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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

Mark One:

         [X]   Annual Report  pursuant to Section 13 or 15(d) of the  Securities
               Exchange Act of 1934.
         For the fiscal year ended December 31, 1998; 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

                          BLACK WARRIOR WIRELINE CORP.
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                 (Name of Small Business Issuer in its Charter)

DELAWARE                                                              11-2904094
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(State or Other Jurisdiction of                                    (IRS Employer
Incorporation or Organization)                               Identification No.)

3748 HIGHWAY #45 NORTH, COLUMBUS, MISSISSIPPI                             39701
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                              (Zip Code)

                                 (601) 329-1047
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                (Issuer's Telephone Number, Including Area Code)

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

      Securities Registered Pursuant to Section 12(g) of the Exchange Act:
                              (Title of Each Class)
                    COMMON STOCK, PAR VALUE $.0005 PER SHARE

         Check whether the Issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past twelve (12) months (or
for such shorter period that the Issuer was required to file such reports),  and
(2) has been subject to such filing  requirements for the past ninety (90) days.
[X] Yes [_] No

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of Issuer's  knowledge,  in definitive proxy or information  statements
incorporated  by reference in Part III of this Form 10-KSB,  or any amendment to
this Form 10-KSB. [X]

         State Issuer's revenues for its most recent fiscal year:  $34,436,553
         State  the  aggregate   market  value  of  the  voting  stock  held  by
non-affiliates as of March 31, 1999:
              COMMON STOCK, PAR VALUE $.0005 PER SHARE, $3,966,694
         (Non-affiliates have been determined on the basis of holdings set forth
under Item 11 of this Annual Report on Form 10-KSB.)
         Indicate  the  number of  shares  outstanding  of each of the  Issuer's
classes of common equity, as of the latest practicable

date:

                 Class: COMMON STOCK, PAR VALUE $.0005 PER SHARE
                 Outstanding at March 31, 1999: 3,942,831 SHARES

                       DOCUMENTS INCORPORATED BY REFERENCE
     No documents are incorporated by reference into this Annual Report on
                                   Form 10-KSB

            Transitional Small Business Issuer Format: [_] Yes [X] No


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<PAGE>


                                     PART I

         ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         Black Warrior  Wireline Corp. (the "Company") is an oil and gas service
company  currently  providing  various  services  to oil and gas well  operators
primarily in the Black Warrior and  Mississippi  Salt Dome Basins in Alabama and
Mississippi,  the Permian Basin in West Texas and New Mexico, the San Juan Basin
in New Mexico, Colorado and Utah, the East Texas and Austin Chalk Basins in East
Texas,  the Anadarko Basin in Oklahoma,  the Powder River and Green River Basins
in Wyoming and  Montana,  the  Williston  Basin in North Dakota and areas of the
Gulf of Mexico offshore Louisanna and South Texas. The Company's principal lines
of business  include (a) wireline  services,  (b)  directional  oil and gas well
drilling activities,  and (c) workover services. The Company's recent growth and
increased  revenues  have been  principally  the  result  of seven  acquisitions
completed since November 1996.

RECENT ACQUISITIONS

         The   following   table  sets  forth   information   regarding   recent
acquisitions made by the Company:

<TABLE>
<CAPTION>


     DATE (1)                COMPANY ACQUIRED                      BUSINESS LOCATION               PURCHASE PRICE
     --------                ----------------                      -----------------               --------------
<S>                 <C>                                  <C>                                          <C>
June 1, 1998        Petro Wireline                       Four  corners  region  of New  Mexico,       $875,000
                                                         Colorado, Utah and Arizona

March 16, 1998      Phoenix Drilling Services,  Inc.     Continental United States                 $19.0 million
                    assets

December 15,        CAM Wireline Services, Inc.          Texas                                      $850,000 (3)
   1997

October 9, 1997     Diamondback Directional, Inc.        Texas and Louisiana                      $8.9 million (2)

June 9, 1997        PetroLog, Inc.                       Wyoming, Montana and South Dakota          $2.1 million

June 6, 1997        Production Well Services, Inc.       Southern Mississippi and Alabama           $940,000 (4)

November 19,        Dyna-Jet, Inc.                       Wyoming, South Dakota, Montana               $758,000
   1996                                                     and New Mexico

</TABLE>

--------------------
(1)      Date the acquisition was closed.
(2)      Includes  647,569  shares of the Company's  Common Stock.
(3)      Includes 24,969 shares of the Company's Common Stock.
(4)      Includes 133,333 shares of the Company's Common Stock.

<PAGE>


         At  present,  the  Company  is  primarily  seeking to  consolidate  its
management of the operations acquired throughout 1997 and 1998 and implement its
cost  cutting  program and plan to  restructure  its  outstanding  indebtedness.
Additional  acquisitions  would be dependent upon favorable  opportunities,  the
strategic  objectives  to be achieved and the  availability  of  financing.  The
Company  is  not  currently   pursuing  any  material   additional   acquisition
opportunities.

         With respect to the  acquisitions  completed in 1997 and the first half
of 1998, the Company funded those  transactions  using the proceeds from secured
borrowings  from banks and other  institutional  lenders,  the private or public
sale  of debt  and  equity  securities  and  the  cash  flow  from  its  current
operations.  Financing obtained included borrowings secured by substantially all
of the Company's assets.

WIRELINE SERVICES

         The Company's wireline logging service activities  contributed revenues
of $11.6  million  (approximately  33.7% of  revenues)  in  1998,  $9.5  million
(approximately 55.7% of revenues) in 1997, and $5.9 million (approximately 77.4%
of revenues) in 1996.  At December 31, 1998,  the Company  owned 52  operational
motor  vehicle  mounted  wireline  units,  of  which  21  are  equipped  with  a
state-of-the-art  computer  system,  7 are equipped  with an earlier  generation
computer  system,  16 are  analog  equipped  and 8 are  devoted  exclusively  to
hoisting  operations.  In the  third  quarter  of 1998,  the  Company  commenced
providing  wireline services  off-shore to customers with operations in the Gulf
of Mexico. As of December 31, 1998, the Company owned six operational cased-hole
wireline  units  skid-mounted  for offshore work, all of which are equipped with
state of the art computers.

         Wireline logging services are used to evaluate  downhole  conditions at
various  stages of the process of drilling and  completing  oil and gas wells as
well as at various times  thereafter  until the well is depleted and  abandoned.
Such services are provided using a truck-mounted  wireline unit equipped with an
armored cable that is lowered by winch into an existing well.  The cable,  which
contains one or more electrical  conductors,  lowers  instruments and tools into
the well to  perform a variety  of  services  and  tests.  The  wireline  unit's
truck-mounted  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. The Company's wireline
units are equipped with state-of-the-art  computerized systems, DRS computerized
systems  (which  is  an  earlier  generation   computerized  system)  or  analog
equipment.

         Open hole  wireline  services are  performed  after the drilling of the
well but prior to its  completion.  Cased hole  wireline  services are performed
during  and  after  the  completion  of the  well,  as well as from time to time
thereafter during the life of the well. The Company's  services primarily relate
to  providing  cased  hole  wireline  services.   Cased  hole  services  include
radioactive


                                      -2-
<PAGE>


and acoustic  logging used to evaluate  downhole  conditions  such as lithology,
porosity,  production patterns and the cement bonding  effectiveness between the
casing and the formation.  Other cased hole services include perforating,  which
opens up the casing to allow  production from the  formation(s),  and free-point
and  back-off,  which locates and frees pipe that has become lodged in the well.
Cased  hole  services  are  used in the  initial  completion  of the well and in
virtually all subsequent  workover and stimulation  projects throughout the life
of the well. The Company performs these services on a contract basis at the well
site for operators and producers of the wells primarily on a bid basis at prices
related to Company standard prices.

         These  services are routinely  provided to the Company's  customers and
are subject to the customers' time schedule, weather conditions, availability of
Company  personnel and complexity of the operation.  These procedures  generally
take approximately one to one-and-one-half days to perform.

         Manufacturing.  Since 1996 the  Company  has  operated a  manufacturing
facility located in Laurel, Mississippi to assemble and install wireline service
equipment,  both mounted on motor vehicles and on wireline  skids,  for internal
use and for sale to others. During the year ended December 31, 1998, the Company
manufactured  for  internal  use six new  wireline  trucks and six new  offshore
wireline skids. The manufacturing facility also totally refurbished for internal
use one wireline truck and refurbished to a lesser extent three wireline trucks.
The  Company  also  manufactured  and  sold to a  third-party  customer  one new
wireline truck and in November 1998 entered into a contract to  manufacture  and
sell four  wireline  skids for a customer,  the first of which was  delivered in
December 1998.

DIRECTIONAL DRILLING SERVICES

         The Company's  directional  drilling services  contributed  revenues of
$21.3  million  (approximately  61.9% of  revenues)  in 1998  and  $5.9  million
(approximately  34.8% of  revenues)  in  1997,  substantially  all of which  was
realized  during the four months ended December 31, 1997. The revenues  realized
in 1997 were  primarily the result of the  acquisition by the Company in October
1997  of  Diamondback  Directional,  Inc.  The  Company  had  no  revenues  from
directional drilling services in 1996.

         Directional  drilling entails  entering a producing zone  horizontally,
using  specialized  drilling  equipment,  which expands the area of interface of
hydrocarbons and thereby greatly enhancing recoverability.

         On March  16,  1998,  the  Company  completed  the  acquisition  of the
domestic  oil and gas well  directional  drilling and  downhole  survey  service
business,   including  the  related  operating  assets,  from  Phoenix  Drilling
Services,  Inc.  This  acquisition  contributed  to  further  increases  in  the
Company's  revenues from  directional  drilling  services  commenced in 1997. In
addition,  the


                                      -3-
<PAGE>


acquisition  has enabled the Company to provide  downhole survey services to the
oil and gas industry.

         The  Company's  multi-shot  division  provides  directional   surveying
services  and  directional  drilling  equipment  operators  to the  oil  and gas
industry.  The services  include  gyros,  magnetic,  single shot,  high accuracy
magnetic probe, electric surface recording gyro, and measurement while drilling.
Management of the Company believes these services are state-of-the-art.

WORKOVER AND COMPLETION SERVICES

         These activities  contributed  revenues of $1.5 million  (approximately
4.4% of revenues)  in 1998,  $1.6  million  (approximately  9.5% of revenues) in
1997, and $1.7 million (approximately 22.6% of revenues) in 1996. These services
are performed primarily on an hourly basis.

         Workover  services  include  those  operations  performed on wells when
originally  completed and on wells previously placed in production and requiring
additional work to restore or increase production.  A completion or workover rig
is used to position  tubing,  pumps and other  production  equipment  in a cased
hole.  The unit is used for the initial  completion  of the well and  subsequent
workover and remedial service.  A completion or workover rig is generally a four
to six axle  truck-mounted  hoist unit with a 60 to 90 foot  derrick  capable of
lowering and hoisting up to 300,000 pound loads.

         The Company also  engages in other oil and gas well service  activities
including,  primarily,  the sale, rental and service of tools and equipment used
in the oil field services  industry and conducts tool and equipment  inspection,
maintenance and testing services.  These activities are not deemed by management
to be material.

PRINCIPAL CUSTOMERS AND MARKETING

         During the year ended December 31, 1998, no single  customer  accounted
for more than 10% of the Company's revenues. During the years ended December 31,
1997  and  December  31,  1996,  three  customers   accounted  for  a  total  of
approximately 25.7% and 63.8%, respectively,  of the Company's net revenues. The
Company's  principal  customers and the percentage of the Company's net revenues
received from each of such customers during the two years ended


                                      -4-
<PAGE>



December 31, 1997 are as follows:

<TABLE>
<CAPTION>


                                                                      1997             1996
                                                                ----------------- ----------------
<S>                                                                  <C>               <C>
Taurus Exploration, Inc.                                             10.3%             25.3%
Pioneer   Resources,   Inc.   (formerly   Parker   &   Parsley
Development L.P.)                                                    12.4%             23.7%
Becfield Drilling Company                                             3.0%             14.8%
                                                                ----------------- ----------------
                           TOTALS                                    25.7%             63.8%
                                                                ================= ================
</TABLE>


         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 the customer.

         The  Company's  services are marketed by its  executive  officers and a
sales staff of approximately 20 persons working from its district  offices.  The
Company relies  extensively on its reputation in the industry to create customer
awareness of its services.

OPERATING HAZARDS AND INSURANCE

         The  services  of the  Company  are used in oil and gas well  drilling,
workover and  production  operations  that are subject to inherent risks such as
blow-outs,  fires,  poisonous gas and other oil and gas field  hazards,  many of
which can cause  personal  injury and loss of life,  severely  damage or destroy
equipment,  suspend  production  operations  and  cause  substantial  damage  to
property of others.  Ordinarily,  the  operator of the well  assumes the risk of
damage to the well, the producing reservoir and surrounding property and revenue
loss in the event of accident, except in the case of gross or willful negligence
on the part of the Company or its employees.

         The Company has general liability,  property,  casualty,  officers' and
directors', and workers' compensation insurance. Although, in the opinion of the
Company's  management,  the limits of its insurance coverage are consistent with
industry  practices,  such  insurance may not be adequate to protect the Company
against liability or losses occurring from all the consequences of such risks or
incidents.  The  occurrence  of an event not fully  covered by insurance  (and a
determination of the liability of Company for  consequential  losses or damages)
could result in substantial  losses to the Company and have a materially adverse
effect upon its financial condition, results of operations, and cash flows.

         The Company maintains two policies totaling $2.0 million on the life of
William L. Jenkins,  its President and Chief  Operating  Officer,  and maintains
$1.0   million   policies   on  the  lives  of  each  of  Danny  Ray   Thornton,
Vice-President,  and  Allen  R.  Neel,  Executive  Vice-President.  See  Item 9,
"Directors,  Executive Officers,  Promoters and Control Persons;


                                      -5-
<PAGE>

Compliance  with  Section  16(a) of the Exchange  Act." The benefits  under such
policies are payable to the Company.

COMPETITION

         Most of the Company's  competitors are divisions of larger  diversified
corporations  which  offer  a  wide  range  of oil  field  services.  Its  chief
competitors include  Halliburton  Company,  Schlumberger,  Ltd. and Baker Hughes
Incorporated,  as well as a number of other  companies  active in the  industry.
These  competitors  have  substantially  greater  economic  resources  than  the
Company.  Recent business  combinations  involving oil and gas service companies
may have the  effect  of  intensifying  competition  in the  industry.  With the
decline  in  demand  for oil and  natural  gas well  services,  competition  has
intensified.  Competition principally occurs in the areas of technology,  price,
quality of products and field  personnel,  equipment  availability  and facility
locations.  Although  price  competition  has  been  in the  past a  significant
characteristic   of  the  industry,   the   Company's   ability  to  offer  more
technologically  advanced services is believed by management to have reduced its
exposure to severe price competition.  The Company continues to make a conscious
effort to  compete,  not just on price,  but on its  ability  to offer  advanced
technology, experienced personnel, and a safe working environment.

         The  Company's  growth is  dependent  upon its  ability to attract  and
retain  skilled  oilfield and management  personnel.  The  competition  for such
qualified  employees is  frequently  intense and there can be no assurance  that
sufficient  qualified  persons  will be  available  at such times as the Company
requires their services.

REGULATION

         The oil and gas business is a heavily regulated industry. 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.  Serious  penalties  and fines are
imposed for violations from such  directives and violations  could result in the
loss of licenses and other penal proceedings.

         The Company is not  currently  the  subject of any,  nor is it aware of
any,   threatened   investigations   or  actions  under  any  federal  or  state
environmental,  occupational  safety  or  other  regulatory  laws.  The  Company
believes  that it  will  be able to  continue  compliance  with  such  laws  and
regulations  without a material  adverse effect on its earnings and  competitive
position. However, there can be no assurance that unknown future changes in such
laws and  regulations  would not have  such an  effect if and when such  changes
occur.


                                      -6-
<PAGE>


EMPLOYEES

         As of March 31, 1999, the Company employed approximately 221 persons on
a full-time basis. Of the Company's employees,  22 are management personnel,  28
are administrative personnel and 171 are operational personnel. The Company also
uses the services of  approximately 30 to 35 independent  contract  drillers and
directional  guidance personnel.  None of the Company's employees is represented
by a labor  union,  and the  Company is not aware of any current  activities  to
unionize its  employees.  Management of the Company  considers the  relationship
between the Company and its employees to be good.

INCORPORATION

         The Company was incorporated under the laws of the State of Delaware in
1987 under the name Teletek,  Ltd. and in June 1989 Teletek,  Ltd. merged with a
predecessor of the Company  incorporated  under the laws of the State of Alabama
and  concurrently  changed its name to Black Warrior  Wireline Corp. The Company
and its predecessors  have been engaged in providing  wireline and other oil and
gas well support services since 1984.

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,  that involve risks and uncertainties.  Forward-looking
statements include, but are not limited to, the matters described below, as well
as "Item 1.  Description  of Business - General,"  "- Recent  Acquisitions,"  "-
Principal  Customers  and  Marketing,"  "Item  6.  Management's  Discussion  and
Analysis or Plan of Operations - General," "-Twelve-Month Periods Ended December
31, 1998 and 1997", "- Liquidity and Capital  Resources" and "Year 2000 Computer
Issues." Such  forward-looking  statements  relate to the  Company's  ability to
implement its plan for the  restructuring  and  refinancing  of its  outstanding
indebtedness,   to  maintain,   implement  and,  if   appropriate,   expand  its
cost-cutting  program  instituted in 1998,  to generate  revenues and attain and
maintain  profitability  and cash flow,  improvement in,  stability and level of
prices for oil and natural gas, pricing in the oil and gas services industry and
the  willingness  of customers to commit for oil and natural gas well  services,
the  ability  of the  Company to compete in the  premium  services  market,  the
ability of the Company to redeploy its equipment  among  regional  operations as
required,  the ability of the  Company to provide  services  using the  recently
acquired  state  of the  art  tooling,  the  ability  of the  Company  to  raise
additional capital to meet its requirements and to obtain additional  financing,
its ability to  maintain  compliance  with the  covenants  of its  various  loan
documents and other agreements pursuant to which securities have been issued and
the  ability of the  Company  to  successfully  address  Year 2000  issues.  The


                                      -7-
<PAGE>



inability of the Company to meet these  objectives  or the  consequences  on the
Company  from  adverse  developments  in general  economic  conditions,  adverse
developments in the oil and gas industry, further declines in the prices for oil
and natural gas and the absence of any material improvement in those prices, and
other factors could have a material  adverse effect on the Company.  The Company
cautions  readers  that various  risk  factors  described  below could cause the
Company's  operating  results,  financial  condition  and ability to fulfill its
restructuring   plan  to  differ   materially   from  those   expressed  in  any
forward-looking  statements made by the Company and could  adversely  affect the
Company's  financial  condition and its ability to pursue its business  strategy
and plans. Risk factors that could affect the Company's revenues,  profitability
and future business operations include, among others, the following:

         Substantial Indebtedness;  Existing Defaults. At December 31, 1998, the
Company's  total  indebtedness,  all of  which  is  classified  with  a  current
maturity, and inclusive of accrued interest, was approximately $41.1 million. In
addition,  subsequent to December 31, 1998 through  March 31, 1999,  the Company
incurred  additional  indebtedness of approximately  $2.5 million.  At March 31,
1999,  the Company was not in  compliance  with  various  covenants  of the loan
agreements relating to approximately $11.5 million of outstanding senior secured
indebtedness  and  an  additional  $3.2  million  of  unsecured  purchase  money
indebtedness was in default. As a consequence of cross-default provisions in its
various  debt  instruments,  substantially  all  of  the  Company's  outstanding
indebtedness  is  classified as currently  due. The Company  expects that it may
incur  additional  indebtedness to meet its current  obligations.  The Company's
level of indebtedness and the defaults  thereunder pose substantial risks to the
Company and the holders of its securities,  including the  possibility  that the
Company may not be able to generate sufficient cash flow to pay the principal of
and interest on the indebtedness when due or to refinance such indebtedness.

         Restrictions  Imposed by Lenders;  Secured  Borrowing.  The Company has
outstanding secured indebtedness  aggregating  approximately $11.5 million under
an Amended and Restated Loan and Security  Agreement (the "Loan Agreement") with
Fleet Capital  Corporation  ("Fleet") dated October 30, 1998. From time to time,
including  in early 1999,  the Company has not been in  compliance  with various
covenants in the Loan Agreement. In February 1999, the Company and Fleet entered
into a Forebearance  Agreement and Amendment to Loan and Security Agreement (the
"Forebearance  Agreement") whereby Fleet agreed, among other things, to forebear
through  June 30,  1999  taking  action on  defaults  under the  Company's  Loan
Agreement.  Subject to the Company meeting certain conditions and complying with
certain  covenants,  Fleet agreed to defer the payments of principal  due on its
loan  during  the months of March  through  June 1999.  At April 13,  1999,  the
Company  was in default of certain of the terms of the  Forebearance  Agreement.
The instruments governing the Company's indebtedness to Fleet impose significant
operating and financial  restrictions on the Company.  Such restrictions affect,
and in many respects  significantly  limit or prohibit,  among other things, the
ability of the Company 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 ability of the Company to effect


                                      -8-
<PAGE>

future financings, make needed capital expenditures, withstand a downturn in the
Company's  business  or economy  in  general,  or  otherwise  conduct  necessary
corporate  activities.  The Loan Agreement places  restrictions on the Company's
ability  to borrow  money  under the  revolving  credit  provisions  of the Loan
Agreement.   The  Company's  ability  to  borrow  under  this  revolving  credit
arrangement is necessary to fund the Company's ongoing  operations.  The Company
is currently in default under a number of  provisions of its Loan  Agreement and
Forebearance  Agreement with Fleet.  Fleet has the right to elect to declare all
of the funds  borrowed to be immediately  due and payable  together with accrued
and  unpaid  interest  and to  refuse  to make  additional  advances  under  the
revolving credit arrangement.  In such event, there can be no assurance that the
Company  would be able to make such  payment  or borrow  sufficient  funds  from
alternative  sources to make any such  payment.  If the  Company  were unable to
repay all amounts declared due and payable under the Loan Agreement, Fleet could
proceed  against the collateral  granted to satisfy the  indebtedness  and other
obligations due and payable.  This collateral includes  substantially all of the
Company's  assets. If the  indebtedness owing to Fleet  were to be  accelerated,
there can be no assurance  that the assets of the Company would be sufficient to
repay  in  full  such  indebtedness  and the  Company's  other  liabilities.  In
addition,  the acceleration of the Company's  indebtedness  owing to Fleet would
constitute a default under other indebtedness of the Company which may result in
such other  indebtedness also becoming  immediately due and payable.  Under such
circumstances,  the holders of the Company's  Common Stock may realize little or
nothing on their investment in the Company.  Even if additional  financing could
be  obtained,  there  can be no  assurance  that it would  be on terms  that are
favorable or acceptable to the Company or its equity security  holders.  As part
of its proposed  recapitalization  plan described herein, the Company is seeking
to refinance its indebtedness owing to Fleet.

         Other Current Liabilities.  In addition to its outstanding indebtedness
to lenders and others, the Company had outstanding at December 31, 1998 accounts
payable of approximately  $6.0 million.  The Company is substantially  dependent
upon the  cooperation of its creditors in order to be successful in implementing
its restructuring plan described elsewhere herein. The Company's  operations are
hindered by these large amounts of outstanding  payables and certain vendors are
currently dealing with the Company on a cash only basis or otherwise refusing to
provide  services  and  materials  to the  Company  in view  of the  outstanding
accounts payable.

         Recent  Depressed  Levels of Prices  for Oil and  Natural  Gas;  Recent
Business  Environment.   The  business  environment  for  the  Company  and  its
corresponding operating results are affected significantly by petroleum industry
exploration  and  production  expenditures.  These  expenditures  are influenced
strongly  by oil  company  expectations  about the supply and demand for oil and
natural gas, energy prices, and finding and development costs.  Petroleum supply
and demand,  pricing, and finding and development costs, in turn, are influenced
by numerous  factors  including,  but not limited to, those described  herein in
"Cautionary  Statement for the Purposes of the "Safe  Harbor"  Provisions of the
Private Securities Litigation Reform Act of 1995."


                                      -9-
<PAGE>


         Four key factors that currently  influence the worldwide oil market and
therefore current and future expenditures for exploration and development by the
Company's customers are: the degree to which certain large producing  countries,
in  particular  Saudi  Arabia and  Venezuela,  are  willing and able to restrict
production and exports of crude oil; the  increasing  rate of depletion of known
hydrocarbon reserves;.  the level of economic growth in certain key areas of the
world, particularly developing Asia, where the correlation between energy demand
and  economic  growth is  particularly  strong;  and the  amount of crude oil in
storage relative to historic levels.

         These factors,  together with  projections  for future  commodity price
movement,   influence   overall  levels  of  expenditures  for  exploration  and
development by the Company's customers.  Crude oil prices experienced record low
levels in 1998,  trading below  $15/bbl for most of the year and averaging  only
$14.41/bbl  - the lowest  yearly  average  recorded  since 1983 and down over 30
percent from  year-ago  levels.  Prices were lower due to increased  supply from
renewed  Iraqi  exports,   increased  OPEC  and  non-OPEC   production,   higher
inventories (particularly in North America) and a simultaneous slowing of demand
growth due to the Asian  economic  downturn  and a generally  warmer than normal
winter.  U.S.  natural gas weakened in 1998  compared to the prior year periods,
also due to abnormally warm winter weather.  In response to lower oil prices and
expectations  for continued  low oil prices in 1999,  oil companies cut upstream
capital spending, particularly in the second half of 1998.

         As a consequence  of the current  levels of oil and natural gas prices,
which remain depressed from levels  experienced in 1997 and 1996,  management of
the  Company  expects  demand for the  Company's  services  to remain  depressed
throughout  1999,  which may result in reduced  revenues for 1999 as compared to
1998.

         Auditors Report;  Uncertainty as to Going Concern;  Financial Statement
Presentation.  The Company's  financial  statements have been prepared  assuming
that the Company will continue as a going concern.  The Company's  violations of
various covenants in its loan agreements with its principal secured lender,  its
working capital deficiency,  operating losses and its lack of liquidity,  create
substantial  uncertainties  as to the  Company's  ability to continue as a going
concern. The report of PricewaterhouseCoopers  LLP dated March 19, 1999 contains
a paragraph referring to these uncertainties. The Company's financial statements
at December 31, 1998 do not include any  adjustments  that might result from the
outcome of these uncertainties.

         The Company's ability to continue as a going concern makes it dependent
on its  ability  to obtain  additional  financing  and  refinance  its  existing
indebtedness  and to  generate  adequate  revenues  and  cash  flow to meet  its
obligations. As is described under "Item 6. Management's Discussion and Analysis
or  Plan  of   Operation-Liquidity   and  Capital  Resources,"   management  has
implemented a plan that it believes  addresses the uncertainties  referred to in
the report of its  Independent  Accountants.  There can be no assurance  however
that  the  Company  will be  successful  in  implementing  its  plan,  including
refinancing its senior secured  indebtedness,  or that unforeseen events may not
prevent its


                                      -10-
<PAGE>

implementation.  Management of the Company believes that the  implementation  of
its plan will be substantially  dependent upon the continuing cooperation of its
lenders, vendors and customers.

         Material Charge to Operations  During 1998. In accordance with SFAS No.
121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, the Company recognizes impairment losses on long-lived assets
used in operations  when  indicators of impairment are present and the projected
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  are for a period of five years using a discount  rate and  terminal
value  multiple  that would be  customary  for  evaluating  current  oil and gas
service company transactions.

       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 oil and
gas well  service  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  realizability  and/or  amortization  periods of its
goodwill.

         The Company experienced a large decline in demand for its services as a
result of a large  decrease in the price of oil and natural  gas, as well as the
loss of a major customer. Consequently,  management evaluated the recoverability
of its long-lived assets in relation to its business segments.  The analysis was
first  performed on an  undiscounted  basis which  indicated  impairment  in its
directional   drilling  segment.   The  impairment  was  then  calculated  using
projections of discounted  cash flows over five years  utilizing a discount rate
and  terminal  value  multiple  commensurate  with  current oil and gas services
company  transactions.  At December 31, 1998, the discount rate and the terminal
multiple  used  was 12% and  6.5,  respectively.  The  assumptions  used in this
analysis represent management's best estimate of future results.

         The  analysis  resulted  in a charge to  operations  for the year ended
December  31,  1998  of  $11.1  million,  which  consisted  of a  write-down  of
approximately  $8.1  million,  approximately  $2.4  million,  and  approximately
$624,000,   to  goodwill,   property,   plant  and  equipment,   and  inventory,
respectively.

         Substantial Dilution; Possible Defaults on Obligations. The Company has
outstanding as of March 31, 1999,  common stock purchase  warrants,  options and
convertible securities entitled to purchase or be converted into an aggregate of
31,073,280  shares of the  Company's  Common  Stock at exercise  and  conversion
prices ranging from $1.50 to $8.01.  Accordingly,  if all such  securities  were
exercised  or  converted,  the  3,942,831  shares of  Common  Stock  issued  and
outstanding on March 31, 1999,  would represent 11.3% of the shares  outstanding
on a fully diluted basis.


                                      -11-
<PAGE>


         As of March  31,  1999,  the  Company's  Certificate  of  Incorporation
permits it to issue up to 12,500,000  shares of Common Stock.  Accordingly,  the
Company has an  insufficient  number of shares of Common  Stock  authorized  for
issuance in the event all its outstanding warrants and options were exercised in
full and convertible  securities fully  converted.  The Company's loan agreement
dated  February  18, 1999 with SJMB,  LP ("SJMB"),  an  affiliate of St.  James,
provides  that the  Company  shall,  at or before  its next  annual  meeting  of
shareholders,  secure  an  amendment  to its  Certificate  of  Incorporation  to
increase  the  number of shares  that the  Company is  authorized  to issue to a
number  sufficient to authorize the issuance of its current  outstanding  shares
and all shares that are issuable upon  conversion  of the Company's  outstanding
shares  and all  shares  that are  issuable  upon  conversion  of the  Company's
outstanding  convertible  notes and  exercise  of any  warrants  or  options  to
purchase Common Stock. Pursuant to this provision, the Company intends to submit
to a vote of its  shareholders at its next annual meeting a proposal to increase
the number of shares of Common Stock  authorized to 50,000,000 shares.  Approval
of this  amendment  will require the favorable vote of the holders of a majority
of the shares of Common Stock issued and outstanding.

         The failure of the shareholders of the Company to approve the amendment
of the  Certificate of  Incorporation  will constitute a breach of the Company's
agreement with SJMB and, if such default remains uncured for 45 days, constitute
an Event of Default under the  Company's  $2.5 million  promissory  note held by
SJMB.  Under  those  circumstances,  the  principal  of the note and all accrued
interest would become  automatically  immediately due and payable.  Such default
would also  constitute a default under all of the Company's  other  indebtedness
owing to St. James and its affiliates, aggregating $16.9 million as of March 31,
1999,  as  well  as  a  default  under  the  Company's  borrowings  from  Fleet.
Accordingly,  an aggregate of $29.7 of the  Company's  indebtedness  would be in
default and would entitle the creditors to foreclose on substantially all of the
Company's assets

         Availability  of Trained  Personnel.  The  operation  of the  wireline,
directional  drilling and other oil and gas well service  equipment  utilized by
the Company requires the services of employees having the technical training and
experience  necessary to obtain the proper  operational  results.  The Company's
operations  are  to  a  considerable   extent   dependent  upon  the  continuing
availability of personnel with the necessary level of training and experience to
adequately  operate its equipment.  The Company has  historically  experienced a
high rate of  employee  turnover.  In the event the  Company  should  suffer any
material loss of personnel to competitors  or be unable to employ  additional or
replacement  personnel  with the requisite  level of training and  experience to
adequately  operate its equipment its  operations  could be adversely  affected.
While the  Company  believes  that its wage rates are  competitive  and that its
relationship  with its  workforce is good, a  significant  increase in the wages
paid by other employers could result in a reduction in the Company's  workforce,
increases  in wage rates,  or both.  If either of these  events  occurred  for a
significant period of time, the Company's revenues could be impacted.


                                      -12-
<PAGE>


         Dependence  on Major  Customers.  Historically,  a large portion of the
Company's  revenues  has  been  generated  from a  relatively  small  number  of
companies. During the year ended December 31, 1998, no single customer accounted
for more than 10% of the Company's revenues. However, a significant reduction in
business  done by the Company  with its  principal  customers,  if not offset by
revenues from new or existing customers, could have a material adverse effect on
the Company's business, results of operations and prospects.

         Substantial  Control by Principal  Investor.  As of March 31, 1999, St.
James Capital Partners,  L.P.,  including certain of its affiliated entities and
partners, collectively referred to as ("St. James") held promissory notes of the
Company  convertible into 12,933,333 shares of Common Stock and held warrants to
purchase an additional 16,535,138 shares of Common Stock. Upon conversion of the
notes and  exercise  of the  warrants,  St.  James  would hold an  aggregate  of
29,468,471  shares  representing  88.2% of the Company's  shares of Common Stock
then  outstanding.  In addition,  St. James has certain  additional  contractual
rights which,  among other  things,  give to St. James the right to nominate one
person for election to the Company's  Board of Directors,  certain  preferential
rights  to  provide  future  financings  for the  Company,  subject  to  certain
exceptions, prohibitions against the Company consolidating,  merging or entering
into a share exchange with another person, with certain exceptions,  without the
consent of St.  James.  St.  James has agreed to  convert an  aggregate  of $4.9
million  principal  amount of its notes into an aggregate of 3,266,666 shares of
Common Stock (45.3% of the shares then issued and  outstanding).  The  foregoing
give St. James the ability to exert significant  influence over the business and
affairs of the Company. The interests of St. James may not always be the same as
the interests of the Company's other securityholders.

         Under the terms of the  Company's  Loan  Agreement  with Fleet,  in the
event that St. James ceases to own and control beneficially and of record (a) at
least 55% of each class of issued and  outstanding  capital stock of the Company
(on a fully  diluted  basis)  prior to a secondary  public  offering of stock or
other  securities  acceptable  to Fleet,  or (b) pursuant to a secondary  public
offering of capital stock (or other  securities  acceptable to Fleet),  at least
30% of each class of issued and  outstanding  capital stock of the Company (on a
fully  diluted  basis),  the Company will be in breach of a covenant in the Loan
Agreement.

         Competition.  The  wireline,  directional  drilling,  workover and well
servicing industry is a  highly-fragmented,  intensely  competitive and cyclical
business.  A number of large and small  contractors  provide  competition in all
areas of the Company's business. The wireline service trucks and other equipment
used is mobile  and can be moved  from one  region to  another  in  response  to
increased  demand.  Many of the  Company's  competitors  have greater  financial
resources than the Company,  which may enable them to better withstand  industry
downturns,  to compete more  effectively  on the basis of price,  and to acquire
existing or new equipment.


                                      -13-
<PAGE>


         Operating  Hazards and Uninsured  Risks. The Company's oil and gas well
service  operations are subject to the many hazards  inherent in the oil and gas
drilling and production  industry.  These hazards can result in personal  injury
and loss of life,  severe damage to or  destruction  of property and  equipment,
pollution or  environmental  damage and  suspension of  operations.  The Company
maintains insurance protection as it deems appropriate. Such insurance coverage,
however,  may not in all  situations  provide  sufficient  funds to protect  the
Company from all liabilities that could result from its operations.

         Environmental  Risks.  The  Company  is subject  to  numerous  domestic
governmental  regulations  that relate directly or indirectly to its operations,
including  certain  regulations  controlling the discharge of materials into the
environment,  requiring  removal and cleanup  under  certain  circumstances,  or
otherwise  relating to the protection of the  environment.  Laws and regulations
protecting the environment have become more stringent in recent years and may in
certain  circumstances impose "strict liability" and render a company liable for
environmental  damage  without regard to negligence or fault on the part of such
company.  Such laws and  regulations may expose the Company to liability for the
conduct of, or  conditions  caused by,  others,  or for acts of the Company that
were  in  compliance  with  all  applicable  laws at the  time  such  acts  were
performed.  The  application  of  these  requirements  or  the  adoption  of new
requirements could have a material adverse effect on the Company.

         Seasonality and Weather Risks. The Company's  operations are subject to
seasonal variations in weather conditions,  daylight hours and favorable weather
conditions for its off-shore wireline operations. Since the Company's activities
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 and cold conditions and a
decrease in  daylight  hours.  Furthermore,  demand for the  Company's  wireline
services by oil and gas companies in the first  quarter is generally  lower than
at other times of the year. As a result,  the Company's revenue and gross profit
during the first quarter of each year are typically low as compared to the other
quarters.

         Dependence on Key Personnel.  The Company's  success  depends on, among
other  things,  the  continued  active  participation  of  William  L.  Jenkins,
President,  Allen  R.  Neel,  Executive  Vice-President,   Danny  Ray  Thronton,
Vice-President,  Operations, and certain of the Company's other officers and key
operating personnel.  The loss of the services of any one of these persons could
have a material  adverse  effect on the  Company.  The Company has entered  into
employment  agreements with each of its executive  officers,  including  Messrs.
Jenkins  (through  December 2001) and Thornton and Neel (through April 1, 2000),
and has purchased "key-man" life insurance with respect to each of such persons.

         Absence of  Dividends.  The Company  has not  declared or paid any cash
dividends  on  the  Common  Stock  and  currently   anticipates  that,  for  the
foreseeable  future,  any earnings will be retained for the  development  of the
Company's  business.  Accordingly,  no cash  dividends  are


                                      -14-
<PAGE>

contemplated  to be  declared  or paid on the Common  Stock.  In  addition,  the
Company's existing loan agreements  prohibit the payment of cash dividends.  See
"Price Range of Common Stock; Dividend Policy."

ITEM 2.  PROPERTIES

         The  Company  leases  6,500  square feet of office  space in  Columbus,
Mississippi  for a  five-year  term  expiring  on  September  30,  2001  for its
executive  offices.  The  monthly  rental  is  $1,900,  plus  electric  and  gas
utilities.  In addition,  the Company maintains District Offices at 21 locations
throughout its service area and a manufacturing facility in Laurel, Mississippi.
The aggregate annual rental for these facilities is $522,000. Of such facilities
three are owned by the Company and the others are leased with rental  periods of
from a month-to-month  basis to five years. The Company believes that all of the
facilities are adequate for its current requirements.

ITEM 3.  LEGAL PROCEEDINGS

         The Company and certain of its officers and Directors  are  respondents
in an arbitration  proceeding commenced by Monetary  Advancement  International,
Inc.  before the American  Arbitration  Association  in New York,  New York. The
claimant seeks  recompense  against the Company and the other named  respondents
for the alleged  failure to pay  compensation  in the form of shares of stock of
the Company for services allegedly  rendered.  The respondents have submitted an
answer and counterclaims and have initiated a Court proceeding seeking a partial
stay of the  arbitration  proceeding.  The Company deems the  allegations of the
claimant to be without merit and intends to vigorously contest the case.

         The  Company  and  Southwick  Investments,   Inc.  are  parties  in  an
arbitration  proceeding before the American Arbitration  Association in Atlanta,
Georgia.  Initially,  Southwick  filed a claim in the state  courts of  Georgia,
seeking to recover  damages for failure to furnish an option to purchase  50,000
shares of the  Company's  stock and pay other fees  allegedly  due pursuant to a
Professional  Services Agreement between the Company and Southwick.  The Company
counterclaimed against Southwick,  alleging failure of performance by Southwick.
The Company deems the allegation of Southwick to be without merit and intends to
vigorously  contest  the  defense  of this case and to pursue  its  counterclaim
against Southwick.


                                      -15-
<PAGE>


         The Company is a defendant in a number of other legal proceedings which
it considers to be routine  litigation  that is incidental to its 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

         No matter was  submitted  during the fourth  quarter of the fiscal year
ended December 31, 1998, to a vote of security  holders of the Company,  through
the solicitation of proxies, or otherwise.


                                      -16-
<PAGE>



                                     PART II

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

MARKET INFORMATION

         The  Company's  Common Stock is quoted in the OTC Bulletin  Board under
the trading symbol BWWL.  The following  table sets forth the bid prices for the
Company's Common Stock for the periods indicated as provided by the OTC Bulletin
Board:

<TABLE>
<CAPTION>

                                                                      BID PRICES
                                                       ------------------------------------------
                             1997                           HIGH                      LOW
-------------------------------------------------------------------------------------------------
<S>                                                        <C>                       <C>
              First Quarter                                $4.44                     $2.75
              Second Quarter                               $4.19                     $2.56
              Third Quarter                                $6.81                     $3.13
              Fourth Quarter                               $9.63                     $6.00


                                                                      BID PRICES
                                                       ------------------------------------------

                             1998                           HIGH                      LOW
-------------------------------------------------------------------------------------------------

              First Quarter                                $8.00                     $5.88
              Second Quarter                               $9.34                     $5.00
              Third Quarter                                $5.75                     $2.38
              Fourth Quarter                               $2.69                     $0.88

                                                                       BID PRICES
                                                       ------------------------------------------
                              1999                           HIGH                      LOW
--- ---------------------------------------------------------------------------------------------
                First Quarter                               $2.50                     $1.00

</TABLE>



         The  foregoing  amounts  represent   inter-dealer   quotations  without
adjustment for retail markups,  markdowns or  commissions,  and do not represent
the prices of actual transactions.  On April 12, 1999, the closing bid quotation
for the Common Stock, as reported by the OTC Bulletin Board, was $1.19.


                                      -17-
<PAGE>


         As of April 12, 1998, the Company had approximately 445 shareholders of
record and  believes  it has in excess of 500  beneficial  holders of its Common
Stock,  including  in excess of 350 holding 100 shares or more.  The Company has
never paid a cash  dividend on its Common  Stock and  management  has no present
intention of commencing to pay dividends.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

GENERAL

         The  Company's  results of  operations  are  affected  primarily by the
extent of utilization  and rates paid for its services and  equipment.  Revenues
are also  affected  by the  success of the  Company's  efforts to  increase  its
penetration  of the market for its  services  by  intensified  marketing  of its
services. Incremental demand for the Company's services is affected by the level
of oil and  natural  gas  well  drilling  activity  and  efforts  by oil and gas
producers to improve well production and operating efficiencies. Both short-term
and long-term trends in oil and natural gas prices affect the utilization of the
Company's  services.  Declines  in 1998  in the  prevailing  prices  for oil and
natural gas adversely impacted the Company's operations.

         The following  table sets forth the  Company's  revenues from its three
principal lines of business for each of the three years ended December 31, 1998:


<TABLE>
<CAPTION>

                                                1998                      1997                      1996
--------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                       <C>                       <C>
Wireline Services                              $11,592                    $ 9,513                     $5,874

Directional Drilling                            21,311                      5,932                        -0-

Workover and Completion                          1,533                      1,618                      1,709
                                           -------------------------------------------------------------------------
                                               $34,437                    $17,063                     $7,582
                                           =========================================================================
</TABLE>



                                      -18-
<PAGE>



TWELVE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997

         Revenues  increased by $17.3  million or 101% to $34.4  million for the
year ended  December  31, 1998 as compared to revenues of $17.1  million for the
year ended  December  31, 1997.  Wireline  services  revenues  increased by $2.1
million in 1998  primarily  because of the  acquisition of Petro  Wireline,  the
Company's  establishment of an off-shore  wireline  operation and a new on-shore
wireline facility at Minden, Louisiana.  Directional drilling revenues increased
as a consequence of the Diamondback  activities operated for a full year and the
acquisition of the Phoenix assets in March 1998.

         Operating  costs increased by $18.2 million for the year ended December
31, 1998,  as compared to 1997.  This increase was due primarily to the increase
in the level of  activities as a consequence  of the  acquisitions  completed in
1998.  Salaries and  benefits  increased by $6.7 million for 1998 as compared to
1997. This was due primarily to hiring of additional  personnel as a consequence
of the  acquisitions  completed.  Operating  costs as a  percentage  of revenues
increased  to  88.5% in 1998  from  71.8% in 1997  primarily  because  declining
billing rates and equipment utilization.

         Selling, general and administrative expenses increased by approximately
$5.2 million from $2.1 million in 1997 to $7.5 million in 1998.  As a percentage
of revenues,  selling,  general and administrative expenses increased from 12.8%
in 1997 to 21.6% in 1998,  primarily  as a result of  increased  fixed  expenses
arising out of acquisitions and declining  revenues in the last half of 1998. At
December 31, 1998, the Company's accounts receivable were $3.6 million, net of a
reserve  of  $2.2  million.   The  reserve  arose  out  of  liquidity  shortages
experienced  by the Company's  customers  because of declines in the  prevailing
prices  received  for oil and  natural gas  production  and  contributed  to the
increase in selling, general and administrative expenses.

         Depreciation and  amortization  increased from $1.4 million in 1997, to
$4.8 million in 1998,  primarily because of the higher asset base of depreciable
properties in 1998 over 1997.

         In  accordance  with SFAS No.  121  Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to be  Disposed  Of, 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 are for a period of five years
using a discount  rate and terminal  value  multiple that would be customary for
evaluating current oil and gas service company transactions.

       The  Company  considers   external  factors  in  making  its  assessment.
Specifically,  changes in oil prices and other economic  conditions  surrounding
the industry,  consolidation within the


                                      -19-
<PAGE>


industry, competition from other oil and gas well service 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  realizability
and/or amortization periods of its goodwill.

         The Company experienced a large decline in demand for its services as a
result of a large  decrease in the price of oil and natural  gas, as well as the
loss of a major customer. Consequently,  management evaluated the recoverability
of its long-lived assets in relation to its business segments.  The analysis was
first  performed on an  undiscounted  basis which  indicated  impairment  in its
directional   drilling  segment.   The  impairment  was  then  calculated  using
projections of discounted  cash flows over five years  utilizing a discount rate
and  terminal  value  multiple  commensurate  with  current oil and gas services
company  transactions.  At December 31, 1998, the discount rate and the terminal
multiple  used  was 12% and  6.5,  respectively.  The  assumptions  used in this
analysis represent management's best estimate of future results.

         The  analysis  resulted  in a charge to  operations  for the year ended
December  31,  1998  of  $11.1  million,  which  consisted  of a  write-down  of
approximately  $8.1  million,  approximately  $2.4  million,  and  approximately
$624,000,   to  goodwill,   property,   plant  and  equipment,   and  inventory,
respectively.

         Interest  expense and  amortization of debt discount  increased by $2.3
million for 1998 as compared to 1997. This was directly related to the increased
amounts of indebtedness outstanding in 1998 incurred to finance acquisitions.

         Net gain on sale of fixed  assets  increased  in 1998 to $155,000  from
$26,000 in 1997. Other income decreased by $10,694 in 1998 because of a decrease
in interest income.

         Income tax benefit was $1.1  million in 1998  compared to an expense of
$222,000 for 1997. The income tax benefit arises out of the Company's net losses
for the year. See "Note 10 of Notes to Consolidated Financial Statements."

         The  Company's  net loss for 1998 was  $21.0  million,  of which  $11.1
million was the result of the loss from impairment of  intangibles,  inventories
and  property,  plant and equipment  discussed  above.  The  Company's  loss was
primarily  attributable  to the  foregoing  impairment  as well  as the  related
declines in demand for the Company's  services and equipment  utilization  which
arose in 1998 out of the declines in prices for oil and natural gas.


                                      -20-
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

         Cash used in Company  operating  activities  was  $826,000 for the year
ended December 31, 1998 as compared to cash provided by operating  activities of
$1.2 million for the year ended December 31, 1997.  Investing  activities of the
Company  used cash of $6.5 million  during the year ended  December 31, 1998 for
the acquisition of property,  plant and equipment and other businesses offset by
proceeds  from the sale of fixed  assets  of  $300,000.  During  the year  ended
December  31, 1997,  acquisitions  of property,  plant and  equipment  and other
businesses used cash of $3.8 million offset by proceeds of $74,000 from the sale
of fixed assets.  Financing  activities  provided cash of $10.4 million from the
net  proceeds  from the  issuance  of  convertible  notes  and  warrants,  other
borrowings  and the sale of common stock during the year ended December 31, 1998
offset by principal  payments on long-term  notes and capital lease  obligations
and loan origination  costs of $2.8 million.  During the year ended December 31,
1997,  the sale of  convertible  notes and warrants and the sale of common stock
resulted in proceeds of $2.6 million  offset by principal  payments on long-term
debt and capital lease obligations of $347,000.

         During the year ended December 31, 1998, the Company expended  $897,000
for the  acquisition  of property,  plant and equipment  financed  under capital
leases and notes  payable and  incurred  an  additional  $20.2  million of notes
payable in connection with the acquisition of businesses.  During the year ended
December 31, 1997,  the Company  expended  $1.5 million for the  acquisition  of
property,  plant and equipment  financed  under capital leases and notes payable
and incurred an additional  $9.1 million of notes payable in connection with the
acquisition of businesses.

         During 1998,  the Company  experienced  a decline in the demand for its
products and services as a result of a significant  decrease in the price of oil
and  natural  gas.  The  decline in demand  materially  impacted  the  Company's
revenues,  liquidity and its ability to remain in compliance  with  covenants in
its loan agreements and meet its obligations during the last half of 1998. While
these conditions  continued throughout much of the first quarter of 1999, prices
for oil and natural gas had improved  moderately  by the beginning of the second
quarter.  Management of the Company believes that an improvement in its revenues
will be dependent upon a continuing  period of improved pricing and decisions by
oil and natural gas producers to make  commitments  to engage in oil and natural
gas well enhancements.


                                      -21-
<PAGE>


         The  Company's  outstanding   indebtedness  includes  primarily  senior
indebtedness aggregating approximately $18.9 million at December 31, 1998, other
indebtedness of approximately $3.7 million, and $16.9 million owing to St. James
Capital Partners, L.P. ("SJCP") and its affiliates.  All of this indebtedness is
shown as currently due and payable on the Company's  consolidated  balance sheet
at December 31, 1998.

     Management's  plans  with  respect  to  addressing  its  current  financial
situation include primarily the following:

            o    In March 1999 the Company  borrowed an additional  $2.5 million
                 from an affiliate of SJCP, the Company's principal investor.

            o    The  Company is engaged  in  efforts  to  refinance  its senior
                 indebtedness which is intended to provide,  among other things,
                 more favorable terms and thereby improve liquidity.

            o    In March 1999, the Company entered into a forbearance agreement
                 with Fleet Capital Corp. which,  among other things,  permitted
                 the Company to defer  payments of  principal  to Fleet  through
                 June 30, 1999.

            o    In April 1999,  GE Capital  Corp.  agreed to defer  payments of
                 interest   on  an   aggregate   of  $3.9   million  of  secured
                 indebtedness through June 30, 1999.

            o    The Company has continued  through the first quarter of 1999 to
                 further implement a cost reduction program first implemented in
                 the last half of 1998 and  intends  to focus on cost  reduction
                 opportunities through 1999.

         Management also intends to raise additional capital in conjunction with
the foregoing plan,  which may be either debt or equity capital or a combination
thereof,   which,   together  with  the  renegotiation  of  certain  outstanding
indebtedness,  will be  used  to meet  the  Company's  other  current  liquidity
requirements.  Management  expects  that,  upon  conclusion  of  the  plan,  its
indebtedness   owing  to  SJCP  will  be  long-term  or  converted  into  equity
securities.

         Management  believes  that,  provided oil and natural gas prices remain
relatively  stable with prices that  existed at the end of the first  quarter of
1999, the foregoing plan together with the cost-cutting  program  implemented in
1998, which included reductions in personnel and salaries of existing personnel,
closing  and  consolidating  certain  district  offices,   together  with  other
cost-cutting  activities, should enable the Company to operate,  commencing with
the second  quarter of 1999,  without a further  deterioration  of its liquidity
condition.

         Management  of the  Company  is unable to assure  that its  efforts  to
implement the plan  described  above will be successful or state the terms under
which or when the proposed


                                      -22-
<PAGE>

transactions  will be  completed.  Management  expects that in order to complete
such transactions substantial amounts of equity securities may be required to be
issued which may materially dilute the Company's existing stockholders.

YEAR 2000 COMPUTER ISSUES

         Computer  hardware and software  often denote the year using two digits
rather than four;  for example,  the year 1998 is often denoted by such hardware
and software as "98." It is probable  that such  hardware  and/or  software will
interpret  "00" as  representing  the year 1900 rather than the year 2000.  This
"Year 2000" issue potentially affects all individuals and companies. The Company
has and continues to evaluate its information  technology systems,  hardware and
non-information  technology systems to assess  modifications needed for the Year
2000.  These systems  include those  utilized for financial  record  keeping and
certain  oil and gas  service  equipment.  A member  of  senior  management  was
selected to oversee the Year 2000  project.  The project work plan  involves the
following phases:  inventory of critical and non-critical  systems and hardware,
assessment and  certification of third party systems.  The Company has completed
its  inventory of systems and  hardware.  All critical  systems are supported by
third party vendors. The Company is currently in the process of certifying these
systems with the vendors.  With respect to other third party relationships,  the
Company is inquiring of certain vendors, customers, and other third parties that
supply critical services to determine their preparedness and ability to continue
normal operations.

         To date,  the Company has incurred  minimal  costs  related to the Year
2000 project and does not  anticipate any  significant  additional  costs.  Such
costs are expensed as incurred.

         Management  expects  that  Year  2000  issues  will be  addressed  on a
schedule  and in a manner that will  prevent  such issues from having a material
effect on the Company's results of operations, liquidity or financial condition.
While the Company has and will  continue to pursue Year 2000  compliance,  there
can be no assurance that the Company and its vendors,  customers and other third
parties which supply  critical  services will be successful in  identifying  and
addressing  all material  Year 2000 issues.  It is possible  that the  Company's
financial position,  results of operations,  or cash flows could be disrupted by
Year 2000 problems  experienced by its vendors and  customers,  that utilize its
services,  financial  institutions  or other  parties.  The Company is unable to
quantify  the  effect,  if any,  of Year  2000  computer  problems  that  may be
experienced by these third parties.


                                      -23-
<PAGE>



INFLATION

         The  Company's  revenues  have been and are  expected to continue to be
affected by fluctuations in the prices for oil and gas. Inflation did not have a
significant effect on the Company's operations in 1998.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Consolidated   Financial   Statements   of  the  Company   meeting  the
requirements of Regulation S-B are filed on the succeeding  pages of this Item 7
of this Annual Report on Form 10-KSB, as listed below:

<TABLE>
         <S>                                                                                   <C>
         Report of Independent Accountants for the Years Ended
         December 31, 1998, 1997 and 1996....................................................   F-1
         Consolidated Balance Sheets as of
         December 31, 1998 and 1997..........................................................   F-2
         Consolidated Statements of Operations for the Years Ended
         December 31, 1998, 1997 and 1996....................................................   F-3
         Consolidated Statements of Stockholders' Equity (Deficit) for the
         Years Ended December 31, 1998, 1997 and 1996........................................   F-4
         Consolidated Statements of Cash Flows for the Years Ended
         December 31, 1998, 1997 and 1996....................................................   F-5
         Notes to Consolidated Financial Statements..........................................   F-6
</TABLE>


ITEM 8.  CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:

         During the two fiscal years ended  December  31, 1998,  the Company has
not filed any Current  Report on Form 8-K reporting any change in accountants in
which there was a reported  disagreement on any matter of accounting  principles
or practices, financial statement disclosure or auditing scope or procedure.


                                      -24-
<PAGE>


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

         The  following  table  contains  information   concerning  the  current
Directors and executive officers of the Company:

<TABLE>
<CAPTION>


                            NAME                       AGE                        POSITION
             ------------------------------------------------------------------------------------------
                     <S>                              <C>            <C>
                     William L. Jenkins                46            President, Chief Operating Officer
                                                                                and Director

                       Allen R. Neel                   42                 Executive Vice-President

                     Danny Ray Thornton                48               Vice-President - Operations

                      John L. Thompson                 41                         Director

                   Charles E. Underbrink               46                         Director

</TABLE>


         William L. Jenkins has been President,  Chief  Operating  Officer and a
Director of the Company 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 oil and gas  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,   of   which   he   served   as
Secretary/Treasurer until 1988. Mr. Jenkins has over twenty years' experience in
the oil field service business. Mr. Jenkins is Mr. Thornton's brother-in-law.

         Allen R. Neel, is the Executive  Vice-President  of the Company and has
been employed by the Company since August 1990. He is currently in charge of the
Company's  directional  drilling  activities.  In 1981, Mr. Neel received his BS
Degree in Petroleum  Engineering  from the  University of Alabama.  From 1981 to
1987, Mr. Neel worked in engineering  and sales for Halliburton  Services.  From
1987 to 1989, he worked as a District  Manager for Graves Well Drilling Co. When
the Company  acquired the assets of Graves in 1990,  Mr. Neel assumed a position
with the Company.

         Danny Ray  Thornton  is a  Vice-President  of the  Company and has been
employed by the Company since March 1989.  From 1982 to March 1989, Mr. Thornton
was the president and a


                                      -25-
<PAGE>

principal  stockholder of Black Warrior Mississippi,  the Company's  operational
predecessor.  Mr. Thornton has been engaged in the oil and gas services industry
in various  capacities since 1978. His principal duties with the Company include
supervising and consulting on wireline and workover operations.  Mr. Thornton is
Mr. Jenkins' brother-in-law,

         John L.  Thompson is a Director  and  President  of St.  James  Capital
Corp.,  a  Houston-based  merchant  banking firm.  St. James Capital Corp.  also
serves as the General Partner of St. James Capital Partners, L.P., an investment
limited  partnership  specializing  in  merchant  banking  related  investments.
Additionally,  he is  Chairman  of the  Board  of  Herlin  Industries,  Inc.,  a
publicly-held  holding  company  engaged in energy services and is a Director of
Industrial  Holdings,  Inc., a publicly-held  company.  Prior to co-founding St.
James, Mr. Thompson served as a Managing Director of Corporate Finance at Harris
Webb & Garrison,  a regional investment banking firm with a focus on mergers and
acquisitions,  financial restructuring and private placements of debt and equity
issues. Mr. Thompson was elected to the Company's Board of Directors pursuant to
the terms of agreements between the Company and St.James Capital Partners,  L.P.
See "Certain Transactions" for a description of the transaction.

         Charles E.  Underbrink  was elected a Director on April 1, 1998. He has
been,  since July 1995,  the Chief  Executive  Officer and Chairman of St. James
Capital Corp., a Houston based merchant  banking firm and the general partner of
St. James Capital  Partners,  L.P. Mr.  Underbrink has been, from August 1996 to
the  present,  a  principal  of HUB,  Inc.  a  lender  to  small  capitalization
businesses and the operator of mini-storage  facilities located in Minnesota and
Wisconsin.

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 the Company's equity securities,  to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission.  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 Securities and Exchange Commission, all such persons have complied with
such reporting requirements.


                                      -26-
<PAGE>


ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION - GENERAL

         The following table sets forth the compensation  paid or awarded to the
President and Chief  Executive  Officer of the Company and each other  executive
officer of the Company who received compensation  exceeding $100,000 during 1998
for all  services  rendered to the  Company in each of the years 1998,  1997 and
1996.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                         ANNUAL COMPENSATION                LONG-TERM COMPENSATION
                               --------------------------------------------------------------------------------------
                                                          BONUS/ANNUAL    SECURITIES      LONG-TERM
          NAME AND                                          INCENTIVE     UNDERLYING      INCENTIVE       ALL OTHER
     PRINCIPAL POSITION          YEAR         SALARY          AWARD         OPTIONS        PAYOUTS      COMPENSATION
---------------------------------------------------------------------------------------------------------------------
<S>                              <C>         <C>                <C>         <C>               <C>            <C>
William L. Jenkins               1998        $146,275          -0-          200,000          -0-             $1,216(1)
   President                     1997        $110,000          -0-            -0-            -0-             $1,216(1)
                                 1996         $95,000          -0-            -0-            -0-             $1,216(1)

Allen R. Neel                    1998        $131,334          -0-                           -0-             $8,400(2)
  Executive Vice President       1997         $78,500          -0-          80,000           -0-             -0-
                                 1996         $60,500          -0-            -0-            -0-             -0-
</TABLE>
---------------------------------
(1)      Includes  the premiums  paid by the Company on a  $1,000,000  insurance
         policy on the life of Mr.  Jenkins which names his wife as  beneficiary
         and owner of the policy.

(2)      Automobile allowance paid to Mr. Neel.

OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1998.

The  following  table  provides  information  with  respect  to the above  named
executive  officers  regarding  options  granted  to  such  persons  during  the
Company's year ended December 31, 1998.

<TABLE>
<CAPTION>


                                                  % OF TOTAL OPTIONS/                                     MARKET
                        NUMBER OF SECURITIES        SARS GRANTED TO       EXERCISE OR                    PRICE ON
                          UNDERLYING SARS/           EMPLOYEES IN         BASE PRICE     EXPIRATION      DATE OF
        NAME            OPTIONS GRANTED (#)           FISCAL YEAR          ($/SHARE)        DATE          GRANT
--------------------- ----------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                <C>           <C> <C>        <C>
William Jenkins              200,000(1)                   37%                $6.69         1/1/03         $6.69

</TABLE>

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

(1)      Of which, 100,000 shares are exercisable on grant of the option and the
         remaining  shares become  exercisable on January 1, 2000 and January 1,
         2001.



                                      -27-
<PAGE>


STOCK OPTION HOLDINGS AT DECEMBER 31, 1998.

         The  following  table  provides  information  with respect to the above
named  executive  officers  regarding  Company  options  held  at the end of the
Company's  year ended  December  31, 1998 (such  officers  did not  exercise any
options during the most recent fiscal year).

<TABLE>
<CAPTION>


                                                                                       VALUE OF UNEXERCISED
                                    NUMBER OF UNEXERCISED OPTIONS                      IN-THE-MONEY OPTIONS
                                         AT DECEMBER 31,1998                         AT DECEMBER 31, 1998 (1)

         NAME                   EXERCISABLE              UNEXERCISABLE           EXERCISABLE        UNEXERCISABLE
---------------------------------------------------------------------------------------------------------------------
<S>                               <C>                       <C>                      <C>                 <C>
William Jenkins                   100,000                   100,000                  -0-                 -0-
Allen Neel                         60,000                    20,000                  -0-                 -0-

</TABLE>
----------------------------
(1)      Based on the closing sales price on December 31,1998 of $1.00.


EMPLOYMENT AGREEMENTS

         The Company has entered into an Employment Agreement,  dated January 1,
1998,  with  William L.  Jenkins,  to serve as its  President,  Chief  Executive
Officer  and  a  Director  of  the  Company.  The  Employment  Agreement,  which
terminates on December 31, 2001, provides for an annual base salary of $225,000.
Mr.  Jenkins has agreed to a reduction in his salary to $85,000 as a consequence
of the decline in oil and gas prices and the impact on the Company's operations.
The  Employment  Agreement  provides for certain  increases in Mr.  Jenkins base
compensation  in the years  1999,  2000 and 2001 if the  Company  meets  certain
performance  objectives.  Pursuant to the  agreement,  Mr. Jenkins was granted a
ten-year option to purchase  200,000 shares of the Company's  common stock at an
exercise  price of $6.6875  per  share,  the fair  market  value of the stock on
January 1, 1998, the date the option was granted.  With certain exceptions,  the
agreement  restricts Mr. Jenkins from engaging in activities in competition with
the Company  during the term of his  employment  and,  in the event Mr.  Jenkins
terminates the agreement prior to its termination date, for a period of eighteen
(18) months  thereafter and also in the event he terminates the agreement,  from
soliciting  for employment any employee of the Company for a period of two years
after termination.

         The Company has entered into two-year employment agreements terminating
on April 1, 2000 with each of Allen R. Neel, Executive  Vice-President and Danny
Ray Thornton, Vice-President, Operations, of the Company. Mr. Neel is to receive
base compensation of $135,000 per year; however, he has agreed to a reduction to
$85,000 per year. Mr. Thornton  receives base  compensation of $75,000 per year.
On each anniversary  date of the agreements,  the Company and the employee agree
to  renegotiate  the base  salary  taking into  account  the rate of  inflation,
overall  profitability and the cash position of the Company, the performance and
profitability  of the  areas for which the  employee  is  responsible  and other
factors.  The  agreements  contain


                                      -28-
<PAGE>

restrictions  on such  persons  engaging  in activities in competition  with the
Company during the term of their  employment and for a period of two years there
after.  In addition,  the agreements  provide for the grant to such employees of
options to  purchase  50,000  shares of the Company's  Common Stock on execution
of the agreements and 10,000 shares on each of the first three anniversary dates
of the agreements, provided such persons continue to be employed by the Company,
exercisable  at a price of $2.625 per share.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding beneficial
ownership of the Company's  Common Stock as of March 31, 1999 (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 officers,
and (c) by all  Directors  and officers as a group.  As of March 31,  1999,  the
Company had 3,942,831 shares of Common Stock outstanding.


<TABLE>
<CAPTION>
                                                                                        PERCENTAGE OF
                                                              NUMBER OF SHARES      OUTSTANDING SHARES(3)
                       NAME AND ADDRESS (1)(2)                     OWNED
              ------------------------------------------------------------------------------------------------
              <S>                                                  <C>                       <C>
              William L. Jenkins                                    410,000 (4)               5.1%

              Danny Ray Thornton                                     80,666 (5)               2.1%

              Allen R. Neel                                          80,000 (5)               2.1%

              St. James Capital Partners, L.P.
                  and affiliates(6)
              777  Post Oak Boulevard - Suite 950                29,468,471                  88.2%
              Houston, Texas  77056

              Bendover Corp. (7)
              Alan W. Mann (8)
              M. Dale Jowers
              13843 Highway 105 West - Suite 212                    647,569                  17.4%
              Conroe, Texas  77304

              All Directors and Officers as a Group
                 (5 persons including the above)                 33,771,302 (4)(5)(6)        88.9%

</TABLE>

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

(1)      This  tabular  information  is  intended  to  conform  with Rule  13d-3
         promulgated  under the Securities  Exchange Act of 1934 relating to the
         determination  of  beneficial  ownership  of  securities.  The  tabular
         information  gives  effect  to the  exercise  of  warrants  or  options
         exercisable within 60 days of the date of this table owned in each case
         by the person or group whose percentage ownership is set forth opposite
         the respective  percentage and is based on the assumption that no other
         person or group exercise their option.

(2)      Unless  otherwise  indicated,  the address for each of the above is c/o
         Black  Warrior  Wireline  Corp.,  3748  Highway  #45  North,  Columbus,
         Mississippi 39701.


                                      -29-
<PAGE>


(3)      The  percentage  of  outstanding   shares  calculation  is  based  upon
         3,942,831 shares  outstanding as of March 31, 1999, except as otherwise
         noted.

(4)      Includes 200,000 shares issuable on exercise of an option, of which the
         option is presently exercisable with respect to 100,000 shares.

(5)      Includes  80,000 shares issuable on exercise of an option at a price of
         $2.625 per share,  of which 62,500 shares are  immediately  exercisable
         and an  additional  12,500 shares will become  exercisable  on April 1,
         1999 and each anniversary  thereafter,  provided,  the employee remains
         employed by the Company.

(6)      Includes  shares  issuable to St. James  Capital  Partners,  LP and its
         affiliates on  conversion of notes and exercise of warrants.  See "Item
         12. Certain Relationships and Related Transactions."

(7)      Based on  information  contained in the  Schedule 13D dated  October 9,
         1997. On October 9, 1997,  the Company  issued  647,569 shares and paid
         $586,000  in  cash  to  purchase   substantially   all  the  assets  of
         Diamondback  Directional,  Inc. (which corporation subsequently changed
         its  name  to  Bendover  Corp.).  Messrs.  Mann  and  Jowers  each  own
         approximately 42.5% of the outstanding capital stock of Bendover Corp.

(8)      Mr. Mann also holds  directly 784 shares of Common Stock in addition to
         the 647,569  shares held by Bendover  Corp. in which he has an indirect
         beneficial interest.

(9)      Also  includes the shares held by St. James and the shares  issuable on
         exercise of the vested portion of the options held by Messrs.  Thornton
         and Neel.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On March 9, 1998,  the  Messr.  Danny Ray  Thornton,  Allen R. Neel and
Reese James, officers and employees of the Company, agreed to release their lien
on the  Company's  receivables  in exchange for  confirmation  by the Company of
certain  obligations to such persons which consist of (i)  reimbursement of such
persons for their legal fees and  expenses  incurred  in  connection  with their
efforts to recover from Monetary  Advancement  International  Inc., and (ii) the
agreement to make such persons  whole by issuing  stock of the Company  having a
value of  $240,000,  based on the bid  price at the date of  issuance,  less any
recover from MAII.

         In March 1995, the Company received a letter from the District Director
of the Internal  Revenue  Service (the "IRS") in which he formally  notified the
Company that the IRS had  preliminarily  calculated  deficiencies of $35,057 and
$541,727 in federal taxes for the years ended December 31, 1989 and December 31,
1990,  respectively.  The adjustments proposed by the IRS included the valuation
of bonus stock compensation to William L. Jenkins,  President of the Company, as
well as certain  other items.  The Company  agreed to pay whatever  personal tax
liability was determined to be owing by Mr.  Jenkins  related to the bonus stock
resulting from an  unfavorable  resolution of the IRS' proposed  adjustment.  In
June 1996,  the Company  settled this matter with the IRS on terms which,  among
other  things,  resulted in an additional  tax  liability to Mr.  Jenkins in the
amount of $98,524 for taxes,  penalties and interest related to the bonus stock.
The  Company  reimbursed  Mr.  Jenkins  for this sum on January 23, 1997 and has
agreed to further  reimburse Mr.  Jenkins for the tax liability  resulting  from
this payment and any further tax  reimbursement  payments made to Mr. Jenkins in
future years.


                                      -30-
<PAGE>


         Commencing in June 1997 through  February18,  1999, the Company entered
into a series of  transactions  with St.  James  whereby the Company sold to St.
James on the following  dates for an aggregate  purchase price of $19.4 million,
the following securities:

<TABLE>
<CAPTION>


                    DATE                                     SECURITY                       PRINCIPAL AMOUNT
---------------------------------------------------------------------------------------------------------------
<S>                                             <C>                                         <C>
June 6, 1997                                    9% Convertible Promissory Note              $2.0 million (1)
October 9, 1997                                 7% Convertible Promissory Note              $2.9 million (2)
January 23, 1998                                8% Convertible Promissory Note              $10.0 million(3)
October 30, 1998                                10% Convertible Promissory Note              $2.0million (4)
February 18, 1999                               10% Convertible Promissory  Note            $2.5 million (5)


               DATE                        NUMBER OF WARRANTS (6)(7)                     EXPIRATION DATE
---------------------------------------------------------------------------------------------------------------
June 6, 1997                                       1,221,000                               June 5, 2002

October 9, 1997                                    2,239,138                             October 10, 2002

January 23,1998                                    9,000,000                             January 23, 2003

October 30, 1998                                   2,000,000                             October 30, 2003

February 18, 1999                                  2,075,000                            February 18, 2004

</TABLE>

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

(1)      Convertible  at a  current  conversion  price of $1.50  per  share,  as
         adjusted   through   February  18,  1999   pursuant  to   anti-dilution
         adjustments, into an aggregate of 1,333,333 shares of Common Stock.
(2)      Convertible  at a  current  conversion  price of $1.50  per  share,  as
         adjusted   through   February  18,  1999   pursuant  to   anti-dilution
         adjustments, into an aggregate of 1,933,333 shares of Common Stock.
(3)      Convertible  at an  exercise  price of $1.50  per  share,  as  adjusted
         through February 18, 1999 pursuant to anti-dilution  adjustments,  into
         an aggregate of 6,666,667 shares of Common Stock.
(4)      Convertible  at a  current  conversion  price of $1.50  per  share,  as
         adjusted   through   February  18,  1999   pursuant  to   anti-dilution
         adjustments, into an aggregate of 1,333,333 shares of Common Stock.
(5)      Convertible at a current  conversion price of $1.50 per share,  subject
         to anti-dilution adjustments,  into an aggregate of 1,666,667 shares of
         Common Stock.
(6)      Each warrant represents the right to purchase one share of Common Stock
         at $1.50 per share, subject to anti-dilution adjustments.
(7)      As adjusted and subject to further anti-dilution adjustment.

         On each of June 6 and October 9, 1997, January 23 and October 30, 1998,
and February 18, 1999 the Company entered into Purchase Agreements,  and related
notes,  warrants and security  documents  (the  "Agreements")  with St. James or
certain affiliated  entities regarding the purchase of the securities  described
in the  tables  above.  Except  for  those  terms  relating  to the  amounts  of
securities  purchased,  maturity  and  expiration  dates,  interest  rates,  and
conversion and exercise prices, each of such Agreements contained  substantially
identical  terms and  conditions  relating  to the  purchase  of the  securities
involved.  Payment of principal and interest on all the notes is  collateralized
by substantially  all the assets of the Company,  subordinated,  as of March 31,
1999, to borrowings by the Company from Fleet in the maximum aggregate amount of
$11.5 million.  The notes are  convertible  into shares of the Company's  Common
Stock at the


                                      -31-
<PAGE>

conversion  prices  set forth in the  tables  above,  subject  to  anti-dilution
adjustments  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 such shares
were  issued.  Pursuant to the  Agreements,  the Company  agreed to issue to St.
James for nominal  consideration  warrants to purchase shares of Common Stock of
the Company exercisable at the prices set forth in the tables above,  subject to
anti-dilution  adjustment for certain  issuances of securities by the Company at
prices per share of Common Stock less than the exercise prices then in effect in
which  event the  exercise  price is  reduced  to the lower  price at which such
shares were issued.  The shares issuable on conversion of the notes and exercise
of the  warrants  have  demand  and  piggy-back  registration  rights  under the
Securities  Act of 1933.  The Company  agreed that one person  designated by St.
James will be nominated  for election to the Company's  Board of Directors.  Mr.
John L. Thompson,  currently a Director of the Company, serves in this capacity.
The  Agreements  grant St. James certain  preferential  rights to provide future
financings to the Company, subject to certain exceptions. The notes also contain
various affirmative and negative covenants,  including a prohibition against the
Company  consolidating,  merging or entering into a share  exchange with another
person,  with certain  exceptions,  without the consent of St. James.  Events of
default  under the notes  include,  among  other  events,  (i) a default  in the
payment of principal or interest;  (ii) a default under any of the notes and the
failure to cure such  default  for five  days,  which  will  constitute  a cross
default  under  each  of the  other  notes;  (iii)  a  breach  of the  Company's
covenants,  representations  and warranties under any of the Agreements;  (iv) a
breach under any of the Agreements between the Company and St. James, subject to
certain exceptions;  (v) any person or group of persons acquiring 40% or more of
the  voting  power of the  Company's  outstanding  shares  who was not the owner
thereof as of October 30, 1998, a merger of the Company with another person, its
dissolution or liquidation or a sale of all or substantially all its assets; and
(vi) certain  events of  bankruptcy.  In the event of a default under any of the
notes,  subject to the terms of an agreement  between St.  James and Fleet,  St.
James could seek to foreclose against the collateral for the notes.

         In the October  1997 and January 1998  agreements,  St. James agreed to
convert  its $2.0  million  convertible  note  dated  June 5,  1997 and its $2.9
million  convertible  note dated  October 10, 1997 into shares of the  Company's
Common  Stock at such time as the  Company  has filed a  registration  statement
under the Securities  Act of 1933 relating to the shares  issuable on conversion
of such  notes and on  exercise  of the  warrants  issued to St.  James and such
registration statement has been declared effective.

         In March 1998, St. James agreed to certain amendments to its agreements
with the  Company in  connection  with the  Company's  borrowings  from Fleet to
finance  the  completion  of the  acquisition  of assets from  Phoenix  Drilling
Services,  Inc..  Among other  things,  these  amendments  required St. James to
extend  the  maturity  date of $10.0  million of  indebtedness  owing to it from
maturing  in 18 months to  maturing in 36 months,  required  St.  James to fully
subordinate the payment of principal and interest on the  indebtedness  owing to
it to the prior  payment in full of the  Company's  indebtedness  to Fleet,  and
required St. James and its  affiliate


                                      -32-
<PAGE>

to refrain from  selling  shares of Common  Stock of the Company  below  certain
percentage   levels  of  the  Company's  shares   outstanding  so  long  as  the
indebtedness remains owing to Fleet. In consideration for these amendments,  the
Company agreed to reduce the exercise and conversion  prices of the common stock
purchase  warrants  and note  issued to St.  James in January  1998 to $5.50 per
share  and to  provide  that in the  event  shares  are  issued  by the  Company
thereafter  at a price less than $5.50 per share such  exercise  and  conversion
prices  will be  reduced  to a price  equal to the price at which the shares are
issued.  The $5.50 price was based on a price at which the Company issued shares
of Common  Stock in a private  placement  in March 1998,  at the time St.  James
agreed to the amendments to its agreements.

         At June 30,  1998,  the  Company  was not in  compliance  with  certain
financial  covenants of its Loan and Security  Agreement  with Fleet.  Under the
terms of the loan agreement, the breach of these covenants constituted events of
default and at the option of Fleet, the obligations of the Company to Fleet were
subject to being declared by Fleet to be immediately due and payable.

         On October 30, 1998,  the Company  entered into an Amended and Restated
Loan Agreement with Fleet  pursuant to which,  among other things,  Fleet waived
any and all defaults  which  existed under the prior loan  agreement.  Under the
Amended and Restated Loan  Agreement,  Fleet agreed to loan to the Company up to
an  additional  $1.2  million,  subject  however  to the  Company  borrowing  an
additional $1.5 million  subordinated to the Company's borrowings from Fleet and
an additional $500,000 borrowed by the Company from St. James in July 1998 being
converted into a loan subordinated to the Company's indebtedness owing to Fleet.

         In  order  to  obtain  the  additional  $1.5  million  of  subordinated
borrowings  necessary  to  complete  the  closing of the  Company's  Amended and
Restated Loan  Agreement with Fleet,  on October 30, 1998,  the Company  entered
into an agreement with SJMB, L.P. ("SJMB"),  an affiliate of St. James,  whereby
SJMB agreed to purchase up to $2.0  million  principal  amount of the  Company's
convertible  promissory  note due on March 16,  2001.  Such  amount  included  a
refinancing  of the $500,000  loaned in July 1998 and  provided  $750,000 to the
Company on October  30,  1998 to close the amended  loan  agreement  with Fleet.
Subject  to the  Company  meeting  certain  conditions,  SJMB  agreed to loan an
additional $750,000 to the Company, which funds were loaned on December 1, 1998.
The note issued to SJMB is convertible into shares of the Company's Common Stock
at an original  conversion  price of $2.25 per share,  subject to  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 such shares
are issued. The Company also agreed to issue to SJMB warrants to purchase shares
of  Common  Stock  exercisable  at a  price  of  $2.25  per  share,  subject  to
anti-dilution  adjustment for certain  issuances of securities by the Company at
prices per share of Common Stock less than the exercise price then in effect, in
which  event the  exercise  price is  reduced  to the lower  price at which such
shares are issued and the number of


                                      -33-
<PAGE>

shares issuable is adjusted upward.  Under the agreement with SJMB,  warrants to
purchase 1,333,333 shares of Common Stock were issued.

         On February 18, 1999, in order to obtain the additional $2.5 million of
borrowings  necessary to complete the closing under the  Forebearance  Agreement
with Fleet,  the Company  entered into an agreement  with two  affiliates of St.
James,  to  purchase  up to  $2.5  million  principal  amount  of the  Company's
convertible  promissory note due on March 16, 2001. The note is convertible into
shares of the Company's  Common Stock at an original  conversion  price of $1.50
per  share,  subject  to  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 such shares are  issued.  The  Company  also issued
warrants to purchase  2,075,000 shares of Common Stock exercisable at a price of
$1.50 per share,  subject to anti-dilution  adjustment for certain  issuances of
securities  by the  Company  at prices  per share of Common  Stock less than the
exercise  price then in effect,  in which event the exercise price is reduced to
the  lower  price at which  such  shares  are  issued  and the  number of shares
issuable is adjusted upward.

         As a consequence of the issuance of the convertible note and warrant to
SJMB in October 1998 with  conversion  and exercise  prices of $2.25,  under the
terms of the anti-dilution  provisions of the outstanding  convertible notes and
warrants held by St. James,  including  certain of its affiliates and assignees,
the conversion  prices and exercise  prices of those  securities were reduced to
$2.25 per share  with the total  number of shares  issuable  on  conversion  and
exercise being  adjusted  upward to 16,040,092  shares.  As a consequence of the
issuance  of the  convertible  note and  warrant to SJMB in  February  1999 with
conversion and exercise  prices of $1.50,  under the terms of the  anti-dilution
provisions of the outstanding  convertible notes and warrants held by St. James,
including  certain of its affiliates and  assignees,  the conversion  prices and
exercise  prices of those  securities  were  reduced to $1.50 per share with the
total number of shares issuable on conversion and exercise being adjusted upward
to 29,468,471 shares.

         The  ability  of St.  James and its  affiliates  to fully  exercise  or
convert their warrants and notes is dependent upon an amendment to the Company's
Certificate  of  Incorporation  to increase the number of shares of Common Stock
the Company is authorized to issue from 12,500,000  shares to 50,000,000  shares
at the Company's forthcoming annual meeting of stockholders.

         During the year ended  December 31, 1998,  the Company paid $902,012 to
St. James Capital Corp. for consulting fees.


                                      -34-
<PAGE>



                           GLOSSARY OF INDUSTRY TERMS

         The following are  definitions of certain  technical terms used in this
Annual Report relating to the Company's business:

         "3-D Seismic"  Involves the acquisition of a dense grid of seismic data
over a precisely defined area. An energy source creates an acoustic impulse that
penetrates  the subsurface  and is reflected off  underlying  rock layers.  This
reflected  energy is recorded by  sensitive  receivers  (geophones  connected to
sophisticated computers). The resulting data is then analyzed and interpreted by
geophysicists  and  used by oil  and  natural  gas  producing  companies  in the
acquisition of new leases, the selection of drilling locations and for reservoir
management. The technology is particularly useful with directional drilling. 3-D
Seismic data provides greater precision and improved subsurface  resolution than
is provided by 2-D seismic surveys.

         "Casing" Steel pipe lowered into the drilled hole (borehole) to prevent
"caving  in"  and to  provide  isolation  of  zones  and  permit  production  of
hydrocarbons

         "Cased  Hole" The  drilled  hole  after  casing  has been  lowered  and
cemented in place.

         "Directional   Drilling"   Enables  the  drilling  of  computer  guided
directional  wellbores from existing or newly drilled wells intended to increase
the  exposure  of the well  bore to  producing  hydrocarbon  zones.  Directional
drilling is facilitated through the use of 3-D Seismic technology.

         "Downhole"  Any part of the borehole below the ground surface.

         "Junk  Basket" A  mechanical  device  lowered  into the  borehole  with
wireline  to  remove  extraneous  or  unwanted  debris.  A  gauge  ring  is  run
simultaneously to check conformity of hole size.

         "Cement  Bond Log" A cement  quality and bonding  evaluation  performed
with sonic  transmitters and receivers  lowered into the borehole with wireline.
This survey is recorded by surface computers.

         "Hoisting  and  Steering  Services"  Services  provided  utilizing  the
Company's  wireline trucks and equipment for operating  surveying  equipment and
steering tools owned and operated by others.

         "Logs" (a) Open Hole:  The  measurement  of properties of formations to
determine  hydrocarbon  bearing  characteristics.  Open  hole  logs  are  mainly
radioactive (porosity) and electric (resistivity).


                                      -35-
<PAGE>


                (b)  Cased  Hole:  The  measurement  of  gamma  rays  (different
formations  have  different  levels),  casing  collars  (joints in  casing)  for
correlation to open hole depths,  and cement quality and bonding.  Porosity logs
can be run in cased holes with Compensation Neutron Tools.

         "Rigs" (a) A drilling  rig is one which drills the  borehole.  This rig
normally is used for setting the casing in the borehole.

                (b) A  completion  or workover  rig is used to position  tubing,
pumps and other production  equipment in he cased hole. As the name plies,  this
is used for subsequent "workover" or remedial service.

         "Winch Unit" A powerful machine with one or more drums on which to coil
a cable or chain for hauling or hoisting.

         "Workover"  Operations pertaining to work on wells previously placed in
production  but  needing  additional  work  in  order  to  restore  or  increase
production.


                                      -36-
<PAGE>


                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  The Exhibits  required by Regulation  S-B 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-KSB as so indicated in such list.

         Exhibit           Designation
         -------           -----------

           3.2             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).

           3.3             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             Employment  Agreement,   dated  September  18,  1996,
                           between William L. Jenkins and the Company. (Filed as
                           Exhibit 10.1 to the  Company's  Annual Report on Form
                           10-KSB for the fiscal year ended December 31, 1996.)

          10.2             Employment Agreement, dated January 31, 1997, between
                           Danny Ray  Thornton and the  Company,  and  amendment
                           thereto.

          10.3             Employment Agreement,  dated January 31,1997, between
                           Allen R. Neel and the Company, and amendment thereto.

          10.4             Purchase  and  Sale  Agreement  dated  June  6,  1997
                           between Black Warrior  Wireline  Corp.  and Vernon E.
                           Tew,  Jr.,  Mark R.  Roberts,  E.J.  Wooten,  Chester
                           Whatley and  William A. Tew.  (Filed as an exhibit to
                           the Company's  Current Report on Form 8-K for June 6,
                           1997)

          10.5             Purchase  and  Sale  Agreement  dated  June  9,  1997
                           between  Black  Warrior  Wireline  Corp.  and John L.
                           Morton,  Theodore  W.  Morton,  and  John D.  Morton.
                           (Filed as an exhibit to the Company's  Current Report
                           on Form 8-K for June 6, 1997)


                                      -37-
<PAGE>


         10.6              Agreement  for  Purchase  and Sale dated June 6, 1997
                           between Black Warrior  Wireline  Corp.  and St. James
                           Capital  Partners,  L.P.  (Filed as an exhibit to the
                           Company's  Current  Report  on Form  8-K for  June 6,
                           1997)

         10.7              $2,000,000  Convertible Promissory Note dated June 6,
                           1997  issued  to St.  James  Capital  Partners,  L.P.
                           (Filed as an exhibit to the Company's  Current Report
                           on Form 8-K for June 6, 1997) 10.8 $3,000,000  Bridge
                           Loan Promissory Note dated June 6, 1997 issued to St.
                           James Capital Partners,  L.P. (Filed as an exhibit to
                           the Company's  Current Report on Form 8-K for June 6,
                           1997)

         10.9              Warrant dated June 6, 1997 to purchase 546,000 shares
                           of Common Stock issued to St. James Capital Partners,
                           L.P.  (Filed as an  exhibit to the  Company's  Annual
                           Report on Form 10-KSB for the year ended December 31,
                           1997).

         10.10             Warrant dated June 6, 1997 to purchase 120,000 shares
                           of Common Stock issued to St. James Capital Partners,
                           L.P.  (Filed as an  exhibit to the  Company's  Annual
                           Report on Form 10-KSB for the year ended December 31,
                           1997).

         10.11             Registration  Rights Agreement  between Black Warrior
                           Wireline Corp. and St. James Capital  Partners,  L.P.
                           dated  June 6,  1997.  (Filed  as an  exhibit  to the
                           Company's  Current  Report  on Form  8-K for  June 6,
                           1997)

         10.12             Asset  Purchase  Agreement  dated as of  September 1,
                           1997  between  Black  Warrior   Wireline   Corp.  and
                           Diamondback Directional,  Inc., Alan Mann and Michael
                           Dale  Jowers.  (Filed as an exhibit to the  Company's
                           Current Report on Form 8-K for October 9, 1997).

         10.13             Employment  Agreement  effective  as of  September 1,
                           1997 between the Company and Alan Mann.  (Filed as an
                           exhibit to the Company's  Current  Report on Form 8-K
                           for October 9, 1997).

         10.14             Employment  Agreement  effective  as of  September 1,
                           1997  between the Company  and Michael  Dale  Jowers.
                           (Filed as an exhibit to the Company's  Current Report
                           on Form 8-K for October 9, 1997).

         10.15             Registration  Rights Agreement dated October 10, 1997
                           between the Company and DDI.  (Filed as an exhibit to
                           the Company's  Current Report on Form 8-K for October
                           9, 1997).

         10.16             $3.0  million  promissory  note due August  31,  1999
                           issued to DDI.  (Filed as an exhibit to the Company's
                           Current Report on Form 8-K for October 9, 1997).


                                      -38-
<PAGE>


         10.17             Agreement for Purchase and Sale dated October 9, 1997
                           between Black Warrior  Wireline  Corp.  and St. James
                           Capital  Partners,  L.P.  (Filed as an exhibit to the
                           Company's  Current  Report on Form 8-K for October 9,
                           1997).

         10.18             $2,900,000  Convertible Promissory Note dated October
                           10, 1997 issued to St. James Capital  Partners,  L.P.
                           (Filed as an exhibit to the Company's  Current Report
                           on Form 8-K for October 9, 1997).

         10.19             Warrant  dated  October 10, 1997 to purchase  725,000
                           shares of Common Stock  issued to St.  James  Capital
                           Partners,  L.P. (Filed as an exhibit to the Company's
                           Current Report on Form 8-K for October 9, 1997).

         10.20             Amendment  No.  1 to  Registration  Rights  Agreement
                           between Black Warrior  Wireline  Corp.  and St. James
                           Capital Partners, L.P. dated October 10, 1997. (Filed
                           as an exhibit to the Company's Current Report on Form
                           8-K for October 9, 1997).

         10.21             Asset Purchase  Agreement dated as of January 1, 1998
                           between  Black  Warrior  Wireline  Corp.  and Phoenix
                           Drilling  Services,  Inc. (Filed as an exhibit to the
                           Company's  Current Report on Form 8-K for January 23,
                           1998).

         10.22             Agreement  for  Purchase  and Sale dated  January 23,
                           1998 between Black  Warrior  Wireline  Corp.  and St.
                           James Capital Partners,  L.P. (Filed as an exhibit to
                           the Company's  Current Report on Form 8-K for January
                           23, 1998).

         10.23             $10,000,000 Convertible Promissory Note dated January
                           23, 1998 issued to St. James Capital  Partners,  L.P.
                           Filed as an exhibit to the Company's  Current  Report
                           on Form 8-K for January 23, 1998).

         10.24             Warrant  dated  January 23, 1998 to purchase  200,000
                           shares of Common Stock  issued to St.  James  Capital
                           Partners,  L.P. (Filed as an exhibit to the Company's
                           Current Report on Form 8-K for January 23, 1998).

         10.25             Amendment  No.  2 to  Registration  Rights  Agreement
                           between Black Warrior  Wireline  Corp.  and St. James
                           Capital Partners, L.P. dated January 23, 1998. (Filed
                           as an exhibit to the Company's Current Report on Form
                           8-K for January 23, 1998).


                                      -39-
<PAGE>


         21                Subsidiaries.

                                 NAME                     STATE OF INCORPORATION
                                 Boone Wireline Co., Inc.                Alabama

         27                Financial Data Schedule.


         (b)      Reports on Form 8-K.

     During the quarter  ended  December 31, 1998,  the Company  filed a Current
Report on Form 8-K for October 30, 1998 in response to Item 5. Other  Events and
Item 7. Financial Statements and Exhibits


                                      -40-
<PAGE>


                                   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.

         Dated: April 12, 1999

                                                 BLACK WARRIOR WIRELINE CORP.

                                            By:  /s/ William L. Jenkins
                                                 -------------------------------
                                                 William L. Jenkins, President

         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.

<TABLE>
<CAPTION>


Signature                                            Capacity                              Date
---------                                            --------                              ----
<S>                                                                                  <C>


/s/ William L. Jenkins                    President (Principal Executive,             April 12, 1999
---------------------------                  Financial and Accounting Officer)
William L. Jenkins                           and Director



/s/ John L. Thomspon                       Director                                    April 12, 1999
---------------------------
John L. Thompson

/s/ Charles E. Underbrink                  Director                                    April 12, 1999
---------------------------
Charles E. Underbrink
</TABLE>


<PAGE>





                          BLACK WARRIOR WIRELINE CORP.

                                 AND SUBSIDIARY

                        CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996


<PAGE>



REPORT OF INDEPENDENT ACCOUNTANTS



The Stockholders and Board of Directors
Black Warrior Wireline Corp.
Columbus, Mississippi

In our  opinion,  the  accompanying  consolidated  balance  sheets  and  related
consolidated statements of operations,  stockholders' equity (deficit), and cash
flows present fairly, in all material respects,  the financial position of Black
Warrior Wireline Corp. and its subsidiary (the Company) at December 31, 1998 and
1997,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  consolidated  financial  statements  based on our  audits.  We
conducted our audits of these  statements in accordance with generally  accepted
auditing  standards  which  require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will  continue as a going  concern.  As discussed in Note 17 to
the  consolidated  financial  statements,  the  Company's  violation  of certain
debenture agreements, working capital deficiency,  operating losses, and lack of
liquidity raise  substantial  doubt about the Company's ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 17 to the consolidated financial statements.  The consolidated financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

Birmingham, Alabama
March 19, 1999


<PAGE>




BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997

<TABLE>
<CAPTION>

                                      ASSETS                                                           1998                1997
<S>                                                                                            <C>                   <C>
Current assets:
   Cash and cash equivalents                                                                    $       1041242       $       435845
   Short-term investments                                                                                 50000                50000
   Accounts receivable, less allowance of $2,157,421 and $143,559, respectively                         3596004              5459689
   Prepaid expenses                                                                                      110579               390144
   Deferred tax asset                                                                                                          80815
   Other receivables                                                                                     236273               514946
   Other current assets                                                                                  498812               386683
        Total current assets                                                                            5532910              7318122
Land and building, held for sale                                                                         400000
Inventories                                                                                             4278601
Property, plant, and equipment, less accumulated depreciation                                          22628601              9347685
Other assets                                                                                             539537               358521
Goodwill, less accumulated amortization of $215,678 and $134,421, respectively                          3435201              9061655

        Total assets                                                                            $      36814850       $     26085983
                                                                                                ===============       ==============

                  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Accounts payable                                                                             $       5964266       $      3619466
   Accounts payable, related parties                                                                                            6090
   Accrued salaries and vacation                                                                          91275               124376
   Income taxes payable                                                                                                       599877
   Accrued interest payable                                                                             1527674                69041
   Other accrued expenses                                                                                826366               289445
   Deferred revenue                                                                                      155016               100000
   Current maturities of notes payable to banks                                                                                 7624
   Notes payable to related parties                                                                    20662890               380000
   Current maturities of long-term debt and capital lease obligations                                  18923719               793618
        Total current liabilities                                                                      48151206              5989537
Deferred tax liability                                                                                                       1132513
Long-term accrued interest payable                                                                                            150364
Notes payable to banks, less current maturities                                                                                22212
Notes payable to related parties                                                                                             8070549
Long-term debt and capital lease obligations, less current maturities                                                        5123535
        Total liabilities                                                                              48151206             20488710

Commitments and contingencies (Notes 6, 7, 13, 15, and 18)


Stockholders' equity (deficit):
   Preferred stock, $.0005 par value, 2,500,000 shares authorized
      none issued at December 1998
   Common stock, $.0005 par value, 12,500,000 shares authorized
      in 1998 and 1997, respectively; 3,897,451 and 2,990,254 shares
      issued at December 31, 1998 and 1997, respectively                                                   1948                 1495
   Additional paid-in capital                                                                          12107551              7744953
   Common stock to be issued in connection with acquisition (133,333 shares)                                                  280000
   Accumulated deficit                                                                                -22862462             -1845782
   Treasury stock, at cost, 4,620 shares at 1998 and 1997                                               -583393              -583393
        Total stockholders' equity (deficit)                                                          -11336356              5597273

        Total liabilities and stockholders' equity (deficit)                                    $      36814850       $     26085983
                                                                                                ===============       ==============
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
                                   statements.

                                       2
<PAGE>

BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
                                                                          1998              1997              1996
                                                                          ----              ----              ----

<S>                                                             <C>               <C>                <C>
Revenues                                                        $       34436553  $       17062542   $       7582021

Operating costs                                                         30484788          12247630           5116777

Selling, general, and administrative expenses                            7453547           2191785           1302994

Depreciation and amortization                                            4815955           1442635            574400

Loss from impairment of goodwill, inventories,
   and property, plant, and equipment (Notes 2 and 19)                  11100000

      Income (loss) from operations                                    -19417737           1180492            587850

Interest expense and amortization of debt discount                      -2867575           -609430           -342197

Net gain on sale of fixed assets                                          154986             25584             76645

Other income                                                               61948             72642             39425

      Income (loss) before provision (benefit) for income
        taxes and extraordinary gain                                   -22068378            669288            361723

Provision (benefit) for income taxes                                    -1051698            222041            -65715

      Income (loss) before extraordinary gain                          -21016680            447247            427438

Extraordinary gain on extinguishment of debt, net of income
   taxes of $-0- in 1996 (Note 6)                                                                            1608501

      Net income (loss)                                         $      -21016680  $         447247   $       2035939
                                                                ================  ================   ===============

Income (loss) per common share - basic:
   Income (loss) before extraordinary gain                      $          -5.86  $           0.18   $          0.41

   Extraordinary gain, net of income taxes                                                                      1.55

   Net income (loss) per common share - basic                   $          -5.86  $           0.18   $          1.96
                                                                ================  ================   ===============



Income (loss) per common share - diluted:
   Income (loss) before extraordinary gain                      $          -5.86  $           0.14   $          0.41
   Extraordinary gain, net of income taxes                                                                      1.55

   Net income (loss) per common share - diluted                 $          -5.86  $           0.14   $          1.96
                                                                ================  ================   ===============

Weighted average common shares outstanding                               3589235           2533650           1040192
                                                                ================  ================   ===============

Weighted average common shares outstanding
   with dilutive securities                                              3589235           3759756           1040192
                                                                ================  ================   ===============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       3
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                                                               COMMON
                                                 COMMON STOCK                                  STOCK         TREASURY STOCK
                                             --------------------    PAID-IN   ACCUMULATED     TO BE       -----------------
                                             SHARES     PAR VALUE    CAPITAL     DEFICIT       ISSUED      SHARES       COST
                                             ------     ---------    -------     -------       ------      ------       ----
<S>                                         <C>       <C>          <C>         <C>        <C>              <C>     <C>
Balance, December 31, 1995                    759052  $      380   $ 3375702   $ -4328968                    4620  $  -583393

Shares issued in private placement            600000         300      643080

Conversion of subordinated debentures
   to common stock and stock warrants         814164         407     1099311

Shares  issued to related party in
   consideration for services performed        12000           6       14994

Net income for the year ended
   December 31, 1996                                                              2035939

Balance, December 31, 1996                   2185216        1093     5133087     -2293029                    4620     -583393

Shares issued in consideration
   for consulting services                     65000          32      136461

Shares issued for acquisitions                672538         336     2239664

Shares to be issued in connection
   with acquisition (133,333 shares)                                                       $     280000
   shares)

Issuance of warrants                                                   69550

Shares  issued from exercise of warrants      67500           34      134966
warrants

Stock option plan  compensation                                        31225
expense

Net income for the year ended
   December 31, 1997                                                               447247

Balance, December 31, 1997                  2990254          1495     7744953    -1845782        280000       4620     -583393

Shares issued in private placement           596000           298     3035268

Shares issued in private placement           176364            88      902012

Shares issued in connection with
   prior year acquisition                    133333            66      279934                   -280000

Shares issued from exercise of
   warrants                                    1500             1        2999

Issuance of warrants                                                   142385

Net loss for the year ended
   December 31, 1998                                                             -21016680

Balance, December 31, 1998                   3897451   $     1948 $  12107551 $  -22862462 $          0       4620  $  -583393
</TABLE>

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

                                       4
<PAGE>

BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997, and 1996


<TABLE>
<CAPTION>
                                                                                     1998            1997             1996
                                                                                     ----            ----             ----
<S>                                                                             <C>           <C>             <C>
Cash flows from operating activities:
   Net income (loss)                                                            $   -21016680  $       447247  $      2035939
   Adjustments to reconcile net income (loss) to net cash (used in)
      provided by operating activities:
        Depreciation                                                                  4398762         1308214          574400
        Amortization                                                                   417193          134421
        Allowance for doubtful accounts                                               2279922           96359            6844
        Net gain on disposition of property, plant, and equipment                     -154986         -124384          -76645
        Loss on impairment of goodwill, inventories, and property,
           plant, and equipment                                                      11100000
        Compensation, consulting, and management expenses paid
           by issuance of common stock                                                                 167725           15000
        Extraordinary gain on extinguishment of debt                                                                 -1608501
        Deferred tax expense (benefit)                                               -1051698          185245         -118262
        Change in:
           Accounts receivable                                                        -416237        -1843476         -456033
           Inventories                                                                  97304
           Prepaid expenses                                                            174006         -336720          -18284
           Other receivables                                                          -221327            -310           65974
           Other current assets                                                        -18497         -148313            3556
           Other assets                                                                331133         -283551             -15
           Accounts payable and accrued liabilities                                   3255141         1562981          347490
                Cash (used in) provided by operating activities                       -825964         1165438          771463

Cash flows from investing activities:
   Acquisitions of property, plant, and equipment                                    -5992397        -3087666         -468354
   Proceeds from sale of property, plant, and equipment                                295658           74448           95072
   Purchase of short-term investments                                                                  -50000
   Acquisitions of businesses, net of cash acquired                                   -533224         -697224         -256783
                Cash used in investing activities                                    -6229963        -3760442         -630065

Cash flows from financing activities:
   Proceeds from bank and other borrowings                                             3697054         2515303
   Proceeds from working revolver, net                                                 2769856
   Debt issue costs                                                                   -369765
   Proceeds from issuance of common stock, net                                         3940666          135000          643380
   Principal payments on long-term debt, notes payable, and
      capital lease obligations                                                       -2376487         -346908         -342149
                Cash provided by financing activities                                  7661324         2303395          301231

                Net increase (decrease) in cash and cash equivalents                   605397         -291609          442629
Cash and cash equivalents, beginning of year                                           435845          727454          284825

Cash and cash equivalents, end of year                                          $     1041242  $       435845  $       727454
                                                                                =============  ==============  ==============

Supplemental disclosure of cash flow information:
   Cash paid during the year for:
      Interest                                                                  $     1559296  $       419555  $        74746
                                                                                =============  ==============  ==============

      Income taxes                                                              $           0  $       132649  $            0
                                                                                =============  ==============  ==============

Supplemental schedule of noncash investing and financing activities:
  Land and building with basis of $400,000 exchanged for a $500,000 note                       $       500000
  Default on notes receivable relating to land and building sale (Note 2)       $      500000
  Notes payable and subordinated debentures converted to common
    stock and stock warrants (Note 6)                                                          $                      1343750
  Accrued interest forgiven (Note 6)                                                           $                      1514468
  Acquisition of property, plant, and equipment financed under capital
    leases and notes payable                                                    $      897509  $      1528347  $       796930

   Notes payable incurred in connection with acquisitions of businesses         $    20201140  $      9148449  $       380000
   Borrowings to refinance existing debt                                                       $      4500000
   Stock warrants issued                                                        $      142383  $        69550

The  accompanying  notes are an integral  part of these  consolidated  financial statements.
</TABLE>

                                      5
<PAGE>

BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     GENERAL INFORMATION

       Black Warrior  Wireline Corp. and  Subsidiary  (the Company),  a Delaware
       corporation,  is an oil  and  gas  service  company  currently  providing
       various  services to oil and gas well  operators  primarily  in the Black
       Warrior and Mississippi Salt Dome Basins in Alabama and Mississippi,  the
       Permian  Basin in West  Texas and New  Mexico,  the East Texas and Austin
       Chalk Basins in East Texas,  the Anadarko  Basin in Oklahoma,  the Powder
       River and Green River Basins in Wyoming and Montana,  Williston  Basin in
       North Dakota,  and the Gulf of Mexico  offshore of Louisiana and in South
       Texas.  The Company's  principal  lines of business  include (a) wireline
       services,  (b) directional oil and gas well drilling activities,  and (c)
       workover services.  Further discussion on business segments is located in
       Note 16.

  2.   SIGNIFICANT ACCOUNTING POLICIES

       PRINCIPLES  OF  CONSOLIDATION  - The  consolidated  financial  statements
       include the  accounts of the  Company  and its wholly  owned  subsidiary,
       Boone Wireline Co. All significant intercompany accounts and transactions
       have been eliminated.

       CASH AND CASH  EQUIVALENTS  - The  Company  considers  all highly  liquid
       investments with an original  maturity of three months or less to be cash
       equivalents.

       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  because  the amounts  were not  billable at the balance
       sheet date.  Unbilled  amounts  included in accounts  receivable  totaled
       $48,000 and $554,000 at December 31, 1998 and 1997, respectively.

       INVENTORIES - Inventories consist of tool components,  subassemblies, and
       expendable   parts  used  in  directional   oil  and  gas  well  drilling
       activities. Tools manufactured and assembled are transferred to property,
       plant,  and  equipment  as  completed  at the total  cost of  components,
       subassemblies,   and   expendable   parts  of  each   tool.   Components,
       subassemblies,  and  expendable  parts are  capitalized  as inventory and
       expensed as tools are repaired and maintained. Inventories are classified
       as a long-term  asset rather than a current asset as is  consistent  with
       industry practice (see Note 19).

       LAND AND  BUILDING,  HELD FOR SALE - Land and building  held for sale was
       stated at the lower of cost or estimated  net  realizable  value.  During
       1997,  the Company  exchanged  land and building with a basis of $400,000
       for a  $500,000  note  receivable.  The  Company  did not  recognize  the
       $100,000 gain as no down payment was received.  The $100,000 was included
       in deferred  revenue at December 31, 1997.  During 1998, the buyer failed
       to  pay  the  note  receivable  when  it  became  due.  Accordingly,  the
       transaction  has been  reversed and the land and building are recorded on
       the balance sheet at cost.

                                       6
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       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, 1998,  significantly  all of the property,
       plant,  and equipment  has been pledged as  collateral  for the Company's
       borrowings (see Note 19).

       GOODWILL  -  Goodwill  is  stated  at cost  and is being  amortized  on a
       straight-line  basis  principally  over  twenty-five  years.  The Company
       assesses the recoverability  and the amortization  period of goodwill not
       identified with impaired assets by determining  whether the amount can be
       recovered  through  undiscounted  cash flows of the businesses  acquired,
       excluding   interest  expense  and   amortization,   over  the  remaining
       amortization  period.  If  impairment  was  indicated  by this  analysis,
       measurement  of the loss would be based on the fair  market  value of the
       businesses  acquired  calculated  by  discounting  projected  future cash
       flows. The projections  would be over a five year period using a discount
       rate and terminal  value multiple  commensurate  with current oil and gas
       service companies.

       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 oil and gas well service 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  realizability  and/or
       amortization periods of its goodwill (see Note 19).

       LONG-LIVED  ASSETS - In accordance  with SFAS No. 121  Accounting for the
       Impairment of Long-Lived  Assets and for Long-Lived Assets to be Disposed
       Of, 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  are for a period of five  years  using a  discount  rate and
       terminal value  multiple that would be customary for  evaluating  current
       oil and gas service company transactions.

       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 oil and gas well service 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  realizability  and/or
       amortization periods of its goodwill (see Note 19).

       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  consolidated  financial

                                       7

<PAGE>

       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.

       STOCK-BASED  COMPENSATION - In accordance with the provisions of SFAS No.
       123, Accounting for Stock-Based  Compensation,  the Company has chosen to
       continue to apply the  accounting  provisions  of  Accounting  Principles
       Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,  to
       its stock-based employee compensation arrangements.

       USE OF ESTIMATES - The preparation of consolidated  financial  statements
       in conformity  with generally  accepted  accounting  principles  requires
       management  to make  estimates  and  assumptions  that affect the amounts
       reported in the consolidated financial statements and accompanying notes.
       Actual results could differ from these estimates.

       REVENUE  RECOGNITION  - Revenues are  recognized at the time services are
       performed.

       EARNINGS PER SHARE - In accordance with SFAS No. 128, 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 - In 1998, the Company  adopted SFAS 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  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.  The adoption of
       SFAS No. 131 did not affect  results of operations or financial  position
       but did affect the disclosure of segment information (see Note 16).

       RECLASSIFICATIONS  - Certain  items have been  reclassified  for the year
       ended December 31, 1997 in order to conform to  classifications  used for
       the year ended December 31, 1998.

                                       8
<PAGE>

  3.   ACQUISITIONS

       Effective  June  6,  1997,  the  Company  completed  the  acquisition  of
       Production Well Services,  Inc. (PWS). PWS is engaged in the wireline and
       oil and gas well  services  business  in southern  Alabama  and  southern
       Mississippi.  The purchase  price  consisted of $540,000 in cash financed
       with the proceeds of a $2,000,000, 9% convertible promissory note and the
       issuance of 133,333  shares  (issued on January 1, 1998) of the Company's
       common  stock.  In addition to  providing  the funds to complete  the PWS
       acquisition,  a portion  of the funds was used to  purchase  and  improve
       equipment.   For  financial  statement  purposes,   the  acquisition  was
       accounted for as a purchase and, accordingly,  PWS's results are included
       in the consolidated  financial  statements since the date of acquisition.
       The excess of the  purchase  price over net  assets  acquired,  goodwill,
       approximated  $718,000 and is being amortized over twenty-five years. The
       following  is a summary  of assets  acquired,  liabilities  assumed,  and
       consideration paid in connection with the acquisition:


<TABLE>
<S>                                                                                  <C>
        Fair value of assets acquired, including goodwill                            $       1254055
        Cash paid for assets acquired and transaction
           costs incurred, net of cash received                                               -16850
        Common stock issued in connection with acquisition                                   -280000

           Liabilities assumed or incurred                                           $        957205
                                                                                     ===============
</TABLE>


       Effective  June  9,  1997,  the  Company  completed  the  acquisition  of
       Petro-Log, Inc. (Petro-Log). Petro-Log is engaged in the wireline and oil
       and gas well services business in Wyoming, Montana, and South Dakota. The
       $2,137,500  cash  purchase  price was  financed  from the  proceeds  of a
       $3,000,000,  10% bridge loan note (subsequently refinanced,  see Note 6).
       In addition to providing the funds to complete the Petro-Log acquisition,
       the funds were used to purchase  and  improve  equipment.  For  financial
       statement purposes,  the acquisition was accounted for as a purchase and,
       accordingly,   Petro-Log's  results  are  included  in  the  consolidated
       financial  statements  since  the date of  acquisition.  The  acquisition
       resulted in goodwill of  approximately  $286,000 which is being amortized
       over 25 years. The following is a summary of assets acquired, liabilities
       assumed, and consideration paid in connection with the acquisition:

<TABLE>
<S>                                                                                  <C>
        Fair value of assets acquired, including goodwill                            $       3438613
        Cash paid for assets acquired and transaction costs incurred                         -595381
           Liabilities assumed or debt incurred                                      $       2843232
                                                                                     ===============
</TABLE>

          On October 9, 1997,  the  Company  acquired  substantially  all of the
       assets and certain of the liabilities, effective as of September 1, 1997,
       of Diamondback  Directional,  Inc. (DDI). DDI is engaged in providing oil
       and gas well drilling services, which consists of horizontal drilling as

                                       9
<PAGE>

        well as  conventional  directional  drilling.  For  financial  statement
        purposes,   the  acquisition  was  accounted  for  as  a  purchase  and,
        accordingly,  DDI's results are included in the  consolidated  financial
        statements  since the date of acquisition.  The purchase price consisted
        of $2,750,000  in cash  financed  with the proceeds of a $2,900,000,  7%
        convertible  promissory  note,  $3,170,549 of the  Company's  promissory
        notes and 647,569  shares of the Company's  common  stock.  The purchase
        price is subject to adjustment,  by reduction of the principal amount of
        the notes, to the extent the gross receipts,  as defined in the purchase
        agreement,  from the DDI  operations  for the twelve month period ending
        August 31, 1998 and August 31, 1999 fail to meet a specified performance
        standard.   The  acquisition   resulted  in  goodwill  of  approximately
        $7,686,000,  which  is  being  amortized  over  twenty-five  years.  The
        following  is a summary of assets  acquired,  liabilities  assumed,  and
        consideration paid in connection with the acquisition:

<TABLE>
<S>                                                                                  <C>
        Fair value of assets acquired, including goodwill                            $       9771822
        Cash paid for assets acquired and transaction
           costs incurred, net of cash received                                               -74178
        Common stock issued in connection with acquisition                                  -2100000

           Liabilities assumed or debt incurred                                      $       7597644
                                                                                     ===============
</TABLE>

       On December  15,  1997,  the Company  acquired  substantially  all of the
       assets and certain of the liabilities of C&M Wireline  Services,  Inc., a
       Texas  corporation,  and C.A.M.  Wireline  Services,  a Texas partnership
       (collectively  CAM).  CAM is engaged in the wireline and oil and gas well
       services  business in Texas.  The purchase price consisted of $650,000 in
       cash,  financed  with the  proceeds of a 8.75% note,  and the issuance of
       24,969 shares of the  Company's  common  stock.  For financial  statement
       purposes,   the   acquisition  was  accounted  for  as  a  purchase  and,
       accordingly,  CAM's  results are included in the  consolidated  financial
       statements  since the date of  acquisition.  Goodwill  resulting from the
       transaction approximated $270,000 and is being amortized over twenty-five
       years.  The  following  is a  summary  of  assets  acquired,  liabilities
       assumed, and consideration paid in connection with the acquisition:

<TABLE>
<S>                                                                                  <C>
        Fair value of assets acquired, including goodwill                            $        800815
        Cash paid for assets acquired and transaction costs incurred                          -10815
        Common stock issued in connection with acquisition                                   -140000

           Liabilities assumed or debt incurred                                      $        650000
                                                                                     ===============
</TABLE>

       The  Company  has  agreed  that in the  event  it  files  a  registration
       statement  under the Securities  Act of 1933 relating to an  underwritten
       public  offering  of its shares,  the holder of the shares  issued in the
       above  transactions  will have certain rights to have the shares included
       in the registration statement.

       On March 16, 1998, the Company acquired from Phoenix  Drilling  Services,
       Inc.  (Phoenix)  the assets of its domestic oil and gas well  directional
       drilling and downhole survey service business  (Phoenix  Acquisition) for
       $19,000,000.  A  portion  of the  purchase  price was  financed  with the

                                       10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       proceeds of a  $9,000,000  note  bearing  interest  at 9%. The  remaining
       purchase price was financed through two additional notes,  $9,000,000 and
       $1,000,000, both of which bear interest at 8% (see Note 4). For financial
       statement  purposes,  the  Phoenix  Acquisition  was  accounted  for as a
       purchase  and,  accordingly,   Phoenix's  results  are  included  in  the
       consolidated  financial  statements  since the date of  acquisition.  The
       excess  of the  purchase  price  of  Phoenix  over net  assets  acquired,
       goodwill, approximated $2,760,000 and is being amortized over twenty-five
       years.  During the fourth  quarter of 1998,  the  Company  finalized  its
       allocation of the purchase price of Phoenix which resulted in an increase
       to goodwill of  approximately  $260,000.  The  following  is a summary of
       assets  acquired,   liabilities   assumed,   and  consideration  paid  in
       connection with the acquisition:

<TABLE>
<S>                                                                                  <C>
        Fair value of assets acquired, including goodwill                            $      20219422
        Cash paid for assets acquired and transaction costs incurred                         -510765

           Liabilities assumed or debt incurred                                      $      19708657
                                                                                     ===============
</TABLE>

       During  the  fourth   quarter  of  1998,   the   Company   assessed   the
       recoverability  of  long-lived  assets  relating  to the DDI and  Phoenix
       acquisitions.  The Company concluded the goodwill and certain inventories
       and property, plant, and equipment were impaired (see Note 19).

       On June 1,  1998,  the  Company  acquired  Petro  Wireline,  Inc.  (Petro
       Acquisition),  which is  engaged  in the  wireline  business  in the four
       corners region of New Mexico,  Colorado, Utah, and Arizona, for $875,000.
       A portion of the  purchase  price was  financed  with the  proceeds  of a
       $525,000  note that bears  interest  at 9%. The  Company  entered  into a
       promissory  note with the former  owner for the  remaining  amount of the
       purchase price.  The $350,000 note bears interest at 1.5% above the prime
       rate for  commercial  loans  adjusted  as of the first day of each  month
       during  the  term of the  note  (see  Note 4).  For  financial  statement
       purposes,  the Petro  Acquisition  was  accounted  for as a purchase and,
       accordingly,  Petro  Wireline's  results are included in the consolidated
       financial  statements  since the date of  acquisition.  The excess of the
       purchase  price of Petro  Wireline  over net assets  acquired,  goodwill,
       approximated $87,000 and is being amortized over twenty-five years.

<TABLE>
<S>                                                                                  <C>
        Fair value of assets acquired, including goodwill                            $        966091
        Cash paid for assets acquired and transaction costs incurred                          -22459

           Liabilities assumed or debt incurred                                      $        943632
                                                                                     ===============
</TABLE>

       The following table presents unaudited pro forma consolidated  results of
       operations  for the years ended  December  31,  1998 and 1997,  as if the
       acquisitions  had occurred at the beginning of the years  presented.  The
       pro  forma  summary   information   does  not  necessarily   reflect  the
       consolidated  results of operations  as they actually  would have been if
       the acquisitions had occurred at the beginning of the years presented.


                                       11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
                                                                                          1998              1997
                                                                                       (UNAUDITED)       (UNAUDITED)
<S>                                                                                  <C>               <C>
        Revenues                                                                     $      38688771   $      60254678
        Loss before benefit for income taxes                                         $     -22259312   $      -5465505
        Net loss                                                                     $     -21278034   $      -5465505
        Net loss per common share - basic                                            $         -5.72   $         -1.79
        Net loss per common share - diluted                                          $         -5.72   $         -1.79
</TABLE>

       The  unaudited  pro forma  consolidated  results  include the  historical
       accounts  of  the  Company  and  historical   accounts  of  the  acquired
       businesses and pro forma  adjustments,  including the amortization of the
       excess purchase price over the fair value of the net assets acquired, the
       increase in interest  expense  resulting from  borrowings used to finance
       the acquisitions,  and the increase and decrease in depreciation  expense
       as a result of purchase price adjustments.

  4.   RELATED PARTY TRANSACTIONS

       In  connection  with the DDI  acquisition,  the  Company  issued  debt of
       approximately  $3,200,000  to the former  owners of DDI. The two majority
       stockholders  (85%) of DDI are now  employees of the  Company.  The notes
       bear interest at 6.5% and are due August 1999,  with  quarterly  interest
       payments due beginning in January 1998. Accrued interest payable on these
       borrowings totaled approximately $90,000 and $69,000 at December 31, 1998
       and 1997, respectively.

       In  connection  with  the PWS and  Petro-Log  acquisitions,  the  Company
       borrowed approximately  $7,900,000 from St. James Capital Partners,  L.P.
       (SJCP),  whose chief  executive  officer and president  both serve on the
       Company's  Board of Directors.  Of the amount  borrowed,  $3,000,000  was
       repaid in November  1997 with the  proceeds  from other  borrowings.  One
       remaining note for $2,900,000 bears interest at 7% with the principal and
       interest due October 1999.  Accrued  interest  payable on this  borrowing
       totaled  approximately  $250,000  and $46,000 as of December 31, 1998 and
       1997,  respectively.  The  other  remaining  note  for  $2,000,000  bears
       interest at 9% with the  principal  and interest  due June 2002.  Accrued
       interest  payable on this borrowing  totaled  approximately  $283,000 and
       $104,000 as of December 31, 1998 and 1997, respectively.

       In  connection  with  the  Phoenix  Acquisition,   the  Company  borrowed
       $9,000,000  from St. James Merchant  Bankers,  L.P. (SJMB) and $1,000,000
       from  Falcon  Seaboard  Investment  Co.,  L.P.  (Falcon  Seaboard),  both
       affiliated  with SJCP.  The notes bear  interest at 8% with the principal
       and  interest  due in  March  2001.  Accrued  interest  payable  on  this
       borrowing totaled approximately $688,000 as of December 31, 1998.

       The Company  borrowed an additional  $2,000,000  from SJMB pursuant to an
       agreement  dated October 30, 1998.  This note bears  interest at 10% with
       the principal and interest due March 16,

                                       12

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       2001.  Accrued interest payable on this borrowing  totaled  approximately
       $45,000 as of December 31, 1998.

       At December 31, 1998 and 1997, the Company has a mortgage note payable of
       $250,000 and  $380,000,  respectively,  and an account  payable of $0 and
       $6,090, respectively, to the former owner of Dyna Jet, an employee of the
       Company  through  November  1998 (see Note 6). At December 31, 1998,  the
       Company has accrued interest payable of approximately $18,400 relating to
       this note.

       In  connection  with the Petro  Acquisition,  the  Company has a $350,000
       promissory note to a limited partnership  partially owned by a person who
       is now an employee of the Company.  The note bears interest at 1.5% above
       the prime rate for commercial  loans adjusted as of the first day of each
       month  during the term of the note.  Principal  of  $116,667  and accrued
       interest  to date are due and  payable  each June until June 1, 2001.  At
       December  31,  1998,  the  Company  has  accrued   interest   payable  of
       approximately $21,000 relating to this note.

       During 1996,  a member of the  Company's  Board of Directors  (the Board)
       served as a consultant to the Company on various aspects of the Company's
       business and strategic  issues.  The Company  compensated the director by
       issuing  12,000  shares of common stock.  This  issuance  resulted in the
       recognition  of $15,000 of expense for the year ended  December 31, 1996,
       with a  corresponding  increase in common  stock and  additional  paid in
       capital.

       At  December  31, 1998 and 1997,  the Company had a remaining  accrual of
       approximately  $21,000  and  $53,000,   respectively,   relating  to  the
       Company's  commitment to pay the president's tax liability resulting from
       previously issued common stock as a bonus.

       The Company  leased  office space from the  president of the Company from
       October   1994  to  October   1996  when  he  sold  the   building  to  a
       non-affiliated  person who continues to lease the space to the Company at
       the same rental.  The total amount paid to the president  during the year
       ended December 31, 1996 was $17,264.

       At December 31, 1998,  the Company was in default  with SJCP,  SJMB,  and
       Falcon Seaboard, based on cross default provisions in the agreements.  As
       such, all notes payable and accrued interest to related parties have been
       classified as current on the consolidated  balance sheet. The Company was
       also in default on the notes payable relating to the DDI acquisition (see
       Note 6).

       See  Notes  6  and  8  for  financing   arrangements   and  common  stock
       transactions with related parties.

                                       13
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



  5.   PROPERTY, PLANT, AND EQUIPMENT

       Property,  plant,  and  equipment  includes the following at December 31,
       1998 and 1997:


<TABLE>
<CAPTION>
                                                                                        1998              1997
<S>                                                                               <C>               <C>
        Vehicles                                                                  $        7875896  $        6016315
        Land and building                                                                   245000
        Workover rigs and related equipment                                                 686317            438155
        Operating equipment                                                               22270613           7278663
        Office equipment                                                                    537668            405604

                                                                                          31615494          14138737
        Less accumulated depreciation                                                      8986893           4791052

        Net property, plant, and equipment                                        $       22628601  $        9347685
                                                                                  ================  ================
</TABLE>


       Depreciation  expense for the years ended  December 31, 1998,  1997,  and
       1996 was $4,398,762, $1,308,214, and $574,000, respectively.

       The  following  is a  summary  of  the  equipment  under  capital  leases
       (included above) at December 31, 1998 and 1997:


<TABLE>
<CAPTION>
                                                                                           1998              1997

<S>                                                                               <C>                <C>
        Workover rigs and related equipment                                       $         158909   $        158909
        Vehicles                                                                            257508

                                                                                            416417            158909
        Less accumulated depreciation                                                        74496             31782

             Net equipment under capital lease                                    $         341921   $        127127
                                                                                  ================   ===============
</TABLE>


  6.   LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

       At  December  31,  1998 and  1997,  long-term  debt and  other  financing
arrangements consisted of the following:


<TABLE>
<CAPTION>
                                                                                        1998               1997

<S>                                                                                  <C>
        Note payable to Smith Bank,  monthly  payments of $704 required  through
        November 2001, including interest at 7.0%.

                                                                                   $                  $        29836
                                                                                                 0             29836
</TABLE>

                                       14

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

<TABLE>
<S>                                                                                <C>                <C>
             Current portion of notes payable to banks                                                         -7624

             Notes payable to banks, less current maturities                       $             0    $        22212
                                                                                   ===============    ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                                           1998              1997

<S>                                                                                <C>                <C>
        Installment notes payable,  monthly payments required in varying amounts
        through November 2003, interest at rates ranging from 5.9% to 12.54%.
                                                                                    $      1302669    $       692101

        Capitalized leases, monthly payments required in varying amounts through
        July 2001, including interest ranging from 5.0% to 6.25%.

                                                                                            243156            103905
        Notes payable to General Electric Capital  Corporation,  monthly payments
        required in varying amounts  through  January 2003,  interest at 8.75%. A
        portion  of  the  proceeds  was  utilized  to  refinance  the  $3,000,000
        Petro-Log  bridge loan and  $1,500,000 of existing  equipment  debt (see
        Note 3).




                                                                                           4577904           5121147

        Notes payable to Fleet Capital Corporation,  monthly payments required in
        varying amounts through March 2002, interest rates ranging from 8.75% to
        9.0%.

                                                                                          12799990

                                                                                          18923719           5917153
             Current portion of long-term debt (see below)                               -18923719           -793618

             Long-term   debt  and  capital  lease   obligations,   less  current
             maturities                                                             $            0    $      5123535
</TABLE>


<TABLE>
<CAPTION>
                                                                                             1998              1997
<S>                                                                                 <C>               <C>
        Note  payables  to  former  owner of DDI,  principal  due  August  1999,
        interest due quarterly at 6.5%.
                                                                                    $       3182890   $      3170549
        7% convertible  note payable to SJCP,  principal and interest due October
        1999.  Convertible at $2.25 per share at any time up to 30 business days
        following maturity (see Note 18).


                                                                                            2900000          2900000

        9%  convertible  note  payable to SJCP,  principal  and interest due June
        2002.  Convertible at $2.25 per share at any time up to 30 business days
        following maturity (see Note 18).

                                                                                            2000000          2000000
</TABLE>

                                       15

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


<TABLE>
<S>                                                                                 <C>               <C>
        Promissory  note payable to the former owners of Petro  Wireline,  Inc.,
        due and  payable  each year in 1/3  increments  starting  in June  1999,
        including  interest  of 1.5% above the prime rate for  commercial  loans
        adjusted first day of every month.


                                                                                             350000

        8%  convertible  note payable to SJMB,  principal  and interest due March
        2001.  Convertible  at $2.25 per share at anytime up to 30 business days
        following maturity (see Note 18).
                                                                                            9000000

        8% convertible  note payable to Falcon  Seaboard,  principal and interest
        due March  2001.  Convertible  at $2.25 per  share at  anytime  up to 30
        business days following maturity (see Note 18).
                                                                                            1000000

        10%  convertible  note payable to SJMB,  principal and interest due March
        2001.  Convertible  at $2.25 per share at anytime up to 30 business days
        following maturity (see Note 18).

                                                                                            2000000

        Note payable to former owner of Dyna Jet, Inc., due and payable in April
        1998, including interest at 8% per annum.

                                                                                                             150000

        Note  payable  to  former  owner of Dyna Jet,  Inc.  due and  payable  in
        November  2002 with  interest  at the rate of the  lesser of $1,500  per
        month or 8% per annum on unpaid balance.

                                                                                             230000           230000

                                                                                           20662890          8450549
             Current portion of notes payable to related parties (see below)              -20662890          -380000

             Total long-term notes payable to related parties                       $             0   $      8070549
                                                                                    ===============   ==============
</TABLE>


       Substantially  all of the Company's  assets are pledged as collateral for
       the various debt described above.

       A  certificate  of  deposit  in the  amount of  $50,000  was  pledged  as
       collateral  for the  Company's  corporate  credit  card line of credit of
       approximately  $100,000.  Borrowings  under the corporate credit cards at
       December  31,  1998  and  1997  totaled  approximately  $0  and  $25,000,
       respectively, and are included in current payables.

       Under the terms of the SJCP notes payable,  SJCP, among other things, has
       the right to nominate one person for election to the  Company's  board of
       directors and certain  preferential  rights to provide future financings.
       The note  agreement  also contains  prohibitions  against

                                       16

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       consolidating,  merging,  or entering into a share  exchange with another
       person without SJCP's consent.

       On  October  30,  1998,  the  Company  amended  the  agreements  for  the
       $2,900,000 and  $2,000,000  convertible  promissory  notes with SJCP. The
       notes  were  amended  to  include  anti-dilution  provisions  that if the
       Company issues equity shares, warrants, or options with a per share price
       or exercise price less than the original  conversion prices on the notes,
       the  conversion  prices on the notes shall be adjusted to equal the price
       at which the shares  options or warrants  were issued.  During 1998,  the
       exercise  price  on  these  notes  was  adjusted  to  $2.25  due  to  the
       anti-dilution provisions being triggered.

       During 1998,  the due date of the $230,000  mortgage  note payable to the
       former  owner of Dyna Jet,  Inc. was changed from August 1998 to November
       2002.

       During  September and October 1996, the Company executed a Reorganization
       Agreement  with the holders of certain  debt of the  Company  whereby the
       Company   converted  the  remaining   portion  of  its  13%   convertible
       subordinated  debentures  and all of its 14%  subordinated  debentures to
       common stock and warrants to purchase common stock.  In conjunction  with
       the  conversion,  accrued  interest  was  forgiven  by the debt  holders,
       resulting in recognition of an extraordinary  gain on  extinguishment  of
       debt of $1,608,501, net of income taxes of $-0-.

                                       17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


       The  following is a summary of the debt and accrued  interest  conversion
and extinguishment:

<TABLE>
<CAPTION>
                                                                                     1996
                                                          -------------------------------------------------------------
                                                                                          WARRANTS TO
                                                                                           PURCHASE
                                                                          SHARES OF         SHARES OF        ACCRUED
                                                          PRINCIPAL         COMMON           COMMON          INTEREST
                                                          CONVERTED         STOCK             STOCK          FORGIVEN
<S>                                                      <C>                   <C>             <C>       <C>
       13% Convertible subordinated
          debentures                                     $     443750          305414          165000    $      512868

       14% subordinated debentures                             900000          508750          138750          1001600

                                                         $    1343750          814164          303750    $     1514468
</TABLE>

       At December  31,  1998,  the Company was not in  compliance  with certain
       general and financial  covenants of its loan and security  agreement with
       Fleet.  Under  the  terms  of the loan  agreement,  the  breach  of these
       covenants  constitutes events of default and, at the option of Fleet, the
       obligations  of the  Company to Fleet are  subject to being  declared  by
       Fleet to be  immediately  due and  payable.  At December  31,  1998,  the
       Company  was  unable to obtain  any waiver of  covenant  violations  from
       Fleet. Due to the indebtedness  being callable at the discretion of Fleet
       and  normal  cross  default  provisions  of all  other  debt,  all of the
       Company's debt at December 31, 1998 has been classified as current on the
       consolidated balance sheet.

       Pursuant to the  discussion in the preceding  paragraph,  at December 31,
       1998,  aggregate  maturities of notes payable and long-term  debt and the
       future  minimum lease  payments  under capital leases are shown as due in
       1999.

       7.       COMMITMENTS

       On  December  15,  1998,  the  Company  entered  into an  agreement  with
       Measurement Specialists, Inc. (MSI) to create an alliance between the two
       companies.  This agreement  contains an option for the Company to acquire
       MSI.  Both the  alliance  and the option to purchase  expire on April 15,
       1999. The alliance between the Company and MSI was effective  December 1,
       1998 and was  created  in  order to  pursue  Measurement  While  Drilling
       services  using the tools and  equipment  owned or leased by the Company,
       employees of the Company,  and the technology of MSI.  During the term of
       the alliance,  the Company will rent  equipment  and inventory  from MSI,
       with a monthly rental payment of $12,206 and $15,000,  respectively.  The
       agreement grants the Company the option to acquire  substantially  all of
       the assets of MSI. If the option is exercised,  the Company agrees to pay
       MSI $74,982 in cash,  144,445 shares of common stock of the Company,  and
       payment of the notes payable not to exceed $479,416. Under the


                                       18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       agreement,  the owner of MSI shall be  employed  by the  Company for four
       months.  If  the  option  to  purchase  MSI is not  exercised,  then  the
       employment agreement terminates.

       The Company  leases land,  office  space,  and  equipment  under  various
       operating leases. The leases generally are for terms of five years and do
       not contain purchase options.  Rent expense was  approximately  $922,000,
       $558,000,  and $202,000 for the years ended December 31, 1998,  1997, and
       1996, respectively.

       The future minimum lease payments required under noncancelable  operating
       leases with initial or  remaining  terms of one or more years at December
       31, 1998 were as follows:

<TABLE>
<S>                                                    <C>
                   1999                                 $        529541
                   2000                                          349491
                   2003                                          172781
                   2002                                           57071
                   2003                                           12665
                   Thereafter                                     10554

                                                        $       1132103
</TABLE>

       8. COMMON STOCK TRANSACTIONS

       On  September  18,  1996,  the  Company  offered  800,000  shares  of the
       Company's common stock, in 20 units of 40,000 shares each, at an offering
       price of $1.25 per share, pursuant to a private placement memorandum.  Of
       the 800,000  shares  offered,  600,000  shares were sold by the Company's
       placement  agent,  and the Company received net proceeds (after deducting
       issuance costs) of $643,382.  Approximately $288,000 in proceeds from the
       offering  was used to acquire  Dyna Jet,  Inc.  and the  remainder of the
       proceeds was used for future  acquisitions  and other  general  corporate
       purposes. Options to purchase 80,000 shares of the Company's common stock
       at an  exercise  price of $1.50 per share  were  issued to the  Company's
       placement agent, as additional  compensation for services  rendered.  The
       options are  exercisable  for a period of five years from the date of the
       private placement.  None of the options had been exercised as of December
       31, 1998.

       In March  1998,  the Company  sold  596,000  shares of common  stock at a
       purchase price of $5.50 per share. The securities were sold pursuant to a
       private placement  memorandum.  The proceeds of $3,035,268,  net of issue
       costs, were used to fund a portion of the purchase price and related fees
       of the Phoenix Acquisition.

       In April 1998,  the Company sold an additional  176,364  shares of common
       stock at a purchase price of $5.50 per share.  The  securities  were sold
       pursuant to a private placement memorandum. The proceeds of $902,012, net
       of issue costs, were used to pay consulting fees of SJCP.


                                       19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       Issuance of common stock for the settlement of liabilities of the Company
       are set forth below.  Since the market value of the  Company's  stock was
       not readily available,  the per share amounts for these transactions have
       been  determined  by  the  Company's  Board  of  Directors  based  on the
       Company's consolidated financial results,  business developments,  common
       stock  transfer  restrictions,  number of shares issued and other factors
       which would influence the fair value at the date of Board approval.


<TABLE>
<CAPTION>
                                                                                                          AMOUNT
          MONTH OF           MONTH OF                                                                   RECORDED TO
            BOARD            ISSUANCE/                                        NUMBER       AMOUNT      STOCKHOLDERS'
          APPROVAL           PURCHASE                 DESCRIPTION            OF SHARES    PER SHARE       EQUITY
          --------           --------                 -----------            ---------    ---------       ------
<S>                       <C>                <C>                               <C>       <C>         <C>
       October 1996        October 1996      Issuance to debt holders in
                                              satisfaction of subordinated
                                              debentures                        689375   $    1.25    $      861719

       October 1996        November 1996     Issuance to debt holders in
                                              satisfaction of subordinated
                                              debentures                         96250   $    1.25    $      120312

       October 1996        December 1996     Issuance to debt holders in
                                              satisfaction of subordinated
                                              debentures                         28539   $    1.25    $       35674

       December 1996       December 1996     Issued to related party in
                                              satisfaction of consulting fees    12000   $    1.25    $       15000


       May 1997            May 1997          Issuance to individuals in
                                               satisfaction of consulting fees   65000   $    2.10    $      136493
</TABLE>


  9.   STOCK WARRANTS

       During  1998,  the Company  issued  warrants  to  purchase  shares of the
       Company's  common  stock with the  issuance of certain debt (see Note 6).
       The  warrants  gave the holders  the right to  purchase  up to  2,000,000
       shares at $5.50,  1,333,333  shares at $2.25, and 47,680 shares at $6.05.
       The  2,000,000  and  47,680  warrants  expire  in March  2003  while  the
       1,333,333 warrants expire in October 2003.

       During  1997,  the Company  issued  warrants  to  purchase  shares of the
       Company's  common stock in  connection  with the issuance of certain debt
       (see Note 6). The  warrants  give the holder the right to  purchase up to
       666,000  shares of the  Company's  stock at $2.75 per share  through  May
       1998, $3.25 through May 1999 and $3.75 thereafter and through maturity of
       the debt,  and 725,000  shares at $4.63 per share.  The 666,000  warrants
       expire in June 2002 while the 725,000  warrants  expire in October  2002.

       The warrants  issued  during 1998 and 1997 are subject to "Full  Ratchet"
       anti-dilution provisions.  When the Company issued the 1,333,333 warrants
       described at an exercise price of $2.25. 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 be 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, 1998:


                                       20




<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

<TABLE>
<CAPTION>
                                                                                                            EXERCISE
                                               BALANCE       1998     ANTI-DILUTION   1998       BALANCE     PRICE AT
                                              12/31/97     ISSUANCE     ISSUANCE    EXERCISED     12/31/98    12/31/98
                                              --------     --------     --------    ---------     --------    --------
<S>                                           <C>          <C>          <C>             <C>      <C>
Debt conversion  ($2.00 - expires 9/30/01)      236,250                                 1,500       234,750     $2.00
SJCP ($2.75 - expires 6/5/02)                   546,000                   121,334                   667,334     $2.25
SJCP ($2.75 - expires 6/5/02)                   120,000                    26,666                   146,666     $2.25
SJCP ($4.6327 - expires 10/10/02)               725,000                   767,759                 1,492,759     $2.25
SJMB ($6.75 - expires 3/16/03)                             1,800,000    3,600,000                 5,400,000     $2.25
SJMB ($2.25 - expires 10/30/03)                            1,333,333                              1,333,333     $2.25
Falcon  Seaboard ($6.75 - expires 3/16/03)                   200,000      400,000                   600,000     $2.25
Harris Webb & Garrison
   ($6.05 -expires 3/15/03)                                   47,680       80,526                   128,206     $2.25
                                              ---------    ---------    ---------     -------     ---------
                                              1,627,250    3,381,013    4,996,285       1,500    10,003,048
                                              =========    =========    =========       =====    ==========
</TABLE>

       During  1996,  the Company  issued  warrants  to  purchase  shares of the
       Company's  common stock in connection with the conversion of certain debt
       (see Note 6). The  warrants  give  holders  the right to  purchase  up to
       303,750  shares  of the  Company's  common  stock  at $2 per  share.  The
       warrants expire on September 30, 2001 and may be redeemed,  at the option
       of the Company,  at the price of $.50 per warrant,  provided that the bid
       price of common stock has exceeded $5 per share ending on the trading day
       prior to the date on which the notice of redemption is given. During 1998
       and 1997, 1,500 and 67,500 of these warrants were exercised  resulting in
       an increase to common stock and additional  paid-in capital of $3,000 and
       $135,000, respectively.

10.INCOME TAXES

       The provision  (benefit)  for income taxes  consists of the following for
       the years ended December 31, 1998, 1997, and 1996:

<TABLE>
<CAPTION>
                                                                     1998              1997              1996
<S>                                                             <C>               <C>                <C>
        Federal:
           Current                                                                $         13,962   $      39,841
           Deferred                                             $      -958,652            161,163        -112,096
                                                                ----------------  ----------------   -------------
                                                                       -958,652            175,125         -72,255
                                                                ----------------  ----------------   -------------
        State:
           Current                                                                          22,834          12,706
           Deferred                                                     -93,046             24,082          -6,166
                                                                ----------------  ----------------   -------------
                                                                        -93,046             46,916           6,540
                                                                ----------------  ----------------   -------------

             Total                                              $    -1,051,698    $       222,041   $     -65,715
                                                                ===============   ================   =============
</TABLE>

       In 1996 no provision or benefit has been  allocated to the  extraordinary
       gain since the taxable income generated by it consumed a large portion of
       the Company's net operating loss carryforwards.  These carryforwards were
       totally  offset by a valuation  allowance  at December  31, 1995 and this
       utilization in 1996 reduced expense related to the extraordinary  gain to
       zero.

                                       22
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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

<TABLE>
<CAPTION>
                                                                         1998              1997             1996
                                                                         ----              ----             ----

<S>                                                                 <C>              <C>              <C>
        Provision (benefit) at federal statutory rate               $      -7503249   $       227558   $       122986
        State income taxes, net of federal benefit                          -202818            29238
        Nondeductible tax penalties                                                                             27669
        (Decrease) increase in valuation allowance                          6654369                           -230828
        Other                                                                                 -34755            14458

             Provision (benefit) for federal income taxes           $      -1051698   $       222041   $       -65715
                                                                    ===============   ==============   ==============
</TABLE>

       At December 31, 1998 and 1997,  the Company has  available  net operating
       loss   carryforwards   of   approximately    $8,697,000   and   $507,000,
       respectively,  for federal  tax  purposes  that  expire at various  dates
       through  2011.  Additionally,  the Company has state net  operating  loss
       carryforwards of  approximately  $1,740,000 which expire at various dates
       to 2011.

       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:

<TABLE>
<CAPTION>
                                                                                          1998              1997
                                                                                          ----              ----
<S>                                                                                  <C>               <C>
        Gross deferred tax assets:
           Allowance for doubtful accounts receivable                                $        804718   $         53562
           Accrued bonuses and other                                                          128389             66574
           Operating loss carryforwards                                                      3243847            189103
           Alternative minimum tax credit carryforwards                                                          53804
           Goodwill                                                                          4236568               972
           Valuation allowance                                                              -6654369
             Gross deferred tax asset                                                        1759153            364015

        Gross deferred tax liabilities:
           Depreciation                                                                     -1646485          -1376392
           Other                                                                             -112668            -39321
             Gross deferred tax liability                                                   -1759153          -1415713

             Net deferred tax asset (liability)                                      $             0   $      -1051698
                                                                                     ===============   ======= =======
</TABLE>

       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,  1998,  the  Company  has  recorded a
       valuation  allowance of $6,654,369  against the gross deferred tax asset.
       At  December  31,  1997,  the Company  has  recorded in its  consolidated
       balance  sheet a net deferred tax  liability  as future  taxable  amounts
       exceed future deductible  amounts.  Consequently,  no valuation allowance
       was recorded at December 31, 1997.

                                       23
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


11.EARNINGS (LOSS) PER SHARE

       The calculation of basic and diluted EPS is as follows:


<TABLE>
<CAPTION>
                                                      FOR THE YEAR ENDED 1998                    FOR THE YEAR ENDED 1997
                                             -----------------------------------------    -------------------------------------
                                                 INCOME          SHARES      PER SHARE      INCOME        SHARES      PER SHARE
                                               (NUMERATOR)   (DENOMINATOR)    AMOUNT     (NUMERATOR)  (DENOMINATOR)    AMOUNT
<S>                                          <C>              <C>           <C>          <C>          <C>             <C>
      Income (loss) before extraordinary      $     -21016680                             $     447247
           item
      Extraordinary gain
             Net income (loss)                $     -21016680                             $     447247

      BASIC EPS
      Income (loss) available to common
         stockholders                         $     -21016680        3589235 $     -5.86  $     447247        2533650 $      0.18

      EFFECT OF DILUTIVE SECURITIES
      Stock warrants                                                                                          371552
      Stock options                                                                                           228883
      Convertible debt debenture                                                                93377         625671

      DILUTED EPS
      Income (loss) available to common
        stockholders plus assumed conversions $     -21016680        3589235 $     -5.86  $     540624        3759756 $      0.14
</TABLE>

<TABLE>
<CAPTION>
                                                      FOR THE YEAR ENDED 1996
                                              ----------------------------------------
                                                 INCOME          SHARES        PER SHARE
                                              (NUMERATOR)     (DENOMINATOR)      AMOUNT
<S>                                           <C>               <C>             <C>
      Income (loss) before extraordinary       $    427438
           item
      Extraordinary gain                           1608501
             Net income (loss)                 $   2035939

      BASIC EPS
      Income (loss) available to common
         stockholders                          $   2035939        1040192       $      1.96

      EFFECT OF DILUTIVE SECURITIES
      Stock warrants
      Stock options
      Convertible debt debenture

      DILUTED EPS
      Income (loss) available to common
        stockholders plus assumed conversions  $    2035939        1040192      $      1.96
</TABLE>


       Options to  purchase  1,177,750  shares of common  stock and  warrants to
       purchase  10,303,048  shares of common stock at prices ranging from $1.50
       to $8.01 were  outstanding  during  1998,  but were not  included  in the
       computation  of  the  1998  diluted  EPS  because  the  effect  would  be
       anti-dilutive.  There were also 24,000 options that were canceled  during
       1998 that are not  included in the  computation  of the 1998  diluted EPS
       because the effect would be anti-dilutive.

       Convertible  debt  instruments  which  would  result in the  issuance  of
       7,511,111  shares  of  common  stock,  if the  conversion  features  were
       exercised,  were  outstanding  during  1998 but were not  included in the
       computation  of  the  1998  diluted  EPS  because  the  effect  would  be
       anit-dilutive.  The conversion  price of these  instruments was $2.25 per
       share and remained outstanding at December 31, 1998.


                                       24

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       Options to purchase 12,500 shares of common stock at $8.01 per share were
       outstanding  during 1997 but are not included in the  computation  of the
       1997 diluted EPS because the options' exercise price was greater than the
       average  market price of the common  shares.  The  options,  which expire
       December 2002, were still outstanding at December 31, 1997.

       Options  to  purchase  240,000  shares of common  stock and  warrants  to
       purchase  303,750 shares of common stock were outstanding at December 31,
       1996 but are not  included  in the  computation  of the 1996  diluted EPS
       because the options' and  warrants'  exercise  price was greater than the
       average market value of the common shares.  There were also 7,500 options
       that were canceled  during 1996 that are not included in the  computation
       of the 1996 diluted EPS because the options'  exercise  price was greater
       than the average market price of the common shares.

         12.      MAJOR CUSTOMERS

       Most of the  Company's  business  activity is with  customers  engaged in
       drilling and operating  natural gas wells  primarily in the Black Warrior
       and Mississippi Salt Dome Basins in Alabama and Mississippi,  the Permian
       Basin in West Texas and New  Mexico,  the San Juan  Basin in New  Mexico,
       Colorado, and Utah, the East Texas and Austin Chalk Basins in East Texas,
       the Powder  River and Green  River  Basins in Wyoming  and  Montana,  the
       Williston  Basin in North  Dakota,  and the Gulf of  Mexico  offshore  of
       Louisiana and in South Texas. Substantially all of the Company's accounts
       receivable  at  December  31,  1998 and 1997  are  from  such  customers.
       Performance  in  accordance  with  the  credit  arrangements  is in  part
       dependent upon the economic  condition of the natural gas industry in the
       respective  geographic  areas. The Company does not require its customers
       to pledge collateral on their accounts receivable.

       For the year ended  December 31, 1998, the Company did not derive revenue
       from any one customer that was in excess of 10% of its total revenues.

       The Company  earned  revenues in excess of 10% of its total revenues from
       the following  customers for the years ended  December 31, 1997 and 1996,
       as follows:

<TABLE>
<CAPTION>
                                                                      1997               1996
                                                                      ----               ----

<S>                                                           <C>                <C>
     Taurus Exploration, Inc.                                 $       1752849    $       1916074
     Pioneer Resources, Inc. (formerly Parker
        and Parsley Development Company)                      $       2118484    $       1793411
     Becfield Drilling Company                                                   $       1120898

                                       25
</TABLE>

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         13.      STOCK OPTIONS

       The 1997 Omnibus  Incentive Plan (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 Omnibus
       Plan authorizes the issuance of options to purchase up to an aggregate of
       600,000  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 Omnibus  Plan to allow  additional  issuances  of options to purchase
       400,000  shares of  common  stock.  This  amendment  increases  the total
       aggregate number of shares under the Omnibus Plan to 1,000,000,  and must
       be  submitted  to a vote  of the  shareholders  for  final  approval.  At
       December 31, 1998,  963,750  options had been granted with 36,250 options
       available for issue.

       The 1997 Non-Employee Stock Option Plan (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
       Non-Employee Plan authorizes the issuance of options to purchase up to an
       aggregate of 100,000 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 Omnibus Plan to allow additional issuances of options to
       purchase  200,000 shares of common stock.  This  amendment  increases the
       total aggregate  number of shares under the Omnibus Plan to 300,000,  and
       must be submitted to a vote of the  shareholders  for final approval.  At
       December 31, 1998 and 1997, 134,000 options had been granted.

       Additionally,  of the 240,000  options  outstanding at December 31, 1996,
       options to purchase  160,000  shares of the  Company's  common stock were
       canceled during 1997. Pertinent information regarding stock options is as
       follows:

                                       26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


<TABLE>
<CAPTION>
                                                                                           WEIGHTED
                                                                                           AVERAGE
                                                                                WEIGHTED  FAIR VALUE
                                                             RANGE OF           AVERAGE   OF STOCK
                                                  NUMBER OF  EXERCISE           EXERCISE     AT         VESTING
                                                   OPTIONS    PRICES             PRICE    GRANT DATE   PROVISIONS
                                                   -------    ------             -----    ----------   ----------

<S>                                               <C>       <C>                <C>      <C>         <C>
        Options outstanding, December 31, 1995        7500  $3.46 - 22.27      $7.24

        Options canceled                             -7500  $3.46 - 22.27      $7.24
        Options granted                              60000  50% of mean        $1.66      $1.25     33.3% per year
                                                            share price for
                                                            3 months
                                                            prior to grant
        Options granted                             180000  $1.50 - 2.00       $1.78      $1.25     immediate

        Options outstanding, December 31, 1996      240000  $1.50 - 2.00       $1.75

        Options canceled                            -60000  50% of mean share
                                                            price for 3 months
                                                            prior to grant
                                                   -100000    $2.00            $2.00
                                                   -160000

        Options granted                             160000    $2.625           $2.625     $2.625   62.5% immediate; 12.5% per year
         Exercise  price equals FMV of stock at      67500    $2.625           $2.625     $2.625   33.3% immediate; 22.22% per year
                                                     81250    $2.625           $2.625     $2.625   20% immediate; 20% per year
                                                     40000    $2.625           $2.625     $2.625   25% immediate; 25% per year
                                                     10000    $3.38            $3.38      $3.38    25% immediate; 25% per year
                                                    358750                     $2.65      $2.65
</TABLE>

                                       27
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

<TABLE>
<S>                                                <C>       <C>              <C>        <C>      <C>            <C>
        Exercise  price less than FMV of stock       20000    $3.00            $3.00      $3.50    25% immediate; 25% per year
        at grant date

        Exercise  price  greater  than  FMV of
        stock at grant date                          90000    $4.63            $4.63      $4.25    16.67% immediate; 16.67% per year
                                                    112000    $4.63            $4.63      $4.25    3 year pro rata
                                                     10000    $4.63            $4.63      $4.25    2 year pro rata
                                                     30000    $4.63            $4.63      $4.25    5 year pro rata
                                                     12500    $8.01            $8.01      $7.94    5 year pro rata
                                                      4000    $4.63            $4.63      $4.25    1 year cliff
                                                    258500                     $4.79      $4.43

        Options outstanding, December 31, 1997      717250    $1.50 - $8.01    $3.30

        Options canceled                            -22500    $2.63            $2.63
                                                    -60000    $4.63            $4.63
                                                     -5000    $4.63            $4.63
                                                    -87500

        Options granted
         Exercise  price equals FMV of stock at
          grant date                                  7500    $6.28            $6.28      $6.28     3 year pro rata
                                                     13000    $6.63            $6.63      $6.63     2 year pro rata
                                                    100000    $6.50            $6.50      $6.50     5 year pro rata
                                                     68000    $6.50            $6.50      $6.50     25% immediate, 25% per year
                                                    200000    $6.69            $6.69      $6.69     25% immediate, 25% per year
                                                      4500    $8.00            $8.00      $8.00     4 year pro rata
                                                    393000                     $6.39      $6.39

        Exercise  price greater than FMV of stock
        at grant date                               155000    $7.50            $7.50      $6.81     4 year pro rata

        Options outstanding, December 31, 1998     1177750    $1.50 - $8.01    $4.90
                                                   =======
</TABLE>


                                       28

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       The  following   table   summarizes   information   about  stock  options
outstanding at December 31, 1998:


<TABLE>
<CAPTION>
                                                 OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                                                          WEIGHTED
                                                          AVERAGE        WEIGHTED                     WEIGHTED
                          RANGE OF         NUMBER        REMAINING       AVERAGE        NUMBER        AVERAGE
                          EXERCISE      OUTSTANDING     CONTRACTUAL      EXERCISE     EXERCISABLE     EXERCISE
                                         12/31/98          LIFE           PRICE        12/31/98        PRICE
                        ooPRICES
                        --------

<S>                                     <C>                <C>            <C>          <C>            <C>
                          $1.50              80000            3.75         $1.50          80000         $1.50
                          $2.63             326250            7.65         $2.63         197484         $2.63
                          $3.00              20000            3.42         $3.00          10000         $3.00
                          $3.38              10000            3.50         $3.38           5000         $3.38
                          $4.63             181000            3.67         $4.63          59832         $4.63
                          $6.28               7500            7.42         $6.28                        $6.28
                          $6.50             168000            5.42         $6.50          17000         $6.50
                          $6.63              13000            4.45         $6.63                        $6.63
                          $6.69             200000            9.00         $6.69          50000         $6.69
                          $7.50             155000            4.42         $7.50                        $7.50
                          $8.00               4500            4.36         $8.00           1125         $8.00
                          $8.01              12500            3.96         $8.01           2500         $8.01

                                           1177750            6.06         $4.90         422941         $3.40
                                           =======                                       ======
</TABLE>


       The Company  applies  principles  from SFAS No. 123 in accounting for its
       stock  option  plan.  In  accordance  with SFAS No. 123,  the Company has
       elected to not  report the impact of the fair value of its stock  options
       in the consolidated  statements of operations but,  instead,  to disclose
       the pro forma  effect and to  continue  to apply APB  Opinion  No. 25 and
       related interpretations in accounting for its stock options. Accordingly,
       no  compensation  expense has been recognized for stock options issued to
       employees  with  an  exercise  price  at  fair  market  value  or  above.
       Compensation  expense of $83,540 and $27,267 has been  recognized for the
       years ended December 31, 1998 and 1997, respectively, for 134,000 options
       granted during 1997 as compensation to non-employees at the options' fair
       market value in accordance with SFAS No. 123. Had  compensation  cost for
       all of the Company's  stock options issued been  determined  based on the
       fair  value at the grant

                                       29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       dates for awards  consistent with the method  prescribed in SFAS No. 123,
       the Company's net income (loss) and earnings  (loss) per share would have
       been reduced or increased to the pro forma amounts indicated as follows:


<TABLE>
<CAPTION>
                                                                                 1998              1997             1996
<S>                                                                        <C>                <C>               <C>
               Net income (loss) - as reported                             $      -21016680   $        447247   $     2035939
               Net income (loss) - pro forma                               $      -21530723   $        268327   $     2006094
               Earnings (loss) per share - as reported (basic)             $         (5.86)   $           .18   $        1.96
               Earnings (loss) per share - pro forma (basic)               $         (6.00)   $           .11   $        1.93
               Earnings (loss) per share - as reported (diluted)           $         (5.86)   $           .14   $        1.96
               Earnings (loss) per share - pro forma (diluted)             $         (6.00)   $           .10   $        1.93
</TABLE>

       The pro  forma  amounts  reflected  above are not  representative  of the
       effects  on  reported  net  income  (loss) in future  years  because,  in
       general,  the  options  granted  typically  do not vest  immediately  and
       additional awards are made each year.

       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.


<TABLE>
<CAPTION>
                                                                                        1998         1997         1996
<S>                                                                                    <C>          <C>          <C>
                     Dividend yield                                                       0%           0%           0%
                     Expected life (years)                                             5.62            4            3
                     Expected volatility                                               74.7%        60.6%        70.0%
                     Risk-free interest rate                                           5.48%        6.11%        6.46%
</TABLE>


                                       30
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

 14.   CONTINGENCIES

       On  November  1, 1995,  the Company  entered  into a Business  Consulting
       Agreement  with  MAII  pursuant  to  which  MAII was to  provide  certain
       services,  including, among others, providing assistance in preparing and
       distributing press releases for a period of six months with an option for
       renewal and in equity raising  transactions through the private placement
       of common stock and the restructuring of the Company's indebtedness.  The
       Agreement  stated  that the  compensation  for these  services  was to be
       200,000  shares of freely  traded common stock of the Company with 40,000
       shares due upon execution of the Agreement and the balance due during the
       term of the  Agreement  as  needed by MAII.  It was  agreed  that  MAII's
       services would not include any services that constituted the rendering of
       legal  opinions or that were within the  ordinary  purview of a certified
       public accountant or a NASD registered broker/dealer.  The Company issued
       the 40,000  shares to MAII and has taken the position  that the Agreement
       has  expired  and no further  compensation  is due and  owing,  that MAII
       failed to perform in accordance with the Agreement and that the intent of
       the  Agreement  and  understanding  of the  parties  was that the 160,000
       shares  would only be issued in  conjunction  with a private  sale of the
       Company's  securities.  On September  24, 1996,  MAII  demanded  that the
       Company issue the 160,000 shares to it, which the Company  refused to do.
       Management  of  the  Company   believes  that  it  has   substantial  and
       meritorious  defenses to the claim asserted by MAII and intends to defend
       itself vigorously in any litigation  instituted by MAII. In October 1997,
       arbitration  proceedings  were  commenced  against  the  Company by MAII.
       Management  of the Company  believes  that it will not incur any material
       liability to MAII in connection with this claim nor will the claim have a
       material adverse effect on the consolidated  financial position,  results
       of operations,  or cash flows of the Company. In addition, the Company is
       reviewing the advisability of it instituting litigation or an arbitration
       proceeding  against MAII. There can be no assurance that the Company will
       be successful in an action instituted against the Company by MAII or that
       the Company will be  successful  in any action it may  institute  against
       MAII.

       On July 9, 1998,  Southwick  Investments  Inc.  (Southwick)  commenced  a
       lawsuit  against  the  Company in the  Superior  Court of Fulton  County,
       Georgia, based on a professional services agreement dated March 26, 1997,
       entered  into  between  Southwick  and  the  Company  pursuant  to  which
       Southwick  was to develop and  implement  a plan for  raising  additional
       capital and provide certain  financial  advisory  services.  Southwick is
       seeking to be  awarded  damages  in an  unspecified  amount for breach of
       contract  and the loss in value to  Southwick  of an option  to  purchase
       50,000 shares of the common stock of the Company at an exercise  price of
       $4.00 per share,  together  with court  costs and  attorney's  fees.  The
       matter was transferred to arbitration at the request of the Company.  The
       Company filed a counterclaim  against Southwick,  alleging that Southwick
       failed to  perform  and is due to return a portion  of the  consideration
       previously  paid. The Company  intends to defend this action and believes
       that it has good and  meritorious  defenses.  Management does not believe
       the ultimate  outcome of these  actions  will have a  materially  adverse
       effect on the consolidated financial position,  results or operations, or
       cash flows of the Company.

       The Company also 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  consolidated
       financial position, results of operations or cash flows of the Company.

                                       31

<PAGE>


       On November 30, 1995,  the Company  executed a  Reorganization  Agreement
       with the  holders of certain  debt of the  Company  whereby  the  Company
       converted a note payable to RABAD,  a partnership of officers and spouses
       of officers of the Company, to 148,565 shares of common stock.

       The Company  guaranteed that RABAD would be able to sell its common stock
       received in the 1995  conversion for $2 per share within one year of this
       conversion. RABAD engaged Monetary Advancement International, Inc. (MAII)
       to sell the shares received in this conversion. Due to a dispute with the
       Company that is more fully  described in Note 14, MAII had refused to pay
       RABAD  or  return  any  unsold  shares.  RABAD  and MAII  entered  into a
       settlement agreement in September 1998. The terms of the agreement called
       for MAII to reimburse RABAD for the shares originally transferred to MAII
       for sale. The Company does not believe the aforementioned  guarantee will
       result  in any  liability  to the  Company  based  on  the  terms  of the
       settlement.

       In connection with the above proceedings, the Company has paid legal fees
       on behalf of four  employees in the amount of $26,072 and $12,420  during
       1998 and 1997, respectively.

15.    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,  SHORT-TERM INVESTMENTS,  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 - At  December  31,  1998,  all  long-term  debt has been
       classified as current.  Given the Company's  poor  operating  results and
       severe lack of liquidity, as discussed in Note 17, it is not practical to
       determine  the fair market  value of the  long-term  debt at December 31,
       1998.  The  carrying   amount  and  fair  value  of  long-term  debt  was
       $13,065,798 and $10,858,881, respectively at December 31, 1997.

                                       32

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

16.    SEGMENT AND RELATED INFORMATION

       At December 31,  1998,  the Company is  organized  into,  and manages its
       business based on the performance  of, five business units.  The business
       units  have  separate  management  teams and  infrastructures  that offer
       different  oil and gas  well  services.  The  business  units  have  been
       aggregated  into  three  reportable   segments:   wireline,   directional
       drilling,  and  workover and  completion  since the  long-term  financial
       performance of these reportable  segments is affected by similar economic
       conditions.

       WIRELINE - This  segment  consists  of two  business  units that  perform
       various procedures to evaluate downhole conditions at different stages of
       the  process  of  drilling  and  completing  oil and gas wells as well as
       various times thereafter  until the well is depleted and abandoned.  This
       segment engages in onshore and offshore  servicing,  as well as other oil
       and  gas  well  service   activities   including  renting  and  repairing
       equipment.  The principal  markets for this segment include all major oil
       and gas producing  regions of the United States.  Major customers of this
       segment  for  the  year  ended  December  31,  1998  included  Burlington
       Resources, Pioneer Natural Resources, and Phillips Petroleum.

       DIRECTIONAL  DRILLING  SERVICES - This  segment  consists of two business
       units that perform procedures to enter a oil producing zone horizontally,
       using specialized drilling equipment, and expand the area of interface of
       hydrocarbons  and thereby  greatly  enhances  recoverability  of oil. The
       segment  also  engages  in oil and gas  well  surveying  activities.  The
       principal  markets  for  this  segment  include  all  major  oil  and gas
       producing  regions of the United States.  Major customers of this segment
       for the year ended  December 31, 1998 included  Texaco E&P, Union Pacific
       Resources, Clayton Williams Energy, and Chesapeake Operations.

       WORKOVER AND  COMPLETION - This  segment  consists of a business  unit in
       which  services  include  those   operations   performed  on  wells  when
       originally  completed or on wells  previously  placed in  production  and
       requiring  additional  work  to  restore  or  increase  production.   The
       principal  market for this segment is the Black Warrior Basin of Alabama.
       The major  customer of this segment for the year ended  December 31, 1998
       was Energen Corporation.

                                       33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


       The accounting  policies of the reportable segments are the same as those
       described in Note 2 of Notes to Consolidated  Financial  Statements.  The
       Company  evaluates the  performance  of its operating  segments  based on
       earnings before interest, taxes, depreciation, and amortization (EBITDA),
       which is derived  from  revenues  less  operating  expenses  and selling,
       general, and administrative  expenses.  Segment information for the years
       ended December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                                                              WORKOVER
                                                                           DIRECTIONAL           AND
               1998                                        WIRELINE          DRILLING        COMPLETION           TOTAL

<S>                                                <C>                  <C>            <C>              <C>
              Segment revenues                     $       11591727     $    21311450  $       1533376  $        34436553
              Segment EBITDA                               -1589874         -12028475           -60260          -13678609
              Segment assets                               15607165          20853147           283868           36744180

                                                                                              WORKOVER
                                                                           DIRECTIONAL           AND
               1997                                        WIRELINE          DRILLING        COMPLETION           TOTAL

              Segment revenues                     $        9513189     $     5931516  $       1617837  $        17062542
              Segment EBITDA                                2132694           1505757           230379            3868830
              Segment assets                               14695760          10741380           436587           25873727
</TABLE>

       The Company has certain  expenses and assets  which are not  allocated to
       the individual  operating  segments.  A  reconciliation  of total segment
       EBITDA to income (loss) from operations and total segment assets to total
       assets,  for the years ended  December  31, 1998 and 1997 is presented as
       follows:



                                      34

<TABLE>
<CAPTION>
                                                                                                 1998              1997
               EBITDA
<S>                                                                                         <C>              <C>
               Total segment EBITDA                                                         $     -13678609   $       3868830
               Depreciation and amortization                                                       -4815955          -1442635
               Unallocated corporate expense                                                        -923173          -1245703

                  Income (loss) from operations                                             $     -19417737   $       1180492
                                                                                            ===============   ===============

               ASSETS

               Total segment assets                                                         $      36744180   $      25873727
               Unallocated corporate assets                                                           70670            212256

                     Total assets                                                           $      36814850   $      26085983
                                                                                            ===============   ===============
</TABLE>

                                       35

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 17.   Results of Operations and Management's Plans

       The  Company  incurred  a loss of  $21,016,680  in 1998  and had  current
       liabilities  in excess of current  assets of  $42,618,296 at December 31,
       1998.  As discussed  in Note 6, at December 31, 1998,  the Company was in
       violation of certain general and financial debt  covenants.  Accordingly,
       all of the  indebtedness  owed by the  Company  has  been  classified  as
       current at December  31, 1998.  Currently,  the Company does not have the
       liquidity necessary to satisfy its current obligations.

       During  1998,  the  Company  experienced  a decline in the demand for its
       products and services as a result of a significant  decrease in the price
       of oil and natural  gas.  The decline in demand  materially  impacted the
       Company's  revenues,  liquidity  and its ability to remain in  compliance
       with covenants in its loan agreements and meet its obligations during the
       last half of 1998.  While these conditions  continued  throughout much of
       the first  quarter of 1999,  prices for oil and natural gas had  improved
       moderately by the beginning of the second quarter of 1999.  Management of
       the  Company  believes  that  an  improvement  in its  revenues  will  be
       dependent upon a continuing  period of improved  pricing and decisions by
       oil and natural gas  producers to make  commitments  to engage in oil and
       natural gas well enhancements.

       The  Company's   outstanding   indebtedness   includes  primarily  senior
       indebtedness aggregating  approximately $18,900,000 at December 31, 1998,
       other  indebtedness  of  approximately   $3,700,000,   and  approximately
       $16,900,000 owed to SJCP and its affiliates.  All of this indebtedness is
       shown as currently due and payable on the Company's  consolidated balance
       sheet at December 31, 1998.

       Management's  plans with  respect to  addressing  its  current  financial
       situation include primarily the following:

           In March 1999 the Company  borrowed an additional  $2,500,000 from an
           affiliate of SJCP, the Company's principal investor (see Note 18).

           The   Company  is  engaged  in  efforts  to   refinance   its  senior
           indebtedness which is intended to provide,  among other things,  more
           favorable terms and thereby improve liquidity.

           In March 1999, the Company entered into a forbearance  agreement with
           Fleet Capital Corp. which, among other things,  permitted the Company
           to defer payments of principal to Fleet through June 30, 1999.

           In  April  1999,  General  Electric  Capital  Corp.  agreed  to defer
           payments of interest on an aggregate of  approximately  $3,900,000 of
           indebtedness through June 30, 1999.

           The  Company  has  continued  through  the first  quarter  of 1999 to
           further  implement a cost reduction  program first implemented in the
           last  half  of  1998  and   intends   to  focus  on  cost   reduction
           opportunities through 1999.

                                       36

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

       Management also intends to raise  additional  capital in conjunction with
       the  foregoing  plan,  which may be either  debt or equity  capital  or a
       combination  thereof,  which,  together with the renegotiation of certain
       outstanding  indebtedness,  will  be used to  meet  the  Company's  other
       current liquidity requirements.  Management expects that, upon conclusion
       of the  plan,  its  indebtedness  owing  to SJCP and  affiliates  will be
       long-term or converted into equity securities.

       Management  believes  that,  provided  oil and natural gas prices  remain
       relatively stable with the level of prices that existed at the end of the
       first quarter of 1999, the foregoing plan together with the  cost-cutting
       program  implemented in 1998, which included  reductions in personnel and
       salaries  of  existing  personnel,   closing  and  consolidating  certain
       district  offices,  together with other  cost-cutting  activities  should
       enable the  Company to  operate,  commencing  with the second  quarter of
       1999, without a further deterioration of its liquidity condition.

       Management  of the  Company  is  unable  to assure  that its  efforts  to
       implement  the plan  described  above will be  successful or to state the
       terms under which or when the proposed  transactions  will be  completed.
       Management   expects  that  in  order  to  complete   such   transactions
       substantial  amounts of equity  securities  may be  required to be issued
       which may materially dilute the Company's existing stockholders.

18.    SUBSEQUENT EVENT

       During the first quarter of 1999,  the Company  entered into an agreement
       with SJMB to borrow  $2,500,000  under a 10% convertible  promissory note
       maturing in March 2001.  The note is  convertible  at $1.50 per share and
       can be  converted  by SJMB at  anytime  up until 30  business  days after
       maturity  of the  note.  The  Company  also  issued  warrants  to SJMB in
       connection  with the note.  The warrants  give SJMB the right to purchase
       2,075,000 shares at an exercise price of $1.50. This transaction triggers
       the anti-dilution  provisions of warrants and convertible debt previously
       issued by the  Company  (Note 9).  All  previously  issued  warrants  and
       convertible  debt,  with  anti-dilution  provisions,  have their exercise
       prices lowered to $1.50.  The triggering of the provisions also calls for
       an increase in warrant  shares  outstanding.  The total number of warrant
       shares issued as a result of the anti-dilution  transaction  increased by
       4,884,149 resulting in a total of 16,962,197 warrants outstanding.

19.    IMPAIRMENT OF LONG-LIVED ASSETS

       During 1998, the Company experienced a material decline in demand for its
       services  as a result of a  significant  decrease in the price of oil and
       natural  gas,  as well as the  loss  of a major  customer.  Consequently,
       management  evaluated  the  recoverability  of its  long-lived  assets in
       relation to its business segments. The analysis was first performed on an
       undiscounted   cash  flow  basis  which   indicated   impairment  in  its
       directional  drilling  segment.  The impairment was then calculated using
       projections of discounted cash flows over five years utilizing a discount
       rate and terminal  value multiple  commensurate  with current oil and gas
       services  company  transactions.  The  discount  rate  and  the  terminal
       multiple used were 12% and 6.5,  respectively.  The  assumptions  used in
       this analysis represent management's best estimate of future results.

       The  analysis  resulted  in a charge  to  operations  for the year  ended
       December 31, 1998 of  $11,100,000,  which  consisted  of a write-down  of
       $8,121,684,  $2,354,221, and $624,095, to goodwill,  property, plant, and
       equipment, and inventory, respectively.


                                       36