   |  | $        | 52,480,688 |              | $ | 634,097    |   | $ | 53,114,785 | 
|Segment depreciation and    amortization |  | $        | 4,974,681  |              | $ | 233,635    |   | $ | 5,208,316  | 
|Segment operating income                 |  | $        | 15,442,374 |              | $ | (98,552    | ) | $ | 15,343,822 | 
|Segment assets                           |  | $        | 39,140,833 |              | $ | 53,537,537 |   | $ | 92,678,370 | 
|Segment
    goodwill                     |  | $        | 1,237,416  |              | $ | 12,802,766 |   | $ | 14,040,182 | 




F-37





---



Back to Contents





Warrior Energy Services Corporation
 Notes to Financial Statements
 For the Years Ended December 31, 2005, 2004 and 2003





Note 20  Quarterly Financial Data (Unaudited)





|                  |  | Sales |            | Income
    (loss) from
    operations |   | Income (loss)
    before discontinuedoperations |   | Income    (loss)
    before discontinued 
    operations
    per share |            | Net income
    (loss) |   | Net income
    (loss),
    per share |  
|----------------- |  | ----- | ---------- | ------------------------------------- | - | ----------------------------------------------- | - | ---------------------------------------------------------------------- | ---------- | --------------------- | - | ------------------------------------ | -
|                  |  |       |            |                                       |   |                                                 |   |                                                                        |            |                       |   |                                      |  
|2005 (1)          |  |       |            |                                       |   |                                                 |   |                                                                        |            |                       |   |                                      |  
|First    Quarter  |  | $     | 14,447,772 |                                       | $ | 1,597,335                                       |   | $                                                                      | 646,304    |                       | $ | 0.61                                 |  
|Second    Quarter |  |       | 19,700,482 |                                       |   | 4,963,767                                       |   |                                                                        | 3,799,015  |                       |   | 1.89                                 |  
|Third    Quarter  |  |       | 17,421,589 |                                       |   | 3,353,162                                       |   |                                                                        | 2,273,007  |                       |   | 1.28                                 |  
|Fourth    Quarter |  |       | 22,097,080 |                                       |   | 5,429,558                                       |   |                                                                        | 1,666,188  |                       |   | 0.79                                 |  
|                  |  |       |            |                                       |   |                                                 |   |                                                                        |            |                       |   |                                      |  
|                  |  | $     | 73,666,923 |                                       | $ | 15,343,822                                      |   | $                                                                      | 8,384,514  |                       | $ | 4.48                                 |  
|                  |  |       |            |                                       |   |                                                 |   |                                                                        |            |                       |   |                                      |  
|2004              |  |       |            |                                       |   |                                                 |   |                                                                        |            |                       |   |                                      |  
|First    Quarter  |  | $     | 10,539,320 |                                       | $ | (386,047                                        | ) | $                                                                      | (1,675,622 | )                     | $ | (1.34                                | )
|Second    Quarter |  |       | 13,170,348 |                                       |   | 922,411                                         |   |                                                                        | (266,031   | )                     |   | (0.21                                | )
|Third    Quarter  |  |       | 14,950,787 |                                       |   | 2,188,164                                       |   |                                                                        | 951,364    |                       |   | 0.76                                 |  
|Fourth    Quarter |  |       | 15,026,382 |                                       |   | 1,905,415                                       |   |                                                                        | 897,217    |                       |   | 0.71                                 |  
|                  |  |       |            |                                       |   |                                                 |   |                                                                        |            |                       |   |                                      |  
|                  |  | $     | 53,686,837 |                                       | $ | 4,629,943                                       |   | $                                                                      | (93,072    | )                     | $ | (0.07                                | )
|                  |  |       |            |                                       |   |                                                 |   |                                                                        |            |                       |   |                                      |  




|                                                                                                                                                    
|----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) All quarter per share    calculations include addback of interest on convertible debt as well as effect    of dilutive securities (see Note 13).




F-38





---



Back to Contents





SIGNATURES





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





|                        | Warrior Energy Services Corporation
|----------------------- | -----------------------------------
|                        |                                    
|                        |                                    
|Dated:   March 30, 2006 |                                    
|                        | By:                                
|                        |                                    
|                        |                                    




Pursuant  to the requirements of the Securities Exchange Act of 1934, this Report has been  signed below by the following persons on behalf of the Registrant and in the  capacities and on the dates indicated.





|Signature                    |  | Capacity                                     |  | Date             
|---------------------------- |  | -------------------------------------------- |  | -----------------
|                             |  |                                              |  |                  
|                             |  |                                              |  |                  
|/s/ William L.    Jenkins    |  | President, CEO and Director                  |  | March 30,    2006
|                             |  | (Principal Executive Officer)                |  |                  
|William L.    Jenkins        |  |                                              |  |                  
|                             |  |                                              |  |                  
|/s/ Ron E.    Whitter        |  | Vice    President - Finance                  |  | March 30,    2006
|                             |  | (Principal Financial and Accounting Officer) |  |                  
|Ron E.    Whitter            |  |                                              |  |                  
|                             |  |                                              |  |                  
|/s/ Robert    J. McNally     |  | Director                                     |  | March 30,    2006
|                             |  |                                              |  |                  
|Robert J.    McNally         |  |                                              |  |                  
|                             |  |                                              |  |                  
|/s/ Charles    E. Underbrink |  | Director                                     |  | March 30,    2006
|                             |  |                                              |  |                  
|Charles E.    Underbrink     |  |                                              |  |                  
|                             |  |                                              |  |                  
|/s/ James H.    Harrison     |  | Director                                     |  | March 30,    2006
|                             |  |                                              |  |                  
|James H.    Harrison         |  |                                              |  |                  







---



Back to Contents





Index to Exhibits Filed With This  Annual Report on Form 10-K  for the Year Ended December 31, 2005





|10.22.1 |  | Amendment No. 1 to    Recapitalization Agreement dated October 6, 2005 between the Company and St.    James Capital Partners, L.P.
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|10.23.1 |  | Amendment No. 1 to    Recapitalization Agreement dated October 6, 2005 between the Company and    SJMB, L.P.                      
|10.25   |  | Employment Agreement dated    September 1, 2004 between the Company and Ron Whitter.                                              
|10.25.1 |  | Amendment to Employmenmt    Agreement dated September 1, 2004 between the Company and Ron Whitter.                                
|23.1    |  | Consent of Grant Thornton    LLP                                                                                                  
|31.1    |  | Certification of President    and Chief Executive Officer pursuant to Rule 13a-14(a)                                              
|31.2    |  | Certification of Chief    Financial Officer Pursuant to Rule 13a-14(a)                                                            
|32.1    |  | Certification of President    and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed)                         
|32.2    |  | Certification of Chief    Financial Officer Pursuant to Section 1350 (furnished, not filed)                                       







---